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<m.fo0o*booo 7000 8000 9000 10000 
 
 approximated by allowing a fixed exemption on each 
 base, and levying a proportionate rate on the remainder. 
 Suppose an exemption of $1,000 is allowed from each of 
 the bases of $2,000, $4,000, $6,000, $8,000, and $10,000, 
 and a 10 per cent tax were levied upon the remainder. 
 The actual percentage burden upon each amount would 
 
TAXATION 
 
 113 
 
 be as follows: 5 upon $2,000; 7J5 upon $4,000; 8.33 upon 
 $6,000; 8.75 upon $8,000; and 9 upon $10,000. The 
 accompanying graph, No. I (see page 112), will show the 
 trend of a curve for these figures, with the percentages for 
 the intervening thousands also shown. 
 
 In the tax scheme, where the exemption is changed as 
 the base increases, or where a fixed amount is taken from 
 each grade rather than a certain per cent, or where other 
 than proportionate rates are used, the regularity of the 
 curve may be affected in a number of ways. As long as 
 
 GRAPH No. II 
 SHOWING THE REAL PERCENTAGE BURDEN OF THE UNITED STATES INCOME TAX 
 
 The figures are based on the $3,000 exemption for unmarried persons. The total tax 
 paid by each grade is found by adding the additional tax for each grade to the normal tax 
 of 2%. These rates are provided under the 1916 law, and do not include the supplemen- 
 tary war rates. The additional rates to 5150,000 are as follows: 
 
 1% from $ 20,000 to $ 40,000 
 
 2% " 40,000 " 60,000 
 
 3% " 60,000 " 80,000 
 
 4% " 80,000 " 100,000 
 
 5% " 100,000 " 150,000 
 
 t% 
 
 Go $o loo 
 (.poo omitted) 
 
 /SO 
 
 any exemption remains, however, it is impossible to reach 
 100 per cent, or confiscation. Graph No. II illustrates the 
 actual percentage burden of the first grades under the 
 
114 
 
 OUTLINES OF PUBLIC FINANCE 
 
 1916 income tax in the United States. If, instead of 
 a percentage tax paid in each grade, a lump sum is 
 taken, the lines within each grade will be descending 
 rather than ascending. This is true of the Prussian in- 
 
 GRAPH No. Ill 
 
 SHOTTING THE REAL PEBCENTAGE BUHDEN OP A LUMP-SUM TAX IN AN ASSUMED 
 
 SCHEDULE 
 
 The grades vary by a $1,000 amount. If the amovint is less than $1,000, no tax is col- 
 lected; if more than $1,000 and less than $2,000, $10 is collected; if more than $2,000 and 
 less than $3,000 the tax is $30, and so on with $00, $100, and $200, respectively, levied upon 
 the next successive grades. 
 
 5% 
 
 5% 
 Z% 
 
 3% 
 
 I SL 3 * 5 6 
 (000 omitted) 
 
 come tax. Graph No. Ill illustrates a possible curve of 
 this nature. 
 
 Regressive Taxes. It is possible that taxes may be 
 levied in such a way that the rate may be regressive 
 that is, that the rate decreases as the base increases. In 
 graph No. Ill the tax within each of the grades is regres- 
 sive. Such taxes would, of course, seldom be levied by 
 design for purely fiscal purposes. They may, however, 
 be used as regulatory measures. Certain industries whose 
 products are considered harmful are often subject to a 
 rate of taxation much higher than that of other industries 
 of a similar degree of ability. 
 
 Many taxes, however, are regressive in their effects. 
 
TAXATION 115 
 
 In so far as a tax on tobacco is shifted to the consumer, 
 in order not to have a regressive effect, each individual 
 would have to purchase according to his ability. The 
 effect of a general property tax is much the same. Owners 
 of a small amount of property usually have it in a tangible 
 form, which is easily assessed, while the owners of large 
 amounts hold much intangible property, which escapes 
 assessment and taxation. This places a burden upon the 
 small property owner out of proportion to his ability to 
 bear it. Progressive taxes on incomes and wealth, then, 
 may tend only to give proportionality to the tax system 
 as a whole, since they to some extent equalize the dispro- 
 portionate burdens caused by the regressivity of other 
 taxes. 
 
 Either proportional or progressive taxes may be par- 
 tially regressive if the rate is a flat amount rather than a 
 certain per cent. A ten mill rate in reality means that the 
 classes are to be differentiated by one dollar amounts. 
 The class below one dollar is exempt; from one dollar to 
 two dollars the tax is ten mills; from two dollars to three 
 dollars it is twenty mills, etc. In this case the tax is a 
 greater burden upon the person who is just over the lower 
 boundary of a grade say $1.05 than one who is near 
 the upper limit say $1.95. That is, ten mills, which 
 each will pay, is a larger part of $1.05 than of $1.95. The 
 smaller the grades, of course, the less the effect of this 
 regressivity would be felt. If the ten mill tax be calcu- 
 lated as a 1 per cent tax, and levied upon the actual 
 amount of the base, then the tax is proportional rather 
 than regressive within each grade. 
 
 Apportioned Taxes. Taxes, moreover, are sometimes 
 said to be apportioned. This occurs when some central 
 political unit distributes the amount of tax to be collected 
 among several of the minor political divisions which com- 
 pose it. The apportionment may be made according to 
 some definite rule, such as population, property, or in- 
 come, or it may be that each district in the apportionment 
 
116 OUTLINES OF PUBLIC FINANCE 
 
 area will be asked to contribute an equal amount. An 
 apportionment according to some definite rule, however, 
 does not prescribe a definite plan for raising the tax. A 
 tax apportioned on the base of population, for example, 
 does not mean that the levy will be in the form of a poll 
 tax. Each district may use any method it chooses in 
 raising the necessary amount. 
 
 Kinds of Incomes. Another problem which arises con- 
 cerns the ability of a base to bear taxes under varying 
 conditions. Distinction is often made between earned 
 and unearned incomes and wealth, and between the funded 
 and unfunded incomes and wealth. It seems reasonable 
 that a greater sacrifice would be felt by giving up an 
 amount from funds secured through labor than if they 
 had been secured in some fortuitous manner. Likewise 
 a funded income one which is dependent upon some 
 other factor than the efforts of the individual receiving it 
 can better bear burdens than one which depends solely 
 upon the exertions of the recipient. The former will con- 
 tinue when the productive capacity of the individual 
 ceases; the latter will not. No one would hesitate in 
 choosing between the two forms of income. 
 
 In seeking to determine the faculty of the taxpayer, 
 then, a number of complex problems must be considered. 
 Not only must a just base be found, but justice must be 
 used in applying the rate of tax. No tax, moreover, can 
 be viewed as a distinct factor, but must be considered in 
 relation to the other taxes in the system. A particular 
 tax might be found to work injustice, but when used with 
 another the two may be found to work together in such 
 a way that justice will result. 
 
 69. The Social Aspects of Taxes Deserve Considera- 
 tion. Many reforms have been advocated with taxation 
 as the machinery through which they were to be accom- 
 plished. In these programs of reform taxes have been 
 considered as having a social or ethical function as well 
 as a fiscal function. Some attempts have been made to 
 
TAXATION 117 
 
 separate taxes into periods, in one of which they were 
 used only from the fiscal standpoint; in the other, from 
 social considerations as well as fiscal. It would be difficult 
 to find a time, however, when taxes were not used to some 
 extent as a social measure. 
 
 Different persons suggest different social functions for 
 taxes, according to the institutions they would have cor- 
 rected. Some of the more extreme would have the state 
 use the taxing power as a means of equalizing wealth. 
 This use of taxes is sometimes advocated on the ground 
 that wealth inequalities have arisen because of the past 
 action of the state, and hence the state is perfectly justified 
 in taxing large wealth. This principle is sometimes called 
 the compensatory theory of taxation. Others, who think 
 the present system of wealth distribution woefully un- 
 sound, would use taxes, not only to break down large 
 fortunes now in existence, but to remove political and 
 economic conditions which make such unequal accumula- 
 tions of wealth possible. To accept such a field as a proper 
 function for taxes, one must be willing to concede the 
 present scheme of distribution to be unjust and to be 
 based upon unsound principles a concession which would 
 not generally be made. 
 
 Regulation of Undesirable Institutions. Taxation has 
 seldom been used to the extent suggested in the preceding 
 paragraph, yet everyone is familiar with its use for elimi- 
 nating or regulating social evils. The circulation of state 
 bank notes was considered such an evil to sound currency 
 that their continued use was made unprofitable by the 
 heavy tax that was placed upon them. Enterprises whose 
 products are considered harmful to the moral or physical 
 well-being of society are frequently subject to taxes. 
 Conspicuous among these are the taxes which have been 
 placed upon the liquor industry. The ethical question 
 arises, however, as to the justice of compromising with 
 evil by allowing it to remain by paying a tax. To eliminate 
 an evil at once, however, may not always be desirable, 
 
118 OUTLINES OF PUBLIC FINANCE 
 
 or an institution may be an evil only if it is unregulated. 
 Taxation may be used in these cases as a valuable social 
 weapon. 
 
 Since taxes have so often been used with a social sig- 
 nificance, some would have this aspect a prune considera- 
 tion in the levy of every tax. The purpose of the state is 
 to promote the general welfare, and this is accomplished 
 most effectively when the state so functions as to bring 
 the greatest good to the greatest number. In levying 
 taxes, then, the state should not only be concerned about 
 the sacrifice upon the individual who must pay, but with 
 the good or evil effects upon society as a whole. If the 
 base be considered an evil, then a repressive tax is desir- 
 able, and the resulting good to society would more than 
 counteract the loss to the industry, even though it be 
 destroyed. 
 
 With this idea in mind, officials should carefully con- 
 sider the bases upon which taxes will be levied. Taxes 
 tend to have a repressive effect, and if levied upon a de- 
 sirable and useful industry to such an extent that its 
 production is noticeably curtailed, the sacrifice of the tax- 
 payer may be small in comparison to the general burden 
 on society. Authorities, in levying taxes, then, should be 
 concerned not only with the fiscal aspects, but with the 
 possible repressive effects as well. There can be little 
 doubt that, with the development of the police power, the 
 social aspect of taxes will continue to receive much 
 consideration. 
 
 70. States Do Not Always Attempt to Follow Principles 
 of Justice in Levying Taxes. It must not be forgotten 
 that the primary concern of the state is to get revenue; 
 hence considerations of justice often give way to those of 
 expediency. Taxes are found in the fiscal system which 
 cannot be justified on the basis of equality of sacrifice, 
 and which must be considered in formulating a new 
 scheme simply because they have been embedded there 
 by age. The very fact that they have been able to erjclijre 
 
TAXATION 119 
 
 is enough proof that they are good taxes. To fiscal stu- 
 dents, the saying that an "old tax is a good tax," is almost 
 trite. The ones who pay have become accustomed to the 
 burden and little objection is made. It is a place where 
 the goose may be plucked with little squawking. 
 
 The burden of indirect taxes is much greater upon the 
 poorer classes than upon the rich, yet there is no evidence 
 that they are being given up to obtain equality. The 
 qualities of expediency are too evident to cast them lightly 
 aside. Revenue is easily obtained at low cost and with 
 little objection, since it is paid in the purchase price of 
 goods, frequently without the knowledge of its being paid. 
 The use of the income and inheritance tax by the Federal 
 government, however, is evidence that less reliance will 
 be placed upon indirect taxes in the future than has been 
 placed upon them in the past. Fiscal authorities are often 
 concerned in arriving at a workable scheme one which 
 will produce revenue at a reasonable cost, and which will 
 arouse as little antagonism as possible. In formulating 
 tax programs and in proposing tax reforms, however, 
 public officials have given much attention to justice. 
 
 ADDITIONAL READING 
 
 Seligman, Progressive Taxation in Theory and Practice. 
 
CHAPTER VI 
 
 FEES, SPECIAL ASSESSMENTS, AND OTHER REVENUES 
 
 71. Several Factors May Be Considered in Classifying 
 Revenues. It has been noted that taxes are the compul- 
 sory levies which are made without special reference to 
 the assignment of individual benefits. It is conceivable, 
 of course, that other sorts of payments may be made. 
 Some may be made with no compulsion, while with some 
 only a small degree of compulsion may be used. There 
 may be much difference in the kind and amount of public 
 interest in the benefit which the state gives. Many pay- 
 ments, moreover, give a very direct benefit to the individ- 
 uals making the contribution. Several of these elements 
 may be involved in any single payment. A contribution 
 may not be compulsory, yet if the service is to be enjoyed 
 by the individual a payment must be made. On the 
 other hand, an individual may not wish to pay, yet, be- 
 cause of particular benefits which accrue to him from the 
 action of the state, he is compelled to share in the cost of 
 the benefits. Frequently, also, the state supplies a service 
 which the individual may or may not use, as he chooses. 
 Other avenues may be open to him to get the same service. 
 If he accepts it from the state, however, payment must 
 be made. The forms of revenue suggested by these as- 
 pects will form the basis of most of the discussion of this 
 chapter. The three important forms are fees, special 
 assessments, and public prices. Other minor forms of 
 revenue will also receive brief consideration. 
 
 72. Fees Have an Important Place in Revenue Systems. 
 As the activities of the state expanded, and the means 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 121 
 
 by which it had been self-supporting were either given up 
 or disappeared, a greater amount of reliance for support 
 continually had to be put upon the individual. In order 
 to justify this in the mind of the contributor, the attempt 
 was usually made to show some special benefit which he 
 was receiving from the state because he made the expendi- 
 ture. While much of the revenue of the modern state is 
 in the nature of taxes, yet special payments for special 
 benefits still form an important class. One outstanding 
 example is the fee. 
 
 Definition of Fee. In some respects fees are similar to 
 taxes. In both cases the levy is primarily for the public 
 good. The state fixes the amount of the fee, as well as 
 the amount of a tax. A tax is a compulsory levy, while the 
 fee is largely so. The outstanding difference, however, is 
 that, while the payment of the fee does aid in carrying on 
 a state function for the common good, the state at the 
 same tune gives some special benefit to the individual 
 who makes the payment. A fee might be defined, then, 
 as a semicompulsory levy for some benefit, undertaken pri- 
 marily for the public good, which also confers some benefit 
 on the individual who makes the payment. 
 
 Examples of Fees. Examples of fees are numerous. 
 The varied use of court fees at once presents itself to mind. 
 Courts are maintained for the purpose of establishing 
 justice, yet the individual who avails himself of the service 
 receives a benefit and is charged a fee. The recording of 
 deeds and mortgages, and the issuing of marriage licenses, 
 are undertaken for the public good, yet a charge is made 
 to the individual who records a deed or mortgage or who 
 secures a license. 
 
 Many of our so-called taxes are simply fees. Most 
 license taxes are of this nature. The members of various 
 groups of labor must secure licenses to follow their trade 
 legally. Such are taxicab drivers, teamsters, engineers of 
 various sorts, and peddlers. The state has recognized 
 that the welfare of society demands some regulation of 
 
122 OUTLINES OF PUBLIC FINANCE 
 
 these occupations. It has been found that the individual 
 under regulation has been willing to pay for the privilege 
 of carrying on the activity. The sale of liquor is an exam- 
 ple of an industry which was extensively regulated by the 
 use of the license or fee payments. In such cases the pro- 
 prietor of the business is often anxious that the fee be 
 high, so that his marginal competitors be driven out of 
 business and leave the situation more nearly a monopoly. 
 Under such a condition those remaining in business may 
 more than recoup themselves for the fee paid, by the in- 
 creased prices and trade. It is to the social interest to 
 keep track of the owners of motor cars, and a license must 
 be secured for which a fee is charged before it becomes 
 legal to operate a car. Dog taxes are of the same nature. 
 A profusion of worthless dogs is recognized as a nuisance, 
 and an attempt is made to keep down numbers by levying 
 a tax upon every dog. 
 
 A group of persons may wish to be recognized legally 
 as an individual, and a charter is granted by the state 
 which makes them a corporation. For this service a fee 
 is charged which varies in the different states. Numerous 
 other examples of fees might be given, and many others 
 will occur to the reader. The ones given, however, serve 
 to show the wide extent of the use of fees, and the various 
 purposes which they serve. 
 
 Fees Semicompulsory. These examples illustrate the 
 semicompulsory nature of the fee payment. It can be 
 seen that, while the levy is determined by the public 
 authority, it is only paid when the individual avails him- 
 self of the benefit with which the fee payment is con- 
 nected. That is, if the individual does not avail himself 
 of the benefit no payment is made, but the payment is 
 compulsory if the benefit is used. When the state enacts 
 a statute that every driver of a taxicab must secure a 
 license, for which a fee will be charged, it does not thereby 
 compel any individual to become a driver, but if he secure 
 the privilege to enter this form of obtaining a livelihood 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 123 
 
 he must pay the fee. Neither does the law compel any 
 individual to own a dog, yet if anyone desires to own a 
 dog he must pay for the privilege. Again, a group of in- 
 dividuals could enter business under the partnership form 
 of organization, but if they want the privilege of existing 
 and being known as a corporation, they must pay a fee 
 to the state for granting the privilege. 
 
 The degree of compulsion varies greatly, then, accord- 
 ing to the desirability or necessity of the service which is 
 undertaken. It is sometimes said that in this sense taxes 
 are not compulsory. For example, if a man does not want 
 to pay taxes on his farm he may sell the farm; if he does 
 not want to pay them on income he can cease getting an 
 income. In the first case, the tax on the land would be 
 paid no matter how many sales occurred, and in the second 
 the giving up of an income is highly improbable. The 
 degree of compulsion in all taxes is not the same, neither 
 is it for fees. It may be true that some fees are more 
 compulsory than some taxes, yet in general fees represent 
 a less compulsory form of revenue. 
 
 73. The Characteristics of Fees Vary. The revenue re- 
 ceived from the payment of fees does not always occupy 
 the same place in fiscal systems. It may be set aside for 
 some specific purpose, or simply be placed in the common 
 fund to help meet general expenditures. The dog tax, for 
 example, is commonly set aside to pay damages to sheep 
 owners for the destruction wrought to their flocks by 
 dogs. Some states use all funds secured from licensing 
 automobiles for building or improving highways. A com- 
 mon earlier use of the fee was to remunerate the incum- 
 bent of the office through which the fee was secured. This 
 system proved to be very unjust, because there was fre- 
 quently no relation between the amount of labor of the 
 various officials and the remuneration which came to 
 them. As population increased, moreover, the amount of 
 services to be paid for in this way expanded to such an 
 extent that the resulting remuneration became unreason- 
 
124 OUTLINES OF PUBLIC FINANCE 
 
 ably large. The recent tendency has been to put the re- 
 turns from fees into the general treasury and pay the 
 official a fixed salary. In this way an adequate compensa- 
 tion for services rendered is much more nearly accom- 
 plished. 
 
 No general statement can be made as to the relation 
 between the amount of the fee and the cost of rendering 
 the service. Some have contended that any payment 
 which exceeds the cost of rendering the service automati- 
 cally loses the nature of a fee and becomes a tax. This 
 would perhaps be true of services of a more or less com- 
 mercial nature. When, for example, such charges are 
 made for the use of a postal system that no net revenue, 
 or perhaps a deficit accrues to the government, the charge 
 is evidently a fee. The primary purpose in view is social 
 progress education, enlightenment, ease of communica- 
 tion, and similar considerations. These are the justifica- 
 tions for undertaking the service. If, however, the rates 
 have been so fixed as to lessen the amount of service in 
 order to obtain a large net return that is, the idea in 
 undertaking the sendee has been to get revenue then 
 the charge loses the nature of a fee and partakes more of 
 that of a tax or public price. 
 
 The United States postal services, as well as the con- 
 duct of many municipal water plants, furnish examples 
 of commercial enterprises which have adhered to the fee 
 basis of charge. The French tobacco monopoly is an 
 example of such an enterprise in which the purpose of 
 securing revenue predominates. On the other hand, 
 many fees exceed the cost of providing the service, or 
 there is no attempt made to compare the cost with the 
 exaction which is made. Most of the court fees are exam- 
 ples of this kind. Such services often require simply the 
 filling out of blank forms, for which a nominal fee is 
 charged. The chartering of a corporation, and the grant- 
 ing of various kinds of permits, are other examples of this 
 type. The service is undertaken primarily for the common 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 125 
 
 good, the idea of revenue is secondary, and the arbitrary 
 fee which is exacted is paid because the individual receives 
 a direct benefit. 
 
 Fees and the Police Power. An increase in the use of 
 fees has accompanied the extended use of the police power. 
 This power is that sovereign right of the commonwealth 
 to protect the economic, physical, and moral welfare of 
 its citizens. As former individual liberties become more 
 and more restricted for the good of the group, the system 
 of granting licenses becomes more prevalent. The size 
 of the fee is often governed by the amount of repression 
 which is desired. If the regulation have in view simply 
 to test efficiency, or have on record the members of a 
 particular trade, the fee will likely be comparatively low. 
 The granting of licenses to teachers, engineers, teamsters, 
 and the like would likely be of this nature. When the 
 institution upon which the fee is levied is harmful, and 
 intended to be repressed, the fee may be large. The fees 
 that have been paid by liquor establishments, dance halls, 
 and poolrooms indicate this tendency. 
 
 74. Fees Have Held an Important Place in the Fiscal 
 Systems of European Countries. The importance of the 
 use of fees immediately following the feudal regime has 
 been indicated. It must not be inferred, however, that 
 this was the first tune they formed a part of fiscal systems. 
 Early Greece and Rome furnish numerous examples of 
 fee payments, the nature of which is remarkably modern. 
 Various classes of court fees were used in both countries. 
 Fees for the use of publicly maintained utilities, such as 
 harbors, streets, and roads, were extensively used. Fees 
 were frequently used in connection with religious priv- 
 ileges. The amount of revenue which could be secured 
 was often the factor which determined the size of the fee. 
 
 Fees in England. The modern fees in England are used 
 for the purpose of regulation and for securing revenues. 
 Practically from the beginning both of these motives have 
 been present. The revenue aspect is seen in the fees 
 
126 OUTLINES OF PUBLIC FINANCE 
 
 which were charged for granting monopolies, or for the 
 licenses to hunt and fish upon the public domain. The 
 numerous fees which were used to regulate the crafts and 
 guilds illustrate the other type. When institutions arose 
 which called for state regulation, the regulation was at 
 first undertaken without charge. Fees were soon invoked, 
 however, for the granting of licenses, and the tendency 
 has been to make them heavier. The best example of 
 this type is the fee for granting liquor licenses. Important 
 sources of revenue are the fees from harbors, bridges, 
 roads, lighthouses, and markets. The court fees are also 
 numerous and lucrative. The whole tendency has been 
 to fix the fee at the place where the highest revenue would 
 be secured. 
 
 Fees in France. France has used fees, perhaps, even 
 more extensively. The primaiy motive has usually been 
 revenue, although there are some examples of where the 
 fee charged is less than the cost of the service. The 
 amount of many fees has been raised and lowered until 
 the point which will yield the highest net return has been 
 found, and here it remains. The use of fees has been a 
 remarkably successful part of the fiscal system, owing 
 largely to the highly efficient administrative machinery. 
 Examples of the more important fees which are used in 
 France are those for the use of public utilities and educa- 
 tional institutions, for the granting of patents and hunting 
 and liquor licenses, for permission to erect signs on public 
 property, for registering legal papers, and the postal fees. 
 
 75. Fees Have Been Used Extensively in the United 
 States. The American colonies, as might be expected 
 from the practices of the Mother country, made a wide 
 use of fees. Most of the Colonial officials were remuner- 
 ated for their services by the fees which they collected. 
 The use of money was developed to only a limited extent, 
 consequently most payments were made in products. 
 Much fraud was practiced by the officials in order to in- 
 crease the payments, Simple transactions wer Q often 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 127 
 
 divided into a number of parts, and a fee was charged for 
 each part. Few fees for granting licenses were found, 
 since comparatively little regulation was needed. It would 
 have been surprising, since fees played such an important 
 place in the colonies, had they not been used extensively 
 by the Federal and state governments when they were 
 formed. From the beginning fees have held an important 
 place for various purposes in these governmental units. 
 
 One of the first instances of the use of fees by the Fed- 
 eral government was in connection with the granting of 
 patents. The salaries of the Patent Office officials were to 
 consist of the fees collected. They were so small, however, 
 and the number of patents secured in the early years were 
 so few, that it became necessary to increase the fees. 
 Later the fees were paid directly into the treasury, and the 
 officials were placed on a fixed salary basis. Practically 
 the same has been true of the copyright fees. 
 
 All sorts of fees have been used in connection with ship- 
 ping, such as for handling imports, and for licensing ves- 
 sels, and the numerous maritime officials. At first these 
 fees constituted the remuneration of the officials, but 
 changes were gradually made to a salary basis. The same 
 has been true of the fees connected with the consular and 
 diplomatic service and courts. A large part of the fees 
 of the states and local governmental units are for the 
 granting of some privilege, or for performing some in- 
 spection. A large number of court fees are also found. 
 In most cases the payment goes into the treasury and the 
 official is paid a fixed salary. 
 
 Payment by Salary. One tendency stands out promi- 
 nently in this development of the use of fees to give 
 them up as a basis of payment to officials. In a progressive 
 and changing country it is impossible to frame a schedule 
 which will work justice to all officials. Economic condi- 
 tions may change quickly, so that the operations requiring 
 a fee payment may increase many fold in a few months 
 or may totally disappear.. The payment of officials by 
 
128 OUTLINES OF PUBLIC FINANCE 
 
 fees, who were disposing of the public lands, illustrates 
 the difficulty. Some did " a land office business " and were 
 more than satisfied, while others received so little as to 
 make it unprofitable to maintain the office. These diffi- 
 culties, together with the temptation to fraudulent acts 
 to create more fees, has been responsible for the wide 
 adoption of the fixed salary as a basis of payment. Nu- 
 merous examples may be found, however, especially in 
 the local political units, where the fee is retained by the 
 official as a part or all of his salary. 
 
 76. Fees Have Important Social and Political Aspects. 
 The importance of the indirect social and political 
 effects of the fee system must not be overlooked. It is 
 especially marked where the salary of the official is the 
 fees collected. Under such conditions systems of regula- 
 tion are likely to defeat their own ends. For example, it 
 has long been the custom to require persons contemplating 
 marriage to secure a license. To do this the requirements 
 of the state are expected to be fulfilled, and it is the busi- 
 ness of the official to see that such is the case. If, however, 
 the fee for granting the license is to go to the official, age, 
 relationship, or whatever the requirement may be, might 
 be easily set aside in order to get the fee. The same situa- 
 tion is more or less true of all regulative fees used in this 
 way. 
 
 Sheriffs, police, and city judges have often been paid 
 on a fee basis, with the expectation that they would be 
 more alert to duty. If paid so much per arrest it is likely 
 that the policeman will be more alert to find criminals 
 it will be to his interest to develop crime rather than to 
 prevent and repress it. The attitude of other officials 
 will be much the same when their remuneration is the fee. 
 The judge will be interested in trying more cases, the sheriff 
 in having more commitments to his keeping. Each official 
 act means a fee, hence a larger income. It is to the in- 
 terest of the officials to increase crime rather than to pre- 
 vent it. Examples are numerous of where the sheriff of 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 129 
 
 one county has sought to exceed the hospitality of the 
 sheriffs of adjoining ones in order to obtain more fees for 
 keeping vagrants. A tramp was always welcome, and the 
 longer he stayed the bigger the fee. Most states have 
 overthrown the system, yet in some it seems to be so 
 deeply embedded as to be a fixture. 
 
 Where a magistrate receives a fee for his services, jus- 
 tice is likely to be warped. This system of payment has 
 been given up in most of the larger tribunals, yet it re- 
 mains in some of the smaller, such as those of the justice 
 of the peace. The temptation exists to give the decision 
 in favor of the plaintiff, for if such a reputation is gained 
 that justice of the peace will get more and more cases to 
 try, for anyone bringing suit would much prefer such a 
 justice to one who had given many decisions in favor of 
 defendants. 
 
 Political Corruption. The payment of officials by fees 
 has been the cause of much political corruption. Sums 
 entirely out of proportion to the duties required have 
 been received, and are still received where the system 
 remains. Such positions make desirable political plums 
 to be given to the ward boss, who can afford to go almost 
 any length to secure the lucrative position. Reform comes 
 slowly, because the party in power has given the plums 
 in fulfillment of promises, while the defeated party is 
 promising to give them with the hope of gaining power. 
 
 These social and political evils have no doubt had a big 
 influence in arousing sentiment to abolish fee payments 
 to officials. The Central and Western states have taken 
 the lead, but much remains to be done in the Southern 
 and Eastern sections. It is here that the system has be- 
 come so deeply intrenched in the political machinery as 
 to be hard to remove. 
 
 77. Special Assessments Resemble Taxes and Fees. 
 A third form of revenue that forms an important part of 
 fiscal systems, especially those of municipalities, is what 
 is known as the special assessment. It is a payment re- 
 
130 OUTLINES OF PUBLIC FINANCE 
 
 quired from owners of property because the property has 
 been specifically benefited by some public improvement. 
 A special assessment might be defined as a compulsory levy 
 against property in proportion to the benefits which have 
 accrued to it because of some service undertaken for the public 
 good. Usually the funds exacted are expected to be used 
 in defraying all or part of the cost of the service. Examples 
 most familiar to American students are the levies made 
 upon property by municipalities when streets are paved 
 or sidewalks built. 
 
 Special Assessments and Taxes. In some respects spe- 
 cial assessments resemble taxes, yet they are so dissimilar 
 as to warrant a separate classification. The primary 
 object of the levy, as in the case of taxes, is some common 
 benefit. Special assessments are also similar to taxes in 
 that the payment is compulsory, while the levy is a legal 
 process according to some general rule. A marked differ- 
 ence appears, however, in the measure of the individual 
 benefit which the payee receives. Taxes are paid without 
 reference to specific individual benefits, while in the case 
 of special assessments the basis of the levy is the benefit 
 which accrues to the property. The purpose for which 
 taxes are levied is usually more general and immaterial 
 that is for all sorts of general expenses while the special 
 assessment is for a definite purpose, usually of a material 
 nature, which adds to the capital account of the govern- 
 ment. In modern taxes much concern is given to the 
 ability of the payee to bear burdens, while the special 
 assessment is based entirely on the individual benefit 
 derived from the improvement to property. 
 
 Special Assessments and Fees. Certain similarities exist 
 between the fee and the class of revenue under discussion, 
 yet again the differences are such as to warrant a separate 
 classification. Both are levied by government authority, 
 and both represent a payment for individual benefit re- 
 ceived. The field for the use of the special assessment is 
 limited, however, while that for the fee is almost unlim- 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 131 
 
 ited. The former is a local phenomenon, and always in- 
 volves improvement to property; the latter is restricted 
 to neither locality nor property, but is usually general and 
 personal. Payments of a fee levy will continue to be made 
 with each repetition of the service, which may be frequent 
 or seldom, and there is no defmiteness as to how much 
 these levies will bring to the treasury. A special assess- 
 ment is a definite levy made once for all, while the exact 
 amount to be received is a part of the calculation. Be- 
 cause of these characteristics it adds to clearness to sep- 
 arate special assessments from both taxes and fees. 
 
 Special Taxes and Special Assessments. One should be 
 careful to distinguish between special taxes and special 
 assessments. Special taxes are those which are levied, the 
 expenditure of which will be for some particular purpose, 
 such as school taxes, or road taxes. The expenditure is 
 presumably made in the district where the tax is collected. 
 The special taxes are usually levied upon the same base 
 as other taxes, without reference to any individual benefit 
 which might be calculated to arise from their expenditure. 
 The wealthy unmarried man would be assessed for a 
 special school tax, while a poor man with several children 
 in school might escape. The special assessment is levied 
 for a special purpose, but upon those whom the f ulfillment 
 of the purpose will benefit. 
 
 78. The Special Assessment Has Been Used More Ex- 
 tensively in the United States than in Europe. The first 
 example of a levy of the nature of a special assessment 
 may be found in Europe, yet the real development of the 
 system can be traced through the American colonies and 
 states. As early as the latter part of the seventeenth cen- 
 tury provision was made in New York for the use of the 
 principle. It did not, however, receive extensive develop- 
 ment here, nor was it copied to any extent elsewhere until 
 well into the nineteenth century. The real impetus to 
 its use came with the growth of internal improvements. 
 At present its most prominent place is found in municipal 
 
132 OUTLINES OF PUBLIC FINANCE 
 
 finances, although its use by counties and states is in- 
 creasing with the demand for building improved roads. 
 In a number of cities, at various times, the receipts from 
 special assessments have exceeded those from taxes. Some 
 of the many purposes for which it is used are for laying 
 out and building streets, sidewalks, and roads, for light- 
 ing and sprinkling streets, for building sewers and laying 
 water pipes, for planting shade trees, and for developing 
 parks. 
 
 The special assessment, or betterment tax, is compara- 
 tively little used in European countries, although numer- 
 ous attempts have been made to have it introduced more 
 extensively. Great Britain has perhaps been more an- 
 tagonistic than other countries, and practically all at- 
 tempts to use the principle have met with such objections 
 that they have been given up. One situation which makes 
 its use more difficult is that land or site values are seldom 
 used in levying taxes; the tax is levied on the base of 
 annual rental upon the occupier rather than upon the 
 owner of the land. The " iniquitous American scheme" 
 is gaining ground, however, and is used to a greater extent 
 in the countries on the continent. 
 
 79. The Justice of Special Assessments Has Not Been 
 Destroyed by Difficulties Encountered in Their Use. 
 Some difficulties have arisen in the use of the special as- 
 sessment. A number of these difficulties constitute the 
 chief objections that Europeans have to the principle. 
 One which quickly suggests itself is that of making an 
 assessment in proportion to the increase in property value, 
 and in determining the proper district over which to make 
 the levy. The paving of a street benefits not only abutting 
 property, but also property in the immediate vicinity. 
 An expression commonly used is, "only a block from a 
 paved street." Evidently property in the vicinity of a 
 paved street is enhanced in value, even though an exact 
 measure of the increase may be difficult. The base upon 
 which the levy is to be made is also troublesome at times. 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 133 
 
 Frontage is often used, but this is sometimes so obviously 
 unjust that area or selling value may also be considered. 
 
 It has been objected, frequently, that the use of the 
 special assessment is dangerous because it may compel 
 the property owners to meet the expense of improvements 
 which the nonproperty owners may desire, or that exorbi- 
 tant assessments may be placed by unscrupulous poli- 
 ticians under the guise of conferring a benefit. In so far 
 as the assessment is measured by the actual benefit to 
 property, the first objection can have but little weight. 
 The improvements will mean increased differentials which 
 will be reflected in higher rents, so that much of the 
 burden will rest on the nonproperty owning class if paying 
 for a benefit actually received can be called a burden. 
 Much fraud and injustice have arisen in making special 
 assessments, and there is no doubt that the amount ex- 
 acted has often been far in excess of any benefits accruing 
 to property. Anyone familiar with the Tweed rule in 
 New York City has sufficient evidence of this. The de- 
 cision of the courts, however, that any exaction in excess 
 of benefits is taking of property without just compensa- 
 tion, has done much to alleviate this difficulty. 
 
 The principle of the system, in spite of the numerous 
 difficulties, has appealed so much to the sense of justice 
 that it is being more firmly embedded in municipal fiscal 
 policies. If a public improvement to the property of one 
 individual gives an increase hi value which does not come 
 to the general public, it is but just that some return should 
 be made for this increased value. Great care, however, 
 should be exercised by the administrative authorities in 
 fixing the assessment district and in determining the base 
 and amount of the assessment, so as to alleviate as much 
 as possible injustice and inequality. This admonition ap- 
 plies, however, not only to special assessments, but to 
 other forms of revenue as well. 
 
 80. Prices Are Paid for Commercial Services Supplied 
 by the Government. Numerous examples occur where 
 
134 OUTLINES OF PUBLIC FINANCE 
 
 the state supplies services of a commercial nature which 
 might be supplied by individuals. These are not the same 
 in all countries, nor at all times in the same country. 
 Where services are thus supplied, they are usually such 
 as are given by the post office, waterworks, gas plants, 
 lighting plants, telegraphs, telephones, railroads, canals, 
 and other industries of a similar nature. They are the 
 industries in which the degree of public interest is large, 
 and in which the reason for the government's taking over 
 the industry is usually other than to secure revenue. 
 
 Governments may, however, conduct an industry so as 
 to get the highest revenue; that is, in the same manner 
 as an individual would conduct it. Various government 
 monopolies, such as the French tobacco monopoly, the 
 Indian opium monopoly, or the older salt monopolies, are 
 examples of this condition. The public interest is negli- 
 gible, and the consumer buys from the state on the same 
 basis as if he were buying from an individual. There is 
 no benefit in state ownership except that it is getting re- 
 turns from industry that otherwise would go to individ- 
 uals. The charge is made on the same principle as if it 
 had been made by private management, and has been 
 called a quasi-private price. 
 
 Nature of Public Price. Generally, however, when a 
 government takes over an industry, the item of revenue 
 is not the only consideration in fact, it is usually inci- 
 dental. The feeling exists that the general public has an 
 interest in the conduct of the industry which an individ- 
 ual operator cannot or will not recognize. It is to supply 
 the demands of this public interest that the industry is 
 run by the government, and the amount charged for the 
 service is known as a public price. A public price might 
 be defined, therefore, as a more or less voluntary payment, 
 made for a commercial service, by individuals who receive a 
 special benefit from the service. The word ' ' rate ' ' has some- 
 times been used to designate this charge, but this only 
 adds greater confusion to the already too numerous mean- 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 135 
 
 ings of "rate." Various charges are known as rates, as 
 passenger and freight rates, there is also the rate of tax- 
 ation, while in England the local taxes are known as 
 "rates." 
 
 The amount of the public price is usually governed by 
 the degree of public interest in the conduct of the industry. 
 If the public interest is negligible, as has already been 
 indicated, the basis of the charge will be the same as if 
 the industry were in the hands of an individual. If the 
 conduct of the industry becomes of more importance to 
 the general public, the price charged may be reduced 
 until the service is given at cost. As the public concern 
 becomes more vital, the charges are reduced until the re- 
 turns do not begin to meet the cost. In this situation the 
 price partakes somewhat of the nature of a fee. The dif- 
 ference remains, however, that the payment of the price 
 is voluntary that is, a man may ride on the municipally 
 owned street railway and pay the price, but he may avail 
 himself of any other means of going to town he may choose, 
 and not pay the price. In the case of fees, the avenue for 
 supplying the service is usually limited to the government, 
 while in the case of a price many avenues may be avail- 
 able. The deficit is made up from general taxes. The 
 government may even go so far as to make no charge to 
 the recipients, and meet all expenses from the general 
 tax fund. In such cases the interest of the industry to the 
 public is, or should be, of paramount importance. 
 
 Reduction in Public Prices. The general tendency has 
 been toward a reduction in public prices. Examples may 
 be found representing the various conditions of charge 
 from the quasi-private price down to where no individual 
 charge is made for the service. Public education, as has 
 been previously indicated, has passed through the various 
 stages, and the cost is now met out of the common fund. 
 The same is true of the maintenance of highways and 
 bridges, while a few years ago the cost was partially met 
 from tolls, The public interest has varying effects on 
 
136 OUTLINES OF PUBLIC FINANCE 
 
 postal charges, as has previously been pointed out. Postal 
 rates indicate that some parts of a service may be con- 
 sidered as of greater public interest than others, and 
 prices are fixed accordingly. In this way low magazine 
 rates, and postage-free newspapers within the county of 
 publication, can be justified. Likewise, no individual 
 charge is usually made for water used in sprinkling the 
 streets. There is no doubt that this tendency will 
 continue, and that a greater amount of services will be 
 given by the government, the cost of which will be partly 
 or entirely met from general taxes. 
 
 81. States Have Sources of Revenue of Minor Impor- 
 tance. Taxes, fees, special assessments, and prices 
 charged for commercial products compose by far the 
 larger part of revenues. A few sources of minor impor- 
 tance exist, however, which should be noted. Some held 
 a prominent place in earlier fiscal systems, but have 
 gradually lost their importance. 
 
 Gifts. A form of revenue of this character is gifts. 
 Most political units still receive gifts, but they are usually 
 for some particular purpose, such as a library, hospital, or 
 educational building. Oftentimes it takes the form of a 
 trust fund for some definite purpose. A form of gift of 
 less importance makes up the " conscience fund." Indi- 
 viduals often repent of having defrauded the government 
 and will send in, perhaps years afterward, a sum to 
 square themselves with the government and to ease their 
 conscience. Often these gifts are so small that the cost 
 of the clerical work in properly recording them makes 
 this an expensive form of revenue. 
 
 Escheat and Eminent Domain. Property may come into 
 the hands of the state by escheat or reversion, or by the 
 exercise of the right of eminent domain. The amount 
 received under the first category is, of course, inconsider- 
 able, for there is little property that cannot be claimed 
 by some other ownership than the state. In exercising 
 the right of eminent domain net revenue is not expected 
 
FEES, SPECIAL ASSESSMENTS, REVENUES 137 
 
 to accrue, since a just compensation is expected to be 
 given in return for the property. If the property thus 
 secured should increase in value over a period of time, and 
 then be sold, the state would be the gainer. 
 
 Penalties and Fines. Receipts from penalties and fines 
 are found in all governmental units, and frequently amount 
 to sums which are not inconsiderable. They are levied, 
 not with the idea of getting revenue, but against some one 
 who has committed a misdeed. It is expected that the 
 penalty or fine will act as a deterrent against violation of 
 law. They come under the penal power of the government, 
 and the amounts thus secured are so variable that they 
 are not usually seriously considered as a part of fiscal 
 systems. 
 
 ADDITIONAL BEADING 
 
 Seligman, Essays in Taxation, chaps, xiv, xv. 
 Urdahl, Fee System in tJie United States. 
 Rosewater, Special Assessments. 
 
CHAPTER VII 
 
 EEVENUE SYSTEMS OF IMPORTANT COUNTRIES 
 
 82. Modern Revenue Systems Have Developed Since 
 Feudalism. Many early states, such as Greece and Rome, 
 furnish examples of well-developed fiscal systems. With 
 the growth of feudalism, however, their importance waned, 
 since under this regime the ruler had direct command 
 over a large amount of economic goods and services. 
 The burden imposed upon the individuals was often heavy 
 in fact, it was ordinarily no less than the burden im- 
 posed by modern taxes. Money economy had not yet 
 developed, and these payments were made in kind. As 
 money began to be used, and as the functions of the state 
 began to be widened, a number of monetary payments 
 appeared which at first were considered as commutations 
 for some of the older feudal dues. 
 
 The first payments were demanded for such services as 
 maintaining roads and bridges, for protecting travelers, 
 and for the privilege of importing and exporting goods. 
 It was not long until taxes were levied upon land and 
 other marks of ability to bear tax burdens. The early 
 base of most importance, other than land, was some form 
 of building tax, sometimes upon the building itself, and 
 sometimes upon some distinctive part, such as windows 
 or hearth. It is interesting to note that the payment of 
 these early taxes was looked upon as an indication of ser- 
 vility. No direct taxes were at first levied upon the free- 
 men. The influences of this policy may still be seen in 
 the methods of making assessments in some European 
 countries. 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 139 
 
 Agriculture, in some form, was the predominant indus- 
 try for many years. While this was true, taxes based 
 upon land were, to a large degree, satisfactory, and com- 
 plied reasonably well to principles of justice. Land, how- 
 ever, did not continue to be the sole source of income. 
 Commercial pursuits, and other trades and crafts devel- 
 oped, which made it possible to secure a living, and more, 
 without owning or directly using land. The governments 
 began to extend their services, which meant the need for 
 more revenues. It seemed expedient to secure a part of 
 the increased revenue from these new forms of wealth, 
 and the early tax systems of various countries indicate a 
 branching out to new sources of revenue. The develop- 
 ment was not always the same, and different taxes were 
 used in different countries. It will be instructive to trace 
 briefly the development of the tax system in some of the 
 more important countries. 
 
 83. Early Taxes in England Took a Variety of Forms. 
 Some of the first taxes in England took the form of com- 
 mutations. One of the earliest was known as the ship- 
 geld. When the country was threatened with invasion, 
 the coast towns were expected to furnish ships to aid in 
 the defense. If, for any reason, they did not do this, the 
 tax was levied, and was used exclusively for naval pur- 
 poses. This might be looked upon as a commutation for 
 naval services. An interesting early revenue, while not 
 exactly a commutation, was the Dane-geld. It was levied 
 upon land, and paid as tribute to the Danes to keep them 
 from invading the coasts of England. 
 
 The taxes just mentioned were levied to secure particu- 
 lar services, and the persons taxed were exempt from 
 personally rendering the service. A number of early 
 taxes, however, were levied to secure revenue for general 
 purposes. One of the earliest of these was the hearth 
 tax. This, in effect, was a tax on the family, and was 
 used for a long period of time. Need for increased rev- 
 enue led to the adoption of still other taxes, One of the 
 
140 OUTLINES OF PUBLIC FINANCE 
 
 first was upon tenants occupying royal lands. It was 
 gradually extended until it applied to all rents. It varied 
 at different times, and the tax was often known by the 
 amount taken, as " fifteenths" and " tenths." At times 
 these taxes were supplemented or replaced by some form 
 of poll tax. The exemptions from poll taxes were few, 
 since they were levied upon all men and women above a 
 certain age, actual beggars alone being excluded. It is 
 interesting to note, however, that these poll taxes were 
 often graduated on the basis of property. Some of the 
 more popular rulers secured special funds from the richer 
 classes, which were termed " benevolences." Another 
 fruitful source of funds which was extensively used at 
 various times was the charge made for granting industrial 
 monopolies. The field open to competitive industry was 
 at times extremely limited, and the burden placed upon 
 the consumers of products was severely felt. 
 
 Besides all these forms of direct taxes, duties were levied 
 upon goods which came in or left the country, and that 
 they were generally found as a part of the fiscal system 
 can be seen from the fact that they were called " cus- 
 tomary duties." The modern expression, "customs 
 duties," had its origin in this early phrase. 
 
 84. Later English Taxes Are More Permanent. Many 
 of the direct taxes which are indicated above were grad- 
 ually given up, while the most important one a direct 
 tax on land became a permanent source of revenue. No 
 very definite policy was followed in levying the tax. In 
 order to secure more revenue from larger payments, the 
 privilege was often granted of commuting all future taxes 
 by a single payment. Such a policy, of course, was ill 
 advised, since it used for present purposes what should 
 have been kept for future needs. 
 
 Land Assessment. The land tax continued to be an 
 important part of the fiscal system. In the course of de- 
 velopment, assessments began to be made on some definite 
 basis, and the easiest was that of area. The injustice of 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 141 
 
 this soon became apparent, and the gross product was 
 substituted. Gradually, however, the net product was 
 brought to the front, and this still remains the base. 
 Taxes are regarded as a charge upon rentals, since land 
 values are calculated in terms of rents, rather than in 
 terms of selling price. " Twenty years' purchase 77 is an 
 expression little used in America, yet common in England. 
 
 Income Tax. The wars hi which England engaged 
 about the first of the nineteenth century created a demand 
 for more revenue than was being supplied by the existing 
 sources. It was then that the income tax was introduced, 
 a form of taxation which has since occupied an important 
 place in the fiscal machinery. The provisions of some of 
 the early laws appear decidedly modern. A simple de- 
 gressive scheme was used a fixed exemption was allowed, 
 and a proportionate rate was levied upon the remainder. 
 With incomes of a certain nature, such as salaries and 
 rents, the tax was to be deducted before the income was 
 turned over to the owner. This method is known as col- 
 lection at source. With other classes of income, a declara- 
 tion of the amount of income was to be made, and the tax 
 levied upon this. In cases where there had been a pay- 
 ment at source, while the entire income was less than the 
 granted exemption, the person from whose income the 
 tax had been taken was to be reimbursed by the govern- 
 ment. 1 
 
 Except for a few years, the income tax has continued 
 to be used extensively, and to-day, combined with prop- 
 erty taxes, forms the most important part of the revenue 
 system. Inheritance taxes, or " death duties," as they 
 are called in England, also form a part of the fiscal system. 
 Some old land and building taxes are still used, but are 
 relatively unimportant. 
 
 Customs Duties. The attitude taken toward customs 
 
 1 A detailed discussion of these methods of levying an income tax, to- 
 gether with a discussion of tho present English income tax, is given in 
 Chapter XII. 
 
142 OUTLINES OF PUBLIC FINANCE 
 
 duties is an interesting phase in England's fiscal develop- 
 ment. The importance of their early use has already been 
 indicated. About the middle of the nineteenth century, 
 however, after considerable agitation and opposition, the 
 protective principle was largely removed from the tariff 
 laws, and at the same time any protective feature in the 
 remaining duties was offset by the excise duties. The agi- 
 tation for such action was from the classes who wished to 
 foster an .extension of trade and who considered that 
 much of the misery of the lower classes was due to the 
 protective laws. 
 
 The agitation for the reduction of duties centered around 
 the repeal of the corn laws. These had been kept in force 
 to secure higher prices for the products of land so it could 
 more ably meet the taxes which were imposed upon it. 
 Since the repeal of these laws, protective duties have had 
 no very important place in England's fiscal policy. Her 
 tariff schedules are primarily for revenue, are composed of 
 few commodities, and are comparatively simple. 
 
 Local Taxes. Contrary to the situation in most Euro- 
 pean countries, the local taxes of England have always 
 been more or less separated from the influence of the cen- 
 tral authorities. The levies are made and collected by 
 local authorities for the use of the local district. The taxes 
 are often levied for particular needs, and are known by 
 the purpose for which the levy is made, as, for example, 
 the poor rates. Land in some form was at first the prin- 
 cipal base of assessment, but other bases have developed. 
 Some indirect taxes are also used in securing funds for the 
 different localities. 
 
 85. Indirect Taxes Play an Important Role in the Fiscal 
 System of France. The feudal period in France, as in 
 England, contained a number of exactions for the govern- 
 ment. These were generally upon land, and were more of 
 the nature of rents than of taxes. As feudalism disinte- 
 grated and government activities increased, larger rev- 
 enues became imperative. Taxes upon articles of con- 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 143 
 
 sumption were extensively used. Because of the general 
 acceptance of the mercantilist doctrine, charges were also 
 levied upon imported goods. These taxes formed the 
 most important part of the early French revenue system. 
 The consumption taxes were upon such articles as drinks, 
 jewelry, paper, oil, and the like. Besides taxes upon goods 
 coming into the country they were often levied upon 
 goods which were brought into the cities. They were 
 levied at the city gates and were called gate taxes. 
 
 Early Direct Taxes. A number of more or less direct 
 taxes also found a place in the early fiscal system. Their 
 form resembled, somewhat, the exactions which had been 
 made under feudalism. One of the earliest taxes used 
 was very similar to the modern general property tax, 
 since land, rentals, and various sorts of property were 
 taken as the measure of the tax which was to be paid. A 
 source of revenue which was occasionally used was a sort 
 of income tax. It was one or more twentieths of the 
 income from land or other property. Somewhat similar 
 was the tax exacted for the benefit of the church. This 
 was a certain fraction, not always the same, of the prod- 
 ucts of the land, and was to be paid in kind. 
 
 An interesting demand upon the people was that of 
 services for the maintenance of highways and other forms 
 of public utilities. The levies were made, both upon 
 property and upon persons. No classes were exempt, yet 
 some could commute into a money payment or hire some 
 one else to perform the service. The tax upon salt really 
 amounted to a direct tax, since it was stipulated how much 
 salt should be purchased for each member in a family. 
 Poll taxes were used in varying degree. The amount to 
 be assessed was based upon a number of items, such as 
 rank, property, and amount of other taxes paid. There 
 were a number of classes, usually determined on the basis 
 of ability to pay. Occasionally certain classes, such as 
 the clergy, were exempt. 
 
 Modern Indirect Taxes. The modern fiscal system 
 
144 OUTLINES OF PUBLIC FINANCE 
 
 closely resembles the early one. Indirect taxes form a 
 relatively important place and yield much more revenue 
 than do the direct taxes. The extensive use of this form 
 of taxes is easily accounted for. The need for increased 
 revenues has grown rapidly, while the lack of political 
 solidarity in the country has been marked. When such 
 a condition exists it is imperative for the party in power 
 to conceal the taxes as much as possible in order to keep 
 the burdens from being felt, and thus prevent dissatisfac- 
 tion and perhaps rebellion on the part of the constituency. 
 
 Taxes upon the consumption of goods still hold an im- 
 portant place in the revenue system. Some of the more 
 characteristic objects taxed are wines, liquors, salt, sugar, 
 and tobacco. The old gate taxes are still maintained by a 
 number of cities, both for raising their own revenue and 
 for that apportioned upon them by higher governmental 
 units. The collection of a tax through a government 
 monopoly is well illustrated by the French tobacco mo- 
 nopoly. The government does not own the entire process 
 of production, but closely regulates and supervises every 
 step, fixes the rate of pay for the workers and the selling 
 price of the product. 
 
 Modern Direct Taxes. It must not be inferred, how- 
 ever, that direct taxes do not occupy an important place 
 in the French fiscal policy. A number of these taxes exist, 
 and are modified to meet varying needs. The more im- 
 portant are the taxes levied upon real estate, upon doors 
 and windows, the business tax, and a combination poll 
 and building rental tax. Besides these, numerous fee pay- 
 ments are required, such as for inspection, certification, 
 licensing vehicles, and similar services. 
 
 The importance of the French business taxes will be 
 taken up in a subsequent chapter. The other direct taxes 
 are, to a great extent, apportioned taxes. The tax on 
 land formerly included any assessment of buildings which 
 was attempted. Later, a separate tax was adopted for 
 these two forms of property, and a different method of 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 145 
 
 levy v/as provided. The door and window tax is used to 
 supplement the land and building tax, and is an attempt 
 to raise additional revenue from those who are able to 
 pay. A large number of windows and doors is considered 
 as indicative of wealth, and consequently of taxpaying 
 ability. The combination poll and rental tax is designed 
 to fall upon what is generally termed personal property, 
 as well as upon the individual. The poll tax is a definite 
 amount, and levied upon each individual, with some ex- 
 emptions. The rental tax represents the elastic feature, 
 and is large or small, according to the needed revenue, 
 after the poll tax has been collected. 
 
 86. The Prussian Tax System Has Had a Systematic 
 Development. Most tax reforms have been spasmodic 
 and have come as the result of necessity rather than of 
 deliberation. Often changes have been made to lighten 
 the burden on particular classes of persons who, for the 
 time being, held the balance of power. It is often neces- 
 sary to secure revenue, and the most expedient plan has 
 been the one most generally used, with little thought as 
 to the justice of the scheme itself, or its relation to other 
 methods of raising revenue which may be in use. This 
 characterization is true, to some degree, of every country, 
 but is less applicable to Prussia than to any other. This 
 is because a number of students, from an early period, 
 made careful investigations and calculations as to what 
 the tax system should be. In framing fiscal measures 
 the government used either these authorities or people 
 trained by them. Consequently the fiscal system devel- 
 oped along carefully predetermined lines and embodies 
 such ideals of justice as careful study and investigation 
 would warrant. 
 
 Early Revenues. The systematic development just out- 
 lined does not apply to the early revenues. These rev- 
 enues existed before studies could be made, and were 
 secured from any available source. In some parts of the 
 country the methods in use were crude, while in others, as 
 
146 OUTLINES OF PUBLIC FINANCE 
 
 in the independent cities of advanced political and eco- 
 nomic development, the fiscal system showed much more 
 regularity. The real need for revenues was felt here, as in 
 other countries, with the decline of feudalism. Numerous 
 occasions, such as wars, would arise, in which expenditure 
 was made distinctly for the common benefit. 
 
 Attempts were made to collect the needed funds from 
 a poll tax, levied upon individuals, but measured by the 
 income and property of the individual. When these failed 
 to meet the needs, the officials would often go out and beg 
 more funds hence the term "bedes," which was applied 
 to these early revenues. A particular set of "bedes," or 
 voluntary payments, soon became a fixed charge, while 
 further voluntary payments were often asked for par- 
 ticular purposes. It was a system of gradually converting 
 a voluntary payment into a fixed one. The name "bede" 
 still remains, though its early significance is lost. Certain 
 classes were exempt from these payments, but were fre- 
 quently asked to donate something to the use of the 
 state. 
 
 Early Reforms. When systematic studies began to be 
 made, agitation for reform arose, and it was not long 
 before some of the suggestions of the investigators were 
 adopted. One of the first accomplishments was to de- 
 stroy the old feudal relationship between the tenant and 
 the proprietor of land. Many changes were made in the 
 kind of land taxes and in the method of the assessment. 
 The final result of the experiments was a tax upon the 
 net rental of the land. 
 
 Throughout the early development the tax on buildings 
 was included as a part of the land tax. When net rentals 
 were adopted as the base for land assessments, however, 
 the taxation of buildings was put in a separate category. 
 In the cities the rental value of the building is usually 
 taken as the base for assessment, while in rural communi- 
 ties a number of factors are considered. Another direct 
 tax which received wide use, and which has been very 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 147 
 
 productive, was the one placed upon industries of various 
 kinds. Changes in industry necessitated many changes 
 in this form of revenue. It is rather remarkable that, 
 since so much of the early funds was secured from these 
 sources, later all three were given over to the smaller 
 political units, and the revenue collected was expended for 
 local purposes. 
 
 Consumption and Income Taxes. Consumption taxes 
 were early used as sources of revenue. They were intro- 
 duced with the abandonment of the feudal payments, 
 were placed upon necessities, and were made applicable 
 alike to urban and rural districts. The administrative 
 problem proved so difficult, especially in the country, that 
 it was not long before poll taxes were substituted in all 
 but a few localities. Out of this uniform poll tax a class 
 tax soon developed. Classes were formed on the basis of 
 wealth, profession, and other characteristics, and each 
 individual of a particular class was to pay a definite 
 amount. These taxes, with some modifications as to 
 classes and rates, formed the most important part of the 
 system until the income tax was introduced. 
 
 The income tax was adopted about the middle of the 
 nineteenth century, and since then has supplanted the 
 former class taxes in importance, although the latter are 
 still used to some extent. The scheme for taxing incomes 
 has been modified with attempts to more nearly approach 
 ability to pay. Progressive rates are found, not only for 
 incomes of increasing size, but also on incomes from prop- 
 erty as distinguished from incomes from labor. As might 
 be expected, assessment difficulties have been hard to 
 eliminate. A more detailed study of the Prussian income 
 tax will be found in the chapter on Income Taxes. 
 
 87. Fiscal Development in American Colonies Was Not 
 Uniform. The conditions under which the fiscal systems 
 of the Ajnerican colonies developed possess a number of 
 distinctive features. Land was never held under a feudal 
 regime, but could always be bought and sold, so the fiscal 
 
148 OUTLINES OF PUBLIC FINANCE 
 
 systems were not modified by a transition to private own- 
 ership. Some payments of the officials in earlier Colonial 
 history resembled, somewhat, the older feudal payments. 
 Such were a part of the products of the soil which were 
 occasionally collected. 
 
 Another situation peculiar to the colonies was that they 
 were not free to shape a fiscal system which did not con- 
 form to the ideas of the Mother country. The lack of 
 uniformity in industrial pursuits, moreover, made a uni- 
 form development of tax measures a circumstance not to 
 be expected. Consequently, the early fiscal development 
 corresponds, somewhat, to the economic characteristics 
 which distinguish one section of the colonies from the 
 others. 
 
 Northern Colonies. Where definite forms of property 
 developed, this was taken as an indication of ability to 
 pay taxes, and some form of a property tax was found. 
 In some cases specific articles were stipulated as the base 
 upon which taxes were to be levied, as land, horses, or 
 cattle; in others, all forms of property were taken as the 
 base. The latter condition gradually became prevalent 
 as more and more objects were added to the taxable list 
 in those localities where only specific forms of property 
 had been taxed. 
 
 The above method of securing revenue is best illustrated 
 in the Northern colonies, although it was not entirely con- 
 fined to them. Even there it was frequently supplemented 
 with other sources of revenue. In the use of property as 
 a base, the attempt was made to arrive at the taxpaying 
 ability of the citizens, and a number of the early laws 
 state that the measure was adopted in order to meet the 
 ability to bear taxes. It was on this ground that the 
 extension of the list of taxable property was justified, as 
 well as the inclusion of professional classes, such as law- 
 yers, doctors, and others whose incomes were of such a 
 nature as to enable a tax burden to be met. Some use was 
 also made of different forms of indirect taxes, but it was 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 149 
 
 of little importance when compared with the taxes on 
 property. Frequently, also, poll taxes were found. 
 
 Middle and Southern Colonies. Economic conditions of 
 the Middle and Southern colonies differed from those of 
 the Northern group. Commerce developed much earlier, 
 and continued to be more active. The small farm of the 
 North gave way to the large plantation of the South. It 
 was the difference between a general ownership of land 
 and a small property-holding class. This class, as might 
 be expected, was not in favor of land bearing the tax 
 burdens, and other measures were sought. The poll tax 
 received early consideration and was extensively used. A 
 uniform levy was at first adopted, but the injustice soon 
 became so glaring that the kind and amount of property 
 owned was considered in making the levy. The poll tax 
 was also considered as a lien against property. The sys- 
 tem was so unsatisfactory, however, that indirect taxes 
 were used extensively. These took the form of export 
 duties as well as import duties. 
 
 In the middle group of colonies trade developed almost 
 at the beginning, and was the logical source of obtaining 
 revenue. Consumption duties were levied as well as im- 
 port and export duties. These did not take care of all 
 the needs, and resort had to be made to other sources of 
 revenue. Under the Dutch rule of Peter Stuyvesant in 
 New York, for example, an " honest and fair tax" was 
 placed upon "land, houses, or lots, and milch cows or 
 draft oxen." Property taxes gradually increased in im- 
 portance in this group of colonies, and at the time of the 
 Revolution they were firmly embedded as a fundamental 
 part of the fiscal system of all the colonies. These taxes 
 centered around land, and the importance of its ownership 
 was intensified in some colonies by making the full rights 
 of citizenship dependent upon the possession of a certain 
 quantity of land. 
 
 88. The Central Government Encountered Difficulties 
 in Financing the Revolution. The difficulties encountered 
 
150 OUTLINES OF PUBLIC FINANCE 
 
 by the central government in securing funds to carry on 
 the Revolutionary War warranted some express provi- 
 sions in the Federal Constitution in regard to revenues. 
 The underlying difficulty was that the Continental Con- 
 gress had no compelling power, neither had it any inde- 
 pendent source of revenue. Its sole course was to make 
 requisitions upon the colonies, but it could not enforce 
 payment. The Colonial revenue systems were simple, 
 and had never been strained by heavy demands, since 
 the governmental functions were comparatively few and 
 inexpensive. To expect them to respond to such a need 
 as a national war would have been to expect entirely too 
 much. Indeed, the results were even better than such a 
 loose arrangement might warrant, for more than 50 per 
 cent of the paper money requisitions were paid, and about 
 15 per cent of the specie demands. 
 
 The fiscal provisions in^the Articles of Confederation 
 illustrate the lack of power of the central government. 
 No state was expected to levy duties that would interfere 
 with any treaties into which Congress might enter. All 
 the general expenses were to be met from a common fund, 
 which was to be supplied by the various states in propor- 
 tion to the value of land and improvements. The levies 
 and collections were to be made by state authorities. 
 
 The lack of any power to enforce these provisions re- 
 sulted in a dearth of funds. An attempt was made in 1781 
 to get the consent of the states to a rather general 5 per 
 cent tax on imports. In spite of many protests and much 
 coercion, Rhode Island remained firm against the meas- 
 ure and its adoption failed. Two years later an attempt 
 was made to secure import duties on certain specific 
 articles, the collection to be made by state officials. Less 
 interest was shown in this than in the previous proposi- 
 tion, and the continued opposition of New York kept the 
 proposal from becoming active. 
 
 89. The Federal Constitution Contains Important Fis- 
 aj Provisions, Fiscal problems, as might be expected, 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 151 
 
 received no little attention in the Constitutional Conven- 
 tion. The measures in the Constitution to safeguard the 
 revenues of the Federal government are as follows: 
 
 Congress shall have power to lay and collect taxes, duties, imposts, 
 and excises, to pay the debts and provide for the common defense 
 and general welfare of the United States; but all duties, imposts, and 
 excises shall be unif jrm throughout the United States. 
 
 No capitation, or other direct tax, shall be laid, unless in proportion 
 to the census or enumeration hereinbefore directed to be taken. 
 
 No tax or duty shall be laid on articles exported from any state. 
 
 No state shall, without the consent of Congress, lay any imposts or 
 duties on imports or exports, except what may be absolutely neces- 
 sary for executing the inspection laws; and the net produce of all 
 duties and imposts, laid by any state on imports or exports, shall be 
 for the use of the treasury of the United States; and all such laws 
 shall be subject to the revision and control of the Congress. 
 
 All bills for raising revenue shall originate in the House of Repre- 
 sentatives; but the Senate may propose or concur with amendments, 
 as on other bills. 
 
 The importance of providing for uniform duties is clear. 
 Had it been otherwise, disgraceful state and sectional fili- 
 bustering and log rolling to secure local advantages would 
 have been augmented by attempts to secure favorable 
 duties for a particular section. Attempts to make the ex- 
 pression " uniform" apply to individuals rather than to 
 localities, have been frustrated by the courts. 
 
 Direct and Indirect Taxes. The apportionment of direct 
 Federal taxes caused much difficulty in the Constitutional 
 Convention, and the solution, from the standpoint of jus- 
 tice, leaves much to be desired. The previous apportion- 
 ment with land values as a base had been a failure, because 
 no adequate assessment had been made. The apportion- 
 ment, according to numbers, is no less objectionable. 
 With such an unequal distribution of taxpaying ability 
 as exists among individuals in the United States, appor- 
 tionment on this basis cannot but work injustice. The 
 greatest virtue of the provision is that it seldom has been 
 used. Even when it has been tried the success has not 
 
152 OUTLINES OF PUBLIC FINANCE 
 
 been all that could be desired. The revenues have come 
 in slowly and in uncertain amounts. The first attempt to 
 use it was in 1798, when $2,000,000 was apportioned 
 among the states. It was still being paid five years later. 
 Direct taxes were again used as an emergency measure 
 at the tune of the War of 1812, and also at the time of the 
 Civil War. The states were tardy in paying their appor- 
 tionment and the full amount never was received. 
 
 Meaning of Direct Taxes. The meaning of direct taxes 
 has not always been clear, and has led to considerable 
 litigation. The court has usually decided the particular 
 case before it, without giving a general interpretation. In 
 its decisions it has not always been consistent, neither has 
 it followed the distinctions which have usually been laid 
 down. The income tax of the Civil War was held to be 
 constitutional, while a similar tax in the early 'nineties was 
 declared to be unconstitutional on the ground that it was 
 a direct tax not levied in accordance with population. 
 Soon after the adoption of the Constitution, an attempt 
 was made to secure Federal revenues by levying a tax on 
 carriages and on the sale of certain commodities. The 
 carriage tax varied according to the kind of carriage and 
 was contested on the ground that it was a direct tax. The 
 ordinary distinctions between direct and indirect taxes 
 would place such a tax in the former class, yet the court 
 did not so rule. It held that a tax on expense was to be 
 considered as an indirect tax. Carriages were consumable 
 commodities, therefore an expense to the owner, and a 
 tax would be an indirect one. The court was inclined to 
 believe, it is said, that the direct taxes intended by the 
 Constitution were a poll tax and a tax on land. 
 
 Restriction upon Export Duties. The singular provision 
 that prohibits the levy of taxes on exports was due to the 
 efforts of the Southern coast states. Many leaders of the 
 convention urged the necessity of granting Congress power 
 to levy export duties. The delegates of these Southern 
 states feared such a power might be used to discriminate 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 153 
 
 against their agricultural exports. For fear of losing the 
 support of the South, therefore, the concession was 
 granted. 
 
 The taxes used by the Federal government, then, are 
 principally of the indirect nature. They consist of two 
 kinds duties upon imported goods, and internal revenue 
 duties. The protective feature of the import duties, how- 
 ever, has often surpassed the revenue aspects in impor- 
 tance. The use of the Federal income tax, which was 
 authorized by the Sixteenth Amendment to the Consti- 
 tution, has been an important recent source of revenue. 
 A tax upon the net income of corporations and a Federal 
 inheritance tax have also been used to a small extent. 
 
 90. Numerous Taxes Make Up the Revenues of the 
 States. The fiscal systems of the states are separate and 
 distinct from that of the Federal government. The Fed- 
 eral government is one of delegated powers, while the 
 powers of the states are residual. Much diversity, there- 
 fore, might be expected in the fiscal systems of the states, 
 while the Federal system can only be changed by constitu- 
 tional amendment or a change in court interpretations. 
 
 Constitutional Limitations. The constitutional provi- 
 sions noted above have an appreciable effect upon the 
 revenue systems which can be used by the states. No 
 state, of course, can levy duties upon exports or imports. 
 The significance of this restriction has increased in im- 
 portance as commerce has become more extensive, and 
 has opened up greater and greater possibilities of securing 
 revenue. The constitutional provisions which guarantee 
 the citizens of one state all the privileges and immunities 
 of the citizens of another state, and which give the con- 
 trol over interstate commerce to the Federal government, 
 place further limitations upon the state's taxing power. 
 No state can, therefore, lay a tax upon a citizen of another 
 state which does not apply likewise to its own citizens. 
 The courts have excepted corporations from this inter- 
 pretation of citizenship. A corporation which does busi- 
 
154 OUTLINES OF PUBLIC FINANCE 
 
 ness in a state other than the one in which it was char- 
 tered may be taxed differently from corporations formed 
 within the state. Should a state attempt to levy a tax 
 upon goods, either leaving its borders or coming in, this 
 action would immediately be declared void by Federal 
 authorities because of the interference with interstate 
 commerce. Consequently, what might be made a very 
 fruitful source of revenue cannot be used, and resort must 
 be had to forms of taxation which will stand under the 
 constitutional provisions. 
 
 State Taxes. Some form of property tax was early 
 found in all the states, and has so developed as to include 
 practically every form of property, both personal and 
 real. In spite of the difficulties which have arisen, it still 
 remains the tax of primary importance in every state, if 
 not for state purposes, for the minor political divisions. 
 Problems of equal assessment arose at the beginning of 
 its use, but have increased many fold with the develop- 
 ment of immense wealth in the form of intangibles, which 
 so easily escape assessment. Many innovations and modi- 
 fications have been tried to remedy the defects, but with 
 far from satisfactory results. The long use of the property 
 tax has so firmly embedded it in state and local tax sys- 
 tems that attempts to dislodge it, or even materially 
 modify it, have generally proved futile. 
 
 The property tax still retains much of its earlier im- 
 portance, yet other taxes are used in most states to sup- 
 plement it, and in some cases almost to supplant it for 
 securing funds for state purposes. Where this is true, the 
 property tax is given over more exclusively to the local 
 political units. One of the first taxes to be used, and one 
 which possesses great possibilities which have not been 
 developed, is the inheritance tax. It is only recently that 
 its adoption has become important, and as yet the rates 
 are comparatively low. A few states have developed the 
 use of the income tax, and its further extension as a source 
 of state revenue may be hastened by the adoption of the 
 
REVENUE SYSTEMS OF IMPORTANT COUNTRIES 155 
 
 Federal income tax. The policy of most states of impos- 
 ing taxes of various sorts upon corporations is one of 
 increasing importance. Early corporations were looked 
 upon in a measure as public benefactors, and consequently 
 were treated with leniency. As this attitude changed, 
 and as it began to appear that corporations were well able 
 to contribute to the support of the state in a way which 
 they were not doing under the property tax, states began 
 to impose special taxes upon them. License and business 
 taxes, in recent years, are finding a more important place 
 in the fiscal systems of states. 
 
 Local tax systems are largely governed by the states, 
 and invariably hinge around property taxes. License 
 and business taxes, as well as special assessments, are also 
 used. The principal taxes used by the Federal, state, and 
 local governments will be treated in detail in some of the 
 succeeding chapters. 
 
 91. Definite Tendencies Are Indicated by Fiscal Sys- 
 tems. In this review of the development of tax systems 
 of different countries certain definite tendencies may be 
 noticed. The most important, perhaps, is that, as the 
 central governments become older, and the political duties 
 and responsibilities become recognized by the citizens, 
 direct taxes can be used to supply an increasing propor- 
 tion of the needs. This is evidenced by the importance of 
 the income tax in the fiscal systems of England and Prus- 
 sia, and its recent adoption in the United States. 
 
 Another noticeable tendency is to place less reliance 
 upon property as a base for taxes. The European coun- 
 tries have given it up in large measure, while in the Ameri- 
 can states other taxes are being used to supplement it, 
 and in a few cases the revenue from property is left almost 
 entirely for the use of localities. The tendency has de- 
 veloped, also, to formulate revenue systems, based upon 
 ability to pay taxes. The gradual replacing or supple- 
 menting of indirect taxes by those, the burden of which 
 can more easily be traced, and the seizing upon new forms 
 
156 OUTLINES OF PUBLIC FINANCE 
 
 of ability as they make their appearance, are evidences of 
 this condition. 
 
 No generalization can be made as to tendencies toward 
 centralized control of fiscal systems. In some European 
 countries such control is practically absent, while in others 
 it is important. In the United States, aside from consti- 
 tutional limitations, the Federal government exercises no 
 control over the states. The states, however, usually 
 have complete control over the minor political divisions. 
 There has been a recent movement in some parts of the 
 country to secure local option in fiscal matters, but as yet 
 it has met with little success. Another very marked 
 tendency in every political division is the resort to the use 
 of public credit. A subsequent chapter will be devoted to 
 this aspect of revenues. 
 
 ADDITIONAL READING 
 
 Seligman, Essays in Taxation, chap. xvi. 
 
CHAPTER VIII 
 
 THE SHIFTING AND INCIDENCE OF TAXES 
 
 92. The Justice of a Tax May Depend on Its Shifting 
 and Incidence. A proper understanding of the terms 
 shifting and incidence is necessary before their discussion 
 can profitably be undertaken. Fiscal authorities may 
 place a tax upon a particular individual, which he will 
 pay. He may, however, in some way, transfer the bur- 
 den of this tax to a second individual; the second may 
 transfer it to a third, and so on. The burden must, how- 
 ever, finally rest somewhere that is, a point will be 
 reached where there will be opportunity or possibility for 
 no more transfers. This process of transferring a tax 
 burden from one individual to another is called shifting] 
 the point where the burden finally rests is called the inci- 
 dence. The expressions have the same meaning as when 
 applied by physicists to rays of light. A ray of light may 
 be shifted or refracted in various directions by mirrors or 
 prisms, but it will finally rest or hit upon some point, and 
 this point is its incidence. The incidence of a tax is 
 usually considered as the result of its having been shifted. 
 If, however, a tax burden remained where it was first 
 placed, the incidence properly might be said to be here, 
 even though no process of shifting occurred. 
 
 The shifting of a tax must be clearly distinguished from 
 the evasion of a tax. When an individual evades a tax 
 he neither pays it and bears the burden, nor does anyone 
 else. If all taxes were evaded no revenue would accrue 
 to the state, while if all were shifted the revenue would not 
 be affected, yet the person making the payment would 
 
158 OUTLINES OF PUBLIC FINANCE 
 
 not feel the burden. When the holder of a mortgage, for 
 example, does not list it with the tax assessor, he evades 
 the tax. If, however, he lists the mortgage as a part of 
 his property, pays the tax levied upon it, and then charges 
 the mortgagor a sufficiently high rate of interest to recoup 
 himself for the tax, it is shifted, and the incidence is on 
 the mortgagor. 
 
 Justice in taxation has long been an important fiscal 
 problem, and from the time authorities began to give it 
 their attention the question of shifting and incidence has 
 received careful consideration. Some of the early theories 
 of taxes find their justification in the ideas which were 
 held concerning this particular phase. The ideas were 
 sometimes unsound, and the tax systems were modified 
 as experience showed the fallacies around which they 
 were built. Some attention has been given to the shifting 
 and incidence of revenues from the beginning of fiscal 
 operations, yet it is only recently that any scientific study 
 has been made as to causes, results, and methods. It is 
 at present one of the most important questions if, in- 
 deed, not the most important to be considered in deter- 
 mining the justice of taxes. It is only when knowledge is 
 had of the real bearer of a tax burden, that correct judg- 
 ment can be passed as to the real justice of that tax. 
 
 To know merely that a tax has been shifted is often 
 insufficient knowledge to a reader or an investigator. It 
 is not known how far the incidence is removed from the 
 levy of the tax, whether the tax has been shifted once, 
 twice, or a half dozen times. Neither is it known whether 
 the shifting has been backward toward the producer, or 
 forward toward the consumer, yet a tax might be shifted 
 in either direction, depending on circumstances which 
 will be discussed later. Where there has been more than 
 one stage in the shifting process, a student often wants to 
 notice the consequences of the tax, or the mode of shifting 
 at one or more of these stages. The expressions, original 
 incidence, or first incidence, second incidence, and so on ? 
 
THE SHIFTING AND INCIDENCE OF TAXES 159 
 
 are sometimes used to denote the different stages in the 
 shifting process. When used without a qualifying word, 
 however, incidence refers to the final resting place of 
 a tax. 
 
 A fiscal system which attempted to levy taxes only 
 upon the individuals most able to bear tax burdens, might 
 be very unjust in its operation because of the shifting of 
 these burdens. The attempt should be made to levy 
 taxes so that the incidence will occur where there is the 
 greatest ability to bear the burden. Such an ideal, of 
 course, would be difficult to attain, but it can be more 
 nearly attained if fiscal authorities understand and apply 
 the principles that govern the shifting and incidence of 
 taxes. 
 
 93. A Study of Shifting and Incidence Is Fundamen- 
 tally a Study of Price. It would be utterly impossible to 
 trace the burden of every tax until the incidence were 
 definitely determined. In fact, it would be impossible to 
 trace definitely, through all its ramifications of direct and 
 indirect influences, the shifting of any tax burden, though 
 it could be much more nearly done in some cases than in 
 others. Some taxes are not shifted at all, others to a very 
 small extent, while the burden of some is lost in the great 
 mass of a consuming population where it is impossible, 
 sometimes, even to locate or estimate the burden. 
 
 The Diffusion Theory. The difficulty of tracing a tax, 
 however, need not discourage a study of the principles 
 which underlie the conditions which make shifting possi- 
 ble. An early group of theorists held that every tax was 
 shifted on and on, ad infinitum, until the burden rested 
 upon every individual. This is known as the diffusion 
 theory, and was supported because it was believed that 
 taxes were so diffused that the amount which fell upon 
 any individual was so small as to be practically burden- 
 less. A moment's reflection, however, will reveal the fal- 
 lacy of such reasoning. 
 
 Suppose an individual buys a s.uit of clothes for his own 
 
160 OUTLINES OF PUBLIC FINANCE 
 
 consumption, for which he pays $50. There is a 10 per 
 cent tax on the excess paid over $25, or a tax of $2.50. 
 Since he does not pass the clothes on to some one else, and 
 thereby provide the possibility of raising the price to 
 $52.50, in order to recoup himself, he must bear the bur- 
 den. Numerous taxes, such as the one suggested, are 
 familiar to those who bought goods during and after the 
 Great War. If, in the supposed case, however, the tax 
 had been placed on the manufacturer, and he had raised 
 the price $2.50 to the wholesaler, who likewise raised it 
 $2.50 to the retailer, the consumer must pay $2.50 in 
 order to recoup the retailer. The incidence in this case 
 is the same as in the first supposition, although there have 
 been a number of shiftings. But the consumer cannot 
 shift the tax farther. The suit of clothes is now past the 
 final stage of production, and has ceased to influence the 
 producer-consumer relationship. It no longer can enter 
 into demand and supply as it did when in the hands of 
 the retailer, wholesaler, or manufacturer. 
 
 Demand, Supply, Price. From this example it is seen 
 that a tax on a good cannot be shifted by the consumer if 
 it is levied after the last stage of the productive process. 
 In other words, there must be a chance to affect an in- 
 crease in price to some one else in order to regain the tax. 
 It is a truism to economic students that the two most 
 active determinants of price are supply and demand. In 
 order to influence price, then, the individual who wishes 
 to shift a tax must do it through influencing one of these 
 factors. The case would be rare where a good would be 
 more in demand after a tax had been placed on it than 
 before, for it is difficult to see how the circumstance of a 
 tax would increase the utility. It might be true in cases 
 where the use of taxed goods gave some mark of distinc- 
 tion, and therefore made them desirable, but such cases 
 would be so rare as to need no consideration. 
 
 Ordinarily, then, the price change must be effected 
 through a change in the supply. A decrease in the supply, 
 
THE SHIFTING AND INCIDENCE OF TAXES 161 
 
 with a constant demand, will raise the marginal utility, 
 hence increase the price and allow the tax to be shifted. 
 From this brief review of the nature of price it is easily 
 seen that a study of tax shifting is fundamentally a study 
 of the laws of price. With this in mind it will be interest- 
 ing to note the possibility of shifting some of the more 
 common taxes. 
 
 94. General Poll and Income Taxes Cannot Be Shifted. 
 The conditions just considered, which make the shifting 
 of taxes possible, are scarcely applicable to some taxes, 
 while they are easily applied in the case of others. Gen- 
 eral poll and income taxes furnish good examples of those 
 which cannot be shifted, because of the applicability of 
 the laws of price. 
 
 General Poll Tax. Poll and income taxes are more 
 closely connected with personality than are any other 
 forms of taxation. There is no possibility of a general 
 poll tax changing the price of something used by some 
 one else, so as to make him bear the burden. The burden 
 of a general poll tax of $10 upon every person over twenty- 
 one years old would fall on the individuals of that class. 
 It may be necessary to expend more energy in order to 
 get funds to meet the tax, or the tax may be evaded, as 
 is the case of many of the poll taxes in the Southern states, 
 but this does not shift the burden. 
 
 It is conceivable, however, that a general poll tax could 
 be made so burdensome as to postpone the age of marriage 
 and materially reduce the size of families. The long-time 
 effect, therefore, might be to lessen the supply of labor 
 relative to the demand, and cause a shifting of the tax to 
 the extent that a decrease in numbers, due to the tax, 
 caused a higher wage. In this case a greater burden 
 would be placed upon employers because of the tax. 
 
 Local Poll Tax. The immediate effect of a poll tax 
 levied by a particular community differs materially from 
 a general poll tax in its possibility of being shifted. Sup- 
 pose one county in western Pennsylvania would levy an 
 
162 OUTLINES OF PUBLIC FINANCE 
 
 annual poll tax of $100 upon every male person over 
 twenty-one years old, while the adjoining counties had no 
 such tax. Laborers would leave the county with the tax 
 to seek employment where the tax system was less bur- 
 densome. This decrease in labor would mean an increase 
 in wage to those who remained. The tax will have been 
 shifted to the employer to the extent of the wage increase. 
 
 Income Taxes. The possibility of shifting income taxes 
 follows practically the same reasoning as for poll taxes. 
 A general, proportional income tax would hardly be 
 shifted. An individual would not cease to get an income 
 because it were taxed, neither would he gain by going to 
 another locality or occupation where the tax conditions 
 were the same. If the tax were large enough to be burden- 
 some it might, over a period of tune, have the same effect 
 as a burdensome poll tax in reducing numbers. This re- 
 duction in the size of the family in order to maintain a 
 certain standard of living, will result in higher wages than 
 would otherwise exist. The price of labor has gone up 
 because of a tax, and the tax has been shifted to the ex- 
 tent of the wage increase. 
 
 Where rates vary for different communities there is 
 likely to be a readjustment of the labor supply, with a 
 shifting of the tax to the extent of increased wages due 
 to the readjustment. Shifting might also take place if 
 incomes from one occupation were taxed more heavily 
 than incomes from another. Suppose that, under the 
 police power, the income of teachers should be made ex- 
 empt from taxes while no exemption were made for book- 
 keepers and stenographers. This would make teaching 
 more desirable and the other occupations less desirable. 
 The number of bookkeepers and stenographers would 
 decrease, with a corresponding higher wage to those re- 
 maining. In so far as this would be true, the tax would be 
 shifted to the extent of the increased wage. These cases 
 are mere possibilities, and as a general proposition neither 
 general poll nor income taxes can be shifted. 
 
THE SHIFTING AND INCIDENCE OF TAXES 103 
 
 95. Land Taxes Are Often Called Burdenless Taxes. 
 
 It is a generally accepted principle that a tax on land 
 values is capitalized, and that sufficient allowance is made 
 in the purchase price that the burden of the tax continues 
 to remain on the individual who owned the land when the 
 tax was levied. An example will make clear how this 
 principle is supposed to work. A man contemplates buy- 
 ing a farm, and calculates that the net income from its 
 operation would be about $2,200, which, capitalized at the 
 current rate of return on similar investments, say 5 per 
 cent, would make the value of the farm $44,000. In these 
 figures, however, he has neglected to take into account 
 the annual tax of $200. When this is considered the 
 annual net income is reduced to $2,000, which, capitalized, 
 will give a valuation of $40,000 that the purchaser will be 
 willing to pay. He keeps the additional $4,000 that he 
 would have been willing to pay for the farm had there 
 been no tax, to endow permanently the annual tax of 
 $200. The seller, by being compelled to accept $40,000 
 instead of $44,000, has borne the burden of the $200 tax 
 as long as it exists. 
 
 It is possible that the supposed purchaser of land may 
 want to sell his purchase. He does not feel the effect of 
 the tax as did the original seller. The income, less the 
 tax, will still be the same, and the selling price will be the 
 same as the purchase price so far as the tax is concerned. 
 The tax has been paid year after year, yet the owner of 
 the land has felt no burden of it. It is often asserted, 
 therefore, that the burden of a tax remains upon the 
 owner of the land at the time of the levy, and is burden- 
 less upon all future purchasers. In other words, a tax on 
 land values cannot be shifted to the purchaser. 
 
 Tax on Land Values. It is generally believed that an 
 increase in taxes on land values is often shifted by the 
 landlord to the tenant through collecting a higher rent. 
 A correct understanding of the nature of rents will reveal 
 the fallacy of such thinking. Students of economics are 
 
164 OUTLINES OF PUBLIC FINANCE 
 
 familiar with the differential nature of rents. They repre- 
 sent a surplus which belongs to the owners of the better 
 grades of land. Rent represents the difference between 
 the return from these better grades of land and the return 
 from that grade of land which it just pays to cultivate at 
 the prevailing prices for the products from the land. 
 This marginal grade of land has no rental, hence no capi- 
 tal value to be affected by a tax. Before a tax would 
 lessen the amount of land under cultivation it would have 
 to be 100 per cent of this rental surplus. A tax upon 
 values, then, would have no effect upon the amount of 
 land used for cultivation. The tax, on the other hand, in 
 no way affects the demand for the products from the land, 
 hence prices and the differential advantage, in rent, will 
 remain the same as without a tax. Land is no more or 
 less desirable to a tenant after a tax levy than before. 
 
 It may appear, sometimes, that the landlord shifts the 
 tax in a higher rent charge. If, for some reason, the ten- 
 ant has not been paying the full differential surplus, then 
 it may be possible for the landlord to raise the rent and 
 think he is shifting the tax. What he does, however, is to 
 get more or all of the surplus which he should have been 
 getting before because of the differential advantage of 
 his land. The landlord, then, must bear the new tax, 
 which makes the land a less desirable investment than it 
 was before the tax was levied. Demand will fall off for 
 this class of property, with a consequent fall in the price 
 of land values. Again it is seen that the burden of such 
 a tax once and for all falls upon the owner of the land at 
 the time of the levy. 
 
 Specific Tax on Land. A specific tax on land would 
 have very different results. Here the demand and supply 
 relationship would be changed, which would result in price 
 changes through which the shifting of the tax could be 
 accomplished. Suppose a new tax of $10 an acre to be 
 placed on agricultural lands. The poorest land under 
 cultivation, however, has just been remunerating capital 
 
THE SHIFTING AND INCIDENCE OF TAXES 165 
 
 and labor for the energy expended in production. Again 
 the imposition of the tax makes the products no more 
 desirable, and capital and labor cannot afford to con- 
 tinue to use this land, but will seek other fields where 
 it will be properly remunerated. This action causes a 
 decrease in the amount of products put on the market, 
 with a corresponding rise in price. Through this price 
 change the owners of lands which will continue to be 
 cultivated will partially recoup themselves for the $10 
 an acre tax. 
 
 Tax on Nonreprodudble Goods. General taxes on non- 
 reproducible goods have the same characteristics as taxes 
 on land. They are capitalized by a prospective buyer 
 and the purchase price is so modified that the burden 
 rests on the owner at the time the tax was levied. A tax 
 upon bonds previously exempt would be offset by a de- 
 creased selling price. Suppose, for example, there were 
 no taxes on 5 per cent bonds, and that under this condi- 
 tion the bonds were selling at par. The government now 
 places a tax of 1 per cent on this class of bonds, which 
 reduces the return to 4 per cent. A purchaser will con- 
 sider only such a figure as will bring him 5 per cent on his 
 investment that is, he will be willing to pay no more 
 than 80 for perpetual bonds. The seller must take a 20 
 per cent discount because of the tax. A tax on such non- 
 reproducible goods as pictures, curios, etc., would have 
 the same effect. The levy of a tax does not increase the 
 desire for the goods, the purchase price will be decreased, 
 and the burden remain on the seller. If the tax were a 
 local one, however, rather than general, it might be evaded 
 by moving the goods. Herein lies one important differ- 
 ence between such goods and land. 
 
 From these apparent results of a tax on land and other 
 nonreproducible goods, it appears from the standpoint of 
 justice that such taxes should be permanent rather than 
 temporary. Not all property changes hands within a 
 given period. A temporary tax would be unjust to those 
 
166 OUTLINES OF PUBLIC FINANCE 
 
 transfers which were made while the tax existed, because 
 the burden of future taxes would be saddled upon the 
 transferor, while in a preceding or succeeding period of no 
 tax the burden would be entirely different. The same 
 principle applies to the taxation of inheritances. An in- 
 heritance tax should be permanent so the burden on in- 
 heritances made at different times will not be different. 
 
 96. Taxes on Buildings May Be Shifted. Since the sup- 
 ply of buildings is not constant, but may be materially 
 changed over a period of time, a tax placed upon them is 
 somewhat different, as regards shifting, from a tax placed 
 upon land. Because of the relative fixity of capital in- 
 vested in buildings, however, the total or partial shifting 
 of the tax may take place only after a period of time. It 
 may be assumed that the competition of the different 
 forms of investment for capital will have worked itself 
 out so that capital invested in buildings will be receiving 
 the normal return. Suppose that the government now 
 levies a tax upon buildings which will diminish this re- 
 turn, and that the owner attempts to reimburse himself 
 by exacting a higher rental from the tenant. The rent 
 item in the budget of the tenant is already as large as he 
 can afford, and rather than meet an increase he will move 
 to a less desirable building. Other tenants will do the same 
 until some previously submarginal buildings may be 
 brought into use. Here, as in the case of land, the product 
 is no more valuable to the consumer because it is taxed, 
 the tenant is unwilling to pay more than the utility repre- 
 sented, and the landlord must bear the burden. 
 
 Over a period of time the situation is likely to change. 
 The pressure of the tax makes the investment of capital 
 in buildings less profitable than before the tax was laid, 
 and less profitable than other forms of investment which 
 were excluded from the tax. Capital will cease to flow 
 into this field and the supply of buildings will remain 
 stationary. As population increases, however, the demand 
 for buildings increases, with a corresponding rise in 
 
THE SHIFTING AND INCIDENCE OF TAXES 167 
 
 rentals. They will continue to rise until capital invested 
 in buildings again will be getting the current return, 
 when more buildings will be produced. Rentals have 
 raised because the tax caused the supply of buildings to 
 remain stationary, while there was a continuous increase 
 in demand. Over a period of time, then, because of in- 
 creased rentals due to a readjustment of the supply and 
 demand, the tenant will bear the burden of a tax on 
 buildings. 
 
 In purchasing a building the same considerations apply 
 as in the purchase of land or bonds. If the payment of a 
 tax is going to cause the receipt of less than the current 
 rate on the investment, the tax, or a part of it, will be 
 capitalized and deducted from the purchase price. To 
 the extent that this is done the burden falls upon the 
 seller. 
 
 97. The Capitalization Theory Has Been Ably Criti- 
 cized. 1 The theory that taxes on land and other non- 
 reproducible goods continue to remain a burden upon the 
 owner of the property at the time of the tax levy, has not 
 gone unchallenged. A brief consideration of some of the 
 criticisms may be well worth while. They have been sug- 
 gested, in fact, in the above treatment of the capitaliza- 
 tion principle. 
 
 An individual who wishes to invest capital has a num- 
 ber of possibilities industry, buildings, land, bonds, as 
 well as other fields. Assuming similar degrees of risk, 
 the important factor which will govern the decision is the 
 rate of return. He must, however, compare the rate of 
 return to be received from the taxed land with that from 
 other industries, also taxed. If all other forms of invest- 
 ment of the same degree of risk as land were so taxed that 
 1 per cent of the net income be taken, which would leave 
 a realizable return of 5 per cent, then the purchaser of 
 
 1 For an able criticism of this principle, see an article by T. S. Adams in 
 the American Economic Review for June, 1916. E, R. A. Seligman has a 
 reply in the Peeember issue of the same year. 
 
168 OUTLINES OF PUBLIC FINANCE 
 
 land will be satisfied with a 5 per cent return from his 
 land. But in accepting this return he unconsciously bears 
 the tax burden placed upon the investments with which 
 he made comparisons. 
 
 If the landowner were bearing no tax burden, his rate 
 of return would be greater than that received from taxed 
 industries. What the purchaser of land would capitalize 
 and refuse to include as a part of the purchase price would 
 be any excess in land taxes over the taxes on other forms 
 of investment. He expects the current rate of return, and 
 will not be willing voluntarily to shoulder a tax burden 
 which would cause his return to be less than this. Invest- 
 ments in land, after all, possess no special privileges or 
 immunities. It may seem that the purchaser is only 
 tacitly paying a tax whose burden has already been 
 shouldered. In reality, however, he is silently bear- 
 ing the tax burden in that he has accepted, as a return 
 on his investment, the current return from other taxed 
 industries. 
 
 Correction of Injustice. If a tax on land and similar 
 investments becomes burdenless, then a rank injustice is 
 being perpetrated by allowing such a condition to con- 
 tinue to exist. A particular class is escaping tax burdens 
 which other classes are called upon to bear. The just 
 solution for such an evil would be, not only to have this 
 class pay the tax which is no burden, but to place an addi- 
 tional tax upon it equal to the burdens felt by other 
 classes. That is, immediately after the sale of a piece of 
 land, bonds, or other similar forms of property, there 
 should be a new or additional tax placed on them. But 
 in order to do this the purchaser would somehow have to 
 be led to believe that it was not going to be done other- 
 wise he will capitalize the contemplated tax, not only the 
 immediate one, but all future ones, and the logical outcome 
 would be the destruction of values. 
 
 Illustration of Bond Sales. An illustration will make 
 clear the effect of an attempt to make use of such a scheme 
 
THE SHIFTING AND INCIDENCE OF TAXES 169 
 
 as that just outlined. Suppose a purchaser contemplates 
 buying bonds on which the annual tax is 1 per cent. Under 
 the capitalization scheme he will escape this burden by 
 paying less for the bonds than he otherwise would have 
 paid. To somewhat equalize tax burdens, then, suppose 
 an additional 1 per cent tax be added. On a resale 
 this would also be capitalized, and the purchase price 
 accordingly reduced, necessitating another increase in 
 the tax rate to equalize burdens. After a few such 
 sales the income from the bonds would be entirely taken 
 in taxes. 
 
 If the original purchaser knew this was to be the future 
 policy in levying taxes, allowance would be made for the 
 capitalization of all these new taxes after resales, and the 
 price he would be willing to pay would be materially les- 
 sened. It could be only through some form of deception 
 through levying some form of tax that the purchaser 
 did not expect that he could be made to bear the so- 
 called burden. The situation w r ould be more literally true 
 with land than with bonds. The latter might be pur- 
 chased with the idea of holding to maturity, while the 
 only way of securing capital invested in land is by 
 resale. 
 
 Conclusion as to Burdenless Taxes. Such reasoning, no 
 doubt, seriously questions the commonly accepted "bur- 
 denless taxes" which are supposed to arise from the pur- 
 chaser deducting the capitalized tax from his otherwise 
 purchase price. The important thing to be considered in 
 making an investment, aside from risk, is the rate of re- 
 turn. A tax is one of the factors which will affect this. 
 When the current rate of interest is 5 per cent, 5 per cent 
 bonds will sell at par. They are, however, silently bearing 
 the tax placed upon other investments, because it is the 
 return from these investments with which the bondholder 
 is satisfied. If, somehow, all taxes should be removed 
 from these other investments, the returns from them 
 would immediately go to 6 or 7 per cent. The immediate 
 
170 OUTLINES OF PUBLIC FINANCE 
 
 effect of this on the bond values would be to force them 
 below par, till the same return were realized. 
 
 By using the current rate of return, then, as the basis 
 for his calculations, an investor bears the ordinary rate 
 of taxes in purchasing land and similar kinds of property. 
 If, however, the property to be purchased bore taxes in 
 excess of the ordinary rate, which would result in a less 
 than normal net return, this excess would be capitalized 
 and deducted, in order that the return be the same as for 
 similar forms of investment. 
 
 98. All Taxes on Monopolies Will Not Be Shifted to the 
 Consumer. The opinion is prevalent among the unin- 
 formed that a monopolist has absolute control in fixing 
 price that he can fix it at any place he chooses. A tax 
 placed upon a monopoly or upon a monopoly-produced 
 good, then, is believed to be shifted over to the consumer 
 by the monopolist simply adding the amount of the tax to 
 the price of the product. 
 
 A monopolist, however, possesses no such broad powers. 
 In some cases a tax may be shifted, or partially shifted, 
 while in other cases no attempt would be made to shift 
 the tax burden. When shifting is accomplished, even by 
 a monopoly, the same laws of price must be observed 
 as hi any other case of shifting. A monopolist can 
 have very little, if any, direct control over demand. A 
 good produced by a monopoly possesses no more utility 
 than if it were produced under competitive conditions, 
 and it will bring no higher price. The power of the 
 monopolist lies in his ability to control the amount 
 of goods which will be placed on the market, and this 
 supply in conjunction with the existing demand will 
 determine the price. The attempt will ordinarily be 
 made to regulate the supply so as to receive the highest 
 net returns. 
 
 Tax on Each Unit of Goods. The probability that taxes 
 placed upon a monopoly will be shifted can best be studied 
 from an illustration. Suppose the conditions of cost and 
 
THE SHIFTING AND INCIDENCE OF TAXES 171 
 
 demand for a good produced by a monopoly to correspond 
 to the following schedule : 
 
 Number 
 Produced 
 
 Cost of 
 
 Each 
 
 Selling Price 
 of Each 
 
 Monopoly 
 Profit 
 
 Profit with $2.00 
 Tax per Unit 
 
 25 
 
 $5.00 
 
 $20.00 
 
 $375.00 
 
 $325.00 
 
 50 
 
 4.50 
 
 18.00 
 
 675.00 
 
 575.00 
 
 75 
 
 4.30 
 
 15.50 
 
 840.00 
 
 690.00 
 
 100 
 
 4.15 
 
 12.75 
 
 860.00 
 
 660.00 
 
 125 
 
 4.10 
 
 10.00 
 
 738.50 
 
 488.50 
 
 150 
 
 4.05 
 
 8.00 
 
 593.50 
 
 293.50 
 
 175 
 
 4.00 
 
 4.00 
 
 
 350.00 (loss) 
 
 It is to be remembered that the monopolist has control 
 over the supply schedule, but not over the demand. He 
 will presumably fix the supply at the place where he will 
 receive the highest net return, which in the schedule will 
 be 100 units of the commodity. At this number the net 
 profit is $860 more than if any other number were put on 
 the market. Suppose, now, the government places a $2 
 tax upon each unit of the good produced. The monopoly 
 profits, after paying the tax, are shown in the last column 
 of the schedule. The greatest monopoly profit will now 
 occur when 75 units of the good are produced rather than 
 100. The imposition of the tax will cause a curtailment 
 of supply from 100 to 75, with a corresponding rise in price 
 from $12.75 to $15.50 per unit. In this particular instance 
 the price has risen by more than the amount of the tax, 
 even though the total returns to the monopoly are less 
 than before the levy of the tax. 
 
 With a different tax or a different schedule it is possible 
 that the price might rise because of a tax, but by an 
 amount less than the tax. A tax on the number of units 
 produced, moreover, may not affect, in the least, the sup- 
 ply of goods offered. It is easily possible, if the tax be 
 small, that the point of highest net returns will be at the 
 same point in the supply schedule as before the tax levy. 
 In such a case the tax burden is borne by the monopoly. 
 
 Net Returns or Lump Sum Tax, Taxes on a monopoly, 
 
172 OUTLINES OF PUBLIC FINANCE 
 
 instead of being levied on each unit of goods, may be 
 levied on the net returns or in a lump sum. In neither of 
 these cases would there be any attempt to shift the tax 
 through a readjustment of the supply schedule. In the 
 above schedule suppose a 10 per cent tax has been levied 
 upon the net returns. The highest net returns will still 
 be obtained by producing exactly the same as before the 
 tax was levied. Ten per cent of the net return from 100 
 units will leave a larger amount than a 10 per cent re- 
 duction from any other point in the schedule. 
 
 Had the tax been a lump sum of $50 instead of 10 per 
 cent on net returns, the result would have been the same. 
 Fifty dollars taken from $880 will leave a greater amount 
 than if taken from any other item in the schedule, and the 
 monopolist will continue to produce as before the levy of 
 the tax. A tax upon gross receipts, however, may cause 
 a change in the supply schedule and at least a partial 
 shifting of the tax. 
 
 The method of levying a tax on monopoly-produced 
 goods is important, therefore, from the standpoint of 
 shifting and incidence. If it be the intention of the fiscal 
 authorities to levy a tax which has the possibility of being 
 shifted, then it will be placed upon the units of commodi- 
 ties produced, or possibly upon the gross receipts. If, 
 however, no shifting be desired, and it is contemplated 
 that the monopoly must bear the entire tax burden, the 
 levy will either be in lump sum or on the net returns. 
 Some of the practical considerations of the method of levy 
 will be considered elsewhere. 
 
 99. Taxes on Competitively Produced Goods Have 
 Varying Effects. No general conclusion can be given as 
 to the extent to which taxes are shifted when they are 
 placed upon goods which are produced under competitive 
 conditions. Ordinarily the tax will be shifted to some 
 extent, but in the process the price of the commodity may 
 be changed by an amount less than the tax, greater than 
 the tax, or by an amount just equal to the tax. The price 
 
THE SHIFTING AND INCIDENCE OF TAXES 173 
 
 will change according to the different conditions of cost 
 of production increasing, decreasing, or constant. The 
 effect of a tax on goods which are produced under condi- 
 tions of increasing cost can be most easily seen by the use 
 of a diagram. 
 
 GRAPH No. IV 
 
 Suppose the market conditions are such that each unit 
 of O E goods is selling at the price of O P that is, just 
 enough to cover the cost to the marginal producer. A tax 
 is placed upon each unit of goods produced, which in- 
 creases the cost per unit by the amount of the tax, Cc. 
 This will make it unprofitable for the marginal producer 
 to remain in the field, and fewer goods will be produced. 
 At the new cost the demand will warrant the production 
 of only O B units. As fewer goods are produced, however, 
 the marginal cost becomes less, and the new marginal 
 producer can sell at a price increased by an amount less 
 
174 OUTLINES OF PUBLIC FINANCE 
 
 than the tax, and still cover his cost of production. The 
 new price per unit will be OP', an increase over the former 
 price of P P' or B' b. The tax was C c or B' b', so the in- 
 crease in the price was less than the tax by bb'. 
 
 Decreasing and Constant Cost. In a similar way dia- 
 grams could be drawn to show the effect of a tax placed 
 upon goods produced under conditions of decreasing and 
 constant costs. In case the tax is levied upon goods pro- 
 duced under conditions of decreasing costs, the price will 
 increase, but by an amount greater than the tax. The 
 producer will have to recoup himself for the tax, and in 
 addition make up for the greater cost per unit as fewer 
 goods are produced. 
 
 In the case of goods produced under constant costs, 
 since the cost of each unit is the same no matter how 
 many are produced, the final result of a tax will be to in- 
 crease the price by the amount of the tax. If competition 
 has not worked itself out until the selling price is equal 
 to the cost of production, then a tax may make no change 
 in price. The producer may pay the tax out of the differ- 
 ential above costs, and leave production as before. Here 
 the tax is not shifted, and the consumer is the gainer. 
 
 Ideas of justice and expediency which authorities may 
 hold will help to determine upon what class of goods 
 taxes will be levied. If it be decided that prices should be 
 affected as little as possible, while little consideration is 
 given to marginal producers, taxes will be secured from 
 such extractive industries as agriculture, mining, and for- 
 estry, because of their condition of increasing costs of 
 production. If it be decided that industry should be left 
 as intact as possible and that the consumer can bear the 
 price increases, then the objects of taxation will be those 
 produced by large-scale establishments. 
 
 100. Shifting of Taxes Is Influenced by the Elasticity of 
 Supply and Demand. Important conditions which in- 
 fluence and modify the principles of tax shifting which 
 have just been considered, are the elasticity of supply 
 
THE SHIFTING AND INCIDENCE OF TAXES 175 
 
 and demand. A supply may be said to be elastic when a 
 small change in price would cause a perceptible change 
 in the amount of goods produced. If a large part of a 
 supply of goods were produced at practically a uniform 
 cost, and this were near the selling price, it would be 
 impossible for producers to bear an appreciable tax burden 
 without greatly curtailing the amount of goods produced. 
 If the tax could not be successfully shifted under such 
 conditions, the amount of goods produced would be ma- 
 terially lessened. If there were a substantial margin 
 between cost and selling price, however, the tax might be 
 borne by the producer, for this would create a condition 
 of inelastic supply. 
 
 Elasticity of Demand. Of no less importance is the 
 elasticity of demand. The condition of elastic demand 
 exists when a small change in price will cause a percep- 
 tible change in demand. The greater the degree of elas- 
 ticity the more difficult it is to shift a tax. The addition 
 of even a small tax to the current price, when the demand is 
 very elastic, will cause a perceptible falling off in the 
 demand for the product. Some consumers may find sub- 
 stitutes, while others may forgo the use of the particular 
 utility. The less the degree of elasticity in demand, how- 
 ever, the easier a tax may be shifted to the consumer. If 
 the product be a necessity for which there is no substitute, 
 then a tax, to almost any extent, might be added to the 
 price, and the consumer would bear it. 
 
 The effect of such shifting, however, may not stop here. 
 The consumer, because of the high prices which he must 
 now pay for these necessities, may materially lessen his 
 consumption of other goods. This decreased demand 
 will cause a lowering in their price. The burden of such 
 a tax then is noticed in other lines of production, for these 
 producers must either curtail production or accept a lower 
 price for their product. 
 
 Direction of Shifting. The relative elasticity of supply 
 and demand has an important influence in determining 
 
176 OUTLINES OF PUBLIC FINANCE 
 
 the direction which the shifting of a tax may take. So 
 far the suggestion has been that taxes are shifted only 
 toward the consumer. This is necessarily true only when 
 the tax is levied upon the first stage of a productive proc- 
 ess, and not when it is levied on any of the intermediate 
 stages. 
 
 Suppose the processes in production are manufacturer, 
 wholesaler, jobber, and retailer, and that a tax is placed 
 upon the wholesaler. He wishes to shift this, and may do 
 it by raising his price to the jobber, who will recoup him- 
 self by exacting more from the retailer, who in turn will 
 increase the price to the consumer. He may shift the 
 tax, on the other hand, back to the manufacturer, in re- 
 fusing to pay as high a price as previously for the product. 
 He would pursue the first course if the manufacturer were 
 already selling at near the cost of production while the 
 demand for the product was comparatively inelastic. If 
 there were a wide margin between the manufacturer's 
 cost and his selling price, while the demand were elastic, 
 he would pursue the second course. When a tax is levied 
 on some intermediate stage of production, then, its shift- 
 ing will likely take the direction of greatest inelasticity. 
 
 It is entirely too much to expect that fiscal authorities 
 should give the principles which determine the shifting 
 and incidence of taxes primary consideration in the levy 
 of every tax. It would be well, however, for them to have 
 a thorough knowledge of these principles, while more 
 frequent attempts at their application might help to 
 equalize tax burdens. 
 
 ADDITIONAL READING 
 
 Carver, Essays in Social Justice, chap. xvii. 
 Seligman, The Shifting and Incidence of Taxes. 
 
CHAPTER IX 
 
 CUSTOMS DUTIES 
 
 101. Modern Customs Duties Apply Chiefly to Imports. 
 It has been indicated in a previous chapter that a cus- 
 tomary part of early fiscal systems was to levy duties 
 upon goods when they crossed a political boundary. They 
 were called the " customary duties/ 7 and later simply cus- 
 toms duties. In modern times they are usually called 
 tariff duties, and much is said and written on the tariff 
 rather than on customs duties. 
 
 Only those duties upon goods which cross a national 
 boundary line, or the line of some customs territory which 
 is a part of a nation or combination of nations, are con- 
 sidered as customs duties. Duties which might be levied 
 by a city upon goods, either coming hi or going out over 
 its boundary, would not come under this category. 
 Neither would levies made upon goods going from one 
 part of the country to another, as from one state or 
 province to another, nor would those which might be 
 placed upon goods passing through a country be classed 
 as customs duties. 
 
 In the earlier development of these duties, levies upon 
 goods going out of the countries were as important and 
 significant as the ones upon goods coming in. Permission 
 from the government to secure gain by trading with for- 
 eigners was considered a valuable privilege, and conse- 
 quently a charge was made. Likewise it was considered 
 perfectly proper to tax a foreigner who secured profits 
 from trading with the citizens of another country. 
 
 As nations developed, however, the relative importance 
 
178 OUTLINES OF PUBLIC FINANCE 
 
 of these two classes of duties changed. The growth of the 
 mercantilistic sentiment had much to do with the decline 
 of duties on exports. Apparently one of the easiest ways 
 to augment the growth of the money wealth of a country 
 was to stimulate exports and retard imports, so duties 
 were generally removed from exports. Frequently gov- 
 ernments went further than this and gave bounties, in 
 one form or another, upon goods which went to another 
 country. The claim of mercantilism has lost much of its 
 strength, yet duties on exports have not regained their 
 early importance. 
 
 It should not be inferred that export duties find no place 
 in modern fiscal systems. In comparatively recent years 
 England used an export duty on coal, with the combined 
 purpose of conserving the supply and raising revenue. 
 Export duties still fill an important place in the fiscal 
 systems of Turkey, India, and a few other countries, and 
 are used upon a few products in some European countries. 
 As a general rule, however, customs duties and import 
 duties are practically synonymous in the programs of 
 most important countries. 
 
 1 02. Various Motives May Prompt the Levy of Customs 
 Duties. The two most important motives which prompt 
 governmental authorities to levy customs duties are to 
 secure revenue, and to protect home industries from for- 
 eign competition. These duties are known, respectively, 
 as revenue duties and protective duties, or tariff for 
 revenue only, and protective tariff. Other motives some- 
 times prompt the levy of tariffs, but they usually sink 
 into insignificance when compared with these two. 
 
 Revenue Duties. The most evident tariffs for revenue 
 only are those placed upon goods which could not be pro- 
 duced Vithin the country, or which could not be produced 
 without great disadvantage. It might be possible to place 
 such a high tariff upon coffee that it would become profit- 
 able to build greenhouses and grow coffee in the United 
 States. Until such a result would begin to transpire, how- 
 
CUSTOMS DUTIES 179 
 
 ever, the tariff would be one for revenue only. The rates 
 might be raised to a point where little revenue would be 
 received because of the small amount of goods imported, 
 but still it has given no protection to the coffee industry 
 because it has resulted in the establishment of no coffee 
 industry in this country. 
 
 If the maximum amount of revenue be desired, concern 
 must be had as to how much an increase in duties will 
 cause a decrease in the amount of goods imported. If the 
 duties were placed upon a good which could not be pro- 
 duced at home, and for which the demand were absolutely 
 inelastic, there would be no limit to the tax that could be 
 placed with an ever-increasing return. 
 
 Goods only possess the above characteristics in degree, 
 however, and some to only a very small degree. Increase 
 in prices, then, to recover the increase in duties, will 
 sooner or later drive the marginal consumer to go without 
 the taxed goods, or to use substitutes, either of which will 
 lessen the demand for the goods, hence lessen the imports 
 and the amount of revenue. The problem of levying a 
 tariff so as to get the highest revenue is much the same as 
 the problem of monopoly price, for exactly the same 
 principles must be considered. 
 
 Revenue Tariff and Industry. While a tariff for rev- 
 enue only is not calculated to affect industry, it cannot 
 escape doing it to a greater or less degree. Consider again 
 the example of coffee. It has been coming into the coun- 
 try without duty; there was a certain demand, and a 
 price established. If the duty is increased, and the price 
 raised to meet it, the marginal coffee drinkers will begin 
 to drink tea, postum, or cocoa. This creates a demand 
 for products of another industry the duty in effect is 
 protecting it from the former competition of the coffee 
 industry. 
 
 The above situation would be different if the demand 
 for coffee were inelastic or nearly so. As the price of coffee 
 would rise, more of the consumer's purchasing power 
 
180 OUTLINES OF PUBLIC FINANCE 
 
 would be needed to supply his want for coffee, and he 
 would have a smaller remainder with which to buy wool- 
 ens, cottons, and other goods. These industries would 
 suffer because of a revenue tax on coffee. It is easily seen, 
 then, that no matter how purely a tariff is for revenue it 
 must have some indirect effect upon industry through the 
 action of the laws of price. 
 
 Protective Duties. The levy of a protective duty is 
 motivated, primarily, by its anticipated effect upon in- 
 dustry, rather than by any considerations of revenue. 
 The purpose is to lessen the importation of foreign goods, 
 cause a rise in prices, and thereby stimulate the develop- 
 ment of such an industry at home. It is expected to 
 drive industry into fields which would be unattractive if 
 no such duty existed. 
 
 The diversification of industry secured by a protective 
 tariff comes at the expense of other industries. As the 
 price which must be paid for the protected product goes 
 up, the consumer has a smaller remainder with which to 
 purchase other commodities. At the same time the tend- 
 ency will be to raise wages in these other industries by 
 taking away a part of their supply of labor to work in the 
 new industry. The direct effect of a protective tariff is 
 easily seen it produces a new industry in the country. 
 The indirect effects, however, are just as certain, yet not 
 so easily seen, while they are often impossible to calculate. 
 It is a safe assertion, moreover, that a protective tariff is 
 not an institution which gives something for nothing. 
 
 Protective and Revenue Duties. In most modern tariff 
 duties the ideas of revenue and protection are not entirely 
 separated. A duty may bring a large amount of revenue 
 and give a small amount of protection, or give a large 
 amount of protection and continue to produce some 
 revenue. The more protection a duty gives, however, the 
 less will be the revenue received, while a duty which would 
 give absolute protection, by eliminating the importation 
 of goods, would destroy revenues. 
 
CUSTOMS DUTIES 181 
 
 Suppose that woolen cloth of a certain grade, produced 
 under competitive conditions in England, can be sold in 
 this country for fifty cents a yard in a sufficient amount 
 to supply the need. A small amount could be produced 
 by the mosr favored producer here at seventy-five cents 
 a yard, and enough to supply the need at ninety cents a 
 yard. To simplify calculations, assume an absolutely 
 inelastic demand for the cloth. With no tariff whatever, 
 it is evident that no cloth will be produced here, but will 
 be imported, and sell for fifty cents a yard. The fiscal 
 authorities decide that some revenue should be obtained 
 from the importation of this commodity, and levy a duty 
 of twenty cents a yard. This is purely a revenue tariff, 
 because the increase in price that is likely to follow is not 
 sufficient to allow production at home. 
 
 If the duty is raised to thirty cents a yard it becomes 
 partially protective, for it allows the most favored pro- 
 ducer to market his small amount of cloth. Upon this, 
 however, the government receives no revenue, since it is 
 not imported. The buyer of the cloth is paying the higher 
 price caused by the duty, but to the home producer rather 
 than to the government. Now assume a wholly protective 
 duty, say of forty-five cents a yard. The English pro- 
 ducers cannot now compete with the home producers, 
 who can supply the desired quantity at ninety cents a 
 yard. The government gets no revenue, since importa- 
 tion has ceased. The buyers of cloth pay forty cents more 
 a yard for the cloth, but to the new industry rather than 
 to the government. 
 
 It is sometimes pointed out that the government does 
 not wholly destroy the possibility of revenue by granting 
 an absolutely protective tariff, because the patrimony of 
 the state is increased to the extent of the protected indus- 
 try, upon which the government can draw for support. 
 This is true only when the protected industry is given a 
 start, and can soon stand on its own feet. As long as an 
 artificial price is maintained by protection, however, the 
 
182 OUTLINES OF PUBLIC FINANCE 
 
 patrimony represented by the new industry simply repre- 
 sents a patrimony subtracted from other industries. 
 
 Other Tariffs. Tariffs are sometimes levied to retaliate 
 for the duties laid by another country, are sometimes 
 modified to reciprocate for favors shown by another coun- 
 try, and are sometimes used to attempt to equalize the 
 costs of production between countries. Many of the 
 European duties which are levied against American goods 
 are to retaliate for the high tariffs levied by this country. 
 The proposed reciprocity treaty with Canada a few years 
 ago was an attempt to make concessions between the two 
 countries. An agreement was not reached because of the 
 strong protectionist sentiment. 
 
 The French tariff represents a system based upon the 
 reciprocity principle. It is known as a maximum-mini- 
 mum tariff that is, a certain maximum tariff is levied 
 from which concessions are made to countries which grant 
 favors to France. A somewhat similar provision is found 
 in our tariff law of 1909, except that it partakes more of 
 the nature of a retaliatory measure. Certain minimum 
 tariffs are levied, which are increased against those coun- 
 tries which have tariff legislation unfavorable to the 
 United States. 
 
 When a tariff to equalize costs is used, it is expected 
 that neither home nor foreign producer will have any 
 advantage over the other, and that healthy competition 
 can continue between the two. In the example of woolen 
 cloth used above, a forty cents a yard duty would be 
 such a tariff. In actual practice, however, because of the 
 continual changing aspects of industry, the maintenance 
 of such a scheme is next to impossible. 
 
 Another attempt to use the tariff as an equalizer of 
 costs is the adoption of what is sometimes called the com- 
 pensating tariff. This occurs when an increase is granted 
 in the duties levied on manufactured products sufficient 
 to offset any duties which have been levied on the raw 
 materials used by the. industry which m^kes the manu- 
 
CUSTOMS DUTIES 183 
 
 factured products in question. Tariffs of this nature 
 have been particularly applicable in the case of woolens. 
 With every increase in the duty on raw wool, the manu- 
 facturers felt they must have a proportionate increase in 
 the duties on manufactured cloth to compensate for their 
 increased costs occasioned by the tariff on raw wool. 
 Such tariffs may also be used to compensate for the use 
 of excise taxes. When an excise tax is placed upon goods 
 produced within a country, a tariff of the same amount 
 is placed upon goods imported into the country. 
 
 In most countries a relatively greater amount of atten- 
 tion is being paid to the revenue features of tariffs than to 
 the protective issues. Two reasons can be seen for this. 
 First, the need for increased funds has grown rapidly, and 
 second, the avenues open to central governments for rais- 
 ing funds have been limited. 
 
 103. The Incidence of Customs Duties Is Important. 
 The principle of shifting and incidence has no more im- 
 portant application to any part of a revenue system than 
 to customs duties. To the uninformed it has appeared 
 that the importer has simply added the amount of the 
 duty to the former price, and that the consumer conse- 
 quently has borne the burden. The problem of shifting, 
 however, does not permit of such a simple solution. The 
 underlying principles of shifting and incidence, discussed 
 in the preceding chapter, apply as much to customs duties 
 as to any other form of revenue. 
 
 Elasticity of Demand and Supply. The two controlling 
 factors in the shifting of a customs duty, then, are the 
 elasticity of demand, and the elasticity of supply. If the 
 demand were absolutely inelastic, then the importer could 
 continue to import as many goods as before, and sell them 
 at a price, increased by the amount of the duty. Such a 
 situation, however, would rarely exist, and the direction 
 which the shifting will take will depend upon the relative 
 elasticity of demand and supply. More frequently than 
 has been supposed, a part of the burden at least will rest 
 
184 OUTLINES OF PUBLIC FINANCE 
 
 upon the importer. This happens when the price is either 
 not raised at all or raised by an amount equal to only a 
 part of the tax. Consideration will be given to the possi- 
 bility of shifting import duties in only a few assumed 
 cases. 
 
 Influence of Extended Market. It is seldom true that 
 any one country is the sole market for an imported good. 
 The laws of trade will have so worked themselves out, 
 under existing conditions, that the seller will be receiving 
 approximately the same net return from the sales in the 
 various countries. If, now, one of these countries levies 
 an additional tax, it will be more profitable to send some 
 of the goods to other countries until the diminished supply 
 would so raise the price as to bring about again an equi- 
 librium of profits. This would come about before the 
 price had raised by quite the amount of the tax, because 
 the increased supply to the other countries would lower 
 the price there. In this case the larger part of the tax is 
 shifted to the consumer, while only a minor part is felt by 
 the producer. 
 
 Importer Bears Burden of Duty. In some cases, though 
 rarely, a large share of the tax burden may rest upon the 
 producer or importer. In case the demand could be easily 
 supplied by home producers at a slightly higher price, 
 while this market is necessary for the disposition of the 
 foreign product, the foreigner may bear the whole burden 
 of the tax rather than allow the potential home producer 
 to occupy the field. The situation would be temporary 
 if he expected to dispose of only an existing stock of goods 
 which would otherwise be lost, but which could not con- 
 tinue to be produced with the added expense of the tax. 
 If, however, the former margin between cost and selling 
 price had been sufficient to allow the payment of the tax 
 and still continue to produce, the situation would be 
 permanent. 
 
 It may be possible, moreover, that a particular country 
 constitutes practically the entire market for products. If 
 
CUSTOMS DUTIES 185 
 
 the demand for these be strongly elastic, the producer 
 will bear the tax until he can change the nature of his 
 production. He may lose by bearing the burden, but he 
 would lose more by the immediate curtailment in demand 
 through an increased price. If the commodity of impor- 
 tation is one which is largely used as a substitute for 
 another, which can be obtained at small increase in price, 
 or if it be one for which a satisfactory substitute can be 
 obtained at a small additional cost, it will be impossible 
 to increase the price perceptibly to offset duties, for by 
 so doing the market would be destroyed. The shifting 
 could be accomplished only if the price of the other 
 product should advance sufficiently. 
 
 Other hypothetical cases might be given to show the 
 varying phases of the incidence of customs duties. Enough 
 have been given, however, to show that the laws of price 
 are the determinants. In general, when the demand is 
 inelastic and the supply elastic, the conditions are favor- 
 able for the shifting of the tax, while the opposite condi- 
 tions make it unfavorable. The possible effect of an at- 
 tempted shifting upon the home production of goods is 
 always a modifying factor. It should not be forgotten, 
 moreover, that even when the price can be raised by the 
 full amount of the tax, some burden is felt by the pro- 
 ducer because of the decrease in the demand for his goods. 
 
 104. Problems Arise from the Use of Customs Duties. 
 The use of customs duties has developed a number of 
 perplexing difficulties. One of the first to develop was 
 that of smuggling. When a country has a large frontier 
 line, with many possible approaches, it is difficult to pro- 
 hibit some goods from getting in without the knowledge 
 of the officials. This is especially true of goods of small 
 bulk and great value, such as precious stones. The duty, 
 on a value basis, is likely to be high enough to make smug- 
 gling profitable. If such goods are not taxed, a source 
 which^is easily able to bear tax burdens is allowed to 
 escape. 
 
18G OUTLINES OF PUBLIC FINANCE 
 
 Method of Levy. The method of levy is an important 
 problem which always confronts customs administrators. 
 There are two important methods, each possessing ad- 
 vantages and disadvantages. One class of levy is known 
 as ad valorem, and the other as specific. The base for the 
 levy of ad valorem duties, as the term suggests, is the 
 value of the goods. Specific duties are levied upon some 
 other unit than value, such as volume, length, or weight. 
 A specific duty would be upon each gallon, yard, or hun- 
 dredweight. Many objects bear both classes of duties, 
 while some bear only the ad valorem or specific duties. 
 
 Objections to Specific Duties. Specific duties possess 
 the advantage of being simple and easy to collect. Fraud 
 and evasion are comparatively difficult. They do not, 
 however, conform to theories of justice, since, in effect, 
 they are regressive. Heavier burdens are placed upon the 
 less valuable goods of a class than upon the more valuable, 
 since some other criterion than value is made the base of 
 the tax. The tax burden does not fluctuate, moreover, 
 whether the price to be received is high or low. The gen- 
 eral result is that they are taxes of increasing burden in a 
 period of falling prices, and the opposite when prices are 
 rising. Their administrative simplicity, however, gives 
 them their place as a part of customs duties. 
 
 Difficulties with Ad Valorem Duties. Ad valorem duties 
 have the advantage of falling upon value, the most just 
 base of levy, yet many possibilities of fraud are presented. 
 The duties have frequently been evaded through fictitious 
 invoices, especially when the goods were shipped by the 
 agent of an American buyer. Goods of high value have 
 often been placed in consignments of a lower value, and 
 have consequently escaped the higher duty. In some cases 
 goods have been artificially colored to resemble those of a 
 lower value, as, for example, the coloring of better grades 
 of sugar. Where a minute classification exists, as in our 
 woolen schedule, it is often difficult to accurately classify 
 the goods. To reduce these fraudulent practices to a 
 
CUSTOMS DUTIES 187 
 
 minimum, and hence secure a reasonable degree of justice, 
 a large amount of administrative machinery is required. 
 
 Administrative Machinery. The need for administra- 
 tive machinery can be illustrated by a brief review of the 
 method of levy in force in the United States. The importer 
 receives a consular invoice, which contains a description 
 of the merchandise, including value, discounts, charges, 
 etc. He then makes entry of these goods, with their proper 
 description, with the rates that he considers applicable, 
 and pays the gross amount of duty thus determined. The 
 inspector then issues a permit for delivery, with the ex- 
 ception of one package in every ten included in the im- 
 portation. In no case is less than one article retained 
 from each invoice. 
 
 These packages or articles are retained for the purpose 
 of appraisement. The value is determined and the rate 
 checked with that used by the merchant. In case the rate 
 which the merchant used was too low, the difference is 
 collected, with penalties for attempted fraud. All protests 
 from the merchants are heard by a board of general ap- 
 praisers, provided the protest is filed within ten days after 
 the merchant has been notified of the charges. The board 
 examines witnesses, calls in experts, and after a thorough 
 investigation renders a decision. Appeals may be made, 
 however, to the Circuit Court within thirty days. 
 
 The complexities and uncertainties of customs duties, 
 especially of those in the United States, have prevented 
 their indorsement as an unqualified success. The laws 
 are cumbersome and difficult to understand. Duties are 
 laid upon articles with apparently no definite scheme hi 
 mind. The returns have been very irregular, often failing 
 the government when funds were needed most. With 
 proper legislative forethought such difficulties could be 
 greatly lessened, and customs duties could be made a more 
 satisfactory part of the fiscal system. 
 
 105. Definite Principles Should Be Followed in Levying 
 Customs Duties. If Adam Smith's second canon of taxa- 
 
188 OUTLINES OF PUBLIC FINANCE 
 
 tion that the tax which each individual is bound to pay 
 ought to be certain, and not arbitrary is applicable to 
 any form of revenue, it should apply to the levy of customs 
 duties. No other form of revenue has such great possi- 
 bilities for influencing the industrial stability of a coun- 
 try. It is not so much a question of high duties or low 
 duties, of revenue or protective tariff, as it is a question 
 of being able to know what to expect. 
 
 A country can ill afford to make a political football of 
 its tariff policies, yet this has been true in the United 
 States practically from the beginning. Attempts to use 
 nonpartisan tariff boards have been of no avail, and in- 
 dustry continues to fear a change in administration be- 
 cause of what may happen to the tariff. Where such un- 
 certainty and instability exist, it is impossible to rely upon 
 customs duties for any definite amount of revenue, and 
 avenues must always be kept open through which de- 
 ficiencies can be supplied. 
 
 Aside from the deranging of industry, then, an indefinite 
 tariff policy also creates instability in the remainder of a 
 fiscal system. The United States would do well to follow 
 the example of some of the European countries in adopt- 
 ing and maintaining some definite policy, but the accom- 
 plishment of such an end seems surrounded with insur- 
 mountable difficulties. Because the tariff may have such 
 important fiscal and industrial consequences, and because 
 the United States is so far from any settled policy, it will 
 be well to review somewhat in detail the tariff struggle as 
 it has been waged, not only in the United States, but in a 
 few other important countries. 
 
 106. Early United States Tariffs Combined Fiscal and 
 Protective Aspects. Two attempts were made to secure 
 a national tariff before the adoption of the constitution in 
 1789, which gave Congress practically the exclusive power 
 to levy such duties. These attempts were made near the 
 end of the Revolution, when other sources of revenue 
 were failing to supply the needed funds. In 1781 Congress 
 
CUSTOMS DUTIES 189 
 
 hoped to secure the acquiescence of the states in the levy 
 of a duty for the purpose of raising revenue. The pro- 
 posal was a 5 per cent tax upon all imports except muni- 
 tions and certain other specified articles. All the states 
 reacted favorably except^Rhode Island, and no amount 
 of persuasion or remonstrance was able to break down the 
 opposition. The principal objections were that such taxa- 
 tion would fall more heavily upon the commercial states, 
 that it was introducing officials within her borders over 
 whom she would have no control, and besides it was open- 
 ing the way for an indefinite drain upon the resources of 
 the state by the Federal government. 
 
 The second attempt, in 1783, was no more successful 
 than the first. The amendment which was proposed pro- 
 vided for specific duties on certain classes of goods, as 
 liquors, tea, coffee, and molasses, and an ad valorem rate 
 on all other commodities. The action was to be limited to 
 twenty-five years and, in an attempt to make it more 
 attractive, the returns were not to be used to meet the 
 current expenses of the government, but only for the pay- 
 ment of interest on the pub ic debt. In order to eliminate 
 a previous objection of Rhode Island, the collection was 
 to be put in the hands of the state officials. 
 
 The spirit of commercial freedom, which at this time 
 had such a hold on European states, was making itself felt 
 on this side of the Atlantic. The great need for revenues 
 by the states also made some of them reluctant to allow 
 the Federal government to enter this field. The consent 
 of all the states was finally obtained except that of New 
 York, whose opposition could not be broken. 
 
 From the attitude which had been displayed previous 
 to the adoption of the Constitution, it is not surprising 
 that much dissatisfaction was expressed when the states 
 were practically prohibited from using customs duties. 
 It was considered to be entirely too much of an encroach- 
 ment on the rights of the states. It was not long after the 
 adoption of the Constitution, however, until Congress 
 
190 OUTLINES OF PUBLIC FINANCE 
 
 began to make use of its prerogative to use the tariff. 
 Revenue was sorely needed, internal tax levies were abhor- 
 rent, direct taxes could not be laid until a census had 
 been taken, consequently the tariff presented the most 
 logical field. 
 
 Tariff of 1789. On July 4, 1789, after a debate of nearly 
 two months, the first tariff legislation of the new govern- 
 ment was enacted. The time in the debate was consumed 
 by attempting to fix the rates, and by attempting to agree 
 upon the measure of protection which should be afforded. 
 Much discussion has arisen over the question of whether 
 this first tariff act was a protective measure. The rates 
 were so low that little protective influence could be ex- 
 pected. Specific duties were placed upon some thirty 
 lands of goods, while ad valorem rates, which ranged from 
 73/2 to 15 per cent, were levied upon a few goods. A 
 general ad valorem tax of 5 per cent was levied upon 
 all commodities which were not covered by the other 
 duties. 
 
 While these rates do not give evidence of a very strong 
 protectionist feeling, yet the preamble to the bill would 
 indicate that this was an important consideration. It 
 states that, " Whereas, it is necessary . . . and for the en- 
 couragement and protection of manufacture, that duties 
 be laid." It appears that thus, in the very beginning, the 
 tariff legislation was not to be confined to merely fiscal 
 purposes. The Act was to remain for seven years, yet 
 many minor details along with some rates were changed 
 as need arose. 
 
 107. The War of 1812 Increased the Sentiment for 
 Protection. The War of 1812, because of the dangers im- 
 posed upon shipping, and because of the various regula- 
 tions which were placed upon trade, greatly disturbed the 
 foreign commerce of the United States. Revenue de- 
 creased with the diminution of imports, but with the close 
 of war, when Europe began to unload her accumulated 
 stocks of goods upon our markets, the values of imports 
 
CUSTOMS DUTIES 191 
 
 reached an unprecedented figure, with a corresponding 
 increase in revenue. 
 
 In this stimulated importation, however, was sensed 
 the destruction of many of the American industries which 
 had sprung up from necessity and under difficulty during 
 the war. The clamor naturally arose for succor. Presi- 
 dent Madison was an advocate of some kind of relief and 
 urged protection to these growing enterprises. The final 
 result was the tariff bill, which became a law April 27, 
 1816. The tariff imposed by this Act has often been desig- 
 nated as the first protective tariff of the United States. 
 
 Tariff of 1816. The policy of protection unquestion- 
 ably superseded any fiscal considerations in the tariff of 
 1816. Little opposition was registered except in the South 
 and Southwest, and even here nearly as many votes were 
 in favor of the measure as were cast against it. The in- 
 dustrial emergency was clearly recognized, and the coun- 
 try as a whole showed its willingness to come to the rescue. 
 It was not until later that sectional feelings were strongly 
 evidenced. The rates provided were both specific and 
 ad valorem, and were highest upon textiles, leather, glass, 
 and paper, and ranged from 25 to 35 per cent. An inter- 
 esting feature of this measure was the introduction of the 
 minimum principle in regard to cotton cloth. All kinds of 
 cloth which had ordinarily cost less than twenty-five cents 
 a yard should be considered under the application of the 
 law as having cost that much, and the tariff would be 
 levied accordingly. 
 
 For decades following the passage of this law the tariff 
 became the center of discussion from the standpoint of 
 both revenue and industry. Fiscal officials were interested 
 in it because internal revenues were not used from 1817 
 until the Civil War, and hence import duties were the 
 principal source of revenue. It became important to 
 industry because of what particular individuals and sec- 
 tions of the country expected to accomplish by either 
 inaugurating or abandoning certain tariff policies, 
 
192 OUTLINES OF PUBLIC FINANCE 
 
 The tariff of 1816 had scarcely gone into action when 
 dissatisfaction arose from interests which considered that 
 the protection granted to them was not strong enough. 
 The producers of iron were the first to register extensive 
 protest because they felt the textile industries were 
 afforded better protection than those who were engaged 
 in iron production. The agitation was so effective that 
 the duties upon iron were increased in 1820. 
 
 Tariffs of 1824 and 1828. The falling off in revenues 
 due to the industrial depression of 1819 led the fiscal 
 officials to ask a further extension of tariff duties. Those 
 engaged in industry were not backward in asking for 
 further protection, while many saw in this kind of legisla- 
 tion a method for enticing foreign capital to invest in the 
 United States. So effective was the demand from the 
 various quarters that a law was enacted in 1824 which 
 greatly extended and increased the duties. The demand 
 for such legislation, however, was much more sectional 
 than was that for protection in 1816. The commercial 
 interests of New England, as well as the solid South, were 
 opposed, so that the bill secured a bare majority of votes 
 in the House of Representatives. 
 
 The effect of the legislation was to increase the protec- 
 tion afforded to manufacturers of textiles, iron, glass, and 
 cutlery. The mrnimum valuation on cotton goods was 
 raised, and this principle was also applied to woolens. An 
 important feature, which was destined to be the source 
 of much difficulty hi the future, was the introduction of a 
 tariff on raw wool. The difficulty which this inaugurated 
 was in the securing of a woolen schedule which would be 
 satisfactory to both wool producers and manufacturers of 
 woolen materials. 
 
 Even though the duties now in force were highly pro- 
 tective, and apparently satisfactory to some industries, 
 representatives of other industries, particularly the 
 woolen, sought to seize upon the existing protectionist 
 sentiment to secure still greater increases in rates. The 
 
CUSTOMS DUTIES 193 
 
 political trickery and intrigue which resulted, the outcome 
 of which was the tariff of 1828, need not be reviewed here. 
 The protection on woolens was increased to such a degree 
 that the law has frequently been called the " Woolen 
 Tariff." The tariff, as a matter of fact, was unpopular in 
 all sections, and has been generally called the " Tariff of 
 Abominations." Many rates were excessive, and particu- 
 lar sections were favored at the expense of others. The 
 South was particularly hostile, and the Act added new fuel 
 to the nullification flame which the tariff had already 
 helped to kindle. 
 
 The general dissatisfaction, with its accompanying pro- 
 tests to Congress, together with the fact that a large sur- 
 plus of revenue was accumulating, led many to believe 
 that reductions might be expected. Some attempts were 
 made in 1830, but nothing of importance was accomplished 
 and the agitation continued. The necessity of modifying 
 some of the more objectional features of the tariff of 1828 
 was becoming obvious. Much difficulty was encountered, 
 however, in agreeing on what the modifications should be. 
 A bill was finally passed in 1832 which, while it did not 
 eliminate the protective features, did lower some of the 
 excessive rates. The protectionists now hoped that the 
 measure was in a form that would not call forth such 
 hostile objection. 
 
 1 08. The High Tariffs Were Followed by Reduced 
 Rates. -The hopes which the protectionist branch held 
 for the tariff of 1832 proved to be ill founded. While a 
 part of the South appeared satisfied, yet the people of 
 South Carolina were too much incensed to be appeased by 
 such slight amendments as the law offered. The legisla- 
 ture was not long in passing what is known as the Nulli- 
 fication Act the tariff law, so far as it applied to South 
 Carolina, was null and void. 
 
 Compromise Tariff. The Nullification Act was the sig- 
 nal for Congress to do something, and a bill providing for 
 extreme reductions was submitted so extreme that little 
 
194 OUTLINES OF PUBLIC FINANCE 
 
 hope could be entertained for its passage. Henry Clay 
 came to the rescue with a compromise bill, which was 
 passed in 1833, and which is generally known as the Com- 
 promise Tariff. The important features were the enlarge- 
 ment of the free list, and a gradual reduction of duties, so 
 that industries would have a chance to readjust them- 
 selves. All duties that exceeded 20 per cent were to be 
 gradually reduced. Every two years between 1834 and 
 1842 one tenth of the excess above 20 per cent was to be 
 taken off. On January 1, 1842, one half of the remaining 
 excess was to be removed, and on July 1 the remainder. 
 The final result, then, was to be a tariff of 20 per cent 
 rates or less. 
 
 Whether the law of 1833 tied the hands of Congress on 
 tariff legislation until 1842 is beyond our province to 
 decide. At any rate there was a marked lull in tariff dis- 
 cussion. The great falling off in revenue, due to the panic 
 of 1837, led some to suggest that the succeeding biennial 
 reductions should be canceled. No legislation was 
 effected, however, until 1842, when the Whigs, a party 
 with the protectionist viewpoint, were in power. The law 
 which was passed was a radical departure from the pre- 
 vious trend and much higher rates were imposed. 
 
 Some opposition of course arose, but this was kept to 
 a minimum because the treasury was actually in need of 
 increased funds. The South did not seriously press its 
 claim of breach of faith on the part of Congress. As pros- 
 perity increased, however, the tariff again became a vital 
 question and entered extensively into the presidential 
 campaign of 1844. The result of it all was the Walker 
 tariff of 1846. 
 
 Walker Tariff. Under the Walker tariff rates in gen- 
 eral were greatly reduced, and while it was not a free 
 trade measure, it has frequently been designated as such. 
 The system of arranging the articles under particular 
 schedules was inaugurated, and the change was made 
 from specific to ad valorem duties. The system of pro- 
 
CUSTOMS DUTIES 195; 
 
 viding warehouses, which has been continued to the pres- 
 ent time, was inaugurated under this Act. These were 
 built, and importers permitted to store goods in them, the 
 duty to be paid when the goods were removed. In 1857 
 the rates provided for under the Walker tariff were mate- 
 rially reduced, with no strenuous opposition, and it seemed 
 the country was drifting to a free trade, or at least a 
 revenue basis, for its tariff. 
 
 109. The Panic of 1857 and the Civil War Changed the 
 Course of Tariff Rates. The tariff of 1857 had been a 
 law but a few months when a panic swept the country 
 with its business failures and consequent treasury deficits. 
 The protectionists realized this as a psychological time to 
 increase duties, yet the sentiment for low tariffs was still 
 too strong to warrant the attempt of any radical increases. 
 Many suggestions were made, but the bill which was ap- 
 proved was one drawn by Representative Morrill, and is 
 known as the Morrill tariff. It finally became a law in 
 1861. Ad valorem rates were raised to about the level of 
 the Walker tariff, and many specific duties were substi- 
 tuted for former ad valorem ones. This Act also intro- 
 duced the compensating feature, which continued to play 
 an important part in tariff legislation. The increase in the 
 duty on raw wool was met with a corresponding increase 
 in the duty on manufactured woolens. 
 
 The advent of the Civil War, with its demands upon the 
 treasury, increased the interest in tariff rates. Some 
 slight modifications were made in 1862, but primarily to 
 compensate manufacturers for the burdens which the 
 newly inaugurated excise tax had thrust upon them. 
 Again in 1864 a hasty revision was made, by which rates 
 were greatly increased, partly in the hope of increasing 
 revenues, and partly to compensate for the increased bur- 
 dens of the internal revenues. After the war some at- 
 tempts were made to revise the tariff in both directions, 
 but practically nothing was accomplished. In 1872 a flat 
 reduction of 10 per cent was secured, and duties were re- 
 
196 OUTLINES OF PUBLIC FINANCE 
 
 moved from tea and coffee. The panic of 1873 was re- 
 sponsible for the addition, in 1875, of the 10 per cent 
 which had been removed in 1872. 
 
 It was not long, however, before revenues were again 
 excessive, and it became generally recognized that some 
 tariff changes were needed. The appointment of a com- 
 mission representing varied interests, in 1882, by Presi- 
 dent Arthur, was met with general approval. Despite the 
 protectionist flavor which was to be found in the commis- 
 sion, it recommended an average reduction in the tariff 
 of from 20 to 25 per cent. Congress proceeded to disre- 
 gard the views of the commission, and passed a tariff law 
 in 1883 which, if anything, still more firmly intrenched 
 the principle of protection. 
 
 The McKinley Tariff. The sessions of Congress which 
 followed were the scenes of many tariff debates. The two 
 parties were becoming more united in their stands the 
 Republican for protection, and the Democratic for low 
 tariffs. The Democrats attempted many reductions, but 
 were unsuccessful. The first real change in the tariff 
 after 1883 was the McKinley Act, which became a law in 
 1890. 
 
 The McKiniey tariff was a Republican measure, yet it 
 purported to reduce revenues. This it attempted in two 
 ways, by raising some duties so high as to make them pro- 
 hibitive, and reducing others. The reductions were on cer- 
 tain iron and steel products, while raw sugar and some steel 
 were put on the free list. The net result, however, was a 
 greater intrenchment of the protective policy because of 
 the large number of commodities upon which duties were 
 increased. Bounties were granted on sugar produced in 
 the United States, while the President was given power to 
 levy duties upon sugar, coffee, tea, and some other articles 
 in retaliation to any country which was unfavorable to 
 the United States with her tariff laws. 
 
 Gorman-Wilson Tariff. The McKinley tariff proved 
 Very unpopular and the tariff became the leading issue in 
 
CUSTOMS DUTIES 197 
 
 the Presidential campaign of 1892. The Democratic suc- 
 cesses augured for the adoption of tariff revision down- 
 ward, and this attempt was made in the Gorman- Wilson 
 law of 1894. This represented the first real lull in the 
 steady march of protection since the Civil War. The 
 changes, however, were much less than is generally sup- 
 posed the reduction of rates was so slight as to leave the 
 principle of protection unscathed. It was such an un- 
 satisfactory attempt to redeem pledges that President 
 Cleveland refused to sign the bill, and allowed it auto- 
 matically to become a law. 
 
 High Tariffs. Much blame was attached to the Demo- 
 cratic administration and its tariff legislation for the in- 
 dustrial conditions following 1893. When the Republicans 
 regained power in 1897 the passage of high tariff schedules 
 was comparatively easy. This was accomplished in the 
 Dingley tariff of 1897, the net result of which was the 
 highest wall of protection the country had yet known. 
 For a number of years little tariff discussion appeared, 
 but a feeling gradually arose that the tariff was partly 
 responsible for some of the increased costs of living, and 
 that a downward revision was needed. The Republicans 
 pledged themselves to this program, and offered the 
 Payne- Aldrich Act in 1909 as the fulfillment of this pledge. 
 Some rates were lowered while others were raised, so that 
 the net result represented, as a whole, a revision upward 
 rather than downward. 
 
 Lower Tariffs. The election of a Democratic adminis- 
 tration in 1912, pledged to lower tariffs, was looked upon 
 as an indication of real reduction. The result was the 
 Underwood-Simmons Act of 1913. The rates in every 
 schedule were reduced, yet the measure came far from 
 inaugurating a tariff for revenue only. Large additions 
 were made to the free list, and the average rate of duty 
 was materially decreased. The provisions of the bill are 
 so complicated that they lack the clearness which tariff 
 measures should possess. Provision was also made for an 
 
198 OUTLINES OF PUBLIC FINANCE 
 
 expert tariff commission to investigate and report upon 
 tariff needs. The Great War, unfortunately, interfered 
 with any results, whether good or bad, which might have 
 resulted from this legislation, and consequently no judg- 
 ment can be given as to the success of its trial. 
 
 Recent Legislation. It was expected that the Republi- 
 can successes in the election of 1920 would result in tariff 
 modifications. The rapid decline in the prices of agricul- 
 tural products, followed by the demand of the farmers for 
 some form of relief, hastened the attempts to modify the 
 tariff. Before the close of the Wilson administration 
 Congress passed the Fordney emergency tariff bill, which 
 the President vetoed, and which failed to pass over his 
 veto. The subcommittees of the Ways and Means Com- 
 mittee of the House at once began to recast the bill for 
 presentation to the Sixty-seventh Congress. 
 
 The emergency tariff bill, as it is called, was passed by 
 Congress and signed by President Harding in May, 1921. 
 The provisions of the bill are much the same as the one 
 vetoed by President Wilson. It is not designed to produce 
 revenue, but primarily to afford protection to the agri- 
 cultural interests. Comparatively high duties are placed 
 upon a large number of agricultural products. Some aid 
 is extended to Eastern manufacturers through the anti- 
 dumping provisions of the bill. This emergency tariff is 
 presumably but temporary legislation, and Congress has 
 promised a thorough revision of the tariff at a later date. 
 It is difficult to predict just what this will be, but it is 
 likely that some increase in tariff rates may be expected. 
 
 Import duties have always been an important source of 
 revenue, but it must be concluded from the foregoing sur- 
 vey that the fiscal aspects have very seldom had control- 
 ling interest in the formulation of our tariff laws. Indi- 
 vidual and sectional interests have always been reckoned 
 with, and have shown their influence in the legislation. 
 Nor can the tariff controversy be considered as settled, 
 for the problems of reconstruction have only increased the 
 
CUSTOMS DUTIES 199 
 
 importance of the tariff in fiscal and political discussions. 
 The situation calls to mind a statement which the author 
 remembers his great-grandfather to have made. He re- 
 marked that the first thing he expected to hear discussed 
 when he awoke in the next world was the tariff. 
 
 no. Revenue Is Given First Consideration in English 
 Tariffs. The tariff schedule of England is an outstanding 
 example of a system in which entire consideration is given 
 to the fiscal aspects. This result was achieved, however, 
 only after a long process of evolution. England was one 
 of the first countries to use the tariff as a form of revenue, 
 and developed it extensively during the seventeenth cen- 
 tury. The growth of the mercantile doctrines had a 
 strong influence during the eighteenth century. Import 
 duties were generally increased, some to rates which were 
 prohibitive. 
 
 The Revolutionary War and the French wars caused 
 further increases in many of the duties until, at the close 
 of the War of 1812, most of the rates were excessively high, 
 and applied to a large number of commodities. During 
 this long course of development little objection developed 
 to the gradual expansion of the duties, and the list of goods 
 to which they were to apply. Only two periods of reaction 
 were noticed, and these were so brief and ineffective as 
 to be relatively unimportant. 
 
 Early in the eighteenth century, when the continually 
 increasing rates were accompanied by a falling off in 
 revenues, many began to question the efficacy of the tariff 
 system then in force. The agitation which arose soon 
 began to produce results, and about 1820 duties were re- 
 moved to some extent from raw materials and food prod- 
 ucts. Again, in the early 'forties, rapid strides were made 
 hi the reduction of duties, and the final work was com- 
 pleted by 1860. Since that time attention has been 
 directed to the fiscal considerations, with the result of 
 securing practically as much revenue as before the reduc- 
 tion of duties, The list of taxed objects is small, and the 
 
200 OUTLINES OF PUBLIC FINANCE 
 
 system works in coordination with the excise taxes by 
 which duties are levied upon materials which are also of 
 domestic production. Import duties are levied upon a 
 few other commodities which are not produced at home, 
 such as tea, coffee, raisins, wine, and tobacco. The ma- 
 jority of the revenue is secured from liquors and tobacco. 
 As a whole, the system is simple and productive, and has 
 received but a small amount of criticism. 
 
 in. Other Countries Have Used Tariffs for Industrial 
 and Fiscal Purposes. The use of some form of customs 
 duties is almost universal. In scarcely any countiy, how- 
 ever, is such undivided attention paid to the fiscal results 
 as in England. In France the list of articles taxed is large, 
 and the intention is to secure results other than fiscal. 
 Food products, raw materials, and manufactured products 
 are taxed, on some of which the rates are so high as to 
 give practically absolute protection. The bulk of the 
 revenue has come from comparatively few commodities, 
 as coffee, sugar, corn, petroleum, and wines. There is no 
 attempt to correlate the customs duties with the internal 
 revenue duties, as is done in England. The present system 
 really dates back to 1791, for it is that law, with modifi- 
 cations, usually for political or industrial rather than fiscal 
 purposes, that is the basis of modern French tariffs. 
 
 The Italian duties, with a history much shorter than 
 that of France or England, are nevertheless strongly de- 
 veloped. Duties upon articles of necessary use form the 
 central part of the system, consequently the burden falls 
 heavily upon the poorer classes. The German system 
 represents a growth from the customs union which was 
 formed before the political union of the German states. 
 The system is characterized by a strong protectionist 
 sentiment which has been directed toward such a diversi- 
 fication of industry so as to make the country self-sup- 
 porting. A majority of the revenue which is received 
 comes from comparatively few commodities, such as corn, 
 coffee, wine, and tobacco. 
 
CUSTOMS DUTIES 201 
 
 If other countries were reviewed the same situation 
 would be found the use of a tariff system which seeks to 
 combine fiscal, industrial, and political ends. In all the 
 countries export duties, which in the earlier development 
 occupied a comparatively important place, have been 
 practically abandoned. 
 
 ADDITIONAL READING 
 
 Taussig, Tariff History of the United States. 
 Dewey, Financial History of the United States. 
 
CHAPTER X 
 
 EXCISE, CAPITATION, 1 AND BUSINESS TAXES 
 
 112. The Federal and State Governments Impose Many 
 Taxes. The customs duties have received more consid- 
 eration than any other form of revenue which has been 
 used by either the Federal or state governments. This has 
 been because of the economic and industrial significance 
 rather than because of any fiscal importance which may 
 be attached to them. Other sources of revenue of im- 
 portance exist, however, which are no less remunerative. 
 It is proposed in this chapter to discuss some of these 
 sources from which the Federal and state governments 
 secure funds. The treatment of a part of the sources of 
 revenue, however, such as the taxation of incomes, cor- 
 porations, property, and inheritances, will be reserved for 
 separate chapters. 
 
 An important source of revenue of the Federal govern- 
 ment which, like the customs duties, is not used by the 
 states or minor political units, is what is frequently called 
 the excise tax. Until a few years ago the significance of 
 Federal revenues was almost synonymous with customs 
 duties and excise taxes. The scope of Federal revenues 
 has been extended, however, in spite of the constitutional 
 limitation as to the levy of direct taxes, until nearly all 
 the sources of revenue which are used by the states must 
 also be considered as a part of the Federal fiscal system. 
 It is only in recent years that the Federal government has 
 
 1 There is no logical relation between capitation taxes and excise or 
 business taxes. They are the remnant of an earlier fiscal system, and the 
 brief consideration which they warrant is inserted in this chapter. 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 203 
 
 levied taxes upon corporations and incomes, and it is more 
 than likely that the emergency use of the inheritance tax 
 during the war will remain a part of the Federal source of 
 revenue. 
 
 Because of constitutional restrictions, and because of 
 the peculiar adaptability of some kinds of taxes to the use 
 of the different political units, it is not to be expected 
 that the different governmental units will derive their 
 revenue from exactly the same sources. It will be true, 
 however, that the overlapping of the sources of revenue 
 will be more extensive in the future than it has been in the 
 past. 
 
 The breakdown of such sources of revenue as the capi- 
 tation taxes, and the continual increase in the pressure 
 for additional funds, has led to the inclusion of new 
 sources of revenue. One of the most important of these 
 in the states and minor political divisions, is the use of 
 licenses and business taxes. In this chapter consideration 
 will be given to the excise tax, the capitation tax, and 
 business and license taxes. 
 
 113. Excise Duties Are Taxes upon Consumption. 
 Present excise taxes have, to a large extent, replaced what 
 were once called direct taxes upon consumption. By the 
 expression " direct consumption taxes " was meant that 
 the tax was placed upon the consumer of the commodity 
 which was the basis of the tax. The use of this form of 
 tax has existed from the beginning of revenue systems. 
 The exaction of a share of the commodities which were 
 produced somewhat resembled this form of levy. Later 
 the taxes were levied upon particular classes of goods 
 more with the idea of discouraging their use than with the 
 hope of securing revenue. Had revenue been the primary 
 object, the articles chosen would have been in the class of 
 necessities instead of luxuries, as was usually the case. 
 
 The goods most commonly taxed were plate, furniture, 
 horses, dogs, and servants; later houses were put in tne 
 same category. While levies on houses were regarded as 
 
204 OUTLINES OF PUBLIC FINANCE 
 
 consumption taxes, they perhaps more nearly corresponded 
 to the modern concept of property tax. In modern times 
 little use is made of this system, yet all are familiar 
 with some close approximations which were used during 
 and after the Great War. The tax which the purchaser 
 was compelled to pay on theater tickets, railroad tickets, 
 automobiles, and on many articles of wearing apparel 
 which retailed for more than a certain amount, are well 
 known examples. A large class of commodities which 
 were regarded as luxuries also were subject to the tax. 
 
 Modern Excise Taxes. This class of taxes has been re- 
 placed, to a large extent, by the modern excise tax which 
 is levied upon the commodity in some stage of its produc- 
 tion before it reaches the consumer. While the burden 
 may be as heavy, it does not raise so much opposition, 
 since the consumer does not realize that a tax is being 
 paid. From the administrative standpoint, also, the mod- 
 ern excise tax is more desirable. Before the industrial 
 revolution the majority of articles were domestically pro- 
 duced and consumed, and there was but the one place 
 to levy the tax. 
 
 With the development of the factory system of produc- 
 tion, however, the advantages of using the more indirect 
 method of levying taxes upon commodities forced itself 
 upon the attention of fiscal authorities. It is compara- 
 tively easy, for example, to place a tax upon one million 
 articles at the place where they are produced, while it 
 would be a task of no small proportions to collect it from 
 each of the ultimate consumers. Where the direct con- 
 sumption tax is used, moreover, because of administrative 
 difficulties, it must be limited to a comparatively small 
 list of objects, which usually have been luxuries. The 
 demand for this class of goods is comparatively elastic, 
 and a tax would drive the consumer to use substitutes 
 a feature which destroys the adaptability for fiscal 
 purposes. 
 
 Shifting and Incidence. The adoption of the excise 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 205 
 
 method of levy, however, does not destroy the fact that 
 the taxes upon commodities, wherever levied in the proc- 
 ess of production, are usually burdens upon the consumers 
 of the goods. Whether the tax will be shifted to its full 
 amount will depend upon the principles which govern the 
 shifting and incidence of taxes. A review of these princi- 
 ples, which were discussed in the chapter on "The Shifting 
 and Incidence of Taxes, " will be of benefit here. 
 
 The particular phase of shifting and incidence which is 
 applicable to the present situation is the relative elas- 
 ticity of supply and demand in the case of the taxed good. 
 It may be possible, in the process of readjustment follow- 
 ing the imposition of a tax, that the retail price of the 
 commodity may not be raised by the amount of the tax, 
 or may not be changed at all, if the supply be inelastic 
 and the demand elastic. The current assumption, how- 
 ever, that taxes on commodities will be shifted to the con- 
 sumer, is likely to be largely true. In the final result of 
 the burden there may be little difference whether the tax 
 be laid directly or indirectly in either case the burden of 
 a tax on commodities of consumption will usually rest on 
 the consumer. 
 
 114. The Use of Excise Taxes Presents Various Prob- 
 lems. In framing and administering a system of excise 
 taxes, a number of difficulties present themselves. Not 
 least among these is the problem of making the taxes 
 conform to the principles of justice in taxation. The old 
 diffusion theory held that any tax, if left in the fiscal sys- 
 tem long enough, would finally become so diffused and 
 broken up that it would fall with practically an equal 
 burden upon the whole of society. If this were true the 
 only thing necessary to justify excise taxes would be to 
 leave them till their burden became generally diffused. It 
 is largely from this reasoning that the dictum, an old tax 
 is a just tax, arises. 
 
 A moment's reflection, however, will show the fallacy 
 of the above conjectures. Suppose a tax be placed upon 
 
206 OUTLINES OF PUBLIC FINANCE 
 
 one particular commodity tobacco, for instance, and on 
 no others. It is difficult to see how, no matter how long 
 the tax remained in force, it would place a burden of 
 any moment on others than those who were connected 
 in some way with the production or consumption of 
 tobacco. To argue that such taxes conform to justice is 
 to affirm that the amount spent is the best measure of 
 taxpaying ability. Yet there is little relationship between 
 what a person spends and his ability to bear burdens. 
 One man may have a large family and it will be necessary 
 for him to spend his entire income to provide them with 
 necessities, without any added tax burden, while another 
 man with the same means may have no family to support. 
 Each may spend the same amount, yet their taxpaying 
 ability be entirely different. 
 
 Classes of Goods Taxed. The articles upon which the tax 
 shall be levied are an important consideration in connection 
 with excise taxes. In the earlier development of this form 
 of revenue, attempts were made to place the tax upon 
 every class of commodities, so that equality of burden 
 might be secured. It was even considered by many that 
 this form of revenue should replace all other forms. Such 
 a multiplicity of tax bases, especially in modern times, 
 would present such a detail and expense of administra- 
 tion, and be so prejudicial to the peace of mind of indus- 
 try and individuals that even to suggest such a policy is to 
 augur defeat. 
 
 Since, then, some selection must be made in the number 
 and kind of articles upon which the tax is to be levied, the 
 choice of the items becomes a problem of first importance. 
 The amount of revenue expected to be secured from this 
 source, together with the other taxes which are in use, 
 with their incidence, must be considered. If a large 
 amount of revenue is anticipated the tax must be levied 
 upon a different class of commodities than if only a small 
 amount is to be secured. 
 
 From the standpoint of justice excise taxes should not 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 207 
 
 be levied upon articles which would place an undue bur- 
 den upon a class of people that is particularly hard hit by 
 other taxes. It may be considered either that all should 
 have an exemption equal to a minimum of subsistence, or, 
 on the other hand, that every citizen should contribute 
 to the support of the state. 
 
 The articles upon which an excise tax would be placed 
 would differ according to the principle adhered to. If it 
 be deemed wise to exempt a fixed minimum, then no tax 
 should be placed upon such necessities as salt, sugar, 
 flour, and other articles in the class of necessities; if, on 
 the other hand, it be held that all should contribute some- 
 thing to the state, no surer method of accomplishing this 
 can be devised than by placing a tax upon such articles 
 as those just mentioned. If the idea be to make excise 
 taxes provide a sort of progressive element to the tax 
 system, then the levy will be upon objects which enter 
 primarily into the purchases of the richer classes. If the 
 primary object be to secure revenue, with no consideration 
 as to the justice of the incidence, then the objects chosen 
 for the levy would be the class of goods which are con- 
 sidered as necessities by the large middle class of citizens. 
 
 In the determination of the rate, where the yield of 
 revenue is the prime consideration, much attention will 
 have to be directed to the elasticity of the demand for 
 the various bases of the tax. The actual results from ex- 
 cise taxes, therefore, because of the many more or less 
 indeterminate factors connected with them, may vary 
 greatly from the anticipations which were in mind at the 
 time of levy. 
 
 115. Excise Taxes May Have Industrial and Social 
 Effects. The use of excise taxes, aside from any fiscal 
 considerations, may have intentional or unintentional 
 effects upon industrial and social activities. Obviously, 
 these effects cannot be accurately measured, perhaps in 
 no instance, but this does not destroy the fact that these 
 results exist. 
 
 14 
 
208 OUTLINES OF PUBLIC FINANCE 
 
 May Counteract Protective Tariff. One use which can 
 be made of the tax is to offset the effects which may be 
 caused by other parts of a fiscal system. A good example 
 of this function is the concurrent use of customs duties 
 and excise taxes which sometimes occurs. Take, for ex- 
 ample, the case of a country which wishes to levy an 
 import duty upon a class of goods which is being pro- 
 duced under competitive conditions, both at home and 
 abroad a feature which it is desired to continue. The 
 levy of the import duty would afford protection to the 
 home producer unless some equalizing burden be placed 
 upon his product. The excise tax can be made to fill 
 such a need. 
 
 Suppose the commodity in question be sugar, which is 
 being produced in each of two countries at about the same 
 degree of advantage. One country levies a tax of two 
 cents a pound upon the product from the other country, 
 which is such a handicap that no sugar is imported, the 
 home producers have a monopoly of the situation, the 
 price of sugar will go up, and the government will get no 
 revenue. An excise tax, however, of two cents a pound 
 on sugar produced at home will place an entirely different 
 aspect on the situation. No advantage will be given to 
 either home or foreign producer because of the tax levies, 
 and the government will get two cents a pound from all 
 sugar consumed. 
 
 May Affect Progress. Care should be taken in placing 
 excise duties not to interfere with the natural progress of 
 industry. In order to prevent fraud and evasion, govern- 
 ment regulation of the production of taxed commodities 
 may be necessary. This regulation may be of such a 
 nature as to check invention and hinder the adoption of 
 more effective processes of production, and society may 
 suffer more than enough to compensate for the revenue 
 which was gained by the state. 
 
 The indirect effect of excise taxes upon industry may 
 also vary greatly. If the tax be levied upon articles which 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 209 
 
 are the basic products for industry in general, the effect 
 will be much more widely felt than if the levy be upon 
 articles which have little connection with industry. The 
 effects of a heavy excise tax upon the production of iron 
 ore, for example, would be felt by nearly all industries, 
 while a tax upon such an article as coffee would have 
 indirect effects of little significance. The taxation of 
 productive materials, such as iron, presents problems 
 which are not found in connection with the taxing of con- 
 sumers' goods. To place an estimate upon the real effects 
 of the duties is very much more difficult because of the 
 many processes of shifting which are likely to occur. The 
 ultimate burden on the consumer is likely to be greater, 
 moreover, because the tax has been advanced very early 
 in the stage of production, and the individual who has 
 made the payment will seek a rise in price great enough 
 to repay him for having waited to collect the tax from the 
 consumer. 
 
 Sumptuary Taxes. The primary purpose for the levy 
 of excise taxes is often sumptuary. The desire to limit 
 the consumption of commodities which are considered 
 harmful has led to their being taxed, at varying rates, 
 with the expectation that the increased price would lessen 
 the demand. The fiscal aspect is overshadowed in these 
 cases by the expected beneficial effects on the moral and 
 social uplift of the community. The most common exam- 
 ple of this class of excises has been found in connection 
 with intoxicating liquors, tobacco, patent medicines, play- 
 ing cards, and similar articles. The diminution in con- 
 sumption, however, has not always been what was antici- 
 pated, and the anticipated results have often been de- 
 feated by the adulteration of the product, so that a less 
 desirable commodity is disposed of at the former price. 
 The use of the excise tax as a sumptuary measure has 
 not been entirely satisfactory. 
 
 Care must be taken, in formulating the excise system, 
 to make evasion difficult, or at least not to make it profit- 
 
210 OUTLINES OF PUBLIC FINANCE 
 
 able. Evasion is likely to arise when the attempt is made 
 to tax luxuries in proportion to their value. The tempta- 
 tion is at once given for undervaluation of the products, 
 which not only defeats the purpose of the tax, but has a 
 demoralizing effect upon the citizen. The less the incen- 
 tive to fraud and evasion, therefore, the more salutary 
 will be the social and moral effects of excise taxes. 
 
 116. Different Methods Are Used in Levying Excise 
 Taxes. The original levy of the excise tax may be made 
 in different ways, even though the burden is expected to 
 rest upon the final consumer of the product. These ways 
 may be divided into two general classes: a license fee or 
 tax is imposed upon either the producer or seller of the 
 commodity, or the tax is levied against each unit of the 
 article. These methods may be used singly or in com- 
 bination. In the United States the license taxes are col- 
 lected by means of stamps or licenses which must be con- 
 spicuously displayed in the place of business. The pur- 
 chase of the license is a transaction which is necessary 
 before the conduct of the business becomes legal. Severe 
 penalties are liable to be inflicted in cases of default. All 
 persons who are subject to the tax must register with the 
 internal revenue collector of the district in which he is 
 located, and furnish specific information of various kinds 
 in regard to his business. The tax is a graduated one, and 
 the rates before the Great War ranged from $600 on the 
 manufacturers of oleomargarine to $20 on the retailers of 
 malt liquors. The dealers in tobacco were formerly re- 
 quired to pay a license, but this stipulation was repealed 
 in 1890. 
 
 Tax upon Units of Goods. The levy of a tax upon the 
 units of goods produced is far more important than the 
 levy upon producers and dealers. This, in fact, consti- 
 tutes the real internal revenue system, while the license 
 taxes are merely auxiliary measures. In the case of the 
 levy upon the commodity the payment of the tax is usu- 
 ally required from the manufacturer, for it is here that 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 211 
 
 the goods are concentrated, and hence the administrative 
 work is reduced to a minimum. The most common 
 method of collecting this form of tax is from the sale of 
 stamps. These are canceled by the proper official, and 
 wherever possible are affixed to the package containing 
 the goods in such a way that the stamp will be broken 
 upon opening the package. The failure of a package to 
 bear a stamp is evidence that the tax has not been paid, 
 and constitutes a basis for prosecution. Where the stamp 
 cannot be affixed to the article, it is required to be con- 
 spicuously posted hi the place of business. Some fraud 
 has come from the re-use of stamps, but this has been 
 reduced to a minimum. 
 
 Commodities Taxed. The principal commodities upon 
 which the excise tax has been levied in the United States 
 are distilled and fermented liquors, tobacco, oleomarga- 
 rine, playing cards, and patent medicines. In times of 
 emergency, such as a war, this list has been greatly ex- 
 tended. Cigars and cigarettes are graded both as to weight 
 and value, while the tax on the other commodities ranges 
 according to quantity. In countries other than the 
 United States, excise taxes have been placed upon such 
 articles as sugar, silk, chocolate, and salt. Salt was for- 
 merly extensively used as a basis for taxes, and collection 
 was made in the form of licenses upon producers and dis- 
 tributors, or by the granting or maintenance of a mo- 
 nopoly. The tax was productive, but unjust, because it 
 fell with about the same weight upon all classes of individ- 
 uals, no matter what their ability to meet the burden. 
 The use of salt, consequently, as a basis for taxes, has been 
 generally discarded. The principal bases for the modern 
 excise tax the world over are liquors and tobacco, and the 
 motive behind the levy is frequently sumptuary as well 
 as fiscal. 
 
 117. Excise Taxes Will Continue to Form a Part of 
 Fiscal Systems. The adoption of any new plan for rais- 
 ing revenue has usually met with numerous objections, 
 
212 OUTLINES OF PUBLIC FINANCE 
 
 and the introduction of the excise tax did not escape. Its 
 introduction in England was severely criticized, while, as 
 will be later explained, its early use in the United States 
 met with serious objection. But " an old tax is a good tax " 
 is now applicable to the excise tax in so far as the people 
 have become used to it, and the administrative machineiy 
 has become so perfected as to do away with many of the 
 earlier objections of inquisitorial processes, fraud, and eva- 
 sions. The tax has come to represent a sort of silent flow 
 of revenue to the treasury, with no one feeling any par- 
 ticular burden, and hence raising no complaints. 
 
 The amount of funds which accrues from the excise tax 
 in the United States, at least, is as large as from any other 
 source, and because of the efficient administrative ma- 
 chinery which has been developed, the expense of collect- 
 ing the returns is comparatively low. With the machinery 
 in existence, this form of tax can be made to respond 
 rather quickly and satisfactorily to increased fiscal needs, 
 either by increasing the duties upon articles already taxed, 
 or by placing additional commodities upon the taxable 
 list. This was illustrated by the wide use, not only of 
 excise taxes, but of the direct consumption taxes during 
 the Great War. 
 
 It may be difficult to square a tax upon the articles of 
 consumption with the ideals of justice, yet a tax so pro- 
 ductive as the excise tax finds little difficulty in squaring 
 itself with fiscal authorities. Its use has been made easier 
 and more uniform because of the dissemination of large- 
 scale production throughout the principal nations of the 
 world, and the increasing uniformity in the demands of 
 individuals. But even though excise taxes are produc- 
 tive, inexpensive, and meet with comparatively little ob- 
 jection three desirable qualities of a revenue system- 
 yet too much reliance should not be placed upon them or 
 their legitimate place will be destroyed. 
 
 It must always be kept in mind that consumption does 
 not represent ability. An extensive use of taxes placed 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 213 
 
 upon necessities, while it would doubtless be productive 
 of much revenue, would be so extremely regressive as to 
 discredit its place in a fiscal program. The future use of 
 the excise, instead of expanding to all articles of consump- 
 tion, as was formerly extensively advocated, will likely be 
 limited to comparatively few goods, and these will be in 
 the class of semiluxuries and luxuries, rather than in the 
 class of necessities. The class of commodities chosen, 
 moreover, will likely consist, to some extent, of those of 
 which a diminution in use, because of the tax, would not 
 be considered undesirable. While, under ordinary con- 
 ditions, no levies will be made upon necessities, yet large 
 returns will continue to be received from the class of semi- 
 luxuries whose use is largely a matter of fixed habit. 
 
 118. The United States Has Effective Machinery for 
 Administering Excises. The machinery for handling the 
 collection of the internal revenue for a country as large as 
 the United States must necessarily be extensive. Since 
 the additional duties of assessing and collecting the Federal 
 income and excess profits taxes has been added to the 
 duties of the internal revenue department, a partial re- 
 organization has been found necessary in order to expedite 
 the large amount of business which it is necessary to 
 handle. 
 
 Central Machinery. The Bureau of Internal Revenue, 
 which has charge of the collection of the excise taxes, as 
 well as the income and excess profits taxes, is one of the 
 divisions of the treasury department, under the direction 
 of the Commissioner of Internal Revenues. The commis- 
 sioner is directly responsible to the Secretary of the Treas- 
 ury. Two advisory boards are provided the legal ad- 
 visory board, and the excess profits advisory board. The 
 latter of these boards, as the title indicates, has to do with 
 the collection of excess profits, while the other, which is 
 composed of lawyers, must advise on the legal situations 
 which arise in connection with assessments and collections. 
 
 The bureau is composed, at present, of six divisions, 
 
214 OUTLINES OF PUBLIC FINANCE 
 
 each of which is placed under a deputy commissioner. 
 The first three divisions have to do with the regulations 
 regarding the collection of the taxes, while the fourth has 
 charge of their actual collection. The fifth division has 
 charge over the inspection of returns, while the sixth 
 division is sometimes called the Division of Business Co- 
 operation. It is the function of this division to obtain 
 as much cooperation as possible between the business 
 interests of the country and the government. It has 
 worked with the boards of trade and chambers of com- 
 merce in a campaign of education. This division also looks 
 after the complaints, and invites suggestions for a greater 
 perfection of the administration of the law. 
 
 Local Machinery. The actual collection of the excise 
 taxes is handled by local internal revenue officers. The 
 United States is divided into sixty-four collection dis- 
 tricts, and each is in charge of an internal revenue col- 
 lector. It is to this officer that the individuals and firms 
 of the district make returns and pay taxes. Returns are 
 always examined, and if any serious errors occur may be 
 sent back to be filled out again. The list of taxes for the 
 month are calculated and sent to the Commissioner of 
 Internal Revenue, who in turn charges the local official 
 with the amount of the tax, and makes him responsible 
 for its collection. The local collector is expected to detect 
 fraudulent returns, or to know that a return should have 
 been filed, but was not, and to take proper steps to make 
 rectifications. Even after the reports are turned in to the 
 department, evidences of fraud or mistakes may be found, 
 in which case an abstract is made and turned over to the 
 field force of investigators in the proper district. These 
 investigators are expected to be thorough and to ascertain 
 the facts. 
 
 If taxes have been illegally assessed or collected a claim 
 may be presented on an authorized form. The entire 
 burden of proof rests on the claimant, and if his case is 
 established, reimbursement may be secured through the 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 215 
 
 revenue office of the district. The efficient machinery 
 which has been developed is helping to make the internal 
 revenue sj^stem, with its multitude of added burdens, a 
 successful part of the fiscal program of the United States. 
 
 119. The United States Did Not Use Excises Exten- 
 sively Before the Civil War. The constitutional grant to 
 the Federal government of the power to levy internal 
 revenue duties was the cause for much objection. All 
 sorts of evil consequences were pictured, such as the entire 
 confiscation of property and imprisonment of individuals. 
 Officials, consequently, were somewhat slow and cautious 
 in extending the fiscal system to make use of internal 
 taxes, and when it was attempted much opposition arose, 
 both within and without Congress. 
 
 The failure of the import duties to supply sufficient 
 funds, led Hamilton, the Secretary of the Treasury, to 
 recommend the adoption of an excise tax, especially on 
 whisky. Congress was not anxious to create the new 
 Federal offices which the tax would make necessary, while 
 in some par,ts of the country strenuous objection arose to 
 the use of whisky as the base of the tax. It was consid- 
 ered so much of a necessity as to make the tax in the 
 nature of a poll tax, which, therefore, fell with an unequal 
 burden upon different classes of people. The tax was 
 adopted, however, and imposed a duty of from eleven to 
 thirty cents a gallon on spirits manufactured from foreign 
 materials, and from nine to twenty-five cents a gallon on 
 spirits from domestic materials. The opposition which 
 arose, and which culminated in armed resistance in 
 western Pennsylvania, known as the Whisky Rebellion, is 
 familiar to students of American history. The unproduc- 
 tiveness of this tax led to an extension of excise duties 
 upon carriages, sales of liquor, manufacture of snuff, 
 sugar, and auction sales. 
 
 Early Tax Repealed. This initial employment of the 
 excise principle as an integral part of the Federal fiscal 
 system was of short duration. The political party which 
 
21(5 OUTLINES OF PUBLIC FINANCE 
 
 came into power at the beginning of the nineteenth cen- 
 tury believed in simplifying the administrative machinery 
 to the greatest possible extent, and, furthermore, that the 
 use of excise taxes violated the principles of democratic 
 freedom. The chairman of the Committee on Ways and 
 Means of the House of Representatives, under the new 
 political regime, hastened to recommend the abolition of 
 excise taxes on the ground that they increased the number 
 of officers and placed increased burdens on the people. 
 He contended, also, that they were obnoxious, vexatious, 
 and hostile to the genius of a free people, and at the same 
 time were expensive to collect. 
 
 The opposition contended that if reduction of duties 
 were to be made it should come from the import taxes on 
 such necessities as tea, sugar, and similar commodities, 
 rather than from such a luxury as distilled spirits. A 
 strong argument was further made for the retention of the 
 fiscal administrative machinery which had been estab- 
 lished. These considerations were of no avail, however, 
 and the repeal measure passed in 1802. 
 
 Emergency Use of Tax. The burden of the War of 1812 
 came upon the treasury, the returns from imports fell off, 
 and no excise taxes were in existence. Much discussion 
 occurred in Congress over the reestablishment of excises, 
 but no agreement could be reached. In a special session 
 in 1813, Congress levied light duties upon liquors, sugar, 
 carriages, and auctions, as well as some stamp duties. 
 These proved insufficient, and in 1814 the rates were 
 raised and the duties extended to a few other commodities. 
 The administrative machinery was so ineffective, however, 
 that the returns were slow in coming in many of the 
 taxes were not collected until years after they were due. 
 The war was scarcely over when strong agitation arose 
 for the removal of the burden of the excise taxes. They 
 continued to be used to some extent until 1817, after 
 which, except for the payment of some duties which had 
 previously accrued, they ceased to have any place in the 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 217 
 
 revenue systam of the country until war again called them 
 forth. 
 
 120. Some Civil War Excises Have Been Permanently 
 Retained. No attempt was made to secure any adequate 
 revenue from taxes during the first months of the Civil 
 War. It was the policy of the Secretary of the Treasury 
 to rely principally upon borrowed funds to meet the 
 emergency needs. In spite of this policy of Secretary 
 Chase, Congress, in 1862, determined to extend the use 
 of taxes, and an adoption of a system of internal revenue 
 duties was a part of the plan. The problem of getting a 
 workable system was, of course, much more complex than 
 when excises had previously been used during the War of 
 1812. The territory as well as the population was greatly 
 extended, while industry had become greatly diversified 
 during this lapse of forty-five years. 
 
 To inaugurate a successful system of excises under these 
 conditions, an extensive administrative machinery was 
 necessary, and this, of course, did not exist. With the hope 
 that little attempt would be made to evade the tax, it 
 was decided to place low duties upon a large number of 
 articles. The list of taxed articles included liquors, to- 
 bacco, manufactured products, carriages, billiard tables, 
 slaughtered animals, means of transportation, and various 
 forms of business organizations. Taxes were also levied 
 upon incomes and legacies. Besides these a large number 
 of licenses were imposed. 
 
 Tax of 1864. The returns from these levies were disap- 
 pointing less than one half of the anticipated revenue 
 4vas realized and Congress attempted to remedy the 
 situation by new legislation in 1864. In general outlines, 
 this measure was much the same as the earlier enactment, 
 the principal difference being a general increase in rates 
 and an extension to more commodities. So all-inclusive 
 was the system that it became impossible to tell how many 
 taxes many commodities were expected to pay. Nearly 
 every class of raw material bore a tax, as well as the 
 
218 OUTLINES OF PUBLIC FINANCE 
 
 finished product, while a tax generally was placed upon 
 transportation and sale. While the burdens inflicted were 
 often inequitable, yet from the fiscal standpoint the re- 
 turns proved satisfactory. That the administrative ma- 
 chinery had had a chance to be developed since the pas- 
 sage of the earlier law, will account in part for the more 
 successful operation of the law of 1864. 
 
 Development Since the Civil War. A change can be 
 noted in the temper of the citizenship following the Civil 
 War from that which was evidenced after the War of 1812. 
 Less clamor was raised to have the excise taxes removed. 
 The old selfishness of the states was beginning to disap- 
 pear, and they were beginning to view the extension of 
 Federal activities as a lessening of the burden on the 
 treasuries of the states. The expenses of the government 
 continued to be high for a number of years after the close 
 of the war, and never did go back to the pre-war level. It 
 needed little argument, then, to show that the excise tax 
 should remain as a fundamental part of the fiscal system. 
 
 Changes were gradually made until the tax applied 
 principally to tobacco and distilled and malted liquors. 
 The rates on these have varied somewhat, but usually have 
 been lower than in most countries. During the Spanish- 
 American War the excise taxes were greatly extended, and 
 the existing duties were practically doubled, so that their 
 receipts formed a considerable portion of the total revenue. 
 At the end of the war their use was again curtailed to 
 practically the former basis, where it remained until the 
 Great War. The extensive use made of these taxes during 
 and after the Great War is familiar to all. Because of the 
 large future revenue needs to meet interest and debt 
 charges, as well as the rapidly multiplying government 
 activities, and because of the elimination of liquors as a 
 source of revenue, it is to be expected that the excise tax 
 will be continued on a very much larger number of com- 
 modities than during the pre-war period. 
 
 121, Excise Ites Have Important Places in Foreign 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 219 
 
 Fiscal Systems. It is intended to do no more than simply 
 indicate some of the uses of excise taxes in countries other 
 than the United States. As might be expected, because 
 of their indirect nature they very early held prominent 
 places in fiscal systems. England resorted to their use as 
 early as the seventeenth century and gradually extended 
 the system until it included such articles as salt, glass, 
 leather, liquors, and many other commodities. Marked 
 extension was made of these duties to supply war funds, 
 and after the passing of the emergency they were usually 
 reduced to something like the former level. 
 
 As the country developed and the fiscal machinery 
 became better organized, the multiplicity of the duties 
 lost popularity, and from the first quarter to the middle 
 of the nineteenth century many commodities which had 
 long been burdened by taxes were relieved. Among these 
 were glass, brick, tile, leather, and soap. The removal of 
 many of these duties had a stimulating effect upon indus- 
 try. The duties, however, have been retained on the 
 various kinds of alcoholic liquors, the brewing and dis- 
 tilling of which are kept under close government super- 
 vision. Licenses are also charged for the sale of these 
 liquors. The results of an excise on tobacco have been 
 accomplished through the restriction of its growth in 
 England, and taxing it through the use of the customs 
 duty. 
 
 Excise Tax in France. The most extensive use of ex- 
 cise taxes has been found in France. They were developed 
 here much earlier than in England and have always occu- 
 pied a place of more or less importance in French fiscal 
 history. They have been far from satisfactory at times, 
 and have been often in ill repute among the citizens be- 
 cause of bad administration and discriminations. Their 
 importance to the fiscal system has varied at different 
 times, but because of the nature of the government they 
 have been used more extensively than in most countries. 
 This is the situation at present. A larga number of com- 
 
220 OUTLINES OF PUBLIC FINANCE 
 
 modities are taxed, and various methods are used in mak- 
 ing the levy. A common method is to levy the tax upon 
 goods as they pass from one political division to another. 
 Luxuries and semiluxuries have formed the bases for the 
 most of the taxes. 
 
 Use in Other Countries. Italy has also made extensive 
 use of excise taxes, but is distinguished from the other 
 countries in that articles of necessary consumption have 
 always been made to contribute heavily. Germany, also, 
 has long used this form of taxes, though its prominence 
 has not been so marked as in some of the other European 
 states. Some of the effects have been offset by the use of 
 bounties, while some articles which were capable of pro- 
 ducing much revenue, such as beer, have been lightly 
 taxed. In practically every country the use of this form 
 of tax occupies a place of some degree of importance. In 
 nearly every case, moreover, this degree of importance 
 has been greatly increased since the advent of the Great 
 War, and it is doubtful whether it will ever recede to its 
 former level. The articles which are most universally 
 used as the bases upon which to levy excise taxes are 
 liquors, tobacco, salt, and sugar. 
 
 122. Government Industries May Have the Effect of 
 Excise Taxes. It was pointed out hi an earlier chapter 
 that a state may take over and conduct an industry, and 
 that in doing this it may be impelled by any one of several 
 motivating forces. If the thing which leads the state to 
 enter industry be primarily fiscal or sumptuary, then the 
 effect is much the same as that produced by the use of 
 excise taxes. As long as the motivating force is to give a 
 service at the lowest possible cost, the situation is differ- 
 ent. When Queen Elizabeth granted monopolies to par- 
 ticular industries in return for a payment to the state, 
 while it was not precisely a state industry, yet the effect 
 was much the same as if there had been a levy upon the 
 articles produced. The plan of producing and distributing 
 intoxicating liquors which is used by some of the smaller 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 221 
 
 European countries, as well as the state dispensary sys- 
 tem, which was formerly used in South Carolina, are 
 examples of the interference of governments in industry 
 for sumptuary purposes. At present, in some of the Euro- 
 pean countries, government monopolies are maintained 
 over particular industries, primarily for the purpose of 
 securing revenues. Monopolies of the salt and match 
 industry are found, but the best example is the tobacco 
 monopoly, which is found in Austria, Italy, and France. 
 The most systematic use of this monopoly is in France, 
 and as an illustration of a government monopoly for 
 revenue, a brief examination will be beneficial. 
 
 French Tobacco Monopoly. The French tobacco mo- 
 nopoly is by no means a new experiment, but was begun 
 nearly two hundred and fifty years ago, and has had an 
 uninterrupted existence for more than a hundred years. 
 The growth of tobacco is prohibited except in certain 
 districts, and here it is only allowed by persons to whom 
 licenses have been granted. Painstaking government su- 
 pervision and inspection are carried out, primarily to pre- 
 vent any of the crop from passing into other hands than 
 those of the government. The prices allowed for the crop 
 are determined by a board of experts. The manufactur- 
 ing is carried on in government factories, and the selling 
 is done by government officials. As a general thing the 
 price has been much higher for tobacco in France than in 
 most other countries. It has been so high, in fact, as to 
 act to some extent as a sumptuary institution, yet even 
 with this situation enormous revenues are secured. 
 
 Government Ownership. This is not the place for a dis- 
 cussion of the merits or demerits of government owner- 
 ship and operation of industry. That it can be used suc- 
 cessfully, both for fiscal and sumptuary purposes, cannot 
 be denied. This does not mean, however, that the state 
 can enter all fields of industry to advantage to its citizens. 
 While revenue may be secured, the keenness in develop- 
 ing a perfected plant, and in adopting more effective pro- 
 
222 OUTLINES OF PUBLIC FINANCE 
 
 ductive processes, may be much less than if the plants 
 were competitively run by individuals. In such cases the 
 patrimony of the state is impaired, and a greater burden is 
 placed upon posterity because their income will not be as 
 great as it might have been. The quality of materials 
 and services is not always of the highest, consequently all 
 these indirect effects must be weighed when a question of 
 the state's entering industry is under consideration. 
 
 123. Capitation Taxes Are No Longer Important in Fis- 
 cal Systems. Capitation or poll taxes have never occu- 
 pied a place of importance in Federal revenue systems, 
 yet they have played a role of more or less importance in 
 some of the states and minor political divisions. Their 
 importance is waning, however, and consequently this 
 source of revenue warrants but a brief discussion. In the 
 early history of many countries poll taxes occupied the 
 place of primary importance in fiscal systems. The injustice 
 which comes from a uniform assessment upon individuals 
 was soon felt, and the tax, while still often designated as 
 the poll tax, was graduated according to property, per- 
 sonal rank, or some other such evidence of ability to meet 
 burdens. In many cases the poll tax has gradually de- 
 veloped into other forms of taxes where an attempt is 
 made to levy in accordance with the ability to pay. In a 
 few foreign countries, however, the tax is still assessed at 
 a definite amount per capita. 
 
 In American States. The most extensive use of the poll 
 tax has been in the American states. At the beginning of 
 the present century its use was still found in about half 
 of these commonwealths. Its retention is most general 
 in the Southern and some of the New England states. 
 Its use was extensive in the Colonies, and frequently the 
 entire amount of revenue was collected from this source. 
 Gradually, however, its importance as a source of revenue 
 was replaced by other taxes, yet the payment of the poll 
 tax was often retained as a prerequisite of certain political 
 privileges, usually the right of suffrage. The fiscal irn- 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 223 
 
 portance of the tax throughout its history has been small, 
 while frequently great importance has been attached to 
 the other aspects. 
 
 Objections to Poll Tax. The poll tax is the source of 
 much corruption and little revenue in the states where it 
 is still retained. In many of the Southern states the pay- 
 ment of the poll tax has been made a prerequisite to suf- 
 frage, with the express intention of limiting the number of 
 voters. This purpose often has been worse than frus- 
 trated by unscrupulous politicians, who make a practice 
 of paying the tax in return for the support of the voter. 
 It was the development of this practice which led many 
 of the New England states to give up this qualification 
 for suffrage. 
 
 In most states and localities where the tax is retained 
 as a fiscal measure, it is unproductive of revenue because 
 no attempt is made to administer it. The amount of 
 the tax is so small that, where it cannot be assessed and 
 collected in connection with property, the administrative 
 expense proves to be a greater item than the amount of 
 the tax itself. It is, therefore, easy to explain the gen- 
 eral reports from the various officials that no attempt 
 has been made to collect the tax, or that the returns from 
 this source have been insignificant. 
 
 Where the tax is levied by local governmental units it 
 is usually for some specific purpose, such as schools or 
 roads. The old payment of services is still exacted in 
 some quarters in the form of requiring every male citizen 
 between certain ages to execute a given number of days' 
 labor on the highways. The results are usually not satis- 
 factory, and the plan is gradually going into discard, 
 while the highways are kept up by expenditures from the 
 general tax fund. 
 
 The outstanding objections to the modern use of the 
 poll tax do not justify its retention to anything like the 
 extent it is still found in the American commonwealths. 
 It never has been, and never will be, a form of taxation 
 
221 OUTLINES OF PUBLIC FINANCE 
 
 which is popular with the citizenship of a country, conse- 
 quently an extensive evasion may be expected. To be a 
 general tax, the amount of the levy must be small, and 
 because of the administrative expense involved, a thor- 
 ough collection cannot be expected. The use of the tax 
 as a political prerogative has been the source of so much 
 corruption as to leave nothing to be said in its favor. 
 From the fiscal, political, and ethical points of view, 
 therefore, the poll tax is doomed, and its retention often 
 can be explained only because of the selfish designs of 
 political parties. 
 
 124. Business Taxes Have Been Extensively Developed 
 in France and Prussia. In these days of excessive public 
 expenditure and consequent demands for revenue, fiscal 
 authorities of all political units are anxious to discover 
 untapped sources of funds, and, if such are discovered, to 
 determine the most successful way of making them pro- 
 ductive. Business and license taxes are one of these 
 sources which have been used only to a small extent in 
 the United States, except in certain sections, until com- 
 paratively recent years. Other countries have preceded 
 in the use of these taxes, and have worked out de- 
 tailed systems, some of the successful of which can be 
 noted with profit by American students, since this method 
 of taxation doubtless will be extensively used in the future. 
 
 Business Taxes in France. The system of business 
 taxes which had been worked out in France before the 
 Great War represents, perhaps, the most thorough and 
 detailed development in fiscal machinery of this na- 
 ture. Only the briefest outline of the plan will be at- 
 tempted here. Certain definite principles are recognized, 
 and these are embodied in the formulation of the sched- 
 ules. It is assumed, in the beginning, that certain forms 
 of industry are more profitable than others; that even in 
 the same class of industry profits vary directly with the 
 population; that the profits of a manufacturer or mer- 
 chant will ordinarily vary directly with the size of the 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 225 
 
 site which is occupied; and that the kind of residence 
 which the business man occupies is often an indication of 
 his business success. 
 
 In arriving at the tax assessment, two classes of rates 
 existed the fixed and proportional. To arrive at the 
 former three schedules were used. Schedule A includes 
 merchants and professional classes. The merchants are 
 further classified as to the nature of the business, whether 
 it be wholesale, retail, or a combination. After the de- 
 termination of the kind of business, then it must be placed 
 in one of the nine classes according to population. Sched- 
 ule B includes bankers, department stores, transfer com- 
 panies, etc. The classifications in this group are based 
 upon the population of the town where the business is 
 located and upon the number of persons employed. 
 
 Industrial establishments are placed in Schedule C. 
 Population is not used as a criterion of classification here, 
 but a fixed rate is levied upon each industry of the same 
 kind, while a variable rate is based upon the amount of 
 profits. In addition to these schedules another tax is 
 assessed, w^hich is based upon the site value of the resi- 
 dence of the individual, together with the value of the site 
 used in his business. Certain classes, such as lawyers, 
 physicians, and others of a similar nature, are subject only 
 to this latter tax. 
 
 Tax in Prussia. For many years Prussia used a similar 
 method of taxing business organizations, but in 1891 the 
 basis for classification was remodeled. Population of the 
 place in which the business was located was no longer 
 used as a principle in classification, neither were the in- 
 dustries divided into classes because of the nature of the 
 business. The entire classification, under the revised plan, 
 is based upon the capital invested and upon the annual 
 earnings. The earnings are used as the primary basis of 
 classification, with capital as a modifying factor, in divid- 
 ing industries into four classes, and the tax is so graduated 
 as to take about 1 per cent of the earnings. 
 
226 OUTLINES OF PUBLIC FINANCE 
 
 The French system appears exceedingly complex, but 
 does possess some advantages. The business man or his 
 business is subject to no investigation by fiscal officials, 
 and consequently the tax is not unpopular. The tax, 
 moreover, is not upon actual earnings, but upon what 
 should be earned, ordinarily, under given conditions. The 
 tax penalty is not upon the enterprising entrepreneur of a 
 particular class, but upon the laggard. The necessity of 
 relying upon declarations of the taxpayer is also elimi- 
 nated. Many inequalities doubtless have arisen, yet the 
 advantages somewhat compensate for them. The system 
 has been productive and provided no small part of the 
 pre-war revenues. 
 
 125. Business and License Taxes May Be Extended by 
 American Fiscal Authorities. The methods to be used by 
 the different political divisions of the United States in 
 securing increased revenues, has been an important phase 
 of recent fiscal discussion, and no little attention has been 
 given to the possibilities of business and license taxes. 
 It must not be inferred from this, however, that business 
 and license taxes have not previously had a place in our 
 fiscal system. In many of the states they were among 
 the early sources of revenue, and in some of these states 
 have had a continuous existence to the present time. The 
 use of the various kinds of franchise taxes upon corpora- 
 tions is, of course, a tax upon business, which has so in- 
 creased in importance in recent years as to deserve treat- 
 ment in a separate chapter. 
 
 Present Use of Tax. The most extensive use of this 
 form of revenue has been in the Southern states, where 
 the rates have been gradually increased and extended to 
 cover a wider range of occupations. Nearly all the states 
 have made use of the license payment for the purpose of 
 regulation, as in the case of peddlers, sale of liquor, etc., 
 but often the primary consideration was sumptuary 
 rather than fiscal. Yet in more than one third of the 
 states rates are assessed against occupations and trades, 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 227 
 
 primarily for the purpose of raising revenue. They are 
 frequently used by the state and county governments, 
 but the most extensive use of the license tax has probably 
 occurred in municipalities. These taxes are sometimes 
 used in connection with the property tax, and sometimes 
 in addition to it. 
 
 The use of these taxes differs greatly in the various 
 political units where they are found and generalizations 
 are impossible. A few characteristics, however, may be 
 noted. Manufacturing plants are usually exempt from 
 the tax, while mercantile establishments nearly always 
 have been included. In many places licenses are imposed 
 upon the professional classes, but this is not general. 
 Usually no classification or graduation has been attempted. 
 Louisiana has been a notable exception in this respect in 
 that a rather extensive graduation is provided. The scale 
 in most cases is arranged on the basis of sales or gross 
 earnings, while in some cases other factors are considered 
 in hotels the number of rentable rooms, in theaters the 
 number of seats, etc. An interesting basis for graduation 
 which has been used in the Province of Ontario may be 
 noted here. Municipalities may levy a tax upon trades 
 and businesses which is to be some percentage of the 
 assessed value of the real estate occupied by the business. 
 Businesses are classified as to their degree of profitable- 
 ness, and the per cent that is assessed, based on this de- 
 termination, varies greatly. 
 
 Objections and Advantages. Much opposition has arisen 
 to the extension of the use of business taxes. The objec- 
 tion that such action will repress industry was to be ex- 
 pected, since it is made against every tax. The problem 
 of evasion has been, frequently, a serious one, but this 
 has been because of a lax administration rather than to 
 any fundamental defect in the system. The objection 
 that this form of taxes encroaches upon the use of the 
 property and income tax is not important, since a business 
 is an entity distinct from its property and from the ir^ 
 
228 OUTLINES OF PUBLIC FINANCE 
 
 comes of its individual owners. The problem of valuing 
 such intangibles as franchises and good will would be no 
 more difficult for this purpose than for any other. Much 
 has been made of the inequalities that would occur, espe- 
 cially among competitors, but this, again, would be due, 
 not to the system itself, but to an improper classification, 
 graduation, or administration. 
 
 There is, on the other hand, much to be said in favor of 
 the extension of the use of business and license taxes. One 
 of the first considerations is the fiscal one they will pro- 
 duce revenue quickly, at a low cost, and with compara- 
 tively little objection. This has been demonstrated by 
 their use not only in this country, but in other countries. 
 Business, as a unit, possesses a peculiar ability to bear 
 burdens because of the expenditures the various political 
 units have made in its behalf. The Federal government 
 maintains standard weights and measures, a coinage sys- 
 tem, and regulates transportation rates; the states main- 
 tain bureaus of research of various kinds, and the munic- 
 ipalities provide police, fire, and sanitary protection. 
 Since business organizations do have abilities to meet 
 burdens, and since this ability is greatly enhanced by gov- 
 ernmental activities, it is all the more reason why busi- 
 ness organizations of various kinds mercantile, manu- 
 facturing, and others should contribute their just share 
 to the general public treasury. 
 
 Use in Future. It is probable that a larger percentage 
 of state and local revenues will come from these sources 
 in the future than in the past. In many cities and states 
 the increase in the returns has been marked. The possi- 
 bility for the increase in the number of license charges, as 
 well as an increase in the revenue therefrom is, in many 
 places, unbounded. The licensing of automobiles by the 
 states, while of some regulative value, has proved a profit- 
 able source of revenue and has but suggested future pos- 
 sibilities. The state of Illinois, for example, with a license 
 charge much lower than that found in some states, col- 
 
EXCISE, CAPITATION, AND BUSINESS TAXES 229 
 
 lected nearly five and a quarter million dollars during the 
 first half of the year 1920. This can also be made a fruit- 
 ful source of revenues for municipalities, and many have 
 begun to avail themselves of it. The licensing of occupa- 
 tions has not been carried to the extent that it might be, 
 either from the regulative or the fiscal point of view. In 
 view of the fact that some remunerative sources of rev- 
 enue have been cut off, and that expenditures are con- 
 stantly increasing, it may be confidently expected that 
 both our states and municipalities, if not the other politi- 
 cal divisions, will make a more extended use of business 
 and license taxes in the future than they have in the past. 
 
 ADDITIONAL BEADING 
 
 Frederick C. Howe, The Internal Revenue System of the 
 United States. 
 
 Proceedings of the National Tax Association, 1917, pp. 
 10-19, 185-194. 
 
 H. E. Smith, United States Federal Internal Tax History 
 from 1861 to 1871. 
 
CHAPTER XI 
 
 PROPERTY TAXES 1 
 
 126. Taxes on Property Have Developed from Early 
 Times. It has been pointed out that taxes first came into 
 use to meet extraordinary needs for funds. When their 
 use became somewhat general some definite system of 
 levy became essential, and the base at first chosen was 
 property usually land. Records of the tax systems of 
 ancient Greece and Rome have been preserved with suffi- 
 cient accuracy to indicate the early use of land taxes in 
 these countries. With the development of other forms of 
 property attempts were made to extend the tax systems 
 to include them as a part of the base, so that in reality a 
 general property tax was established. There is no indi- 
 cation, however, that much was attempted in the way of 
 assessing intangible forms of wealth when they began to 
 accumulate. 
 
 The history of tax development has been much the 
 same, through the early stages, at least, in most new 
 countries. Practically all the early English taxes were 
 forms of land taxes. Gradually other forms of wealth 
 were added, until a general property tax was the result. 
 An interesting feature to develop very early in the English 
 system was the use of the annual return from the land as 
 the base of the tax, rather than the actual value of the land. 
 
 1 In this and the following chapters which treat different kinds of taxes, 
 no attempt will be made, except occasionally, for illustrative purposes, to 
 go into the specific problems of individual states. Those who want to 
 investigate these details should consult such sources as the reports of the 
 State Tax Commissions and the Proceedings of the National Tax Asso- 
 ciation. 
 
PROPERTY TAXES 231 
 
 In France, Germany, and Italy, the sequence of events 
 in tax development followed those in England. Land was 
 the first source drawn upon, to which was gradually added 
 the other forms of wealth, until the general property tax 
 was in vogue. Subsequent history shows, however, that 
 as more and more intangible wealth accumulated in the 
 various countries, and as the failure in making fair and 
 equal assessment became apparent, such vigorous opposi- 
 tion developed that the result has been the practical 
 abandonment of the general property tax. 
 
 Early American Taxes. In the American Colonies the 
 use of a tax on property came very early. Funds became 
 necessary, and the officials knew of no better source than 
 the existing evidences of wealth. In the colony of New 
 York, for example, as early as 1654 Peter Stuyvesant suc- 
 ceeded, as previously noted, in having an " honest and 
 fair tax" placed upon "land, houses or lots, and milch 
 cows or draft oxen." Soon after this, under the English 
 rule, the principle of assessing every person in proportion 
 to his aggregate property became the fundamental rule. 
 The principle of property assessment continued to be the 
 center around which all future revenue measures were 
 formulated. 
 
 In some of the Colonies the development of the general 
 property tax was gradual. Specific classes of property 
 were designated as the basis for assessment, and frequently 
 the value of the property was regulated by law. Land, 
 horses, cattle, and other forms of property were classified 
 into different grades. Gradually, as the pressure for in- 
 creased revenue became felt, the category of taxable ob- 
 jects was extended, until it included all forms of property. 
 In some of the Colonies also levies were placed upon cer- 
 tain classes of business and professions. 
 
 The necessity of holding land before being admitted to 
 the full rights of citizenship, as well as the provision in the 
 Federal Constitution which forbids the levy of export 
 and import duties by the several states, helped to tighten 
 
232 OUTLINES OF PUBLIC FINANCE 
 
 the grip on property as the chief source of revenue. This 
 situation has continued throughout the development of 
 revenue systems in the various states; consequently, as 
 new forms of wealth appeared, it became inevitable that 
 an attempt be made to assess this wealth by an extension 
 of the general property tax. Although some of the states 
 have recently made efforts to place less reliance on its use, 
 the general property tax still holds the place of primary 
 importance in the revenue systems of most states and 
 localities. 
 
 127. Democratic Ideals Have Influenced the Tax Sys- 
 tem. It is difficult to describe the minutia of the workings 
 of the general property tax by the use of broad generaliza- 
 tions. Each of the forty-eight states is governed by an 
 individual constitution, and different ideas prevail among 
 the older and newer sections of the country as to the 
 nature and functions of government. One need not be 
 surprised, then, to find wide variations in the application 
 of revenue systems the fundamentals of which are the 
 same. Perhaps the most easily traced are those which 
 arise because the conceptions as to the functions of gov- 
 ernment are not uniform. 
 
 The most purely democratic form of government on the 
 Continent was developed in the New England colonies, 
 and this spirit of democracy still permeates the New Eng- 
 land states, and those which have been modeled after 
 them. The machinery and working of the general property 
 tax in this district corresponds to what one might expect 
 under such circumstances. The important governmental 
 unit is small, usually designated as the town or township, 
 and varies in size from a small city ward in some of the 
 Eastern states to the regulation township in some of the 
 states farther west. The burden placed upon each asses- 
 sor is so small that his duties can generally be performed 
 in a few days, and do not materially interfere with his 
 ordinary business. He is elected by his associates, usually 
 for one or two years, and would naturally be expected to 
 
PROPERTY TAXES 233 
 
 have some knowledge of the property which it becomes 
 his duty to assess. 
 
 There is a wide variation in the amount of centralized 
 control which is exercised over the fiscal machinery in 
 the region where this type prevails. It may be said to 
 exist in some degree in the territory north and east of the 
 Ohio and Mississippi rivers. It would naturally be ex- 
 pected that this centralized control would be less in those 
 districts where the ideals of democracy were most firmly 
 fixed. In the old New England states, therefore, there is 
 comparatively little supervision from any central authori- 
 ties. Rhode Island furnishes the most extreme example of 
 absence of centralization, although the same situation pre- 
 vails to a less extent in other states. 
 
 In Rhode Island the county does not exist in the sense 
 that it is found in other states. The state provides for 
 the tax by general statute, determines the amount of the 
 state levy, and leaves the administrative details entirely 
 to local authorities. The necessary number of assessors is 
 elected at the regular town meeting, and these assessors 
 have broad and practically final powers in the assessment 
 of property. In some states these ideals of local autonomy 
 have been less fixed, and the amounts collected for the 
 counties and states have assumed a large proportion of 
 the entire tax. Under these conditions there has been a 
 gradual development of central supervision. County and 
 state equalization boards have been instituted; super- 
 vision is exercised over local assessors by county and state 
 officers, and meetings of local assessors are frequently 
 held that they may be instructed in more just and efficient 
 methods of rendering their services. 
 
 128. The Southern and Western States Present Cen- 
 tralized Tax Systems. Less importance is attached to 
 the duties of local officials in the parts of the country that 
 failed to develop strong local governments. The planta- 
 tion type of development in the South did not encourage 
 local assemblies for the purpose of determining fiscal, 
 
234 OUTLINES OF PUBLIC FINANCE 
 
 political, and economic policies. The important adminis- 
 trative governmental unit in the South, consequently, is 
 the county, and because of the size of the unit the tax 
 system is necessarily more centralized than that described 
 above. 
 
 The property in the county is usually assessed by one 
 or more assessors under the direction of the county court. 
 Obviously the assessors can know little concerning either 
 the persons or property to be assessed. Much more re- 
 liance must be placed upon the declaration of the tax- 
 payer, and less upon the personal judgment of the assessor 
 than in the Northern states. Systems to prevent evasion 
 have been introduced, and penalties have been prescribed 
 against violators of the tax laws. Property frequently 
 escapes the assessors, and it becomes necessary to sup- 
 plement their efforts by those of other officials. 
 
 In the Western states the plan of centralization is car- 
 ried to greater lengths. The county is not an automaton, 
 but an administrative unit which acts under the direction 
 of the state. Methods, rates, and the different adminis- 
 trative features are usually formulated by state officials, 
 while state equalization boards are maintained to equalize 
 the assessments among the counties. The extent and 
 effectiveness of central control have become an important 
 factor in the success of property tax administration. 
 
 129. Some Features of the Early Property Tax Do Not 
 Now Exist. In the course of its development many 
 changes have occurred in the nature of the general prop- 
 erty tax. At its inception it was distinctly a personal tax 
 levied to secure revenue for local purposes. In the modern 
 use of the tax the property itself, rather than the owner, 
 is the fundamental basis of the assessment. The practice 
 of requiring personal declarations continues to be followed 
 in a number of localities, but where these cannot be 
 secured an assessment is made against the property. This 
 method of procedure illustrates the importance which is 
 attached to the property aspect. Assessors are usually 
 
PROPERTY TAXES 235 
 
 instructed to assess all the property in their district, 
 whether ownership be located there or not. As the func- 
 tions of government grew the services rendered by the 
 locality were supplemented by those of the state and 
 county, and need for a larger revenue appeared in these 
 larger political units. The most feasible process to follow 
 to supply the necessary funds, it seemed, was to use the 
 machinery already in existence, and to add a state and 
 county tax rate to the one for local purposes. 
 
 Classification of Property. The classification of property 
 has come with the development of the property tax. The 
 attempt has been made to designate two general classes 
 real property and personal property, with the further 
 division of personal property into tangible and intangible 
 property. In general, real property refers to land and that 
 which is attached to it, while personal property designates 
 movables, or those objects which are more closely related 
 to personal use than they are to land. 
 
 Property does not fall naturally into the above classes, 
 and the inconsistencies and difficulties which are encoun- 
 tered in the various states in the attempts at classification 
 but illustrate the arbitrariness of such a division. A tree 
 in the forest, for example, is real estate, but as soon as it is 
 felled it becomes personal property; gravel in the creek 
 bed is real estate, but as soon as it is thrown out on the 
 bank it becomes personal property. 
 
 One may find court decisions which have classified 
 property in a purely arbitrary manner. Many legisla- 
 tures also make arbitrary classifications for administra- 
 tive purposes. The state of New York, for example, 
 classes the special franchise value of public utilities as 
 real estate. It is impossible, then, to generalize as to what 
 property belongs in each division, but one must rely upon 
 the more or less arbitrary decisions of legislatures and 
 courts, the lack of uniformity of which, in the different 
 states, is striking. 
 
 Property and Ability, Changes in economic institu- 
 
236 OUTLINES OF PUBLIC FINANCE 
 
 tions have resulted in the situation that the possession of 
 property no longer represents ability to meet tax burdens. 
 In a purely agricultural community, in its primitive stage 
 of development, property was an approximate test of 
 ability, for here each individual was concerned with real- 
 izing a return from his land, and the amount of land was 
 a measure of opportunity and ability. As industries and 
 trades developed, however, livelihoods came from other 
 sources than the ownership of property. Some ability to 
 bear tax burdens must be recognized in the receipt of a 
 salary or wage, even though there be no possession of 
 property. 
 
 The forms of property have also differentiated with 
 economic development, so that all property does not have 
 the same ability to bear burdens. The real criterion of 
 taxpaying ability is the productiveness of the property. 
 In the case of two factories or farms, each of the same 
 value, one may enjoy a profitable year and the other meet 
 with reverses; the one be able to bear tax burdens and the 
 other not. In our modern economic organization prop- 
 erty represents ability to meet burdens only as it is a 
 productive entity. 
 
 130. Marked Variations Occur in the Assessment of 
 Real Property. The instructions which most assessors re- 
 ceive require that real estate be assessed at a fair cash 
 value that is, what it would bring at sale with a willing 
 purchaser and willing seller. That some method of uni- 
 form assessment should be used becomes apparent when 
 consideration is given to the fact that the state and 
 county taxes on property are apportioned among the 
 various districts on the basis of the assessed valuation. 
 
 Results of Apportionment. The total amount to be ob- 
 tained by the state is determined and then apportioned to 
 the local tax district ; a district which had an assessed val- 
 uation of say $100,000 would be asked to contribute 
 twice as much toward the state fund as one where the 
 valuation was $50,000. Counties frequently apportion 
 
PROPERTY TAXES 237 
 
 their demands among the townships or tax districts in 
 the same way, so that the total rate is a composite sum 
 of the state rate, plus the county rate, and in addition the 
 rate representing the needs of the local district itself. In 
 order, then, that the tax burden of the state and county 
 be equally distributed, it is necessary that some uniform 
 system of valuation be used. Whether it be full valua- 
 tion or a partial valuation would make little difference as 
 long as the same basis was used in all the districts. 
 
 It is a matter of common knowledge that anything but 
 uniformity exists in making assessments. Lands of prac- 
 tically the same nature in adjoining townships and coun- 
 ties have been assessed at figures in which there is a wide 
 variation, while a comparison of the assessment figures of 
 a whole state frequently shows startling results. In some 
 states the assessed value has ranged all the way from 20 
 to 100 per cent of the actual value. In adjoining counties 
 the assessment of railroad property has varied more than 
 $20,000 per mile. 
 
 Such discrepancies in assessment must mean an in- 
 equality in the tax burden levied by the state and county. 
 If the same basis of assessment were followed within a 
 district, and none of the taxes collected went out of the 
 district, it would make no difference in the burden whether 
 the property were assessed at 100 per cent or 20 per cent 
 of actual value. Suppose two farms in this district, one 
 worth $100,000, the other worth $50,000, and that the 
 assessment has been at full value. The officials of the 
 district decide that it is necessary to assess $1,500 against 
 this property. This will mean a ten mill tax (tax rates 
 are expressed as the number of mills taken from each dol- 
 lar valuation), and the burden upon the farms will be 
 $1,000 and $500, respectively. Let us suppose, however, 
 that the property had been assessed at 50 per cent of the 
 actual value, or $50,000 and $25,000. The basis upon 
 which taxes are to be levied is thereby reduced, and to get 
 the required revenue the rate must be raised. To secure 
 
238 OUTLINES OF PUBLIC FINANCE 
 
 the $1,500 the officials must levy a twenty mill tax, which 
 imposes exactly the same burden as in the previous assess- 
 ment at full value. 
 
 Suppose, now, that under certain property valuations, 
 the state levies a five mill tax, the county a ten mill tax, 
 and each local district a five mill tax. The actual prop- 
 erty values in the districts, let us assume, are practically 
 equal, but the assessor in one district values it at 100 per 
 cent; in another at 50 per cent, and in still another at 
 20 per cent. The inequality which arises from collecting 
 a twenty mill tax, the total of the three rates, at once 
 becomes apparent. The property assessed at full value 
 is paying twice as much to the state and county as that 
 assessed at 50 per cent and five times as much as that 
 assessed at 20 per cent. 
 
 The Local Assessor. It is too much to expect that 
 assessors for a whole state, or even for a county, will have 
 the same ability in appraising property, or would use the 
 same basis of calculating values, even though their abili- 
 ties were approximately equal. The qualifications of as- 
 sessors, moreover, frequently leave much to be desired. 
 The remuneration is so small that men of ability do not 
 care for the task, and it is left to be performed by men of 
 little ambition and second-rate qualifications. 
 
 The fact that a goodly portion of the revenue collected 
 in most districts is turned over to the state and county, 
 makes it desirous to the property owners that their as- 
 sessments be kept low. It is one of the expectations of a 
 satisfactory assessor that he keep values down. In order 
 to receive the votes of his constituency for a continuance 
 in office, therefore, he too frequently, from the standpoint 
 of justice, attempts to do what is expected of him. 
 
 The assessor must frequently make returns under oath 
 that he has made the valuation to the best of his ability. 
 In one of the states where the discrepancy between the 
 actual value and the assessed value is most flagrant, the 
 assessors subscribe to an oath in which they declare that 
 
PROPERTY TAXES 239 
 
 the assessment has been made at the full value of the 
 property. In the same state a statute provides that an 
 assessor who falsely subscribes to an oath shall be liable 
 to the penalties of perjury, which are both fine and im- 
 prisonment. As yet it seems they are still liable for the 
 punishment, but have not received it. 
 
 131. Much Personal Property Is Not Assessed. The in- 
 equalities in real estate assessments fade into insignificance 
 when the results of the attempts to reach personal prop- 
 erty values are brought in review. If assessors have been 
 unable to give a semblance of equality in the assessment 
 of real estate, how much less could satisfactory assess- 
 ments of the multitudinous forms of personal property be 
 expected. When one considers the task which devolves 
 upon the assessor when he is instructed to get the value 
 of all property, there is little wonder that results are so 
 uncomplimentary. 
 
 The early assessor, in valuing personal property, had 
 but to consider live stock, agricultural implements, and 
 other objects which were easily discernible, and the value 
 of which was well known. To the modern assessor, how- 
 ever, the assessment of tangible objects of personalty 
 presents a problem which is more complex. Public utili- 
 ties, factories, wholesale establishments, retail stores of 
 various kinds, and the many other institutions whose 
 business is of a complex nature, may be in his district. In 
 a number of states the assessor is required to secure the 
 full and true value of all the property as it is on the first 
 day of April, or " assessment day," as it is sometimes 
 called. Consider the magnitude and impossibility of the 
 task. He must locate and appraise the value of the rolling 
 stock and equipment of the public utilities; he must 
 evaluate the machinery in the factory, the raw materials 
 and finished products on hand; he must assess the stock 
 of goods contained in the wholesale establishments, as 
 well as those in department and simple retail stores. To 
 concede even the possibility of anything like satisfactory 
 
340 OUTLINES OF PUBLIC FINANCE 
 
 results presupposes a degree of intelligence and ability 
 not likely to be found in the ordinary assessor. Indeed, 
 few would claim to possess sufficient qualifications to fit 
 them for such a task. 
 
 Intangible Property. To the burden of assessing the 
 various forms of tangible property is added the task of 
 securing the value of intangibles, and here the property 
 tax system becomes confusion worse confounded. A re- 
 flection on the nature of much of the intangible property 
 immediately leads one to sense the difficulty. One writer 
 partially describes it as follows: 
 
 Thus a large part in fact, the larger part of what is to-day termed 
 personal property, in every civilized state, is of the most intangible 
 character, and in a great part invisible and incorporeal; such, for ex- 
 ample, as negotiable instruments in the form of bills of exchange, 
 state, municipal, and corporate bonds, and the multiplied forms of 
 evidence of indebtedness, certificates of stocks, copyrights, patents, 
 legal-tender notes, etc., all of which, if entitled to the name of property, 
 is, through a great variety of circumstances, constantly exposed to fluc- 
 tuations in value, frightful in amount, and incalculable in their sudden- 
 ness, and under the influence of which wealth vanishes as if by the wave 
 of a magician's wand. It is offset or measured by indebtedness which 
 may never be the same one hour with another, is easy to transfer, and as 
 essential to using, is, in fact, continually transferred from one locality 
 to another, and from the jurisdiction of one state to the jurisdiction 
 and laws of another and different state; is here to-day, gone to-mor- 
 row; is burned, sunk at sea, lost in mines, patents, railways, factories, 
 trading associations, and in a thousand other different ways. It has 
 been recently said that five men who do business in Boston can to- 
 gether control or dispose of an amount of property which equals one- 
 fifteenth of the entire assessed valuation of that city; and that they 
 could, if they pleased, carry round the evidence of the existence of that 
 property in their coat pockets, or, according to popular theory, the 
 property itself. 1 
 
 This description vividly portrays the nature of what the 
 assessor is expected to value, and it is little wonder that 
 he takes the path of least resistance, places on the assess- 
 ment roll the property which is easily found, and allows 
 
 1 D. A. Wells, The Theory and Practice of Taxation, p. 401. 
 
PROPERTY TAXES 
 
 241 
 
 the rest to escape. When we consider, moreover, that the 
 laws designate all such evidences of wealth as stocks and 
 bonds to be assessable property, it becomes evident that, 
 in most districts, the assessed value of personalty should 
 far exceed that of real estate. Yet it is a notorious fact 
 that nowhere does the value placed upon personal property 
 even approximate that placed upon real estate. In some 
 states where there has been a large increase in the real 
 estate valuations, the assessed valuation of personal prop- 
 erty has actually decreased. It is a very common situa- 
 tion for personal property to bear less than 20 per cent 
 of the tax burden, and it frequently falls as low as 3 
 to 5 per cent. 
 
 Statistics of Valuation. A few figures from the census 
 reports, chosen almost at random, will serve to visualize 
 the relative positions of these two classes of property, as 
 far as the assessors' books are concerned. The following 
 figures show the assessed value of real estate at different 
 times, as compared with the total assessment of property 
 for five states in various parts of the Union. The first 
 set of figures represents the total assessment, while those 
 just beneath are real estate values. The relation between 
 the two can be calculated easily from this. 
 
 ASSESSED VALUATION OF ALL PKOPERTY COMPARED WITH THE ASSESSED 
 VALUATION OF REAL ESTATE 
 
 (000 omitted) 
 
 
 I860 
 
 1880 
 
 1902 
 
 1912 
 
 1918 
 
 Ohio 
 New York . . 
 Kansas 
 Texas 
 
 $ 957,807 
 687,518 
 1,390,465 
 1,069,658 
 22,518 
 16,089 
 267,792 
 
 $1,534,361 
 1,093,678 
 2,651,940 
 2,329,282 
 160,892 
 108,432 
 320,365 
 
 $1,990,885 
 1,396,180 
 5,969,913 
 5,297,764 
 363,163 
 242,071 
 1,017,572 
 
 $6,481,059 
 4,335,666 
 11,131,779 
 10,684,290 
 2,746,900 
 1,798,339 
 2,532,710 
 
 $8,542,734 
 5,277,180 
 12,091,438 
 11,605,615 
 3,075,275 
 1,920,070 
 2,888,365 
 
 California. . . 
 
 102,476 
 139,655 
 66,907 
 
 205,509 
 
 584,578 
 466,274 
 
 652,603 
 1,290,239 
 974,493 
 
 1,650,198 
 2,921,277 
 2,163,020 
 
 2,011,109 
 Not 
 given 
 
242 
 
 OUTLINES OF PUBLIC FINANCE 
 
 A glance at these figures will reveal the large proportion 
 of the tax burden which is borne by real estate. It becomes 
 still more evident when figures for some of the larger cities 
 are compared. Figures are shown in the following table 
 for four cities for different dates. The first number in the 
 column shows the assessed value of real estate; the one 
 just beneath it that of personal property. 
 
 ASSESSED VALUATION OF REAL ESTATE AND PERSONAL PROPERTY 
 (000 omitted) 
 
 Date 
 
 New York 
 
 Chicago 
 
 Washington 
 
 San Francisco 
 
 1905. 
 
 $5,221,584 
 
 $295,514 
 
 $239 461 
 
 $398 983 
 
 1907 
 
 609,562 
 6 240 480 
 
 112,447 
 346 844 
 
 18,806 
 255 325 
 
 2,270 
 349 511 
 
 1912. 
 
 554,861 
 7,861,899 
 
 131,078 
 670,652 
 
 22,403 
 330,322 
 
 105,196 
 
 447 777 
 
 1916 
 1918. . . 
 
 342,963 
 8,108,761 
 352,052 
 8,254,549 
 
 227,067 
 749,887 
 245,438 
 753,322 
 
 29,610 
 394,209 
 35,042 
 410,173 
 
 62,562 
 476,825 
 61,879 
 482 618 
 
 
 419,156 
 
 263,402 
 
 340,0671 
 
 72,132 
 
 1 The explanation of this remarkable increase in the assessment of personal property 
 given by the Bureau of the Census is as follows: . "Prior to 1918 the only personal property 
 subject to taxation in the District of Columbia was tangible personal property, but in 1918 
 the law was changed requiring that intangible personal property be assessed for taxation." 
 The large assessment of personal property for 1918 is an interesting exception to the general 
 rule. 
 
 No comment is needed to show that a wholesale evasion 
 of personal property assessment exists. Figures for other 
 cities are just as startling. The conclusions follow that 
 personal property cannot be reached by the assessors, or 
 at least is not reached, and that this class of property 
 bears tax burdens inversely proportionate to the amount. 
 
 132. Difficulties Arise in Exempting Property from Tax- 
 ation. The caption, " general property tax," is somewhat 
 misleading, for specific kinds of property are generally 
 relieved from the application of the law. In some of the 
 earlier states one of the privileges which attended citizen- 
 ship was the freedom from paying taxes. Exemption 
 from taxes to some extent is still practiced by most gov- 
 ernments. Difficulty in administering the tax laws has 
 
PROPERTY TAXES 243 
 
 been responsible for some exemptions, while others are 
 granted in an attempt to make the tax system more just. 
 
 Agitation for Exemption. The inability to administer 
 the tax laws in a satisfactory manner has led to much 
 agitation for the extension of exemption provisions. Thus 
 several states, because mortgages were not being assessed, 
 have exempted them from the property tax. Many au- 
 thorities urge the exemption of all intangible personal 
 property from taxation, and would reach the ability thus 
 represented in other ways. Some, who feel that taxpayers 
 should know the burden of the taxes they pay, see injus- 
 tices in indirect tax systems, and would have these abol- 
 ished. A few would even go so far as to exempt all bases 
 for taxes except land values. The question of exemption 
 takes on a somewhat different form, according to the 
 nature and advancement of a country, yet it forms an 
 important feature of all tax systems. 
 
 Kinds of Exemptions. One of the most common of the 
 exemptions from property taxes has been a minimum 
 amount of property. This has been for two reasons : first, 
 because there has been the desire to recognize, as it were, 
 a minimum of subsistence; and second, the administra- 
 tive duties in finding and assessing small amounts of 
 property proved entirely too burdensome for the returns 
 in revenue. Consequently a few hundred dollars are 
 usually exempt from taxes. Frequently, also, particular 
 classes of property, such as mechanics' tools, are placed 
 in the exempt class. Exemptions are sometimes granted 
 to industries during the developmental stage, or as an 
 incentive to get them to locate in particular localities. 
 Much variation, however, can be found hi the practice 
 of the various political units. 
 
 Other kinds of property which are free from taxes are 
 imported goods in the original package, and goods in the 
 process of transportation. Most states exempt the de- 
 posits in savings banks. Public property of the various 
 political units, such as buildings and parks, likewise enjoys 
 
244 OUTLINES OF PUBLIC FINANCE 
 
 freedom from the burden of taxes. Public welfare insti- 
 tutions receive similar treatment. Under these come such 
 institutions as churches, hospitals, cemeteries, horticul- 
 tural societies, and the various charitable institutions, 
 such as county farms, almshouses, and homes for orphans 
 and the aged. Property used for educational and develop- 
 mental purposes is treated in like fashion. Not only does 
 this include public institutions, but it generally extends 
 to endowed colleges, libraries, and various kinds of scien- 
 tific and literary organizations. 
 
 It seems no more than just to make the burdens upon 
 public uplift institutions as light as possible. In many 
 cases, where the institutions are owned by the state, taxa- 
 tion would simply mean the transferring of the amount 
 of the tax from one pocket to the other. The exemption 
 of such property when owned by individuals has not 
 always been accepted in good faith, but, on the other 
 hand, has frequently been abused. Property holdings far 
 in excess of the need for carrying on their operations have 
 been accumulated by some of these institutions. Tax 
 exemption has been claimed, although the returns from 
 the property are much more of an individual than public 
 nature. This condition has led to considerable agitation, 
 in some localities, for the removal of the tax exemption 
 privilege upon this class of property. 
 
 Governmental Activities. A common source of tax ex- 
 emption is found in the securities issued by different 
 political units Federal, state, and local. It has been the 
 practice of the Federal government to exempt its securi- 
 ties from most taxes, and it has been held, in the famous 
 McCullough vs. Maryland case, that the states cannot 
 even indirectly tax the instruments of the Federal gov- 
 ernment. It has also been the common practice and 
 belief that the Federal government cannot tax the instru- 
 ments that the states use in their functions. 
 
 These two views create a large class of tax exemptions 
 that has become particularly significant since the intro- 
 
PROPERTY TAXES 245 
 
 duction of the income tax. The freedom of the income of 
 Federal, state, and municipal bonds from the income tax, 
 while the income from the bonds of commercial enterprises 
 is taxed, sometimes places a hardship and disadvantage 
 upon the latter class of securities. Inequality likewise is 
 placed upon different classes of citizens. There is little 
 reason, for example, why a salary of $5,000 received by 
 an employee of a corporation should be taxed, while the 
 $5,000 paid to an employee of a state should not be taxed. 
 
 133. Evils of Double Taxation Arise with the Use of 
 Personal Property Taxes. The expression " double taxa- 
 tion " appears almost self-explanatory, yet it may have 
 a number of applications. In general, it refers to the levy 
 and collection of two taxes, the burden of which falls upon / 
 the same base. Such an occurrence immediately appears 
 to be unjust. This, however, is not necessarily true. If 
 a tax were levied upon all property, for example, and then 
 a tax were levied upon the income from this property, it 
 might be called a case of double taxation. It would be 
 unjust, however, only if some classes of the property 
 owners were subject to the income tax while others were 
 not. Under such conditions the income tax would be a 
 discriminating tax. When two taxes are levied alike upon 
 all classes, the result is the same as if a higher property or 
 a higher income tax had been used. The use of the ex- 
 pression " double taxation," however, usually implies an 
 injustice, so that it might be well to use another ex- 
 pression, say "dual taxation," to apply to the levy of 
 two taxes upon the same base when no injustice is 
 perpetrated. 
 
 Many cases of double taxation and even multiple taxa- 
 tion arise, however, which are clearly unjust because of 
 the unequal burden which they impose upon different 
 classes of property. Cases of this nature arise within a 
 particular taxing jurisdiction, and to a magnified degree 
 where competing jurisdictions are concerned. Double 
 taxation arises in the first case from the attempt to tax 
 
246 OUTLINES OF PUBLIC FINANCE 
 
 land and factories and from the attempt at the same time 
 to tax evidences of claims upon this property. The same 
 situation arises between competing jurisdictions because 
 of the individual code of tax laws which each jurisdic- 
 tion has adopted, with little regard for inter jurisdiction 
 comity.^ The states, in particular, have been anxious to 
 extend their jurisdiction over as much taxable property 
 as possible. This ambition has often been so keen that 
 the legislatures, and even the courts, have frequently lost 
 sight of what would ordinarily be called fair play. The 
 result is that tax systems exist that will not stand the 
 requirements of justice under the present industrial 
 organization. 
 
 Place of Levy. Much litigation has arisen over the 
 proper situs or location of property for purposes of assess- 
 ment, and many unsatisfactory decisions have been ren- 
 dered. When securities are assessed by the officials of one 
 jurisdiction, and the property in which these securities 
 represent but an interest is assessed in another jurisdic- 
 tion, a part of the tax is clearly an unjust burden. A 
 share of stock of a corporation chartered in New Jersey, 
 and owned by a citizen of Pennsylvania, who is tempo- 
 rarily living in Maryland, should obviously not be taxed 
 in the three different states; yet such attempts have been 
 made, and marked injustice often arises. Modern indus- 
 try is so expansive that a single business unit may be 
 represented in a number of tax districts, which creates the 
 possibility of a multiplication of taxes. 
 
 Many factors have been used by the different states in 
 determining the proper principle upon which to make the 
 tax levy. Some use citizenship as the proper criterion 
 upon which to make the levy, while others use domicile, 
 situs of property, situs of securities, or other factors, until 
 it is possible to have taxes levied by as many as a half 
 dozen states upon the same taxable base. ^ If every juris- 
 diction should decide upon the same principle, then there 
 woul4 be little need to raise the question of double taxa,- 
 
PROPERTY TAXES 247 
 
 tion. The disinclination to do this, however, makes the 
 problem a serious one. 
 
 The principle of citizenship is one that is frequently fol- 
 lowed in determining where taxes should be paid. The 
 United States, for example, levies an income tax upon its 
 citizens no matter where they are located. Citizenship, 
 no doubt, was at one time the important consideration, 
 and still has some claim in a state's right to levy taxes. 
 Under the organization of industry as it is at present, 
 however, other factors must be given consideration. A 
 man, for example, may be a citizen of one taxing district, 
 may be a permanent resident of another, may for the 
 time being be living in still another, and have all his 
 property in the form of a corporate business located in a 
 fourth district, the charter of which was taken out in still 
 another district. Each of the districts has some claim to 
 tax the individual, while evidently there is but one prop- 
 erty upon which the burden of the tax can fall. 
 
 It may be true that taxes should be paid in more than 
 one district in fact, it seems reasonable that an individ- 
 ual should pay taxes at least in the district where his , 
 property is located and where he has his permanent resi- 
 dence. Yet it does not follow that each of these districts ' 
 should levy the tax as if its tax were the only one to be 
 levied. It has been suggested that the owner of property 
 should be taxed where his real economic interest is found. 
 The suggestion is good, but to carry it out it would be 
 necessary to secure the proper apportionment of the tax 
 burden among the districts where the interests of the 
 indvidual lie, and to get each district to respect the rights 
 of the other taxing units. Until this is accomplished a 
 large amount of injustice may be expected in the taxes 
 levied by competing jurisdictions. 
 
 Bases for tax levies are sometimes arbitrarily made. A 
 good example of this situation is the taxation of the shares 
 of stock of national banks. These shares must be assessed 
 to the owner at his place of residence, but for purposes of 
 
248 OUTLINES OF PUBLIC FINANCE 
 
 taxation his residence shall be considered in the district 
 where the bank is located. A man living in California, 
 who owns shares of stock in a national bank in New York, 
 would be assessed and taxed on the shares as if he lived in 
 New York. 
 
 134. The Proper Handling of Indebtedness Is Difficult. 
 Much difficulty has arisen in handling indebtedness. 
 Where indebtedness exists it is obviously unjust to tax 
 both the debtor on his indebtedness and the creditor on 
 the evidence of this indebtedness. On the face of the 
 proposition it is what an individual has, and not what he 
 owes, that gives ability to meet tax burdens. When evi- 
 dences of indebtedness are taxed the same property may 
 be made the basis of many taxes. Suppose, for example, 
 a man buys a house and gives a five-year promissory note 
 in payment; in a few days he sells the house and likewise 
 accepts a note; this purchaser in turn sells and accepts a 
 note. There now exist three notes and a house which 
 the assessor is expected to assess separately to four dif- 
 ferent individuals. It is the general consensus of opinion 
 that indebtedness does not create ability to bear tax 
 burdens, but in fact lessens such ability. Many authori- 
 ties, consequently, have declared themselves in favor of 
 allowing the deduction of debts from property assessments. 
 
 When debt deduction is permitted, however, the way 
 is at once open to so much fraud and deception as practi- 
 cally to defeat the tax. Fictitious debts are frequently 
 created to such an extent that, when offset against the 
 property, there is nothing left to tax. It is comparatively 
 easy for two neighbors, just before assessment day, to 
 lend to each other, without giving notes, a sum sufficient 
 to offset any property valuations which might exist. It 
 opens a particularly easy way for corporations to escape 
 assessment on capital stock. Bonds, of course, are items 
 of indebtedness, and under the plan of debt deduction 
 should be subtracted from the value of the capital stock. 
 Corporations, therefore, simply need to issue bonds to 
 
PROPERTY TAXES 249 
 
 the amount of the capital stock, and when indebtedness 
 is deducted there is nothing left to tax. Evils of compara- 
 tive magnitude exist, therefore, whether or not debt ex- 
 emption is permitted, and there seems to be no way to 
 escape the difficulties. Some states have attempted to 
 solve the problem by allowing debt deductions from per- 
 sonal property, but not from real estate, with results that 
 have been entirely unsatisfactory. Such a practice fre- 
 quently causes a very arbitrary classification of property. 
 In the state of New York, for example, where debt deduc- 
 tions are permitted from personal property but not from 
 real estate, special franchise values are classed as real 
 estate to prevent the deduction of indebtedness which 
 might exist. 
 
 Taxation of Mortgages. Mortgages on real estate form 
 one class of indebtedness that has caused much concern 
 to fiscal officials and authorities. Obviously, to assess a 
 piece of land at full value, and then assess the mortgage 
 that is against it, is a case of unwarranted double taxation. 
 If every piece of property were mortgaged in the same 
 proportion, and all property and all mortgages taxed, 
 then no injustice would be perpetrated because the same 
 burden would be placed upon all property. Where only 
 a part of the property is mortgaged, however, and both 
 the mortgage and the property are taxed, it is an unjust 
 burden upon the mortgaged property. The mere issue of a 
 claim to one half the value of a $50,000 farm does not 
 increase the taxpaying ability of the farm. If the farm is 
 taxed to its full value, and in addition the mortgage is 
 taxed, it means that the tax burden is 50 per cent greater 
 than that upon unencumbered land. It is generally be- 
 lieved, moreover, that a tax on mortgages is shifted to the 
 borrower through an increase in the interest rate, so that 
 in reality the mortgagor is paying the tax both upon the 
 property and upon the mortgage he has given. 
 
 The situation with corporate property and the shares 
 of stock which represent that property, is much the same 
 
250 OUTLINES OF PUBLIC FINANCE 
 
 as that of property and mortgages. The capital stock 
 does not represent taxpaying ability apart from the prop- 
 erty of the corporation. If the property of individuals is 
 taxed but once, it is apparently unjust to levy two taxes, 
 both of which must be borne by the property of the cor- 
 poration. 
 
 Credit Instruments. Examples of difficulties and in- 
 equalities which have arisen from attempts to tax credit 
 instruments might be multiplied indefinitely, and in the 
 end the conclusion that something is fundamentally wrong 
 with such a system would only be more strongly verified. 
 The taxing of credit instruments emphasizes the personal 
 rather than the property element of assessment. At the 
 base, however, property is the fundamental criterion, the 
 factor that creates the ability to pay, and under no sys- 
 tem of logic can credit instruments be justly put into this 
 class. Notes and bonds are simply evidences of contracts 
 under which the holder has transferred property for which 
 he expects to receive a future remuneration. 
 
 The issuing of $25,000,000,000 in United States bonds 
 did not automatically, increase the taxpaying ability of 
 the purchasers of the bonds by that amount. Neither 
 will the payment of the bonds and their subsequent de- 
 struction destroy any wealth or taxpaying ability. Credit 
 instruments merely represent rights to a share in property, 
 and their creation or destruction does not change the 
 amount of the property. While there is much to be said 
 against the assessment of credit instruments because of 
 the administrative difficulties that arise, the nature of the 
 instruments, moreover, indicates that there is no logical 
 basis for attempting to assess them. 
 
 135. The Personal Property Tax Discriminates Among 
 Classes. Many state constitutions assert that all prop- 
 erty must be assessed at a uniform rate, yet such a con- 
 spicuous violation of this principle occurs nowhere to the 
 extent that it does in the working of the personal property 
 tax. That wholesale evasion occurs is generally known, 
 
PROPERTY TAXES 251 
 
 but the perversity of the situation arises in that the eva- 
 sion does not apply equally to all classes of taxpayers. 
 
 In the agricultural districts personal property to a large 
 extent takes a tangible and visible form live stock and 
 other similar forms of property upon which assessments 
 are comparatively easy to make. These items cannot be 
 hid as can the stocks, bonds, and mortgages which com- 
 prise the bulk of the personal property of the urban resi- 
 dent. Since little intangible personalty ever reaches the 
 assessment roll, the heavier burden falls upon the class 
 with the larger proportion of tangibles, which, it is evident, 
 is the agricultural class. 
 
 It follows from the foregoing that an undue burden is 
 placed upon those whose intangible personal property 
 does find its way to the assessment roll, whatever the 
 cause. Estates consisting of various forms of intangibles 
 are frequently placed in the hands of trustees to be used 
 for the benefit of widows and orphans. It is not difficult 
 for the assessor to place these upon his assessment roll. 
 Occasionally people will be so scrupulously honest that 
 the value of all household goods, jewelry, bonds, stocks, 
 and money in the bank will be returned to the assessor. 
 It is upon these classes, then, that practically the entire 
 burden of the taxes upon intangible personal property 
 rests. They are usually the individuals, moreover, who 
 are less able to bear tax burdens. 
 
 General Property Tax Regressive. It will easily be seen 
 from the foregoing features of the general property tax 
 that it is strongly regressive in the manner in which it 
 works out. A small amount of property takes the form of 
 visible personalty or realty, which is comparatively easily 
 assessed. As more property accumulates it begins to take 
 on the intangible nature which escapes taxation. Not 
 only this, but more effort is usually exerted by assessors 
 to obtain a full valuation of a small estate than in the 
 case of a large one. A house and lot worth $5,000, for 
 example, is much more likely to be assessed at that figure 
 
252 OUTLINES OF PUBLIC FINANCE 
 
 than is one worth $50,000 to be assessed at its full value. 
 The tax rate on property, then, actually varies inversely 
 with the amount of the property a situation which con- 
 demns the system from the standpoint of justice. 
 
 136. The Personal Property Tax Degrades the Morals 
 of Citizens. The personal property tax has been charac- 
 terized as one which falls upon the ignorant and the 
 honest. Since such a small amount of the tax is assessed, 
 the statement implies that a large majority of the tax- 
 payers are dishonest. That the system is one well de- 
 signed to lower the integrity of the citizenship to the level 
 of the most unscrupulous cannot be denied. The classes 
 of property which are usually exempt from assessment 
 have already been noted, and it is often an easy matter 
 to convert otherwise taxable property into one of these 
 forms until after assessment day. The temptation to do 
 so is at least presented. 
 
 The widespread dishonesty occurs in the failure to re- 
 turn to the assessor the full amount of taxable property. 
 There is no possible way by which an assessor can reach 
 certain classes of intangible property, and reliance must 
 be placed upon the integrity of the owner to return it. 
 That very few make such returns, even though oaths are 
 often taken to that effect, is a matter of common knowl- 
 edge. Most of these individuals are considered exemplary 
 citizens, and would be highly incensed if they were con- 
 fronted with the charge of dishonesty and perjury. 
 
 The present situation has come to exist largely as a 
 weapon of self-defense. Every enlightened citizen recog- 
 nizes the services of the state and is perfectly willing to 
 bear his share of the burden. His objection arises, how- 
 ever, when he is asked to bear the burden which properly 
 belongs elsewhere. Some dishonest individual in a com- 
 munity fails to return his property, and his neighbors 
 know it. This not only means that he is going to escape 
 the tax, but that it will be placed on the other citizens by 
 a higher rate on the consequently smaller valuation. One 
 
PROPERTY TAXES 253 
 
 does not have to look long at a list of assessments, which 
 some districts require to be published, to see how pitifully 
 small are the property returns of some of the wealthiest 
 citizens. 
 
 Imagine the feelings of a young college instructor with 
 nothing but ordinary furniture and one salary check in 
 the bank, when he finds his personal property assessment 
 higher than that of one of the leading bankers of his 
 community, one of whose automobiles represents more 
 value than the whole of the instructor's property. By 
 the time the next assessment is made his conscience will 
 doubtless have become so warped that his furniture will 
 have depreciated in value, and the assessor will find out 
 nothing about the salary check, even though the return 
 be made under oath. 
 
 The conscience of most people rebels at the thought of 
 committing murder, yet nearly everyone will shoot, if he 
 has a chance, as a measure of self-defense. So it is in the 
 case of property valuations men whose honesty is above 
 reproach, and who would shudder at the thought of falsi- 
 fying under oath, repeatedly swear to false tax returns 
 with scarcely a prick of the conscience. So it is those 
 who are ignorant of the actual burdens, or who have too 
 great a degree of integrity to act even in self-defense, who 
 really bear the brunt of taxes upon intangible personal 
 property. 
 
 Tax officials have long sensed the situation and have 
 decried it in no uncertain terms. One can pick up reports 
 of boards of assessors and boards of tax commissioners 
 for the last fifty years, almost at random, and find the 
 personal property tax denounced in scathing terms. Such 
 expressions as the following may be easily found. "The 
 system debauches the moral sense." "It is a school of 
 perjury." "The tax falls upon the man who is scrupu- 
 lously honest; upon the guardian, executor, and trustee, 
 whose accounts are matters of public record." ''The sys- 
 tem has demoralizing and corrupting influences." "The 
 
254 OUTLINES OF PUBLIC FINANCE 
 
 system is debauching to the conscience and subversive 
 of the public morals a school for perjury, promoted by 
 law." Pages might be given to citing opinions of various 
 officials, but the inevitable conclusion would be the same 
 that the system has been a dismal failure. 
 
 137. The General Property Tax Is Intrenched in the 
 United States. When all these glaring defects of a system 
 are presented, one immediately inquires, "Why is it toler- 
 ated?" A number of explanations might be given. The 
 country has been new and prosperous, and the revenue 
 demands have not been an excessive burden on the social 
 income of the country. The increase in land values has 
 been more than rapid enough to offset tax burdens. It 
 has been difficult, moreover, to get concerted action among 
 a number of more or less competing commonwealths. 
 One state does not desire to tax land and capital at full 
 value, because it wants to attract industry to the state, 
 nor do its officials want to drive capital from its borders 
 to other states whose tax inducements are more favorable. 
 Hence state legislators have not always been overzealous 
 to increase assessments to the requirements of law. 
 
 Some of the devices which have been used to make the 
 system more effective have also helped to intrench it 
 more firmly in the minds of the individuals. The system 
 of valuing property for taxation at only 50 or 60 per cent 
 of actual value is an example. The psychological effect 
 is that the property owner feels that he is getting off 
 lucky by not having to pay taxes on the entire amount. 
 Then, too, he generally conceals some personal property, 
 and he feels he is somewhat ahead, forgetting for the 
 moment that others are doing the same thing. Many 
 attempts at classification of property have been voted 
 down, no doubt, because the voters in general have feared 
 that the capitalists were back of the measure, or that the 
 single taxers were attempting to introduce taxes on land. 
 
 Modern fiscal literature in the United States abounds 
 with discussions of the general property tax, and it 
 
PROPERTY TAXES 255 
 
 strange to the American student to find nothing concern- 
 ing it in the literature of other countries. It forms such 
 an important part of our revenue that he has taken it for 
 granted that it is a universal phenomenon. Such, how- 
 ever, is not the case, but it would have been much more 
 nearly the condition two centuries ago. Other countries 
 have tried the method, carried it through its various 
 stages of development, just as we are doing, and have 
 found it wanting. They have long since discarded it as 
 a part of their real tax system, and it is now only a part 
 of their fiscal history. 
 
 In England, Italy, Scotland, France, Germany, and 
 other countries, the evolution has been the same. First, 
 taxes were placed upon land, then upon other commodi- 
 ties as they began to appear; this was followed by whole- 
 sale evasions and inqualities, with the consequent over- 
 throw of this form of tax as an important part of the 
 fiscal system. The general property tax still plays a minor 
 role in a few countries, but nowhere is it used as in the 
 United States. It may be that some time in the future 
 we will profit by their example, but at present European 
 writers refer to our fiscal system as an antiquated one. 
 
 ADDITIONAL READING 
 
 Seligman, Essays in Taxation , chap. ii. 
 Proceedings of the National Tax Association, 1910, pp. 
 219-313; 1911, pp. 333-421; 1919, pp. 477-496. 
 Reports of State Tax Commissions. 
 
CHAPTER XII 
 
 PROPERTY TAX REFORM 
 
 138. Constitutional Provisions Present Difficulties. 
 Many changes and suggestions have been made to at- 
 tempt to remedy some of the evils that were pointed out 
 in the preceding chapter. One of the first things to be 
 remembered by those who are interested in making 
 changes in fiscal systems, is that they cannot use a free 
 hand in the matter. In every case the provisions of the 
 Federal Constitution as well as the provisions of the state 
 constitutions, with their court interpretations, must be 
 considered. The government of the United States is one 
 of delegated powers, while the powers of the state govern- 
 ments are residual. That is, the Federal Constitution 
 specifically enumerates and prescribes the activities hi 
 which the Federal government may engage, while the 
 states are free to enter any fields of endeavor from which 
 they are not prohibited. 
 
 The latitude of the states in tax matters is easily seen 
 to be much broader than that of the Federal government. 
 The fiscal provisions of the Constitution have already 
 been enumerated Congress shall have power to lay and 
 collect taxes, duties, imposts, and excises; no direct tax 
 shall be laid except in proportion to the population; no 
 tax shall be laid upon exports; bills for raising revenue 
 shall originate in the House. These, with the Sixteenth 
 Amendment, which gives the power to levy an income 
 tax, constitute the taxing powers of the Federal govern- 
 ment. 
 
 Court Decisions. The court interpretations, however, 
 
PROPERTY TAX REFORM 257 
 
 must not be overlooked. Taxes upon corporation incomes 
 and inheritances, for example, have been held as not 
 direct, and consequently do not need to be apportioned 
 in accordance with population. An income tax at the 
 time of the Civil War was considered constitutional, while 
 the one of 1894 was held to exceed the powers of Congress. 
 It has been held, moreover, that the states have no power, 
 by taxation or otherwise, to retard, impede, burden, or 
 in any other manner control the operation of the constitu- 
 tional laws enacted by Congress. Consequently taxes 
 upon operations which will hinder the activities of the 
 Federal government have been held void. State laws 
 which imposed taxes upon United States bonds, for ex- 
 ample, have been declared unconstitutional, as interfering 
 with the prerogatives of the Federal government. Like- 
 wise it has been held that the Federal government has no 
 power to tax the instrumentalities or property of the 
 states. 
 
 The Fourteenth Amendment. The Fourteenth Amend- 
 ment to the Constitution has also developed an important 
 bearing upon taxation. The clause, "nor shall any state 
 deprive any person of life, liberty, or property without 
 due process of law," is frequently invoked in tax matters. 
 The importance of this lies in the interpretation the courts 
 place upon the phrase, "due process of law." This has 
 frequently been invoked to prevent or annul the arbitrary 
 assessment and collection of taxes, and to require that all 
 taxes be levied through the general process of legislation. 
 
 Limitations by States. State legislatures, because of the 
 residual nature of their powers, are not limited in the field 
 of their activities except as restrictions are placed upon 
 them by the Federal or state constitutions. The limita- 
 tions found in the state constitutions, however, have not 
 only been rather widespread, but have frequently been 
 barriers to securing needed tax reforms. Most of the con- 
 stitutions were formed when the entire reliance for rev- 
 enue was placed upon property, while the property was 
 
258 OUTLINES OF PUBLIC FINANCE 
 
 largely of tangible nature. The idea prevailed that this 
 property represented the best basis for taxpaying ability, 
 and that it should all be taxed equally. 
 
 Uniform Tax Clause. Because of the importance at- 
 tached to property, the " uniform tax clause/' as it is 
 generally known, found its way into many state constitu- 
 tions. It generally takes a form somewhat as follows: all 
 properly shall be assessed at its full value and at rates that 
 are just and uniform. With the development of various 
 classes of property, especially a large class of intangible 
 property, the uselessness of attempting to assess all forms 
 at a full value, and consequently tax them at a uniform 
 rate, becomes apparent. Some states have been able to 
 remove the restriction, but in many it still remains be- 
 cause of the fear of the citizens that if classification of 
 property were allowed some classes of property, whose 
 owners possess political influence, would escape taxes. 
 Mere indifference has also had an influence in many cases. 
 
 139. Attempts Have Been Made to Correct Inequalities 
 of Real Estate Assessments. One of Adam Smith's 
 canons of taxation is that taxes shall be certain and not 
 arbitrary. We have gone far, as has been previously 
 noted, in constitutional attempts to enforce this ideal. In 
 practice, however, much arbitrariness has been found 
 from the beginning because of the difficulty in the admin- 
 istration of the tax laws. The administration is usually 
 left in the hands of local officials, who are seldom adverse 
 to catering to the good will of their constituency. No way 
 is more sure of winning popular favor, moreover, than 
 through the curtailment of the burden of taxes that the 
 individual believes he would otherwise have to pay. The 
 result has been that many assessments have been arbi- 
 trarily made by the assessor in order to gain or maintain 
 popular favor. As industry has grown more complex, 
 the possibilities of these arbitrary assessments have also 
 grown. 
 
 At first thought one would think that little chance 
 
PROPERTY TAX REFORM 259 
 
 exists for arbitrary assessments in the case of real estate, 
 since it is visible, and since comparisons can easily be made 
 between different parcels. Selling prices, also, are gen- 
 erally known and can be used as a basis for assessment. 
 Many arbitrary assessments still result, however, espe- 
 cially in the large cities. Here values are likely to fluc- 
 tuate rapidly and unexpectedly, so that to actually value 
 the property really becomes the business of an expert 
 a qualification that assessors seldom possess. All they 
 can hope to do, even in a conscientious performance of 
 their duties, is to use their best guess, which frequently 
 happens to be far from the actual value. 
 
 Equalization Boards. From the earliest times the in- 
 equalities and injustices which have arisen from real 
 estate assessments have not continued unnoticed and 
 with no attempts to make corrections. One of the earliest 
 plans to secure a just assessment was to have a review 
 and equalization of assessments by a board higher up 
 than the local assessors. That the need was recognized 
 early is indicated by the fact that before the end of the 
 Revolution an appeal was made to the Governor of New 
 York to provide some method for equalizing assessments. 
 From this early date to the present time the equalization 
 of assessments has been used extensively in an attempt to 
 secure greater equality and justice. 
 
 Modern equalization boards are of two kinds those 
 that equalize assessments within a county, or the county 
 equalization boards, and those that equalize assessments 
 among counties, or the state equalization boards. City 
 equalization boards sometimes exist and possess a varying 
 degree of power. 
 
 The state equalization board, which exists in some form 
 in more than three fourths of the states, usually has no 
 power to change individual assessments, but only to make 
 more equitable adjustments between counties. In a few 
 cases individual adjustments can be made. The state 
 board is usually comparatively free from political in- 
 
260 OUTLINES OF PUBLIC FINANCE 
 
 fluence, but the magnitude of its task precludes any 
 entirely satisfactory distribution of tax burdens. 
 
 The county equalization board has a widespread exist- 
 ence, and varies in the degree of its efficiency. The 
 powers are so limited, frequently, that any possible effec- 
 tiveness in accomplishing the desired results is destroyed. 
 Local politics and conditions, combined with personal 
 favoritism, have had so much influence, in general, that 
 the accomplishments have not been what justice would 
 demand. 
 
 Other Attempts. Another remedial measure that has 
 been attempted is to make the assessor an appointee of 
 some central authority, thus removing the influence of 
 local politics. The extension of his tenure of office for a 
 period long enough so that he can attain some degree of 
 efficiency, has also been adopted in some localities. Some 
 states have inaugurated the policy of holding conferences 
 for assessors in order that they may have the advice of 
 others in the same work as well as the benefit of their 
 experience. As a whole, however, little has been accom- 
 plished in mitigating the evils of inequalities in assessing 
 real estate. 
 
 Progress in Cities. Assessments in cities are peculiarly 
 difficult because of the enormous and rapidly changing 
 values. Some city officials have sensed this situation to 
 such an extent that definite methods of assessment have 
 been adopted. Tax maps are constructed that show the 
 exact size and location of each parcel of land. Some unit 
 value is hit upon as a standard of measurement, as so 
 much for a front foot. With this unit of value in mind 
 definite variations are made for distance from the main 
 street, the depth of the lot, and other factors that defi- 
 nitely affect values. A number of cities have even called 
 in experts in valuation to aid in placing a proper assess- 
 ment on property. The merit of such plans has been in 
 their uniformity and in the divorcing of the assessments 
 from the guesswork of the assessors. The movement 
 
PROPERTY TAX REFORM 261 
 
 toward the separate assessment of land and buildings in- 
 dicates that the general adoption of this method would 
 aid materially in obtaining a just assessment of these two 
 classes of real estate. 
 
 140. Many Devices Are Used in Personal Property As- 
 sessments. Because of the difficulties that have attended 
 the assessment of personal property, many methods of 
 securing better results have been suggested, and some 
 have been tried. Such suggestions as the classification of 
 property, the separation of state and local revenues, and 
 the centralization of authority will be treated under 
 separate topics. To mention all the devices that have 
 been used or suggested in the different taxing districts 
 would be next to impossible. Only a few will be noted as 
 suggestive of some of the attempts to make the assessment 
 of personal property successful. 
 
 Use of Oaths and Penalties. As was indicated in the 
 discussion of the local assessor, the law often places strong 
 reliance upon the use of the oath to accomplish the proper 
 assessment of property. The following requirements of 
 the state of Illinois are typical of the requirements of many 
 other states. The assessors are required to take the fol- 
 lowing oath: 
 
 I do solemnly swear (or affirm) that I will support the Constitution 
 of the United States and the Constitution of the state of Illinois, and 
 that I will faithfully discharge all the duties of the office of assessor, 
 deputy assessor, or supervisor of assessments (as the case may be) to 
 the best of my ability; that I will without fear or favor appraise all 
 the property in said county at its fair cash value, said value to be 
 ascertained at what the property would bring at a voluntary sale in 
 the due course of business and trade; and that I will assess said 
 property when so appraised at one half its said cash value; that I will 
 cause every person, company, or corporation assessed, to sign his, her, 
 or its assessment schedule, and I will administer to each and every 
 person so signing said assessment schedule, the oath thereon, and 
 return said schedule so signed and file the same with the county clerk. 
 
 The Illinois law provides for the following penalties: 
 If any assessor refus.es or knowingly neglects to perform 
 
262 OUTLINES OP PUBLIC FINANCE 
 
 any duty required of him by law, or if he consents to any 
 evasions of the law whereby any property required by 
 law to be assessed shall be exempted or valued at less 
 than required by law, he shall, upon conviction, be fined 
 for each offense not less than $100 nor more than $5,000, 
 and shall be imprisoned in the county jail not exceeding 
 one year, or shall be both fined and imprisoned. Anyone 
 who evades the law in regard to the assessment of property 
 or who delivers a false list to the assessor, shall be pun- 
 ished by a fine not to exceed $5,000 or by imprisonment 
 in the county jail not to exceed one year, or both. Yet 
 the public treasuries are not being filled with fines from 
 assessors and property owners, neither are they crowding 
 the county jails. A glance at the figures for property 
 valuations, moreover, would immediately convince one 
 that it is not because the requirements of the law are being 
 enforced. 
 
 Other Methods. Some attempts have been made to 
 divorce the assessors and equalization boards from local 
 politics and influences, and to give the assessors broader 
 powers in locating property. To have no political interest 
 between the assessor and the assessed is of course an ad- 
 vantage, since no office is then at stake. Some plan 
 should be followed, however, to insure that the assessors 
 and members of the equalization boards will be efficient 
 and capable men. This, of course, could not hope to solve 
 the difficulties in reaching intangible values. 
 
 The powers of assessors have often been extended in 
 order to enable them to better reach intangible property 
 values, and just as often have the results been unsatis- 
 factory. It is sometimes attempted to enlist the aid of 
 citizens in securing just assessments. One state requires 
 the publication of the entire assessment list, so that 
 everyone may know the assessed value of the property 
 of everyone else. The hope that discrepancies would be 
 reported, however, has not been realized. 
 
 Ohio Tax Inquisitor Law. One of the most commonly 
 
PROPERTY TAX REFORM 263 
 
 cited examples of the attempt to enlist citizens in the 
 securing of accurate assessments is what has been called 
 the Ohio tax inquisitor law. Under this law anyone could 
 report property that he thought had not been listed with 
 the assessor. If this proved to be true, a 50 per cent 
 penalty was added, a part of which was to go to the 
 individual who made the report. The result, however, 
 was unsatisfactory, and little was accomplished in secur- 
 ing more accurate assessments of personal property. The 
 result of every attempt to reach intangible property 
 values, moreover, has been much the same. 
 
 141. Classification of Property for Taxation Has Been 
 Attempted. The restrictions imposed by constitutions 
 have been particularly troublesome where attempts have 
 been made to treat classes of property differently in order 
 to equalize more nearly the tax burden. The results of 
 property taxation have demonstrated that a general, uni- 
 form system of taxing property is no longer practical, and 
 that, under modern conditions, it cannot be enforced 
 equitably or effectively. The so-called uniform tax is 
 based on the theory that every form of property, regard- 
 less of character or condition, shall be taxed in proportion 
 to value and by a uniform method and rate. The theory 
 presupposes that all property is able to bear the same 
 burdens and that all forms of property are equally easy 
 for the assessor to find and to estimate their values. Uni- 
 formity of valuation is an imperative requirement. All 
 property must be assessed at the same percentage of ac- 
 tual values, so that each class, with a uniform tax rate, 
 will bear its just proportion of the burden. No possi- 
 bility exists, under modern conditions, even to approxi- 
 mate this result. 
 
 Court Interpretation. It has been found possible, where 
 permissible, to approach more nearly a uniformity in tax 
 burdens on property by varying the method of assessment 
 and taxation for the different classes. The Supreme Court 
 of the United States has consistently held that this prin- 
 
264 OUTLINES OF PUBLIC FINANCE 
 
 ciple of classifying property for purposes of taxation does 
 not violate any principle of the Federal Constitution. 
 The line of reasoning has been somewhat as follows: 
 diversity of taxation, both with respect to the amount 
 imposed and the various species of property selected, 
 whether for bearing tax burdens or being exempt from 
 them, is not inconsistent with a perfect uniformity and 
 equality of taxation in the proper sense of these terms. 
 A system, moreover, which imposes the same tax upon 
 every species of property, irrespective of its nature, or 
 condition, or class, will be destructive of the principles 
 of uniformity and equality in taxation out of a first 
 adaptation of property to its burden. State courts, how- 
 ever, have generally been much narrower in their inter- 
 pretation of the constitution or statute providing for uni- 
 form assessment. 
 
 Status of Classification. Much interest has been shown 
 in recent years in the classification of property for tax 
 purposes. In not every state where the constitution per- 
 mits this feature, however, is classification used. Colorado 
 furnishes an example of this situation, which illustrates 
 an exception, however, rather than the rule. A provision 
 was placed in the constitution of 1876 which permitted 
 the legislature to classify property for tax purposes. As 
 yet there has appeared little disposition on the part of 
 the legislature to provide for a classification of property. 
 This is probably on account of the small amount of in- 
 tangible property which appears in this state. On the 
 other hand, in more than a dozen states, where classifica- 
 tion of property is allowed, experiments looking to a 
 greater equality of assessment are being carried on, while 
 a number of states which are not allowed the privilege of 
 classification are seeking to obtain it. 
 
 Principle of Classification. The outstanding idea in 
 the principle of classification is to place a distinctly lower 
 rate of tax on intangible property than upon other forms. 
 This is because it has been clearly demonstrated that an 
 
PROPERTY TAX REFORM 265 
 
 imposition of the general tax rate upon this class of prop- 
 erty drives a large majority of it into hiding, and it is not 
 reached at all. Tangible property, moreover, is so fre- 
 quently assessed at only a fraction of its true value, that 
 a lower rate is needed on the intangible property to secure 
 equality, since much of this must be assessed at full value 
 when it is found. 
 
 Results of Classification. The general experience of the 
 states which have tried to reach intangibles through lower 
 rates has been satisfactory. The results are not that 
 perfection has been reached, but that a decided improve- 
 ment has resulted. The number of property owners as- 
 sessed has increased materially, as well as the amount of 
 property, and in some cases the actual revenue obtained 
 has been greater than before the tax rate was lowered. 
 The results would indicate that the conscience of tax- 
 payers varies inversely with the tax rate. 
 
 Taxation of Mortgages. One class of personal property 
 that has generally escaped taxation under the property 
 tax is mortgages on real estate. A number of plans have 
 been used to attempt to remedy this evil. Some states 
 have taxed the land at full value and levied only a low 
 rate on mortgages, with the hope that more mortgages 
 would be given in to the assessor. Others have allowed 
 the land owner to deduct the amount of the mortgage 
 from the assessed value of the land, but because of the 
 general underassessment of land, the amount of the mort- 
 gage has frequently exceeded the entire assessed value of 
 the land. Still others have given up the attempt to col- 
 lect any tax from mortgages except a nominal tax at the 
 time of recording. In spite of the apparent injustices, 
 however, most states attempt to tax both the mortgagor 
 and the mortgagee. 
 
 New York Mortgage Recording and Secured Debts Tax. 
 The state of New York, in 1906, through the enactment of 
 the mortgage recording tax, gave legal recognition to the 
 fact that mortgages generally escape taxation. This law 
 
266 OUTLINES OF PUBLIC FINANCE 
 
 removes mortgages from the general property tax and sub- 
 stitutes a tax to be paid, once for all, at the time the 
 mortgage is recorded. The rate is five dollars on the 
 thousand dollars, irrespective of the term of the mortgage. 
 The next extraction from the application of the general 
 property tax was the secured debts, which came in 1911. 
 The holders of these instruments could secure immunity 
 from all future taxes, no matter what the length of life of 
 the security, by presenting it to the comptroller of the 
 state, paying a tax of five dollars on the thousand dollars, 
 and having stamps affixed to indicate that the tax had 
 been paid. This was unsatisfactory because of the un- 
 equal rate which resulted on securities of different dates 
 of maturity, and the low return which really came to the 
 state when the time element was considered. Several 
 amendments were tried, and the final result was the in- 
 vestment tax law of 1917. Under this secured debts are 
 taxed annually by the state at the rate of two dollars per 
 thousand dollars. The tax may be paid for one, two, 
 three, four, or five years, but for no longer period. 
 
 Other Examples of Classification. Pennsylvania and 
 Connecticut have both used the principles of classifica- 
 tion with interesting results. A few years ago Pennsyl- 
 vania reduced the rate of taxation on intangible property 
 to a small fraction of what it had been, and for the next 
 year received more revenue from this source than for the 
 preceding year with the higher rate. It appears that the 
 new rate was not high enough to sear the consciences of 
 the owners of intangible property. 
 
 Connecticut has a voluntary registration of bonds, 
 notes, and, in fact, practically every form of taxable in- 
 tangible property, with the state treasurer. A tax is paid 
 upon this registered property at the rate of four mills a 
 year. The attached treasurer's receipt exempts from all 
 other taxes. If the document is not registered it is sub- 
 ject to taxation, if found, at the local rates, which are 
 much higher than the state rate of four mills. 
 
PROPERTY TAX REFORM 267 
 
 The use of the system of classification is but another 
 attempt to make a success of the property tax. At pres- 
 ent it is but in its experimental stage, but a strong agita- 
 tion and extensive program of education is being carried 
 on to secure a wider adoption. It is likely that the future 
 will bring a much more extensive use of the principle, but 
 whether it will satisfactorily solve the problem of taxa- 
 tion of property remains to be seen. 
 
 142. Limitations Have Been Placed upon Tax Rates 
 and Borrowing Power. The rapid increase in public ex- 
 penditures, especially on the part of cities, has been viewed 
 with alarm by the taxpaying citizenship. Charges of 
 graft, recklessness, inefficiency, and general lack of eco- 
 nomical methods have been frequent. The rapidly in- 
 creasing tax burden, because of this enormous growth in 
 expenditures, has led to many demands that something 
 be done to curb the power of the assessing and taxing 
 officials. In some states attempts have been made to 
 curb this supposed extravagance of municipal and even 
 of state officials. The most common method of proce- 
 dure is to place some constitutional or statutory limitation 
 upon the amount of revenue a city may secure. The 
 amount of a city's indebtedness, also, has been closely 
 guarded, and provision has been made to limit the fiscal 
 activities of some state legislatures. 
 
 The most used limitations upon the fiscal powers of 
 municipal authorities is to impose a fixed or limited tax 
 rate with provisions for securing increased funds to meet 
 emergencies. Not only has it been thought that this sort 
 of restriction would curb wasteful expenditure, but that 
 a limited rate of taxation would be an incentive for list- 
 ing a larger amount of the intangible personal property. 
 Experience has shown, however, that no very startling 
 results have been obtained in bringing this class of prop- 
 erty from hiding. 
 
 Methods of Tax Limitation.- The use of a fixed tax rate 
 for municipalities has not proved satisfactory since there 
 
268 OUTLINES OF PUBLIC FINANCE 
 
 is no definite relation between a city's property and its 
 necessary activities. Besides, some cities may be under- 
 taking more legitimate enterprises than others, which 
 will necessarily entail greater expenditures. If the fixed 
 rate is higher than is necessary it will lead to extrava- 
 gance, waste, and graft, while if it proves to be too small 
 it will result in the restriction of necessary activities, an 
 increase of borrowing where this is possible, or the exten- 
 sion of the revenue system to include unproductive or 
 undesirable sources. 
 
 As a substitute for the fixed rate, a limited tax rate has 
 sometimes been used. This plan allows an increase in 
 the rate, but not to exceed a certain percentage of the rate 
 for the preceding year. This, however, is only more 
 satisfactory than the fixed rate, for if the limitation is the 
 same for all cities in a state, it is attempting to place a 
 uniform standard upon needs which vary greatly. In 
 neither case is there any guarantee that the burdens upon 
 property will be kept down because authorities can resort 
 to increased assessments to swell the revenue. A more 
 effective method of real limitation is to allow only a cer- 
 tain increase in expenditure over a preceding year, or the 
 average of several preceding years. Neither the tax rate 
 nor property valuations can be juggled to offeet the in- 
 tended restrictions. 
 
 The limitation on indebtedness usually takes the form 
 of allowing bond issues to only a definite percentage of 
 the property valuation, and this, frequently, only upon 
 popular vote. In any system of limitation some provision 
 for flexibility should be made to allow for emergencies, or 
 for various forms of capital investments which, of course, 
 should be put into a different category from current 
 expenses. 
 
 Many municipalities are finding themselves pressed for 
 funds because of the limitations which have been placed 
 upon them. The increased costs of labor and materials 
 have more than outstripped the possible revenue increases 
 
PROPERTY TAX REFORM 269 
 
 from the existing sources, while the decrease caused by 
 canceled liquor licenses has often been keenly felt. In- 
 debtedness has frequently been increased to the limit, 
 and the only recourse has been to seek new sources for 
 funds. The course most generally pursued has been to 
 increase the use of license taxes, as upon vehicles, and 
 professions. 
 
 Ohio Plan of Limitation. Ohio furnishes one of the best 
 examples of state tax limitation. According to the law 
 a maximum of fifteen mills is placed for the aggregate of 
 all levies, while a limitation of ten mills applies to all 
 levies, except to those authorized by a vote of the people, 
 and those necessary to provide interest and a sinking fund 
 for indebtedness. The limitation extends to the minor 
 political divisions in that the maximum levies of the 
 county, municipality, township, and school district are 
 placed, respectively, at three, five, five, and two mills. 
 These levies, however, are exclusive of any special levies 
 which the citizens may vote. Little satisfaction and much 
 criticism have been expressed concerning the working of 
 the plan. 
 
 143. The Separation of Sources of Revenue Has Been 
 Advocated. The complexities and evils of modern tax 
 systems have led many to desire and to seek for better 
 things. One cause for the difficulties has been the attempt 
 of different political divisions to secure funds by levying 
 taxes upon the same bases. This has led to evasion of 
 payments particularly those in which the individual has 
 not been visibly and closely interested. One reason for 
 the reluctance of individuals to turn in their property to 
 the assessor has been that a part of the tax collected 
 would be expended in a distant part of the state where 
 no benefits would accrue to the payer. Another difficulty 
 has grown up through the attempt of local officials to 
 assess properties, the nature of which caused them to 
 extend far beyond the limits of any one jurisdiction. A 
 remedy for some of these difficulties that has been much 
 
270 OUTLINES OF PUBLIC FINANCE 
 
 discussed in recent years is that state and local revenues 
 should be derived from separate sources. 
 
 Advantages of Separation. On the face of the proposi- 
 tion some outstanding advantages present themselves. 
 It is evident that certain fields of resources are much more 
 suited to the cultivation of the state than of local units. 
 The first example which presents itself is the large class of 
 corporations which are much more nearly organizations 
 of the state than of any locality. The complexities and 
 nature of their business is such as to require assessors of 
 a much higher degree of skill than local districts can afford 
 to provide. It has been advocated that the assessment 
 of the property of corporations should be taken from the 
 locality and turned over to the state. The inheritance 
 tax is another source of revenue which is adapted to the 
 use of states rather than to the use of localities. In the 
 first place, localities do not possess the machinery to ad- 
 minister the tax satisfactorily, and in the second place, in 
 a small area, no reliance can be placed upon enough trans- 
 fers of property occurring within a given time to insure a 
 stable revenue. Within a larger district this stability can 
 be counted upon with a reasonable degree of certainty. 
 A large number of license taxes, also, can be more efficiently 
 handled through state machinery than through that of 
 localities. It seems reasonable, then, that these sources 
 of revenue could be profitably turned over to the state. 
 
 If the state be given the revenues from corporations, 
 inheritances, and certain licenses, it would be possible to 
 relieve the localities from contributing to the support of 
 the state from revenues which are collected by local 
 officials. There would be no state tax to be collected, 
 consequently there would be no particular advantage for 
 the inhabitants of one district to secure a lower percentage 
 valuation than in adjoining ones, for it could not reduce 
 the tax burden, but merely affect the rate. It would give 
 the localities, moreover, a much greater autonomy in de- 
 termining fiscal policies. 
 
PROPERTY TAX REFORM 271 
 
 Dangers of Separation. There is no doubt that the 
 revenue systems of state and localities have been too 
 closely interrelated, and that some degree of separation 
 would prove beneficial. An entire divorce of the two, 
 however, with absolute local autonomy in determining 
 fiscal policies which the most ardent advocates desire, is 
 fraught with dangers, and would not, perhaps, accomplish 
 all that is hoped. 
 
 It is desirable to have some uniformity in the raising of 
 local revenues, even if no part of the revenue is to go out- 
 side of the district. Local fiscal officials, moreover, would 
 not always be competent to decide what plans would be 
 feasible to adopt. The use of an income tax as the base 
 of revenue in one township, for example, while the adjoin- 
 ing township used property, would either impose double 
 taxes or exempt entirely an individual who owned prop- 
 erty in one township and lived in the other. Other rea- 
 sons exist, moreover, for unequal assessments than be- 
 cause a part of the revenue collected locally goes to state 
 purposes. The local assessor, under the plan of separa- 
 tion, would still be an elected official, and the same rea- 
 sons for showing favoritism would continue to exist. 
 While a separation of revenues may be desirable to some 
 extent, the local units should still be kept under central 
 supervision to the extent that some uniformity remain in 
 local fiscal methods. They should also be restrained from 
 experimenting with systems which are not adapted to 
 their need. 
 
 The absolute separation of sources of revenue possesses 
 the added danger of leading to parsimony or extrava- 
 gance. Take, for example, the states which rely almost 
 entirely upon revenues from corporations. If these enter- 
 prises be powerful in the state, and have a controlling 
 influence with the legislature, expenditures will be reduced 
 to the minimum, and many desirable public activities may 
 be thwarted in order to make the tax burden as light as 
 possible. As was previously pointed out, moreover, it is 
 
 18 
 
272 OUTLINES OF PUBLIC FINANCE 
 
 politically undesirable to have one class voting the ex- 
 penditure of funds which another class contributes, for 
 this will lead to extravagance. If, then, corporations be 
 the source of tax, and unpopular with the legislature be- 
 cause it represents another class of people, no amount of 
 expenditure will appear to be too great. For the sake of 
 economy an absolute divorce may not be desirable, and 
 better results may be expected if the people who vote the 
 expenditure of funds also have to help bear the burden. 
 
 As between Federal and state revenues the tendency 
 seems to be in the opposite direction from a separation of 
 sources. A few years ago it was argued that, since the 
 Federal government had the field of customs and excises, 
 the states should have that of incomes, corporations, 
 and inheritances, and leave the returns from property to 
 the localities. More recently, in spite of much objection 
 from state officials, the Federal government has widened 
 its scope of sources. Its use of incomes, corporations, and 
 inheritances as sources of revenue has already been 
 discussed. 
 
 144. The Present Tendency Is to Centralize Fiscal 
 Authority. The preceding topic has indicated that there 
 is some demand for what is known as local option, or home 
 rule, in taxation that is, to allow each tax district to be 
 an automaton in determining its fiscal policies. While it 
 does not usually appear in the public discussion that this 
 is a single tax measure, yet the single taxers are always 
 ardent advocates for the adoption of the principle, with 
 the hope that some locality, when it has secured the power 
 of acting on its own initiative, will adopt the single tax. 
 
 Many of the arguments which are presented for this 
 decentralization and separation are appealing, and de- 
 serve notice. It is claimed that the physical and indus- 
 trial conditions of a state differ so widely that tax methods 
 which are suitable to one locality are adverse to the in- 
 terests of another. In proof of this, disparity between the 
 needs of farms, villages, and large cities is pointed out. 
 
PROPERTY TAX REFORM 273 
 
 Furthermore, it is claimed that the local authorities, be- 
 cause of the intimate knowledge they have of the local 
 affairs, and because of their personal interest in them, 
 have a much better basis upon which to formulate fiscal 
 policies than would officials who have no such interests. 
 The placing of citizens of local districts upon their own 
 resources, and allowing them to work out their own salva- 
 tion, will stimulate an increased interest in civic and 
 fiscal affairs, it is claimed. 
 
 It has been suggested above that absolute autonomy on 
 the part of local districts presaged an increase in the evils 
 of double taxation. Not only this, but it would open the 
 way for all sorts of favorable discrimination to particular 
 industries to secure location within the district. The dan- 
 gers of giving a large number of irresponsible assessment 
 districts a free hand to introduce and experiment with all 
 sorts of untried ideas are too great to be accepted. A 
 certain amount of freedom is no doubt desirable, but it 
 should be so curbed and directed as not to endanger the 
 safety of the larger body politic. 
 
 Equalization of Assessments. The recent trend for the 
 solution of fiscal difficulties, however, has been toward a 
 centralization of authority and responsibility, rather than 
 toward a further decentralization. One factor which has 
 caused this has been the desire to secure greater equality 
 in the valuation of property. The inequalities in assess- 
 ment, which arose with the growth of corporate industries, 
 first led to centralization. This was in reality a movement 
 away from the practically pure local option which formed 
 the early part of our fiscal systems. These discrepancies 
 in assessment led to an attempt to equalize values by a 
 central board appointed for that purpose. It has often 
 been difficult for this board to secure the proper informa- 
 tion, yet it has frequently been able to alleviate much of 
 the inequality and injustice which has arisen because of 
 the incapabilities, inconsistencies, or indisposition of local 
 officials. 
 
274 OUTLINES OF PUBLIC FINANCE 
 
 Control of Assessments. A more important develop- 
 ment of centralization has been the control which central 
 officials exercise over local ones, especially over the as- 
 sessors. More frequently, also, is it becoming true that 
 the assessment district is being enlarged, and the assess- 
 ment for the district performed by competent agents. In 
 many cases it has gone so far that the central authority 
 is found to be a state official, to whom county supervisors 
 are held responsible, while under the county supervisors, 
 and responsible to them, are the local assessors. In some 
 cases the smallest assessing district has been made the 
 county, and all the assessments are made by the county 
 supervisor. These supervisors and assessors are usually 
 appointed under civil service rules, and may continue in 
 office as long as efficiency warrants. 
 
 Advantages of Centralization. The outstanding advan- 
 tages of this form of centralization are plain. In the first 
 place the assessor is divorced from politics. His position 
 does not depend upon how much leniency he shows the 
 owners of the assessed property, but rather upon how well 
 he performs his task. In the second place, men of much 
 better qualifications can be secured through a process of 
 examination of the capabilities for performing the tasks. 
 The system in use in New York City will illustrate the 
 possibilities. The assessors are chosen on the basis of 
 competitive examination, the examination dealing largely 
 with the aspects of valuation. The law requires that one 
 out of the first three rated highest in the examination 
 must be appointed, and it has been the practice of the 
 mayor to designate that the appointments must be made 
 in order of the eligibility, as shown by the examination. 
 As a whole, competent men have been chosen, whose 
 only fear of losing the position is from failure to per- 
 form satisfactory service. Many of the assessors have 
 been serving a number of years, and have become more 
 efficient and valuable with the accumulation of experience. 
 
 145. The State Tax Commission Presents the Best 
 
PROPERTY TAX REFORM 275 
 
 Example of Centralization. The growth of problems which 
 called for the attention of central authorities, and the 
 general trend toward this form of administration, have 
 demanded a competent central organization to render 
 the required services. At first the duties were placed upon 
 boards already in existence, with results which were far 
 from satisfactory. The final outcome has been that in 
 more than three fourths of the states organizations usually 
 known as state tax commissions may be found. While 
 an accurate generalization of their nature is impossible, 
 yet it may be said that the boards are composed of few 
 members, usually three, appointed for a comparatively 
 long period, at a compensation which is large enough to 
 obtain men of expert knowledge and capabilities. As far 
 as possible the attempt has been made to keep political 
 influences apart from the tax commission. 
 
 Activities of Commissions. The work of these commis- 
 sions has been so varied that again no accurate generaliza- 
 tion can be made. They are expected to form the balance 
 wheel of the fiscal system of the state to discover the 
 evils, formulate remedies, and induce legislatures, when 
 this is necessary, to make the needed changes in the fiscal 
 machinery. The general supervision has had a wholesome 
 effect upon the activities of subordinate officials, even 
 down to local assessors. The introduction of the mere 
 possibility of supervision at first had an exhilarating psy- 
 chic effect which, however, tended to wear off with time, 
 causing more actual supervision to become necessary. 
 The most marked result on the part of local officials has 
 been the increased and more uniform assessment of real 
 estate. The aid which has been given to local assessors 
 in formulating methods, such as the use of the tax map, 
 has aided materially in accomplishing this result. The 
 extent of the supervision varies from mere advisory pow- 
 ers to absolute control of all assessments, as in the state 
 of Ohio. 
 
 Auditing and Accounting. Since the advent of the state 
 
276 OUTLINES OF PUBLIC FINANCE 
 
 tax commission, much progress has been made in the adop- 
 tion of uniform systems of public auditing and accounting. 
 It is only through such uniformity that any accurate 
 knowledge and comparisons may be had of public ex- 
 penditures, and this is the basis for the solution of fiscal 
 problems. In a few cases the commissioners aid in making 
 up the budget estimate, but this is as yet not generally 
 true. From their knowledge of the sources of revenue, 
 however, their services should be acceptable in helping to 
 formulate state budgets. The work which has been done 
 in auditing and accounting, however, bids fair to lessen 
 the squandering of public funds and to prove a material 
 saving through the elimination of inefficient and wasteful 
 methods. 
 
 Corporation Assessments. Another accomplishment, for 
 which the tax commissions deserve credit, has been the 
 improvement in the processes for valuing the various 
 classes of corporate property. It has been through their 
 studies and experiments that the various plans gross 
 earnings, net earnings, ad valorem, and other plans- 
 have been tried, and the merits and defects of each noted. 
 Tax commissioners have succeeded in creating an attitude 
 of respect from the corporations, because of the fair treat- 
 ment they have extended, which has been beneficial in 
 more ways than in an increased revenue. Mention should 
 be made of the valuable contributions to fiscal knowledge 
 which have been made through the reports of the various 
 commissions. Many of them are a part of the most val- 
 uable literature on fiscal problems, and should be consulted 
 by students interested in systems of state revenue. 
 
 146. Taxation of Property Remains Unsatisfactory. 
 So far the changes made in assessing and taxing property 
 have been void of satisfactory results. If all the devices 
 suggested above were generally adopted, some of the 
 defects of the present property tax might be less flagrant, 
 yet it seems doubtful if the scheme as a whole can be 
 made satisfactory. Most authorities would be willing to 
 
PROPERTY TAX REFORM 277 
 
 conclude concerning the general property tax, as does 
 Professor Seligman: 
 
 The general property tax as actually administered is beyond all doubt 
 one of the worst taxes known in the civilized world. Because of its at- 
 tempt to tax intangible as well as tangible things, it sins against the 
 cardinal rules of uniformity, of equality, and of universality of taxa- 
 tion. It puts a premium on dishonesty and debauches the public 
 conscience; it reduces deception to a system, and makes a science of 
 knavery; it presses hardest on those least able to pay; it imposes 
 double taxation on one man and grants entire immunity to the next. 
 In short, the general property tax is so flagrantly inequitable that its 
 retention can be explained only through ignorance or inertia. It is 
 the cause of such crying injustice that its alteration or its abolition must 
 become the battle cry of every statesman and reformer. 1 
 
 ADDITIONAL READING 
 
 Seligman, Essays in Taxation, chap. xi. 
 Lutz, The Tax Commission. 
 
 Proceedings of the National Tax Association, 1913, pp. 
 351-371; 1915, pp. 42-77; 1919, pp. 477-496. 
 
 1 Seligman, Essays in Taxation, p. 62. 
 
CHAPTER XIII 
 
 INCOME TAXES 
 
 147. The Use of Income Taxes Represents a Developed 
 Fiscal System. The development of criteria of justice in 
 taxation, with the general acceptance of faculty or ability 
 to pay as the most satisfactory, has been discussed. In 
 the light of this development various kinds of direct and 
 indirect taxes have been considered with reference to their 
 justice, and it has been seen that the incidence of such 
 indirect taxes as customs duties and excise taxes cannot 
 be traced with sufficient accuracy to determine the real 
 burden. Taxes upon consumption, moreover, are regres- 
 sive, in that they fall more heavily upon the poorer classes, 
 and for this reason they are no longer advocated as the 
 essential part of a tax system. 
 
 The development of direct taxes to conform to the abil- 
 ity to pay has followed the changes and growth in eco- 
 nomic institutions. The place of the individual as the 
 base of the first direct taxes has already been pointed out. 
 Poll taxes, however, conformed to the requirements of 
 justice in only the primitive stages of society. Here prop- 
 erty held a sphere of minor importance, there were no 
 such distinctions as rich and poor, and here also the char- 
 acter of the work of individuals, as well as its reward, was 
 very much the same. The injustice of the exclusive use 
 of poll taxes became apparent as property began to occupy 
 a more important place among economic institutions. 
 The development of the use of property as a base for taxes 
 has also been discussed, as well as the outstanding defects 
 of this system as economic institutions developed into 
 their more diverse and complex forms, 
 
INCOME TAXES 279 
 
 As long as society was primarily agricultural, and prop- 
 erty consisted almost entirely of land and its appurte- 
 nances, a tax based upon property could be made to con- 
 form fairly well to the principles of justice. We have 
 seen, however, that as property began to take on diverse 
 forms, and began to assume varying degrees of produc- 
 tivity, a general property tax did not meet the require- 
 ments of justice. The difference in ability hi the vari- 
 ous forms of property to bear tax burdens, the develop- 
 ment of the ability to bear these burdens without the 
 ownership of property, the inequality of assessments, and 
 the failure to assess many classes of property, have em- 
 phasized the failure of this tax to meet the requirements 
 of justice. 
 
 Most countries outside of the United States, it was 
 indicated, have long since given up property taxes in their 
 search for some method which would more nearly conform 
 to faculty under the modern complex industrial organiza- 
 tions. Some form of an income tax has been widely 
 adopted where the property tax has been given up. In 
 recent years, also, income taxes have begun to play a 
 much more important role in the fiscal systems of our 
 Federal and state governments. In the future, no doubt, 
 income taxes will occupy a place of much greater promi- 
 nence in the fiscal systems of the states, at least, than 
 they have held heretofore. 
 
 148. Difficulties Arise in Defining Income. Some def- 
 inite understanding as to what the term income includes 
 becomes necessary, since income taxes are assuming such 
 an important place in fiscal systems. Webster defines an 
 income as "that gain or recurrent benefit, usually meas- 
 ured in money, which proceeds from labor, business, or 
 property; commercial revenue receipts of any kind, in- 
 cluding wages or salaries, the proceeds of agriculture and 
 commerce, the rent of houses, or the return on invest- 
 ments." 
 
 This definition suggests some of the current ideas which 
 
280 OUTLINES OF PUBLIC FINANCE 
 
 are held as to the meaning of income, but it does not in- 
 dicate all the problems which arise when one seeks to 
 determine the income which should be made the proper 
 base for taxes. The popular conception of income is that 
 of net income, yet the expression is used frequently to 
 designate the larger category of gross income. A tax is 
 sometimes levied upon net incomes, and sometimes upon 
 gross incomes, and in the case of the levy of such a tax 
 upon a corporation it is customary to refer to it as a 
 gross or net income tax, because there is no uniformity 
 as to which is used in the different states, or against 
 various corporations. 
 
 Gross and Net Income. The popular conception of in- 
 come is that of the net return, and that this differs widely 
 from gross income is at once apparent. In the case of 
 salaries and wages, the total amount received is usually 
 considered as the income, but this does not hold for pro- 
 ductive enterprises. The income is usually considered as 
 that which is left after expenses are deducted. In the 
 case of manufacturers, merchants, or farmers, the total 
 receipts might be large, while a deduction of expenses 
 might leave comparatively little or nothing. Even a 
 greater difference than this should be made, perhaps, in 
 some cases. In manufacturing plants, for example, the 
 expenditures for a particular year may not indicate all 
 that should be deducted from the gross returns. Depre- 
 ciation is in progress, and provision should be made to 
 take care of both depreciated building and worn-out or 
 obsolete machinery. From this conception an income 
 might be considered as any amount over and above that 
 sufficient to keep the capital investment intact. To de- 
 termine this accurately, however, would be impossible in 
 many cases. 
 
 Capital and Income. Many attempts have been made 
 to make a clear distinction between capital and income, 
 yet for practical purposes most of the distinctions cannot 
 be carried too far. Some point out that capital is a stock 
 
INCOME TAXES 281 
 
 of wealth, while an income is a flow of wealth. The re- 
 ceipt of an inheritance, however, is scarcely to be classed 
 as a part of an income. Some would go farther in modify- 
 ing the income concept, and limit it to a somewhat regular 
 flow of wealth, yet many of the returns from dealing on 
 boards of trade and stock exchanges should be classed as 
 income, although the flow is by no means regular. 
 
 Many attempts have been made by judicial minds to 
 define income, capital, and property, but there has been 
 no more uniformity in their concepts than in those which 
 others have tried to formulate. Fiscal authorities, how- 
 ever, are more concerned about the concept of income, 
 and the methods of levying upon it, which will most nearly 
 conform to principles of justice in taxation. 
 
 149. The Concept of Income Is Sometimes Modified to 
 Conform to Justice in Taxation. In their attempt to reach 
 ability to pay taxes fiscal authorities often make differen- 
 tiations in incomes which would not otherwise be made. 
 A discussion of the uniformity of taxation clause, which is 
 to be found in many state institutions, will be found in 
 another place, but the courts have generally held that the 
 provision does not prohibit the classification of property 
 provided greater equality of assessment could be secured 
 thereby. In other words, the contention has been that the 
 constitutions were concerned about the equality of bur- 
 den rather than equality of assessment. This principle 
 has been carried to income assessments, and differentia- 
 tions have been made. 
 
 Funded and Unfunded Income. The distinction be- 
 tween a funded and an unfunded income, or between an 
 unearned and earned income, was one of the first to be 
 made. In the case of a funded income the income is 
 separated from any personal efforts of the recipient, while 
 in the case of an unfunded income it is dependent upon 
 the exertions of the individual. It is the difference be- 
 tween $3,000 in interest or dividends or in rents from 
 lands, and $3,000 paid as a salary for personal services. 
 
282 OUTLINES OF PUBLIC FINANCE 
 
 It is evident that it is a greater burden to give up a part 
 of the latter $3,000 than it would be to give the same 
 proportion of the first $3,000. In the one case savings 
 need not be considered, because the income is certain, 
 whether the recipient works or not; in the other provision 
 must be made for the future, when the income will cease 
 because of the incapacity of the worker. While the jus- 
 tice of such a differentiation is at once apparent, it is 
 evident that such distinctions cannot always be made 
 with absolute precision. Incomes which appear to be 
 derived exclusively from property may, upon investiga- 
 tion, be found to depend to a greater or less extent upon 
 personal activities. A part of the rent which a landlord 
 receives from a farm may arise because of his management 
 of the methods of production, the choice of fertilizers, 
 or the selection of seed. Dividends from stocks may exist 
 because the recipient has exercised the utmost discretion 
 in their purchase. Many incomes from capital invest- 
 ments, moreover, depend to a greater or less extent upon 
 the efficiency of the management of the owner. It is quite 
 evident, then, that many incomes are combinations of 
 funded and unfunded parts, the separation of which would 
 involve insurmountable difficulties. 
 
 Considerations of Justice. Incomes of the same nature 
 may vary in their ability to meet fiscal burdens. Some 
 may have a large number of necessary and fixed charges 
 against them, while others may have practically none. 
 The amount of fixed charges, of course, makes a great 
 difference in the amount which may be disposed of in 
 any manner which may be decided upon. One man, with 
 no dependents, may have an income of $5,000, against 
 which there is no fixed charge, and he can use it for his 
 enjoyment as he chooses. Another man with the same 
 income, with a home to support, children to feed, clothe, 
 and educate, and feeling the necessity of establishing a fund 
 of savings to meet possible emergencies, may have very 
 little left after these necessary charges are provided for. 
 
INCOME TAXES 283 
 
 Should the privilege be granted of deducting all neces- 
 sary charges which arise against net incomes before taxes 
 could be levied, the plan would doubtless be abused to 
 such an extent that there would rarely be a net income 
 left against which to impose taxes. The principle of de- 
 ductions, however, is generally recognized by the fiscal 
 authorities of most countries which use the income tax. 
 A fixed amount is usually exempt from taxes, and stipu- 
 lated deductions are allowed for each dependent. The 
 attempts of various countries to use this principle will 
 be noted in the discussion of their method of taxing 
 incomes. 
 
 It is true in a number of cases, furthermore, that an 
 individual receives an income from his property without 
 its having taken the form of money. A farmer raises his 
 own fruits and vegetables, dresses and cures his own 
 meat, and frequently exchanges wheat which he has 
 grown for flour at a near-by mill. He has received just as 
 much enjoyment from these goods as the man who has 
 received a money return, and has used it to secure the 
 same utilities. A man who lives in his own house is get- 
 ting a return from it just as much as the man who rents 
 his house for a money income. 
 
 The impossibility of an accurate measurement of these 
 incomes, which do not resolve themselves into a monetary 
 form, is obvious. The principles of justice require that 
 some account should be taken of such incomes in formu- 
 lating a scheme of income taxes. The difficulty is at once 
 encountered, however, of attempting to place a tangible 
 value upon an intangible income. 
 
 150. Variations Occur in Methods of Levying Income 
 Taxes. Many authorities have recognized the theoretical 
 justice of the income tax, yet have been skeptical of its 
 use because of practical difficulties which arise. John 
 Stuart Mill considered it, in principle, the most just of all 
 forms of taxation, yet in effect it was more unjust than 
 many which appeared to be more objectionable. He con- 
 
284 OUTLINES OF PUBLIC FINANCE 
 
 sidered that one of the greatest objections was that it fell 
 most heavily upon the conscientious, and should be used 
 only in great emergencies. 
 
 Exemptions. Many attempts have been made to 
 eliminate the practical difficulties through the method of 
 levying the tax. The general use of an exemption is for 
 securing a more nearly equal sacrifice. The size of the 
 exemption varies greatly in different countries, with no 
 particular reason for the amount which has been chosen. 
 Objection has been made to the granting of any exemption 
 on the ground that every citizen possesses some ability to 
 pay to the state. This objection might apply to large 
 exemptions, but loses its force when the exemption is not 
 more than the minimum of subsistence. To allow at least 
 the minimum of subsistence to be free from tax burdens, 
 on the other hand, seems more logical. To encroach upon 
 this will mean either a retrenchment of the individual's 
 expenditure, to his detriment, or that the state must fur- 
 nish aid in some form of charity. Neither of these con- 
 ditions is a desirable result from a fiscal system. When 
 the cost of assessment and collection is considered, more- 
 over, the amount received from small incomes is an ex- 
 pensive form of revenue. 
 
 Graduation. Some form of graduation is generally used 
 in levying income taxes, yet in this also there is no uni- 
 formity in the various countries. The arguments for 
 progressive rates for income taxes are the same as those 
 advanced for progressive taxes under the discussion of 
 that subject. 1 The application of progressive rates to 
 the taxation of incomes conforms to the faculty basis for 
 measuring taxes. While the intangible utility of incomes 
 cannot be measured with any degree of accuracy, yet 
 there is no doubt that the law of diminishing utility ap- 
 plies to the acquisition of income. As successive units 
 are added, the importance of each unit becomes less 
 than the preceding one. In order to impose the same 
 
 ^ee. 110. 
 
INCOME TAXES 285 
 
 degree of burden upon incomes of various amounts, 
 more than a proportionate sum must be taken as the size 
 increases. 
 
 To formulate a scale of progression which would exactly 
 secure equality of sacrifice for all individuals would, of 
 course, be impossible. Human natures and desires are 
 too diverse for this, yet greater justice would be secured 
 by an attempt at the ideal than if strictly proportionate 
 rates were used. In most cases, at least, proportionate 
 taxes place a lighter burden upon the richer classes than 
 upon the poorer, and are less felt by those who have a 
 wide margin above the minimum of subsistence than by 
 those who have only a small surplus. One of the greatest 
 justifications, then, for progressive rates in the use of 
 income taxes is to equalize the burden upon different 
 classes f incomes. 
 
 The advocate of proportional taxation, moreover, should 
 have no objection to progressive income tax rates, but 
 rather should encourage them. Many taxes, it has been 
 indicated, fall more heavily upon the poorer classes than 
 upon the richer. This is true of many of the indirect 
 taxes upon commodities of consumption, and also of the 
 general property tax. To tax the larger incomes at a 
 higher rate than the smaller simply tends to counter- 
 balance the regressivity of other taxes and to secure for 
 the system as a whole a proportionate burden. 
 
 In order to avoid the objection of ultimate confiscation 
 through the use of progressive rates, some form of degres- 
 sion is used. There is no uniformity of method, however, 
 in the various countries. In England a progressive rate 
 is used up to a certain amount, after which the rate is 
 proportionate. In the Prussian system the amount taken 
 from each grade of income is a lump sum rather than a 
 percentage. The amount increases with each grade, but 
 the tax becomes regressive within the grade. Sometimes, 
 as in the United States, a normal proportionate tax is 
 levied, while a progressive surtax is added. The degres- 
 
286 OUTLINES OF PUBLIC FINANCE 
 
 sivity of the tax is also affected by the amount of exemp- 
 tion which is allowed by the different countries. 
 
 151. Fiscal Authorities Meet Difficulties in Ascertain- 
 ing and Classifying Incomes. Incomes have much to 
 recommend them as sources of taxation. If any single 
 tax were practicable, one upon incomes would doubtless 
 most nearly meet the requirements of justice. Incomes 
 represent a flow of wealth, a part of which can be given up 
 in taxes more easily than can a part of property against 
 which taxes may be levied. In cases of property taxes 
 it is assumed that the tax is to be paid from income from 
 the property, and that no impairment of capital will be 
 necessary. The source of the tax upon property is sought 
 in a separate field from that which measures ability, while 
 the income tax is taken directly from that which is used 
 as the basis for measuring the ability. That the latter 
 will more nearly conform to the requirements of justice in 
 every case is reasonably sure. 
 
 Many individuals with large incomes, and consequently 
 able to meet tax burdens, may have comparatively little 
 property. Large property holdings, on the other hand, 
 do not always indicate that burdens can be shouldered 
 with ease because of the unproductive state in which the 
 property may be found. 
 
 The difficulties which have been encountered, however, 
 in finding incomes, and in securing a proper classification 
 according to taxpaying ability, have restricted the use of 
 income taxes. It may be said, with some degree of accu- 
 racy, that three different methods have been used in at- 
 tempting to secure the amount of income which shall be 
 subject to taxation. 
 
 Estimates of Officials. One plan for assessing incomes 
 has been to give fiscal authorities the power of estimating 
 the amount of incomes that shall be subject to taxes. The 
 difficulties presented are at once apparent. Chances for 
 variations occur according to the abilities or inclinations 
 of the various officials, Some may be diligent and others 
 
INCOME TAXES 287 
 
 negligent; some may be exacting, and others may be 
 content with much less than a full assessment. The op- 
 portunity for favoritism immediately presents itself, along 
 with the unpleasant inquiries into the business affairs of 
 individuals. In fact, many of the undesirable features 
 which accompany the valuation of property by local asses- 
 sors are found in this method of ascertaining incomes. 
 
 Personal Declaration. A second method, which has been 
 extensively used in ascertaining incomes, is to have the 
 recipient of the income make a personal declaration of 
 the amount. The advantage of the plan of self -assess- 
 ment lies in the minimizing of the duties of fiscal authori- 
 ties and the absence of any inquisitorial processes. The 
 ease of evasion, however, constitutes a serious difficulty 
 with the use of this method. Inequalities arise when the 
 honest recipients of incomes make full returns, while the 
 less scrupulous either make no returns or falsify those 
 which are made. Where a complex system exists, it is 
 difficult, at times, for the uninitiated to make proper 
 returns. To secure a semblance of uniformity, then, close 
 official supervision becomes necessary, which involves 
 many of the difficulties which have been indicated in the 
 preceding paragraph. 
 
 Stoppage at Source. In order to overcome the problems 
 indicated above, some attempts have been made to reach 
 incomes before they have been placed in the hands of the 
 recipient. This is done either through assessment at 
 source or collection at source. In the first case the 
 amount of the income is ascertained before it reaches the 
 recipient, but the tax must be paid by him; in the latter 
 plan the tax is deducted before the payment of the income 
 is made. 
 
 Obviously the principle of assessing or collecting at 
 source cannot be applied to all incomes. It is compara- 
 tively easy to apply in the case of government salaries, of 
 interest and dividend payments, and of other incomes of 
 this nature, but cannot be used satisfactorily where ari 
 
288 OUTLINES OF PUBLIC FINANCE 
 
 income consists of returns from the sale of merchandise, 
 or farm products, or such items as physician's or attor- 
 ney's fees. Where the source basis is used, then, it must 
 be supplemented by some other plan to reach those in- 
 comes which cannot come under its application. 
 
 A serious objection to taxing incomes at their source 
 arises in the difficulty of applying progressive rates. The 
 income of a particular individual, for example, might be 
 composed of items from a number of sources. The rate 
 which would apply to each of these items when a pro- 
 gressive scale is in force would likely be less than would 
 apply if the entire income were taken as the base. 
 
 If the tax, on the other hand, be levied upon the total 
 of a dividend or interest payment, the rate would be 
 higher than what would apply to the amount which 
 reaches the individual recipients. With the use of collec- 
 tion at source, then, some readjustments must be made 
 with the individuals in order that the progressive rates 
 may have uniformity of application. Serious administra- 
 tive problems often arise in attempting to make these 
 adjustments. The burden imposed upon the agency that 
 withholds the tax, moreover, may not be inconsiderable. 
 This was one of the difficulties that was encountered in 
 the attempt of the United States to use this device. 
 
 Information at Source. Some attempts have been made 
 to accomplish the same ends as collection at source, and 
 yet avoid the difficulties, by substituting what is known as 
 information at source. Under this plan the one paying 
 the income does not withhold the tax, but informs the 
 fiscal officials of how much income has been paid. The 
 income tax of the United States can be used to illustrate 
 these principles. Collection at source was provided to 
 some extent by the first income tax law. By the law of 1916 
 anyone who paid to another an amount which was sub- 
 ject to the normal tax was required to deduct the tax 
 and turn it over to the government. This was soon given 
 up, and in the law of 1918 a plan of information at source 
 
INCOME TAXES 289 
 
 was substituted. Anyone who makes a payment to an- 
 other of an amount of or exceeding $1,000 in any year is 
 required to make a statement of such payment to the fiscal 
 authorities. 
 
 Other Considerations. It is generally recognized that 
 mere size of the income is not the only factor to be con- 
 sidered in calculating ability to pay. Many schedules 
 have consequently been devised in some countries, with 
 different rates for each, in the attempt to more nearly 
 approximate justice. Such factors as the nature of the 
 industry and its age are given consideration. These varied 
 attempts to secure justice, with the consequent adminis- 
 trative problems, account for the variations which occur 
 in the income tax systems of different countries. A brief 
 consideration of the plans used by some of the more im- 
 portant countries will illustrate the attempts to make 
 income taxes satisfactory. 
 
 152. The Income Tax Has Been Successfully Used in 
 England. The income tax has held an important place in 
 the fiscal system of England for more than three quarters 
 of a century. Even before it became a permanent feature 
 it was used more or less systematically. As early as the 
 fourteenth century, incomes had a place in the base for 
 the levy of taxes in what were called poll taxes. The first 
 real income taxes, however, were introduced by William 
 Pitt, about the beginning of the nineteenth century. 
 These taxes resembled subsequent measures in that ex- 
 emptions and certain allowances were granted, and in- 
 comes were classified into schedules according to their 
 nature. These taxes soon went into disuse, and during 
 the succeeding years many tax experiments were tried. 
 Laws were repealed and new ones enacted without, how- 
 ever, introducing any radical changes. For a quarter of 
 a century the taxation of incomes was discarded, and it 
 was not till 1842 that this form of revenue was revived. 
 
 Sir Robert Peel, who was confronted with the task of 
 meeting a deficit in the treasury caused by tariff reduc- 
 
290 OUTLINES OF PUBLIC FINANCE 
 
 tions, was responsible for reestablishing taxes on incomes. 
 The enactment was made for but three years, but at the 
 expiration of this time the law was again placed upon the 
 statute books. The process of reenacting the law, with 
 occasionally some slight modifications, has continued to 
 the present time. The act of 1842 is, therefore, the basis 
 of the present English income tax system, which is con- 
 sidered by many to be one of the most successful in 
 operation. 
 
 Modern Schedules. The classification of incomes into 
 schedules has been a fundamental part of all the English 
 income tax laws. The present law provides for five sched- 
 ules. Schedule A comprises the income from land and 
 buildings, in which is included the rental value of lands 
 and buildings occupied by the owner, as well as receipts 
 by a landlord. Schedule B is designed to cover the income 
 from farm land, whether received by tenant or owner. 
 Incomes from lands used in connection with industrial 
 establishments are included in neither of these schedules. 
 Schedule C includes "all profits arising from interest, an- 
 nuities, dividends, and shares of annuities payable to any 
 person, body politic, or corporate company or society, 
 whether corporate or not corporate, out of any public 
 revenue." 
 
 The incomes which fall under Schedule D are more 
 than those of all the other schedules. These include, 
 first, all incomes which accrue to any person residing in 
 the United Kingdom from any kind of property, whether 
 located in the United Kingdom or not; and all gains 
 secured by any person residing in the United Kingdom 
 from any profession, trade, employment, or vocation, 
 whether this be carried on in the United Kingdom or else- 
 where. Second, under this schedule is placed the returns 
 arising to any person, whether a subject of Great Britain 
 or not, whether a resident of the United Kingdom or not, 
 from any profit in the United Kingdom, or any profession, 
 trade, employment, or vocation carried on within the 
 
INCOME TAXES 291 
 
 United Kingdom. A third part of this schedule reaches 
 forms of interest, annuities, and profits which are not 
 covered by the other schedules. Schedule E has been 
 relatively unimportant and applies to salaries of public 
 officials, government annuities, and pensions. 
 
 Graduation. Graduation is provided for by exemptions, 
 abatements, and supertaxes. Incomes of less than 160 
 are not taxed. The schedule of abatements is as follows: 
 incomes of more than 160 but not more than 400, an 
 abatement of 160; incomes of more than 400 but not 
 exceeding 500, an abatement of 150; incomes of more 
 than 500 but not exceeding 600, an abatement of 120; 
 incomes of more than 600 but not exceeding 700, an 
 abatement of 70. No abatement is allowed for incomes 
 exceeding 700, but the rate, which is fixed each year, 
 applies to the entire income. 
 
 The actual percentage rates, assuming the rate to be 
 one shilling to the pound, for various amounts, would be 
 as follows: 161, .0003 per cent; 400, 3 per cent; 401, 
 3.1 per cent; 500,3.5 per cent; 601, 4.4 per cent; 700, 
 4.5 per cent. All amounts above this pay the proportional 
 rate of 5 per cent. 
 
 Additional abatements are allowed for life insurance 
 premiums, charities, and other benevolences, while land 
 and building depreciation is also granted. One eighth of 
 the income from land is allowed to be deducted, and the 
 amount for building depreciation is one sixth. Under 
 certain conditions the deduction may be as much as twice 
 this amount. An abatement of 10 for each child under 
 sixteen years of age is allowed to individuals whose income 
 does not exceed 500. 
 
 Declarations. The necessity of making a declaration of 
 income in order to secure the benefit of exemptions and 
 abatements is responsible for the fact that a majority of 
 income tax payers declare the total amount of their in- 
 comes, even though the taxes are collected to a large ex- 
 tent at the source. The situation usually resolve? itself 
 
292 OUTLINES OF PUBLIC FINANCE 
 
 into a refund of taxes which have been collected in excess 
 of the amount which would have been taken had the abate- 
 ment been deducted beforehand. The abatement claims 
 usually run into the thousands, and it becomes necessary 
 to refund thousands of pounds. 
 
 Modifications of Above Outline. In an attempt to tax 
 incomes more nearly in accordance with their ability to 
 bear burdens, differentiations have been made and super- 
 taxes have been placed upon the larger incomes. A dis- 
 tinction is also made between earned and unearned in- 
 comes. On incomes such as wages and salaries, the rate is 
 usually reduced something like 25 per cent, while it is 
 increased for incomes from investments. The supertax, 
 for example, under one law was to apply whenever the 
 total income exceeded 5,000, and was to be levied against 
 the amount in excess of 3,000. Individuals subject to 
 the supertax are required, under severe penalty, to make 
 declaration of the fact to the fiscal authorities. 
 
 The administration of the system is somewhat compli- 
 cated, yet apparently satisfactory. A large number of 
 officials are concerned with assessments and collections. 
 These appear to be remarkably free from political in- 
 fluences a fact which aids materially in securing satis- 
 factory results. As already indicated, an extensive use 
 is made of collecting the tax at the source, which lessens 
 the problem of securing income assessments, but which 
 enhances that of making proper allowance for the abate- 
 ments. 
 
 This broad outline of the English income tax may not 
 conform to the details of a particular year, for these 
 change somewhat with the adoption of the annual budget. 
 The Great War, of course, necessitated changes to meet 
 the emergency which will be noted in a succeeding chap- 
 ter. The above outline, therefore, is intended to give 
 some idea of the English plan as it had developed 
 under normal conditions. As a whole, opposition to 
 the income tax has broken down, and the tax now 
 
INCOME TAXES 293 
 
 functions as one of the most successful features of the 
 fiscal system. 
 
 Reasons for Success. Some of the reasons for the 
 marked success of the British income tax have been 
 summed up by Professor Seligman. 1 He points out that 
 the system of assessment is successful because the asses- 
 sors command the confidence of the recipients of incomes. 
 The supervision is by men of high caliber, who are render- 
 ing service, not for private gain, but because they are 
 animated by a spirit of public duty. The collection at 
 source, furthermore, has eliminated the distasteful and 
 disquieting inquisitorial procedure which arises from the 
 attempt to assess incomes. The policy of keeping the 
 rate low, of recognizing different classes of incomes, and 
 the introduction of graduation and supertaxes, have had 
 their influence in making the tax generally popular. The 
 success of present income taxes in England is a monument 
 to the thought and care which the fiscal experts exercised 
 in organizing and proposing this form of revenue. 
 
 153. Prussia Has Used Income Taxes Successfully. 
 The Prussian income tax had its beginnings in the use of 
 poll and class taxes as far back as 1811. Gradual changes 
 in subsequent fiscal laws have resulted in a use of the 
 income tax as extensive as is found in any country. Be- 
 fore the outbreak of the Great War more than three 
 fourths of the entire revenue came from the income tax, 
 and the success may be attributed partly to the care 
 which has been exercised in formulating the laws, and 
 partly to the respect which the citizenship has had for 
 the mandates of the state. The war, of course, brought 
 some modifications, but the principle of the income tax 
 of pre-war days will likely be continued. 
 
 Tax Rate. The tax rate is kept comparatively low, and 
 an attempt is made at progression, although it is not 
 logically followed throughout the entire schedule of levies. 
 The lowest rate, six marks from incomes between 900 and 
 
 1 Seligman, The Income Tax, p. 214. 
 
294 OUTLINES OF PUBLIC FINANCE 
 
 1,500 marks, is a little over one half of 1 per cent, while 
 the highest rate, placed upon incomes over 100,000 marks, 
 is about 4 per cent. The exaction of a fixed number of 
 marks from each grade of income makes the tax regres- 
 sive within the grade that is, the tax is heavier for in- 
 comes just over the lower limit than for incomes just under 
 the upper limit. 
 
 Exemptions and Abatements. As in the English income 
 tax, exemptions and abatements are granted. All incomes 
 of less than 900 marks (about $214) are not taxed. It is 
 considered that the property taxes and excise taxes, which 
 are used to supplant the income tax, place a sufficient 
 burden upon the poorer class of citizens. Whenever the 
 income of an individual is less than 3,000 marks, a re- 
 duction of 50 marks is allowed for each dependent. The 
 reduction is somewhat different when the income is 
 between 3,000 and 6,500 marks. 
 
 If the income does not exceed 9,500 marks, any circum- 
 stances which have affected unfavorably the source of 
 income may be taken into consideration by the assessing 
 officials, and deductions be made accordingly. Deduc- 
 tions from income may be made for public, charitable, 
 and religious contributions, interest payments, municipal 
 and local taxes, and payments of various kinds of insur- 
 ance premiums. 
 
 The Prussian law does not attempt to reach as many 
 classes of incomes as does the English system. Incomes 
 derived from undertakings in other German states are not 
 taxed, nor is the pay of many of the military officers. 
 Insurance payments and sinking funds are also exempt. 
 The income tax as described is supplemented by a tax 
 upon wealth, and at times, when the treasury is in need 
 of extra funds, by a supertax upon incomes. The com- 
 bination of wealth and income taxes is designed to give a 
 system which will impose taxes as nearly as possible 
 according to ability to pay. 
 
 Collection of Tax. No attempt is made to collect the 
 
INCOME TAXES 295 
 
 tax at the source, but the amount of income to be taxed 
 is ascertained by a system of declaration and assessment. 
 Information as to the recipients of incomes, and the 
 amounts, is secured by the officials from various sources. 
 On the basis of this information the local officials estimate 
 the amount of incomes of the individuals who will prob- 
 ably be subject to the tax. Every person whose income 
 is more than 3,000 marks is required to make a declaration 
 on special forms which are provided by the officials. 
 
 Corporations and other companies are required to make 
 a declaration, and must submit, with the report of income, 
 annual reports, balance sheets, and other data, to be kept 
 on file by the fiscal authorities. Failure to make the 
 declaration by a specified time is punished by the imposi- 
 tion of a fine of 5 per cent of the tax, and if the failure 
 extends to a second specified time, the fine is 25 per cent 
 of the tax. There is, of course, some evasion, but it has 
 not been extensive enough to destroy the importance and 
 approximate justice of the system. 
 
 154. Many Other Foreign Countries Use the Income 
 Tax. One would not be justified in a book of this nature 
 in even briefly outlining the use of the income tax as it is 
 found in more than fifty countries outside the United 
 States. In some of the countries it forms an important 
 part of the revenue system, while in others its role is 
 comparatively insignificant. The significant feature is 
 that the tax is one of the newest systems of securing 
 revenue, and that its place in the different countries 
 where it is being used is becoming more extended and 
 secure. A brief mention of some of the countries where 
 the tax is playing an important part will reveal the fact 
 that it is found in new as well as in firmly established 
 governments, and in radical as well as conservative 
 states. 
 
 An outline has been given of the Prussian income tax 
 system because it represents one of the best organized 
 forms of income taxation, yet income taxes have been in 
 
296 OUTLINES OF PUBLIC FINANCE 
 
 use in the minor German provinces much longer than 
 they have been found in Prussia. In these, as in most of 
 the continental taxes, low exemptions and minute classi- 
 fications are found. 
 
 The English colonies have followed the lead of the 
 Mother country, and have made extensive use of the 
 income tax. The different states of Australia have well- 
 developed and important income taxes. The Federal 
 government of Canada has not made such an extensive 
 use of this form of revenue as some other countries, 
 although income taxes hold an important place in some 
 of the provinces. These taxes resemble the British plan 
 of comparatively high exemptions, with no definite scale 
 of progression. India has a systematic plan which some- 
 what resembles the British. 
 
 Italian and Austrian fiscal machinery very early made 
 a place for income taxes, while they have for a number of 
 years played an important part in the revenue systems of 
 Norway, Switzerland, Hungary, Russia, Japan, and the 
 Philippines. France adopted the tax in 1914, but the 
 outbreak of the war interfered with putting it into effect. 
 
 Many other examples might be given of the use of in- 
 come taxes, but enough have been cited to warrant the 
 conclusion that their use is very general. More than half 
 of the people of the world are now living under the domain 
 of income taxes. These taxes are not used as extensively 
 by Federal governments as by the smaller political divi- 
 sions, although central governments have shown a tend- 
 ency to favor the tax. The comparative newness of the 
 tax is another general characteristic a large majority of 
 present systems having been introduced since the begin- 
 ning of the present century. After this survey of the tax 
 abroad the situation in the United States will be of in- 
 terest to American students. 
 
 155. Federal Income Taxes in the United States Have 
 Had No Systematic Development. No emergency of 
 sufficient moment arose for more than half a century after 
 
INCOME TAXES 297 
 
 the establishment of our national government to force 
 fiscal authorities to utilize every possible source of rev- 
 enue. No attempt was made, consequently, by Federal 
 fiscal authorities, to introduce income taxes until the un- 
 precedented demands of the Civil War presented them- 
 selves. The income tax legislation of the years of this 
 war, and those following, appears to have been on the 
 spur of the moment, and shows evidence of no very 
 mature deliberations of those who were responsible for it. 
 Provisions enacted at one time would often be amended 
 before the date for their becoming effective. 
 
 Civil War Income Tax. The first bill which provided 
 for a Federal income tax was passed in July, 1861. It 
 was simple, and called for a 3 per cent tax on all incomes 
 in excess of $800. The tax was not to go into effect for 
 a year, and in the meantime a modification had been made. 
 The exemption was reduced to $600 and a system of mild 
 progression added. 
 
 Under this law incomes from $600 to $10,000, less the 
 $600 exemption, were to pay the rate of 3 per cent, while 
 incomes in excess of that amount were to pay 5 per cent. 
 This act was in effect but a little while before the Revenue 
 Act of 1864 became a law. This provided for a 5 per cent 
 tax upon incomes between $600 and $5,000; 7K per cent 
 on the amount of income between $5,000 and $10,000, 
 and 10 per cent on all incomes over $10,000. Before this 
 law became active, however, a modification was made by 
 which all amounts over $5,000 were to pay 10 per cent. 
 
 By 1867 the pressure for revenue was somewhat re- 
 duced, and the law passed then, to remain in force for 
 three years, raised the- exemption to $1,000, and reduced 
 the rate to 5 per cent. At the expiration of this law in 
 1870, it was only with the greatest difficulty that a re- 
 enactment was secured. This was for a period of two 
 years, after which the income tax fell into disuse. 
 
 Constitutionality. The use of the Civil War income tax 
 was, in a measure, successful. As might be expected, it 
 
298 OUTLINES OF PUBLIC FINANCE 
 
 was attacked upon the grounds of constitutionality, the 
 contention being that it was a direct tax, and therefore 
 repugnant to the constitutional provision in regard to the 
 levy of direct taxes. The Supreme Court held, however, 
 that the income tax was not a direct tax within the mean- 
 ing of the Constitution, and was therefore constitutional. 1 
 
 Administration. At first the unorganized administra- 
 tive machinery was a handicap, but as this became per- 
 fected, and while the motive of patriotism was active, the 
 fiscal returns were large. The largest amount collected 
 in any one year was in 1866, when $72,982,000 came into 
 the treasury. In the following years evasion became more 
 common, and the amount collected in 1872 had fallen to 
 $14,436,000. The total amount collected from the income 
 tax was more than $275,000,000. 
 
 Most dependence for the determination of incomes was 
 placed in declarations of recipients, although some use 
 was made of the source, and the assessors were given the 
 power to estimate incomes where satisfactory declarations 
 could not be obtained. Penalties were provided for fail- 
 ure to make returns, and for fraudulent returns, but in 
 the latter years of the tax these seem to have instilled 
 little fear into the recipients of incomes. It became a tax 
 upon the honest individual, and consequently unjust. A 
 systematic as well as successful income tax was used by 
 the Confederate government as one of its sources of 
 revenue. 
 
 156. Federal Income Taxes Were Attempted in 1894. 
 After the abandonment of the income tax in 1872 revenues 
 were so large from other sources that practically no con- 
 sideration was given to this form of taxation. It was not 
 until 1894 that an occasion seemed to demand more 
 revenue than would come from existing sources. This 
 resulted from a reduction of tariff duties and an enlarge- 
 ment of the free list under the administration of Presi- 
 dent Cleveland. An income tax provision was made a 
 
 1 Springer t;s. the United States, 102 TJ. S. 586. 
 
INCOME TAXES 299 
 
 part of the tariff law of 1894, and was expected to provide 
 the deficiency in the revenue which the reduced tariff 
 rates would occasion. The bill provided for a flat rate of 
 2 per cent on all incomes above $4,000. 
 
 Much opposition to the bill developed in Congress on 
 the ground that it was undemocratic, inquisitorial, and the 
 still more serious objection that it was a bid for the sup- 
 port of the poorer classes in a discrimination against the 
 more well-to-do. The high exemption was strongly 
 championed by the Populist party, while nearly the whole 
 of the support of the measure came from the Western 
 and Southern representatives. 
 
 Law Declared Unconstitutional. The question of the 
 constitutionality of the law soon came before the Supreme 
 Court. 1 This was considered under four separate heads: 
 
 (1) Was a tax on the income of real estate a direct tax 
 within the meaning of the Constitution, necessitating, 
 thereby, a levy apportioned according to population? 
 
 (2) Was a tax on the income from personal property a 
 direct tax? (3) Did the law violate the principle of uni- 
 formity? (4) Was a tax levied upon incomes from state 
 and municipal bonds constitutional? 
 
 The decision on the Civil War income tax was reversed 
 when the court decided that a tax on the incomes from 
 lands was direct, and therefore must be apportioned ac- 
 cording to population. The court in its first decision was 
 divided on the constitutionality of the other points, but 
 at the rehearing decided against the law in every respect. 
 Many considered that this decision settled once and for 
 all the agitation for an income tax, while others began to 
 seek a new method for securing its establishment. 
 
 157. The Present Federal Income Tax Was Made Pos- 
 sible Through a Constitutional Amendment. After the 
 adverse decision of 1895, sentiment in favor of the income 
 tax as a source of Federal revenue seemed to gain ground. 
 
 1 Pollock vs. Fanners' Loan and Trust Co., 157 U. S. 429. This opinion 
 was rendered in April, 1895; the second was rendered in May, 158 U. S. 601. 
 
300 OUTLINES OF PUBLIC FINANCE 
 
 Many statesmen, among them President Roosevelt, de- 
 clared in favor of income tax legislation, and believed 
 that a law could be so formulated as to be sanctioned by 
 the court. Laws had been upheld already which imposed 
 taxes on the income of some corporations, and upon 
 inheritances. 
 
 In its platform of 1908 the Democratic party declared 
 in favor of a constitutional amendment, permitting the 
 Federal government to levy an income tax. President 
 Taft expressed the belief that an amendment was not 
 necessary, yet did not encourage the adoption of the in- 
 come tax during his term of office. The Republican 
 leaders seemed no more enthusiastic, and in order to 
 calm the agitation for income taxes arrangement was 
 made to submit an amendment to the states. As a result 
 the following Sixteenth Amendment was ratified by the 
 requisite three fourths of the states in 1913: " Congress 
 shall have power to lay and collect taxes on income from 
 whatever source derived, without apportionment among 
 the several states, and without regard to any census or 
 enumeration." 
 
 Tax Adopted in 1913. With this amendment in force, 
 on October 3, 1913, the President signed "An Act to re- 
 duce tariff duties and to provide revenue for the govern- 
 ment and for other purposes/' As in 1894, the income 
 tax law was a part of a tariff bill. This comprises the 
 second part of what is generally known as the Underwood- 
 Simmons Tariff Act. The law is not a detailed piece of 
 legislation, but rather a framework which was to be filled 
 in by rulings of the Treasury Department. No attempt 
 will be made to go into the details in this volume, as many 
 detailed and technical treatises are available. 
 
 Court Decision. In spite of the amendment, the con- 
 stitutionality of the law was contested in the courts. It 
 was contended that the progressive feature, which classi- 
 fied according to wealth, was unwarranted, unjust, and 
 unreasonable; that the collection at source involved the 
 
INCOME TAXES 301 
 
 taking of property without due process, as well as the 
 taking of private property for public use without just 
 compensation; and that the retroactive feature of the 
 law it taxed incomes received since the preceding March 
 was unconstitutional. 
 
 Chief Justice White rendered the decision of the court 
 and upheld the law in every respect. 1 He gave a lengthy 
 discussion of the nature of direct and indirect taxes under 
 the meaning of the Constitution, and of the place of the 
 income tax in this classification. In regard to the points 
 in question the court held that the retroactive feature did 
 not vitiate the law, neither did it violate the due process 
 of law provision of the Fifth Amendment. Tax uniformity 
 required by the Constitution was geographical, and equal 
 protection of the law was not denied by a classification of 
 things and persons. 
 
 The provisions for collecting the income tax at the 
 source did not deny due process of law by reason of duties 
 imposed upon corporations without compensation in con- 
 nection with the payment of the tax. Where differences 
 existed between citizens, Congress did not transcend the 
 limit of its taxing power by taxing them differently. 
 Other cases involving the law have come before the court, 
 and the decisions have generally served to strengthen the 
 income tax. 
 
 Incomes Taxed; Rates. The law is inclusive in the per- 
 sons who are taxable. Every citizen of the United States, 
 whether residing at home or abroad, is subject to the tax. 
 All persons residing in the United States, including minors, 
 are subject to its provisions, as also are all persons residing 
 without the United States who receive an income from 
 property owned, or business or profession carried on, 
 within the United States. 
 
 The tax is divided into two parts the normal tax and 
 the additional tax. The normal tax is a proportional tax 
 of 1 per cent upon the entire taxable income, while the 
 
 1 Brushaber vs. Union Pacific Railroad, 240 U. S. 1. 
 
302 OUTLINES OF PUBLIC FINANCE 
 
 additional tax introduces the progressive feature. The 
 additional tax schedule is as follows: 
 
 1% on net income over $ 20,000 but not exceeding $ 50,000 
 2% " " ' " 50,000 " " " 75,000 
 
 3% " " " " 75,000 " " " 100,000 
 
 4% " " " " 100,000 " " " 250,000 
 
 5% " ' " " " 250,000 " " " 500,000 
 
 6% " " " 500,000 
 
 The law defined as taxable all profits and income de- 
 rived from salaries or compensation for personal services, 
 or from professions, business, or trade. Incomes from in- 
 terest, rents, dividends, securities, or the transaction of 
 any lawful business carried on for gain or profit, and in- 
 comes derived from any source are included. 
 
 Deductions and Exemptions. From gross income cer- 
 tain deductions are allowed. Among these are necessary 
 business expenses, but not family, living, or personal 
 expenses; interest on indebtedness payable within the 
 year, and all taxes except those levied for local benefits. 
 Actual losses sustained not covered by insurance, a rea- 
 sonable depreciation, and worthless debts which have 
 been charged off are also allowed. Deduction is also per- 
 mitted of income which has been taxed at the source, and 
 of the dividends of companies whose net earnings are 
 taxable. 
 
 The exemptions allowed by the law are liberal. An 
 exemption of $3,000 is given to a single person, and 
 $4,000 is allowed to a man and wife living together. All 
 property acquired through gifts, bequests, or descents, 
 and all interest on obligations of the United States or its 
 possessions, are exempt from the tax, as is also the interest 
 on the obligations of the minor political divisions. The 
 compensations paid by all political units, except the 
 United States government itself, are also exempt from the 
 tax. Receipts from life insurance policies, moreover, are 
 not taxed. 
 
 Method of Collection. Use is made both of collection at 
 
INCOME TAXES 
 
 303 
 
 the source, and of declaration of income. Any person or 
 company which pays to another person or company an 
 amount in excess of the legal exemption, is required to 
 deduct the normal tax and pay it to the proper official. 
 When an income is subject to the normal tax alone, and 
 the entire amount is received from a person or company 
 which has paid the tax at the source, no return of such 
 income is required. Returns of all other taxable incomes 
 are required to be made by the recipient of the income. 
 Penalties are provided for failure to make returns, for 
 making fraudulent returns, and for failure to pay the tax. 
 
 158. The Income Tax Was Modified by the Revenue 
 Act of 1916. It was too much to hope that the new tax 
 law would meet with unmitigated success. A heavy bur- 
 den was placed upon the internal revenue department of 
 the treasury in interpreting ambiguous phraseology, and 
 in rendering opinions and decisions of various kinds. 
 The degree of success which the law attained really de- 
 pended upon these officials. While interpretation was all 
 that was necessary in some instances, some conditions 
 developed which demanded a change in the law. The 
 first of the nine titles in the Revenue Act of 1916 consists 
 of the remodeled income tax law. 
 
 Rates Under Act of 1916. The perceptible changes in 
 the 1916 law do not indicate the amount of consideration 
 which was given to this phase of the revenue. While 
 many changes were made in phraseology, the essential 
 features remain very much the same. The most conspicu- 
 ous change is in the normal rate and in the additional 
 rate. The normal rate is doubled, while the schedule of 
 additional rates under the new law is as follows: 
 
 20 
 
 1% on net income over $ 
 
 2% 
 3% 
 4% 
 
 5% 
 6% 
 
 7% 
 
 20,000 not exceeding 
 
 40,000 
 
 60,000 
 
 80,000 
 100,000 
 150,000 
 200,000 
 
 40,000 
 
 60,000 
 
 80,000 
 
 100,000 
 
 150,000 
 
 200,000 
 
 350,000 
 
304 OUTLINES OF PUBLIC FINANCE 
 
 8% on net income over $ 250,000 not exceeding $ 300,000 
 
 9% ' 
 
 10% " 
 
 11% 
 
 12% " 
 
 300,000 500,000 
 
 500,000 " " 1,000,000 
 
 1,000,000 " " 1,500,000 
 
 1,500,000 " " 2,000,000 
 
 13% ' 2,000,000 
 
 Attempted Modifications. In the 1916 revision much 
 pressure was brought to have the exemption lowered to 
 $1,000. This was unsuccessful, however, because of the 
 administrative difficulties already involved and because 
 of the great increase in these burdens which would ensue 
 from the reduction. Pressure had been brought, too, to 
 abolish the collection at source feature, because of the 
 burden placed upon the companies who were compelled 
 to pay the tax. Some desired that this be changed to 
 information at the source, but this was not done. Other 
 changes which many desired, but which were not made, 
 were the elimination of much unjust double taxation be- 
 cause of the treatment of foreigners, and the recognition 
 of some differentiation in incomes. 
 
 Important additions were made to this law by the War 
 Revenue Acts of 1917 and 1919. These will be outlined in 
 the chapter on Emergency Financiering. 1 The law of 1916 
 represents our development of income taxes under nor- 
 mal conditions. Although a recent addition to the Fed- 
 eral revenue system, income taxes have more than proved 
 their worth. In the use of a source of revenue as new as 
 the income tax, a large amount of evasion has been 
 practiced, but this difficulty will decrease as the system 
 becomes better understood and the administrative ma- 
 chinery becomes more perfect. The amount of revenue 
 derived from this source has been considerable, and 
 income taxes are destined to continue to occupy an im- 
 portant place in our Federal fiscal system. 
 
 159. Defects Occur in Federal Income Taxation. It is 
 too much to expect that a system so new, and one which 
 has been expanded to such an extent within a short period 
 
 1 See p. 465. For changes made in 1921 see p. 483. 
 
INCOME TAXES 305 
 
 of time, would possess a perfection which leaves nothing 
 to be desired. While there has been no outstanding 
 objection to the plan, and while it has been responsible 
 for a substantial amount of the Federal resources, yet some 
 defects have appeared which it will be well for Congress 
 to heed when attempts are made to remodel the law. 
 
 One of the first defects to be noticed is the assessment 
 procedure. Practically absolute reliance is placed upon 
 the recipient of the income to turn in the proper amount 
 to the internal revenue collector of his district. After 
 examination the collector may increase the return but 
 cannot lower it. The return is certified by the district 
 collector to the Commissioner of Internal Revenue, who 
 is given a maximum of five years in which to make an 
 official assessment. This assessment occurs when the 
 commissioner has reason to disagree with the assessment 
 the taxpayer has imposed against himself. In the mean- 
 time the recipient of an income continues to pay the tax 
 which he has assessed against himself, with little evidence 
 of official procedure. Closer official scrutiny and pro- 
 cedure than that just indicated would much more nearly 
 accord with American ideas of tax procedure. 
 
 The strict secrecy with which all returns of incomes are 
 held is another feature of the Federal income tax proce- 
 dure for which there can be little justification. There is 
 nothing about an income which connects it so inseparably 
 with the individual that it should be hidden from the 
 knowledge of every other person. Access to the various 
 returns by officials would give material aid in helping to 
 solve the numerous problems which arise. Many other 
 valuable uses of such information will readily occur to 
 the reader, especially if he be interested in the economic 
 condition of individuals of various groups and occupations. 
 
 Some of the conditions of the law necessarily inflict 
 undesirable burdens. One of these is the failure to make 
 provision for the recognition of any other tax year than 
 the one provided by the law. This places an unnecessary 
 
30G OUTLINES OF PUBLIC FINANCE 
 
 hardship on business units whose accounting year does 
 not correspond with the tax year, in that it necessitates 
 additional and difficult calculations. The taxation of the 
 earnings of corporations, moreover, works an injustice 
 upon some recipients of dividends. One individual whose 
 total income may be below the exemption limit may 
 secure a part of it in the form of dividends which have 
 borne the tax, while another individual with the same 
 income from other sources would not be burdened. Some 
 plan of effective and accessible refunds would aid in 
 establishing justice between different individual taxpayers. 
 
 1 60. Income Taxes Have Been Used by Several States. 
 The use of income taxes as a part of the fiscal system of 
 states is looked upon by many as an innovation. There 
 has never been a time, however, when one or more of the 
 states has not had the income tax in some form as a part 
 of its fiscal machinery. Even in a number of the Colonies 
 income was used as a partial measure for determining the 
 proper base for assessment. Some of these Colonial taxes 
 were continued long after the state governments were 
 formed. Some states have used the tax rather consistently, 
 while others have made only sporadic and half-hearted 
 attempts to put it into force. The tax at present is used 
 with a greater or less degree of success in twelve or more 
 states. 
 
 Tax in Wisconsin. The two states which have used 
 the income tax most successfully in recent years are Wis- 
 consin and Massachusetts. Wisconsin has used this form 
 of revenue since 1911, while Massachusetts introduced it 
 in 1916. The Wisconsin tax is assessed against individ- 
 uals and corporations. The law explicitly states who 
 shall be taxed, what deductions and exemptions shall be 
 allowed, the rates that shall be imposed, and the method 
 of administration. An exemption of $800 is allowed to 
 an individual, $1,200 to husband and wife, and $200 for 
 each dependent. The grades range by steps of $1,000 up 
 to $12,000, and the rate is progressive from 1 per cent to 
 
INCOME TAXES 307 
 
 6 per cent. For corporations the grades range by steps 
 of $1,000 to $7,000 and the rate is progressive from 
 2 to 6 per cent. Central administrative machinery is 
 provided, which accounts in a measure for the success 
 of the system. 
 
 The larger part of the Wisconsin income tax has been 
 secured from corporations. The total amount collected 
 the first year was about one and a half million dollars, 
 while the collection in 1918 was nearly seven million dol- 
 lars. The state tax commission characterized the system 
 as follows: l 
 
 Results have been satisfactory. The increase in the tax ... is gen- 
 eral throughout the state. The gradual and steady increase is doubtless 
 due, first to the fact that . . . there is a steady growth in business from 
 year to year, and second, because of the increased efficiency of admin- 
 istration. The conclusion from the foregoing is that a constant increase 
 in revenue from income taxation may be confidently expected. 
 
 Tax in Massachusetts. The Massachusetts law does 
 not attempt to go as far as the Wisconsin plan, yet has 
 been remarkably successful as a revenue producer, and as 
 providing an elastic feature to the tax system. Corporate 
 incomes are not included, and progression is not used. 
 Large classes of incomes are exempt, so that little more 
 than personal incomes are included under the provisions 
 of the law. Incomes are classified, and are taxed at dif- 
 ferent rates. The amount collected in 1918 was over 
 fourteen million dollars, more than one third of the 
 amount collected by the Federal government from in- 
 comes in the state. This record outdistanced that of any 
 other state. 
 
 Tax in Other States. It is significant that four states 
 adopted the income tax in 1919, and that others are con- 
 sidering it. One of the four was New York, and interest 
 centers here since it is the state of many and large incomes. 
 More than one third of the personal income taxes collected 
 
 1 Report of the Wisconsin State Tax Commission, 1918, 
 
308 OUTLINES OF PUBLIC FINANCE 
 
 by the Federal government come from this state. The use 
 of a moderate progression is being attempted. 1 
 
 The attempts to use the income tax in the states are so 
 different, are being tried under such a variety of circum- 
 stances, and with such varying degrees of administrative 
 efficiency, that generalizations cannot be made as to its 
 success. The results in such states as Wisconsin and 
 Massachusetts, however, indicate the possibilities of state 
 income taxes when care is exercised in formulating and 
 administering the law. As demands for more revenue 
 present themselves, and as the old system of property 
 taxes becomes more distasteful, a wider use of income 
 taxes as a source of state revenue may be expected. 
 
 ADDITIONAL READING 
 
 Kennan, Income Taxation. 
 
 Seligman, The Income Tax. 
 
 American Economic Review, vol. iv, pp. 791-815; vol. 
 vi, pp. 837-850. 
 
 Proceedings of the National Tax Association, 1920, pp. 
 274-331. 
 
 1 For drafts of " model " laws for taxing personal and business incomes, 
 e The Bulletin of the National Tax Association, January, 1921 
 
CHAPTER XIV 
 
 INHERITANCE TAXES l 
 
 161. The Inheritance Tax Is Not of Recent Origin. A 
 somewhat detailed study of the theory, advantages, and 
 defects of the inheritance tax is warranted, because so 
 much importance has been attached to it in recent years, 
 and because this form of revenue is likely to be of impor- 
 tance in the future. To the uninitiated, who come upon 
 its extended discussion in comparatively recent years, this 
 principle appears as a modern development in fiscal policy. 
 The great increase in the need for revenue has led fiscal 
 authorities to attach more importance to taxing inheri- 
 tances, while the piling up and bequeathing of enormous 
 fortunes has led many to look upon the principle as a 
 valuable social weapon. Principally because it can be 
 used to encourage a social equality, and because it acts 
 as a means for a fairer distribution of tax burdens, the 
 inheritance tax has found its most extensive development 
 in the more democratic countries, such as Great Britain, 
 Switzerland, and the United States. 
 
 Tax in Ancient States. It is an error, however, to con- 
 sider the taxation of inheritances as belonging exclusively 
 to modern fiscal systems. As a matter of fact, some form 
 of levy upon the transfer of property at death dates back 
 as far as authentic records can be obtained. Some traces of 
 the use of the principle can be found as early as 2000 B.C. 
 It appears that a well-defined system of levies on property 
 
 1 The material in this chapter is much the same as that contained in an 
 article by the author in The Annals of the American Academy of Political 
 and Social Science for May, 1921, 
 
310 OUTLINES OF PUBLIC FINANCE 
 
 successions existed in Egypt for a number of years before 
 the Christian era. The Emperor Augustus, moreover, 
 used a tax on property transfers very early after the birth 
 of Christ. He desired to provide a fund for the pensioning 
 of old soldiers and proposed a tax of one twentieth upon 
 inheritances, which he secured by the consent of the 
 Senate only after he threatened to use the direct land tax. 
 No distinction was made between bequests to relatives 
 and strangers, and only a low exemption was allowed. 
 Some of the later rulers somewhat alleviated the strin- 
 gency of the law by the recognition of family ties and 
 dependency, exempting in consequence some of the more 
 direct bequests, such as between mother, father, and 
 children. Still later these exemptions were removed, and 
 the law was made even more stringent than it had been 
 at first, but was again modified before the tax was given 
 up, probably somewhere near the beginning of the fourth 
 century. 
 
 Tax in Middle Ages. A semblance of the modern in- 
 heritance tax is found in the system of reliefs which existed 
 in the Middle Ages. At the death of a tenant, the right 
 of the tenancy to pass to his heir was recognized, yet some 
 exaction was made by the landlord. As long as the amount 
 could be voluntarily determined by the landlord, extor- 
 tionate demands were often made, which practice led to 
 the establishment of uniform rates by legislation. These 
 duties were found in a number of countries, as well as 
 another class of duties which was levied upon the transfer 
 of property other than land. After the breakdown of the 
 feudal system these duties of course went out of existence. 
 Sporadic attempts were made, however, to use some form 
 of succession levy, especially in the countries on the 
 Continent, which finally resulted in the formulation of 
 permanent inheritance tax laws. It is readily compre- 
 hended, therefore, that inheritance taxes are not products 
 of modern minds, but hare had a long course of develop^ 
 ment, 
 
INHERITANCE TAXES 311 
 
 162. The Inheritance Tax Was Much Discussed by 
 Early Economists. In their discussion of ways and means 
 for obtaining revenue, the early writers on fiscal subjects 
 generally gave space to a consideration of inheritance 
 taxes. Adam Smith opposed the tax because it did not 
 conform to his canons of taxation, and increased the 
 transfer of capital, which was the basis of productive labor 
 of individuals, to the use of the state, the most of whose 
 activities were unproductive. He did admit, however, 
 that when property descended to others than dependents, 
 it might be taxed without a feeling of any very great 
 inconvenience. Ricardo objected to the tax on the ground 
 that it was a capital levy. His reasoning was that if a 
 man paid a tax of $100 out of a bequest of $1,000, he 
 would have no inclination to save the amount of the tax, 
 but would consider the bequest as one of $900. If, how- 
 ever, he were allowed the bequest of $1,000, and then 
 were assessed the amount of the tax on some objects of 
 consumption, he would retrench expenditures in order to 
 save the necessary amount. 
 
 Views of Mill and Bentham. While many other early 
 writers found objection to the principle, John Stuart Mill 
 and Jeremy Bentham were advocates of inheritance taxes 
 in the extreme. Mill took the view that inheritances, 
 other than to near relatives, should be abolished; that the 
 amount which could be received by bequest should be 
 strictly limited, and that rates should be progressive. He 
 denied any right of inheritance, and contended that both 
 individuals and society would be better off if no one were 
 freed from the necessity of working by the receipt of a 
 large fortune. 
 
 Bentham favored the plan because he thought it would 
 produce revenue with the minimum of sacrifice. He ex- 
 pressed his position in the form of a paradoxical question : 
 "What is that mode of supply, of which the twentieth 
 part is a tax, while the whole would be no tax and would 
 not be felt by anybody?" He contended that this situa- 
 
312 OUTLINES OF PUBLIC FINANCE 
 
 tion would be accomplished if the power of bequest of 
 persons having no direct heirs were regulated, and that 
 all cases of intestacy descent of property when no will 
 had been made be abolished, except in an immediate 
 family. A person who had expected no inheritance would 
 feel no burden if the state took the entire amount. If, 
 however, an estate had been given to him, and then a 
 part taken for taxes, the burden at once would be ap- 
 parent. These opinions are but representative of many 
 expressed by early writers on economic topics. 
 
 163. The Inheritance Tax Is Widely Advocated at Pres- 
 ent. It is not necessary, however, to turn to an earlier 
 age to find a defense of the inheritance tax. Much of the 
 earlier opposition has broken down, and ardent supporters 
 may be found among all classes among those interested 
 in social as well as fiscal reform, and among the rich as 
 well as among the poor. It is but natural that those who 
 are socialistically inclined should be its ardent champions, 
 for the tax easily can be made a method for the reduction 
 of large fortunes. Those who are concerned with securing 
 a more equal distribution of the tax burden in accordance 
 with the ability to pay, and who are only secondarily in- 
 terested in social consequences, have come to look upon 
 the inheritance tax as a valuable addition to the fiscal 
 system. Fiscal authorities, both Federal and state, in the 
 severe pressure for funds which has continually arisen 
 within recent years, have been glad to turn to this pre- 
 viously little used source of revenue to replenish an empty 
 treasury. Still others sanction the use of a severe taxa- 
 tion of inheritances, not primarily for an equalization of 
 wealth per se, nor as a source of revenue, but because of 
 the good effects which a limitation of fortunes would have 
 upon the recipients. 
 
 Views of Andrew Carnegie.* An interesting example of 
 an advocate of the extreme use of inheritance taxes to 
 
 1 Mr. Carnegie's views on inheritances are elaborated in his book, Th c 
 Gospel of Wealth. 
 
INHERITANCE TAXES 313 
 
 secure the result just indicated, was the late Andrew Car- 
 negie. He held, in his numerous speeches and writings, 
 that it was a mark of misguided affection for parents to 
 leave great fortunes to their children, especially to sons. 
 To do so deadens the talents and energies, and results in 
 a less useful life than would otherwise develop. A man, 
 he thought, should be prevented from handicapping his 
 son by bestowing great wealth upon him. He believed, 
 further, that the proper use of great riches was to benefit 
 society from which they had been taken. If, then, men 
 persisted in amassing fortunes without making a just 
 social return, the state should make sure of its proper 
 share by the use of an inheritance tax. He advocated a 
 steeply progressive tax to as high as 50 per cent, and 
 believed that a large part of the needed revenue could be 
 secured from this source, with the feeling of very little 
 burden. 
 
 Labor organizations of various kinds, as might be ex- 
 pected, as well as the members of the more radical political 
 parties, have been enthusiastic supporters of this principle. 
 Theodore Roosevelt is an example of a national states- 
 man and leader who thoroughly believed in the justice 
 of the tax. 
 
 164. Some Justify the Inheritance Tax as a Regulator 
 of Fortunes. There is no part of any fiscal system which 
 has had so many and diverse arguments advanced in its 
 favor as a tax upon the transfer of property at death. 
 These range all the way from arguments of a purely social 
 nature to those justifying the principle as a part of the 
 fiscal machinery. The social arguments, for the most 
 part, look to the limitation of fortunes, and follow closely 
 the ideas of Bentham and Carnegie. 
 
 Extension of Escheat. One common argument for the 
 inheritance tax is known as the extension of escheat. This 
 is based upon the ground that there is no natural right of 
 inheritance that the state has gone a long way in allow- 
 ing an individual to have control over property while 
 
314 OUTLINES OF PUBLIC FINANCE 
 
 alive, but would be going entirely too far to allow him to 
 have control over it after death. The disposition of 
 property after death, then, is really a state function, and 
 it is a matter for the state to decide to what extent prop- 
 erty shall be inherited. Under this theory there is little 
 basis for the justification of collateral inheritance 1 while it 
 becomes the duty of the state to decide to what extent, and 
 under what conditions, direct inheritance shall be permitted. 
 
 Diffusion of Wealth. The argument which has branded 
 the inheritance tax as " Socialistic " has been what is 
 usually known as the diffusion of wealth argument that 
 is, the use of the principle to break up large fortunes. 
 Many proposals have been made, and some laws have 
 been enacted with this idea in mind. It has been proposed, 
 for example, to fix a maximum amount beyond which 
 inheritance would not be permitted, while the rate of 
 progression which has been used more or less reflects the 
 limitation which is intended to be put upon inherited 
 fortunes. The use of the tax for this purpose need not, 
 however, be condemned as a Socialistic measure, for it 
 may be desirable to limit the size of fortunes for other 
 reasons than the mere diffusion or equalization of wealth. 
 
 If, as Mr. Carnegie contended, the moral, social, and 
 economic efficiency of the state is impaired because the 
 succession of large fortunes destroys the initiative of the 
 recipient, then it becomes the duty of the state to impose 
 regulation. Inheritance taxes, from this viewpoint, would 
 properly come under the jurisdiction of the police power 
 when levied by the commonwealths. Since, moreover, 
 the right of inheritance is not considered a natural right, 
 but one granted by the state, any limitation which the 
 state may see fit to impose must be considered justifiable, 
 and not an encroachment on the right of private property. 
 
 1 By a collateral inheritance is meant the devolution of property to non- 
 relatives and distant relatives, as cousins, nephews, and nieces. A direct 
 inheritance refers to one in the immediate family, as between husband, 
 wife, son, daughter, and sometimes brother and sister. 
 
INHERITANCE TAXES 315 
 
 165. The Benefit Theory Has Been Applied to Taxing 
 Inheritances. Some advocates of the inheritance tax 
 claim that it is only because of the action of the state 
 that, in the first place, there is an accumulation of wealth, 
 and in the second place, that a transmission of this wealth 
 is allowed; consequently, the state is justified in exacting 
 a part of the wealth of the decedent. 
 
 Expense of Service. The mere transmission of wealth 
 at death inevitably places some burden upon the state, 
 with an accompanying expense. Court officials must be 
 maintained for the purpose of making the transfer in a 
 proper manner, and of guaranteeing the title to property. 
 While these are maintained primarily for the benefit of 
 the public, yet at the same time a special benefit is con- 
 ferred for which it is perfectly proper to make some exac- 
 tion. From the nature of the case, and in comparison 
 with other similar court services, the payment required 
 would be no more than the cost of rendering the service. 
 This would be a fee payment and could scarcely be classed 
 as a tax. The payment would necessarily be small and 
 there would be no place for progressive, nor even pro- 
 portionate rates. A uniform charge for a bequest of any 
 size would be the most logical, since the cost to the 
 court would vary but little with the size of the estate. 
 This principle is the chief consideration in some of our 
 states in their laws relating to the levies placed upon 
 inheritances. 
 
 Value of Service. A more strict application of the 
 benefit theory is found when it is claimed that a state 
 should exact an amount based upon the value of its serv- 
 ice to the recipient of the transfer. The argument goes 
 back to the principle that there is no natural right to 
 transfer property after death. Since this is true, the state 
 has conferred a benefit upon the recipient by establishing 
 the institution of inheritance, and thereby making it pos- 
 sible for the transfer to exist. A valuable benefit has 
 thereby been conferred, and payment should be exacted 
 
316 OUTLINES OF PUBLIC FINANCE 
 
 for this benefit. The state furthermore looks after the 
 safe transfer of the property, and places the title securely 
 in the hands of the recipient, which enhances the value of 
 the benefit. The difficulty with this argument is the diffi- 
 culty with the whole theory of benefit as a base for taxes. 
 To measure accurately the value of these benefits in each 
 particular case would be impossible, and the justice of the 
 tax would then vary according to the accuracy of the 
 measurement. 
 
 Partnership of State. Still another application of the 
 principle of benefit is found in the concept that the state 
 is a partner to the accumulation of wealth, and at the 
 death of the holder is entitled to its share, rather than 
 have the whole estate pass to some one who was only 
 remotely, or not at all, instrumental in its production. 
 Since it has been through the contributions of society that 
 large fortunes have grown, society has the right to demand 
 some return. This return may be secured through a con- 
 tribution to the government at the death of the holder 
 of the accumulated fortune. The difficulty of measure- 
 ment again presents itself in both of these cases. That 
 the state and society are instrumental in the accumulation 
 of individual wealth is an outstanding fact, and it is for 
 such intangible and immeasurable services that taxes in 
 general are partially levied. The principle of benefit, how- 
 ever, in tax levies, has been all but discarded. 
 
 1 66. The Inheritance Tax Conforms to Modern Fiscal 
 Concepts. A consideration of justice in taxation reveals 
 that, through a process of evolution, the most commonly 
 accepted principle for the levy of taxes is ability to pay, 
 with perhaps some consideration for the utilitarian prin- 
 ciple of the greatest good to the greatest number. To 
 students of fiscal problems, at least, a study of the inheri- 
 tance tax from this standpoint assumes the role of primary 
 importance. Many arguments have been advanced to 
 justify its place in fiscal systems, some of which are 
 worthy of review. 
 
INHERITANCE TAXES 317 
 
 Payment of Back Taxes. One of the earlier contentions 
 for the tax was that it was but a collection of the taxes 
 which had not been paid while the fortune was in the 
 process of accumulation. This is commonly called the 
 back tax argument. The reasoning has been effective, 
 and not without foundation, because of the widespread 
 evasion of personal property taxes. In fact, this argu- 
 ment, perhaps, has been used more extensively than any 
 other in securing inheritance tax legislation. From the 
 point of pure justice, however, the reasoning cannot stand. 
 The evasion of taxes for different accumulations of wealth 
 has by no means been the same, and yet it is impossible 
 to attempt any discriminations on the basis of the extent 
 that taxes have been evaded. In this respect it is a tax 
 which falls alike upon the just and the unjust. 
 
 A slightly different argument, and one whose force is 
 somewhat diminished since the extensive introduction of 
 income taxation, is that the inheritance tax represents the 
 payment of a tax which should, in justice, have been 
 levied during the life of the decedent. It is simply ac- 
 cumulation of past property taxes, or income taxes, which 
 were never levied and which are collected at the most 
 convenient time when the individual has no more need 
 for his accumulations. 
 
 Conformity to Ability to Pay. The inheritance tax, in 
 large measure, conforms to the principle of ability to pay. 
 The payment of no other tax is perhaps so lightly felt. 
 It is paid after the property leaves the hands of the de- 
 cedent, and before it reaches those of the recipient. An 
 inheritance is a sudden and often unexpected receipt of 
 property. This additional property creates taxpaying 
 ability, but never is the ability so great as before the 
 property enters into the activities of the benefactor. In 
 a few cases, of course, this increase in ability fails to 
 materialize, as when a provident husband is taken from 
 a wife and dependent children. Such situations are the 
 exception, however, and can easily be cared for by the 
 
318 OUTLINES OF. PUBLIC FINANCE 
 
 formulation of the law. The tax may be the source of 
 much revenue, with a minimum of sacrifice and a small 
 derangement of enterprise, and in this respect corresponds 
 to the modern utilitarian ideals of justice. 
 
 It is not surprising to find persons who are recognized 
 as conservative and yet who are ardent enthusiasts for 
 the inheritance tax. With the constant growth in the 
 functions of the state, the demands for revenue from the 
 old sources began to cut deeply, and some relief through 
 this little-used source is looked upon with pleasure. The 
 ease with which the burden is carried also makes a strong 
 appeal. Where to get the funds to carry on many desir- 
 able state functions is a pressing problem for which the 
 inheritance tax may be used as a partial solution. Many 
 believe, further, that a proper use of this tax would cure 
 much of the Socialistic agitation against wealth, since 
 there is very little unearned and idle wealth outside of 
 inheritances. 
 
 167. Many Objections to the Inheritance Tax Are Weak. 
 Blakemore and Bancroft, in their book on inheritance 
 taxes, say: 
 
 Firmly entrenched in a long and honorable history, with the en- 
 dorsement of the leading economists of ancient and modern times, 
 and approved by the present practice of most civilized governments, 
 he would be indeed brave who should attempt to attack the theory 
 or validity of any sane inheritance tax from an economic standpoint. 1 
 
 Professor Underwood has characterized the tax as follows : 
 
 A defense of the taxation of inheritances is superfluous. Its exist- 
 ence in all but a few of the civilized nations, and in all but a few of the 
 more backward states, is its chief defense. 2 
 
 Use as Penalty. These quotations indicate with what 
 esteem the inheritance tax is looked upon. Most of the 
 objections arise to some of the reasons for advocating the 
 
 1 Blakemore and Bancroft, Inheritance Taxes, p. 9. 
 
 2 J. H. Underwood, State and Lqcal Taxation, ypl. i. p. 211., 
 
INHERITANCE TAXES 319 
 
 tax, and because of difficulty in getting a proper adminis- 
 tration of the law. The use of the tax to penalize fortunes 
 which have been amassed in an illegitimate or fraudulent 
 manner, is open at once to the objection that there is no 
 way of differentiating the rate directly with the amount 
 of evil connected with securing the estate. Rates have 
 been made to vary with size of the bequest, and with the 
 degree of relationship, but neither of these is any indica- 
 tion of the manner by which the bequest originated. 
 Many small accumulations involve a larger amount of 
 dishonesty than many of the larger ones, and to penalize 
 them properly the rates would necessarily be regressive. 
 This, however, cannot be used as an objection to the tax, 
 but only to its use for a particular purpose. 
 
 Tax upon Savings. The objections that the tax will 
 discourage savings, and that it can be easily evaded by 
 gifts before death, really have little foundation. In fact, 
 few taxes tend to discourage savings as little as a tax 
 which does not come until after death. To most individ- 
 uals this appears as an event in the remote future, and a 
 tax at such a time will have little influence on present 
 property accumulations. It may, on the other hand, in 
 some cases, be an incentive to greater savings. To the 
 provident husband and father, who wishes to leave a 
 certain legacy to wife or children, the certainty of a tax 
 deduction will necessitate the accumulation of a larger 
 amount. Until a material change occurs in human nature, 
 the evasion of the tax by a distribution of property before 
 death will be insignificant. Most men wish to retain their 
 property while they are alive, and would rather the state 
 secure a part of it at death than give up the privilege of 
 retaining it in their possession while they are yet alive. 
 
 Tax of Varying Frequency. The objections that the 
 tax falls with varying frequency upon different accumula- 
 tions, and that it falls upon capital rather than upon 
 income, are no more serious. It is no doubt true that 
 transfers of property occur more frequently in some fam- 
 
320 OUTLINES OF JPUBLIC FINANCE 
 
 ilies than in others, and when this situation exists a greater 
 percentage passes to the state. The burden, however, is 
 felt by a different individual with each levy of the tax 
 it falls upon a newly created ability to meet a tax burden. 
 Any hardship which may arise in the case of direct heirs 
 can be alleviated by a system of exemptions, or by allow- 
 ing a lapse of a certain number of years before a second 
 tax will be placed upon the same property. 
 
 That the burden falls upon capital is sometimes true, 
 and it often happens that the tax is met from current 
 income. As long as the receipts go into the general fund, 
 the demand for revenue from other sources is, to that 
 extent, lessened. What is paid in inheritance taxes does 
 not have to be collected from income or other taxes. A 
 larger amount of income can consequently be saved to 
 replace or add to the existing amount of capital. Any 
 tax will directly or indirectly fall upon the accumulation 
 of capital, and the inheritance tax errs here to no greater 
 extent than other taxes. 
 
 1 68. The Courts Have Strengthened the Position of the 
 Inheritance Tax. Hundreds of cases involving different 
 aspects of the inheritance tax have come before state and 
 Federal courts, and with but few exceptions the decisions 
 have given this form of revenue a firmer place in fiscal 
 systems. Nothing more will be attempted here than to 
 mention a few of the more important aspects of the tax 
 which have been established. 1 
 
 The constitutionality of this form of tax was formerly 
 an important question. In regard to this Ross says: 
 
 The constitutionality of the general principles of inheritance taxa- 
 tion has been affirmed by a multitude of decisions, so that the com- 
 petency of Congress, or the legislatures of the several states, to impose 
 an inheritance tax is universally conceded. The inherent justice and 
 
 1 Those who desire to go extensively into this aspect of the inheritance 
 tax will do well to consult the exhaustive work, Inheritance Taxes, by 
 Blakemore and Bancroft, and a similar work by P. V. Ross, Inheritance 
 
 Taxation. 
 
INHERITANCE TAXES 321 
 
 wholesomeness of this system of taxation have so appealed to the 
 judicial mind that all the assaults that wealth, in its aversion to bear 
 its just burdens, has conceived, have proved unavailing. The general 
 doctrine that a state or the United States may raise revenue, and in 
 bountiful quantities, by levying tribute upon estates in the course of 
 transmission from decedents to their successors, is no longer doubted, 
 and most of the attacks now made upon inheritance taxation are upon 
 other than constitutional grounds. 1 
 
 The use of the tax by the Federal government has been 
 sanctioned by the courts on the ground that it is an 
 indirect or excise tax, and therefore does not have to fol- 
 low the rule of apportionment. It has been held further 
 that this comes under the taxing power of the Constitu- 
 tion, and is not undertaken for the purpose of regulating 
 the transmission of property. Since the state govern- 
 ments are governments of residual powers, there is no 
 restriction upon their use of the inheritance tax unless 
 the restriction be imposed by their own constitutions or 
 statutes. The use of progressive rates has been held not 
 to infringe upon the uniformity clause of many constitu- 
 tions that taxes shall be levied uniformly. 
 
 Inheritance Not a Natural Right. The courts of nearly 
 every state those of Massachusetts and Wisconsin being 
 the principal exceptions have held that the right of in- 
 heritance is not a natural right, but a privilege created 
 by the state, and subject to whatever regulations the state 
 may see fit to impose. It has been frequently held that 
 the tax is in the nature of an excise or franchise tax on the 
 succession of the property, and not on the property itself. 
 As one decision describes it, 
 
 it is not a tax upon the property or money bequeathed, but a diminu- 
 tion of the amount that otherwise would pass under the will, and 
 hence what the legatee really receives is not taxed at all. It is that 
 which is left after the tax has been taken off. It is imposed only once, 
 and that is before the legacy has reached the legatee and before it 
 has become his property. 2 
 
 1 P. V. Ross, Inheritance Taxation, p. 20. 
 
 2 7/i re Finncn, 19G Pa. St. 72. 
 
322 OUTLINES OF PUBLIC FINANCE 
 
 Some courts have held, however, that the tax is on the 
 right to receive property rather than on the permission 
 or the right to transmit it. 
 
 Properly understood, it is not the right to transmit, but the right and 
 privilege to receive, that is taxed. ... It is clear that the right is dis- 
 tinct and separate from the property itself, and the state may tax 
 this right to receive property. 1 
 
 This brief summary of a particular line of decisions in- 
 dicates how firm a legal footing the inheritance tax has 
 attained. Litigation involving inheritance tax laws still 
 arises at times, but it seldom has to do with the consti- 
 tutionality or the power to impose such a tax. Many 
 technicalities have arisen, but none of the decisions have 
 vitiated the principle of inheritance taxes. As far as any 
 difficulties may have existed in the past from the legal 
 viewpoint, they may now be considered as practically 
 settled, and legislative bodies may feel themselves free to 
 make an extended use of the tax if they have not already 
 done so. 
 
 169. Problems Arise in Formulating Inheritance Tax 
 Laws. The principle of the inheritance tax may be con- 
 sidered just, and the conclusion may be drawn that it 
 unquestionably deserves a place in fiscal systems. This, 
 however, does not preclude the appearance of serious 
 problems in its adoption and use. Some of the questions 
 which immediately present themselves are: What shall be 
 considered an inheritance for the purpose of taxation? 
 What exemptions shall be allowed? What distinction 
 shall be made between near relatives, distant relatives, 
 and strangers? What rates shall be applied? Shall they 
 be progressive, and to what extent? What provisions 
 shall be used to prevent evasion, or to prevent the tax 
 from becoming unduly harsh upon particular estates? 
 
 Deductions and Exemptions. The first of these questions 
 raises the problem as to what should be deducted from the 
 
 1 State vs. Ferris, 53 Ohio St. 314. 
 
INHERITANCE TAXES 323 
 
 gross amount of an estate in order to determine the 
 proper base for the levy of the tax. All just obligations 
 against the estate, for example, should be deducted. Other 
 deductions, however, which are sometimes permitted, are 
 not always so easily justified. Payments from life insur- 
 ance policies are usually not considered a part of an es- 
 tate, yet very frequently the payment of insurance premi- 
 ums is looked upon primarily as an investment with the 
 payment at death as the return. This is more true of the 
 extremely large policies, and no good reason appears for 
 allowing their deduction. 
 
 Closely connected with the proper deductions is the de- 
 termination of the amount of exemption to be allowed, 
 and differentiation according to the degree of relationship. 
 The soundest approach to a solution of these problems is 
 through an attempt to measure the relative abilities con- 
 ferred by the estate. In the case of a small amount left 
 to a widow or dependent child, there is evidently no in- 
 crease in ability to meet burdens, and consequently no 
 tax should be levied. Where the estate is large, however, 
 a tax may be levied, and no appreciable hardship will 
 result. In the case of distant relatives and strangers in 
 blood, the income is much more of an accidental nature, 
 and consequently less reason exists for allowing an exemp- 
 tion. The nature of the recipient has also, at times, justly 
 received consideration. Bequests to public, religious, and 
 charitable institutions, for example, have not been con- 
 sidered as subject to the inheritance tax. 
 
 Inheritance Tax Rates. The question of the rate which 
 shall be levied is also of importance. Shall it be low or 
 'high, proportional or progressive, and to what degree 
 should it vary for direct and collateral heirs? As to the 
 size of the rate, there has been absolutely no uniformity. 
 In some countries it has been high, and in others very 
 low, while many variations exist in parts of the same 
 country. The rate will be governed somewhat by the 
 purpose which the tax is designed to accomplish. If it is 
 
324 OUTLINES OF PUBLIC FINANCE 
 
 designed to prevent the succession of large fortunes, the 
 rate will doubtless be high. If it is considered that the 
 state should exercise little interference with property 
 transfers, the rates will be low, as they will be, also, if it 
 is feared high rates will cause evasion. 
 
 There has been little question concerning the advis- 
 ability of progressive rates, but much discussion has arisen 
 over the steepness of the rate of progression, and how it 
 should be affected by relationship. Those who would 
 limit the amount of wealth which can be transferred to a 
 comparatively small amount, would have the rate steeply 
 progressive to 100 per cent. Others would have it only 
 moderately progressive on bequests to direct heirs, steeply 
 progressive on bequests to near relatives, and still more 
 steeply progressive on bequests to others. 
 
 It is important, too, when a progressive rate is levied, 
 whether the base for the levy be considered the estate, or 
 the individual share in the estate. Suppose that in an 
 estate of $100,000 one individual is to receive $10,000, 
 another $40,000, another $30,000, and still another $20,- 
 000. If the tax were a proportional rate of 5 per cent it 
 could make no difference whether it were levied upon the 
 entire estate or upon each individual share. If a progres- 
 sive scale were in force, say, with an exemption of $10,000, 
 a 5 per cent tax on amounts between $10,000 and $50,000, 
 and a 10 per cent tax on amounts between $50,000 and 
 $100,000, the difference between considering the estate, 
 and each individual share as the base, becomes at once 
 noticeable. Only a few attempts have been made to use 
 the size of the estate as the base for the tax, and these 
 have either been refused by the courts or given up for 
 other reasons. 
 
 Evasion and Injustice. The gradual increase in the use 
 of the inheritance tax, together with an increase in the 
 rates, has increased the likelihood of evasion, and has 
 magnified any injustices which exist in the system. With 
 the increase in rates, the temptation to dispose of prop- 
 
INHERITANCE TAXES 325 
 
 erty before death increases. Cognizance has been taken 
 of this, and in many cases " transfers of property in con- 
 templation of death" have been made subject to the tax. 
 The courts have rather consistently held that the burden 
 of proof in such cases rested with the state, which resulted 
 in few proofs being attempted. A more recent develop- 
 ment has been legislation to the effect that all transfers of 
 property within a certain period previous to death shall 
 be considered as transferred in contemplation of death, 
 and hence subject to the tax. In Wisconsin the period is 
 six years. Recognition is sometimes made of the fact 
 that some successions may be made more rapidly than 
 others. If a son should die, for instance, and leave an 
 estate to his father, it is likely a second bequest will 
 follow much sooner than if the transfer had been in the 
 opposite direction. Laws sometimes provide that a sec- 
 ond tax will not be exacted if one has been paid within a 
 certain number of years. 
 
 Taxation of Gifts. The attempt to tax gifts in contem- 
 plation of death has led to much litigation and injustice. 
 The length of tune one lives after he disposes of property 
 has little to do with the ability of the recipient to meet 
 the tax burdens. Neither is there any assurance that one 
 year or ten years will measure the time within which 
 death will be contemplated. Any length of time decided 
 upon must be arbitrary, and much injustice will result. 
 
 But why attempt any such measurement? Since in- 
 heritance taxes are justified on the basis of ability to pay, 
 there is no good reason for treating a gift, whenever made, 
 any differently from a transfer of property after death. 
 The case is strong, indeed, for the levy of a tax upon gifts 
 whenever made at the same rate as one levied upon the 
 transfer of property at death. The time element has 
 little to do with the situation. A gift at one time is just 
 as much a fortuitous income as at some other time; it 
 may be just as much unexpected at one time as another; 
 just as much taxpaying ability exists in a gift before 
 
326 OUTLINES OF PUBLIC FINANCE 
 
 death as in the receipt of property after death; as in the 
 case of an inheritance, an ability has been created which 
 will never again be so great. A tax upon gifts, therefore, 
 conforms closely to the ability to pay principle. 
 
 The taxation of all gifts would simplify present inheri- 
 tance tax administration, and would be conducive to a 
 greater degree of justice than where an attempt is made 
 to tax only those gifts made in contemplation of death. 
 The same rates should be placed upon gifts as are levied 
 upon inheritances, with the same exemptions as well as 
 the same differences for near and distant relatives or 
 strangers in blood. 
 
 170. Conflicting Jurisdictions Create Serious Problems. 
 The existence of a number of political units, whose 
 interests are not separate and distinct, and the attempt 
 of each to adopt a form of taxation designed for its own 
 needs, with little consideration for those of its political 
 neighbors, has caused many serious problems to those 
 seeking to secure justice in taxation. This situation has 
 enhanced the problem of securing just inheritance taxa- 
 tion, and has manifested itself in particular in the United 
 States, with its many political divisions. A few of the 
 states do not use the tax, while in the others it varies from 
 a half-hearted attempt to secure a little revenue from col- 
 lateral heirs to highly progressive rates upon all estates. 
 rfThe laws not only lack uniformity in respect to rates and 
 progression, but in the bases upon which the tax is levied. 
 The result is that some estates are subject to more than 
 one tax, while others escape the tax that they are really 
 expected to pay. 
 
 Domicile of Decedent. To a large extent the inheritance 
 tax is placed at the domicile of the decedent. Since the 
 burden varies to such an extent in the different states, it 
 becomes profitable, in the case of large estates, to change 
 the place of residence to a state with lenient considera- 
 tions toward bequests, although no change be made in 
 the business, or property, or economic interest. Because 
 
INHERITANCE TAXES 327 
 
 of the increasing adoption of the income tax as a source 
 of state revenue, the selection of a suitable domicile will 
 assume an aspect of even greater importance. A state 
 which is lenient in the matter of income taxes, as well as 
 in the levy of inheritance taxes, is bidding to become a 
 popular place of residence for men of wealth. This is 
 noticeable in the Eastern states, where the states are 
 small and where there is a large amount of wealth. The 
 possibility of this result, no doubt, has had much to do 
 with keeping a number of states from making a greater 
 use of inheritance taxes. They have feared to increase 
 the severity of the burden beyond that of neighboring 
 states lest the wealthy citizens change their place of 
 domicile. 
 
 Situs of Property. The state frequently imposes an in- 
 heritance tax upon the basis of situs of the property, and 
 upon the personal property of individuals living in the 
 state. Many states go farther, and impose the tax upon 
 shares in domestic corporations, while many go still 
 farther and place the tax upon shares of corporations 
 within the state owned by a nonresident. Some tax the 
 shares at their physical location; for example, shares of 
 stock deposited in a bank for safe keeping, no matter 
 where the residence of the owner. Some have even used 
 indebtedness as a base that is, bonds would be taxed in 
 the state from which issued, no matter w r here the owner 
 lived or died. 
 
 The resulting complexity of the use of these diverse 
 attempts can easily be imagined. Two, three, four, and 
 even five taxes may be collected from one estate the in- 
 justice of which no one will deny. Suppose an individual 
 dies in state A, who was a citizen of state B, owned $100,- 
 000 worth of bonds of a corporation chartered hi state C, 
 the actual property of which was in state D, while the 
 bonds were in a safety vault in state E. The inheritance 
 tax law of A taxes the property of every decedent of the 
 state, B that of every citizen, C the bonds of corporations 
 
328 OUTLINES OF PUBLIC FINANCE 
 
 chartered within the state, D the property where located, 
 and E the situs of the bonds. In this case the bonds 
 would bear the tax rate in force in each of the five states. 
 This, of course, would be an extreme case, yet examples 
 of double and triple taxes upon estates are not uncommon. 
 
 Stability and Uniformity Desirable. This chaotic con- 
 dition is far from satisfactory. The expense and delay in 
 settling estates is often increased many fold, while the 
 rulings of the courts have become so numerous and so 
 hair-splitting as to add greatly to the complexity of the 
 situation. The instability of the various laws, moreover, 
 is not conducive to the comfort of investors. Nineteen 
 states modified their laws in 1919. The law in New York 
 State has been amended more than forty times since its 
 adoption in 1885. One never knows what may be the 
 condition a few years hence. While no single state im- 
 poses an excessive burden upon estates, yet the piling up 
 of double and multiple taxes may develop an excessive 
 burden and even necessitate a dismemberment of the 
 property in order to be able to pay the tax. 
 
 While a better situation is unquestionably desirable, a 
 remedy seems far to seek. Some uniform system which 
 would eliminate double taxation would be the logical 
 solution. To secure cooperation among the states each 
 with its own selfish interests paramount- to the end of a 
 uniform method of inheritance taxation is too much even 
 to hope for. The recent reentrance of the Federal gov- 
 ernment into this field of revenue, however, presents a 
 possible solution, improbable as it may seem. Uniformity 
 could be secured by the various states giving up their 
 diversified systems, and allowing the Federal government 
 to occupy the field with a uniform law. The machinery 
 of transfer located in the states would, of course, have to 
 be used, and the Federal government could distribute 
 back a part of the revenue collected. Rates, in this case, 
 could be high enough to make the system a powerful 
 source of revenue. Practically unsolvable problems arise, 
 
INHERITANCE TAXES 329 
 
 however, in securing the consent of the states, and in 
 finding some practical basis for redistributing the amount 
 collected back to them. 
 
 Advantages of Tax. In spite of the difficulties, however, 
 the inheritance tax is destined to play a role of much 
 greater importance in the fiscal systems of our states, and 
 probably in that of the Federal government, than it ever 
 has in the past. Its outstanding advantages cannot but 
 be favorable to its further extension. The opportunity 
 for fraud and evasion is minimized, since the machinery 
 of the courts must be used in making the transfer of 
 property. The receipts come in throughout the year, 
 with few payments compared with the amount of revenue 
 received. For large political units, moreover, the yield is 
 remarkably uniform. It is a tax well suited to provide 
 an elastic feature a rise in the rates will not cut off the 
 source of the tax by causing fewer deaths, although it 
 may lead to greater evasion. The incidence of the tax, 
 moreover, is certain a definite amount is taken from the 
 estate before it reaches the recipient the burden falls 
 upon him, and he cannot shift it. It is a tax which 
 conforms well to Adam Smith's four canons: it falls 
 according to ability, is certain, is paid at the time 
 most convenient, and should be an inexpensive tax to 
 collect. 
 
 171. The Federal Government Has Not Regularly Used 
 Inheritance Taxes. The inheritance tax has found a place 
 in the fiscal system of the Federal government at several 
 different times. Generally this has been in times of emer- 
 gency, when the primary object was to secure more rev- 
 enue. As early as 1794 recommendations were made for 
 a tax upon the succession of property at death. The first 
 law which placed a tax of this nature was passed in 1797, 
 and remained in force until 1802. Direct heirs were 
 exempt from the tax, while others were taxed only on the 
 excess above $50. The rate was twenty-five cents when 
 the amount was not more than $100; from $100 to $500 
 
330 OUTLINES OF PUBLIC FINANCE 
 
 it was fifty cents; the tax on $500 was one dollar, with 
 an additional dollar for each increase of $500. While this 
 was perhaps more the nature of a fee, we find, early in the 
 levy of a rate upon legacies, the recognition of the prin- 
 ciples of progressive rates, and a differentiation on the 
 basis of relationship. 
 
 Tax of 1862. Other recommendations were made after 
 the repeal of this law, but Congress enacted no similar 
 legislation until 1862. This levy was of two kinds one 
 known as a legacy tax, and the other as a succession tax. 
 The rates were progressive, ranging from 1 per cent to 
 6 per cent, with an exemption of $1,000 allowed. They 
 were repealed in 1870, the revenue having increased from 
 about a half million dollars the first year of use to nearly 
 three million dollars the last year. This last represented 
 a little less than 2 per cent of the total internal revenue 
 receipts. 
 
 Tax of 1898. Taxes upon inheritances and gifts were 
 included in the ill-fated income tax law of 1894. In 1898, 
 however, they were again introduced as a means for 
 securing additional revenue. The law, which was re- 
 pealed in 1902, differentiated between degrees of rela- 
 tionship, and used progressive rates which went as high 
 as 15 per cent for collateral heirs. The act was productive 
 of revenue; in 1902-03 it supplied more than 2 per cent 
 of the internal revenue receipts. As an aid to secure 
 revenue to finance the Great War, inheritance taxes were 
 again called into use. These will be discussed in the 
 chapter dealing with emergency financiering. 
 
 There is much disagreement as to the use the Federal 
 government should make of the inheritance tax. Many 
 authorities hold that this field of revenue should be left 
 entirely to the exploitation of the states, the expenditures 
 of which are continually on the increase, while their 
 sources of income are more or less limited. On the other 
 hand, the needs of the Federal government have increased 
 greatly, and these must be met from revenue. The larger 
 
INHERITANCE TAXES 331 
 
 the percentage that can be collected from inheritance 
 taxes, the less there will be to be collected from some 
 more burdensome source. There is no good reason why 
 both the Federal government and states should not use 
 the tax, nor why they should not cooperate in making 
 the tax uniform and just. 
 
 172. Inheritance Taxes Are Important in the Fiscal Sys- 
 tems of Some States. Ever since Pennsylvania adopted 
 the principle of the inheritance tax in 1826, it has been 
 embodied in the fiscal system of one or more of the 
 American states. Its importance has greatly increased, 
 however, during the last twenty-five years, until in 1920 
 forty-five of the forty-eight states were using some form 
 of the tax. As the needs for revenue become more 
 pressing, as the legislators become educated to the 
 merits of the tax, and as more cooperation can be de- 
 veloped among different states, a much more thorough 
 use of this form of taxes can be expected as a source of 
 state revenues. 
 
 Examples of State Taxes. The inheritance tax laws in 
 our states have taken on nearly every conceivable form. 
 The early Pennsylvania tax was 2J/ per cent placed upon 
 the transfer of property to collateral heirs. An exemption 
 of $250 was allowed. Two years later Louisiana placed 
 a tax on property going to foreign heirs. Gradually other 
 states were added to the list, and as the years went by 
 amendment was placed upon amendment, the courts be- 
 came more favorable, until the system as it is found at 
 present resulted. Space does not permit a survey of the 
 laws found in the various states, nor, because of the 
 changes which are imminent in many states, would any 
 survey, which might be made now, be of any particular 
 value in a few years. The outstanding features of only a 
 few laws will be noted. 
 
 The state of New York, through the amendment 
 adopted in 1911, is considered to have one of the most 
 model inheritance tax laws. An exemption of $5,000 is 
 
332 OUTLINES OF PUBLIC FINANCE 
 
 made to direct heirs, and $1,000 to collateral heirs. The 
 rates are as follows: 
 
 Above exemption, up to $ 50,000, 1% for direct, 5% for collateral 
 From $ 50,000 " " 250,000, 2% " " 6% " 
 250,000 " " 1,000,000, 3% " " 7% " 
 All above $1,000,000, 4% " " 8% " 
 
 The law also seeks to avoid double and multiple taxation, 
 such as was described above. The estates of residents are 
 taxed upon tangible property within the state and intangi- 
 ble property wherever it may be situated. No tax is 
 placed upon the intangible property in the estates of non- 
 residents, and only their tangible property within the state 
 is taxed. The intangible property includes such items as 
 money, bank deposits, shares of stock, bonds, notes, 
 credits, etc. Bequests to religious, educational, and char- 
 itable institutions, whether within or without the state, 
 are exempt from the tax. Recent legislators, however, 
 have shown some disposition to recede from this tolerant 
 attitude, and some of the former exemptions have been 
 removed, as, for example, the shares of stock of domestic 
 corporations and New York national banks in the hands 
 of nonresident decedents. 
 
 Some of the other states have modified their laws so 
 as to conform more nearly to justice. No doubt the un- 
 selfish influence of New York has had its effect. Califor- 
 nia was one of the first states to follow the example, yet 
 went much farther in the steepness of rates. The rate on 
 bequests to direct heirs is progressive from 1 to 5 per 
 cent, while to collateral heirs it ranges from 2 to 25 per 
 cent. The fact that most states have introduced the tax 
 by placing it first upon collateral inheritances and then 
 gradually extending it to include direct inheritances, is 
 still evident. A few years ago many states used the col- 
 lateral tax, with no tax upon the direct transfers of prop- 
 erty, and this is still true in a few cases. Gradually, how- 
 ever, direct inheritances are being included in the tax, 
 
INHERITANCE TAXES 333 
 
 although with higher exemptions and lower rates than for 
 collateral inheritances, until it is likely that the time is 
 not far distant when direct inheritance taxes will be used 
 in all the states where the tax on collateral transfers is 
 now found. 
 
 The abundance of revenue from other sources has made 
 the American states somewhat slow in seizing upon the 
 inheritance tax as a part of their fiscal systems. The tax 
 is one, however, that appeals to public sentiment, and 
 without doubt it has come to stay. As years go on it will 
 be found to occupy a place of increasing Importance in 
 our sources of revenue. 
 
 173. The Inheritance Tax Is Used Extensively Abroad. 
 A study of the use of the inheritance tax in foreign 
 countries reveals how dilatory America has been in seizing 
 upon the principle. The tax has been extensively used in 
 Switzerland, Spain, Sweden, Holland, Italy, Germany, 
 Greece, France, Russia, England, Ireland, Canada, Aus- 
 tralia, Belgium, Portugal, Austria, and many other coun- 
 tries. Highly progressive rates are found in many of these 
 countries, particularly in France, England, Australia, and 
 Switzerland. The tax seems to have had its broadest de- 
 velopment in the more democratic countries. 
 
 To go into the study of the inheritance tax in these 
 foreign countries would take us too far afield. A brief 
 glance at a few of them, however, will be worth while for 
 the purpose of comparing them with the taxes used in the 
 United States. England has used the tax since 1780. 
 Amendments have been made until the tax takes three 
 forms: one on the general estate, one on the personal 
 property, and one on real estate. The amounts are grad- 
 uated and taxed at a progressive rate, ranging from 1 to 
 23 per cent. In France the maximum rate imposed upon 
 collateral inheritances is over 20 per cent, while the maxi- 
 mum rate upon direct estates is about 5 per cent. In 
 Italy and Germany the rates have been somewhat higher. 
 The Australasian and Canadian provinces have followed 
 
334 OUTLINES OF PUBLIC FINANCE 
 
 the lead of the Mother country, and are making extensive 
 use of the tax with steeply progressive rates. 
 
 Since the inheritance tax so admirably supplements in- 
 come taxes, and since each has become so deservedly 
 popular, it is not too much to predict that each will hold 
 a place of vital importance in the revenue systems, not 
 only of Federal governments, but also of the provinces 
 and states. Because of its backwardness in the past the 
 United States may be looked upon to furnish examples of 
 the most rapid extension of the use of inheritance taxes 
 during the next few decades. 
 
 ADDITIONAL READING 
 
 Max West, Inheritance Tax. 
 Blakemore and Bancroft, Inheritance Taxes. 
 Seligman, Essays in Taxation, chap. v. 
 Proceedings of the National Tax Association, 1913, pp. 
 283-320; 1919, pp. 273-293; 1920, pp. 78-95. 
 
CHAPTER XV 
 
 TAXATION OF CORPORATIONS 
 
 174. Different Causes Have Placed Special Taxes on 
 Corporations. The introduction of the corporate form of 
 industry was heralded with delight, and corporations were 
 looked upon and treated as a class of public benefactors. 
 Valuable concessions, in the form of bounties and exemp- 
 tions, were granted by municipal, state, and Federal legis- 
 lative bodies to foster the development of this form of 
 industry. These concessions have taken various familiar 
 forms. Protective tariffs, for example, have been granted 
 to the benefit of particular industries, while the financial 
 assistance and large land grants, by which the railroad 
 companies were subsidized, are familiar to all. Aside from 
 this, many exclusive and irrevocable franchises were 
 granted, while immunities were often extended from exist- 
 ing legislation. This was particularly true of tax laws in 
 their application to public utility companies. Provision 
 was frequently made that no taxes would be collected 
 until the company had been in operation a certain length 
 of time, nor even then, unless the net income were a cer- 
 tain per cent of the capital stock. Under such favorable 
 circumstances it is self-evident why these organizations 
 had a phenomenal growth, and why they became powerful 
 institutions. 
 
 Hostile Attitude of Public. With the growth of their in- 
 dustrial and political strength, corporations began to as- 
 sume the attitude that the public existed for their benefit 
 rather than that they were brought into existence for the 
 
 benefit of the public. With the unfair practices which 
 22 
 
336 OUTLINES OF PUBLIC FINANCE 
 
 arose, and the unreasonable demands which were pre- 
 sented, the public soon became convinced that special 
 immunities should no longer be granted. It was awaken- 
 ing to the fact that it was being exploited by companies 
 that had been granted long time or perpetual franchises, 
 with no reservations to protect the niter ests of the public. 
 A franchise, it began to appear, no longer primarily con- 
 veyed the idea of service to the public, but appeared to 
 grant the right to exploit the public. When the people 
 began to realize the value of these rights which they had 
 so lavishly bestowed, and when they turned to attempt 
 to correct the evil which they had brought upon them- 
 selves, no weapon seemed so readily available as increased 
 taxation. The first step was to abolish special favors and 
 immunities which had been granted, and then the attempt 
 was made to apply the existing tax laws to corporate 
 property. 
 
 Use of Existing Taxes. Practically the only tax in 
 existence at this time was, of course, the general property 
 tax, and the attempt was made to reach the value of cor- 
 porate property through its channels. The tax laws of 
 most states made the property of all persons in the state 
 subject to assessment and taxation, and corporations fre- 
 quently attempted to escape on the ground that they 
 were not persons. The courts, however, uniformly took 
 the opposite view, and eliminated this difficulty. 
 
 The use of the general property tax, when applied to 
 corporations, was even less satisfactory than were the 
 results in reaching other kinds of property. The burden 
 of the assessment was placed upon the local assessor, who 
 was either incapable of making proper valuations, or else 
 unable to do so. The inequalities of assessment have been 
 outstanding. Assessors in some districts have either had 
 different bases of valuation, have possessed better facili- 
 ties for locating values, or have been more or less deter- 
 mined to secure a full valuation than assessors of other 
 districts. The stocks and bonds of corporations, which 
 
TAXATION OF CORPORATIONS 337 
 
 were supposed to be assessed, generally escaped. The ac- 
 curate valuation of a large factory with its machinery, 
 raw materials, goods in the process of making, and stock 
 of finished products, is beyond the possibility of accurate 
 assessment by the average local assessor. Particular dis- 
 tricts, moreover, have frequently offered freedom from 
 heavy tax burdens, as a special inducement for corpora- 
 tions to locate in their midst. 
 
 Outstanding Inequalities. These inequalities are es- 
 pecially marked where the property of a corporation is 
 located in different assessment districts, as is the property 
 of railroads. Assessors have no satisfactory way of placing 
 a value upon such part of the road as lies within their 
 jurisdiction, and yet some valuation must be made. Ex- 
 amples are numerous in which the assessed valuation per 
 mile in contiguous districts has varied many thousands 
 of dollars. Some districts have sought to pay the school 
 expenses from such taxes; others, the maintenance of 
 highways, while others have been negligent in attempting 
 to realize any return from corporations. 
 
 The stipulation has usually been made that the capital 
 stock is to be taxed at the location of the principal office, 
 which one would naturally suppose would be located 
 where the majority of the business is to be found. Cor- 
 porations, however, soon discovered the advantage of 
 stipulating that the principal office of the company be 
 in some out-of-the-way district, where the taxes were low, 
 or where the assessors had no idea that a corporation had 
 its principal office in their midst. The capital stock of 
 some corporations was consequently burdened with taxes 
 while that of others escaped. 
 
 The result of these situations was that corporations, as 
 a whole, were so unequally and inadequately taxed that 
 the public began to demand that special taxes be placed 
 upon them. From the above sketch it might be said that 
 this demand arose from three causes: the rapid growth in 
 extension and power of the corporations, the change ha 
 
338 OUTLINES OF PUBLIC FINANCE 
 
 the attitude of the public toward their nature, and the in- 
 ability of existing methods of taxation to reach corpo- 
 rate values. 
 
 175. Special Corporation Taxes Take the Form of Fran- 
 chise Taxes. Corporations usually have not been re- 
 lieved from the assessments of local taxing districts, but 
 the demand for heavier burdens against them has resulted 
 in the imposition of additional taxes, usually by the state, 
 which are designated as franchise taxes. As the name 
 indicates, they represent an exaction for some special 
 privilege, which a corporation is supposed to possess. 
 These privileges may be of a different nature, but so far 
 as concerns the levy of taxes, three classes are usually 
 distinguished the franchise to become, the franchise to be, 
 and some form of a special franchise other than these two. 
 
 Kinds of Franchises. A franchise to become a corpora- 
 tion is a comparatively simple concept. It is the right 
 which the state gives to an organization to pose and act 
 as an individual. It is an act of the state, done once and 
 for all, but which has a value to the organization. A 
 condition of much greater importance, however, is the 
 continuance of the corporation from year to year, and the 
 enjoyment and advantage which this form of organiza- 
 tion gives over the individual or partnership. It can be 
 readily seen that this is the important form of corporation 
 franchise, and it is in connection with the taxation of this 
 franchise that many of the difficult problems have arisen. 
 Special franchises arise when some outstanding advan- 
 tage is granted to particular corporations that are not 
 enjoyed by others. The best example of this form of 
 franchise occurs in the use of public highways and streets 
 by such public utility companies as telegraph and tele- 
 phone companies, water and lighting companies, and street 
 railways. 
 
 The Incorporation Fee. The taxation of the privilege 
 to become a corporation is comparatively easy, and is 
 usually accomplished through the collection of an incor- 
 
TAXATION OF CORPORATIONS 339 
 
 poration fee. No uniformity exists in the various states 
 as to the amount of this fee. Since it is paid only once, 
 however, this variation has little to do in determining 
 the location of corporations, for location is determined 
 by factors of greater moment than the size of the incor- 
 poration fee. In some states a fixed amount for exam- 
 ple, twenty-five dollars is exacted from every corpora- 
 tion for profit chartered in the state. A more general plan 
 is to levy a tax which varies directly with the amount of 
 capitalization, after a fixed minimum fee has been reached. 
 The amounts exacted under this incorporation fee have 
 never been so large as to be burdensome, and have occa- 
 sioned practically no difficulties. Difficulties have arisen, 
 however, hi assessing the other franchises, which will be 
 given a more extended treatment. 
 
 176. Taxation of the Franchise to Be Presents Serious 
 Problems. The taxation of corporations presents difficul- 
 ties in addition to those which arise in the taxation of 
 individuals. One of the first situations which presents 
 itself is that an artificial individual has been created 
 which can own property and conduct business in which, 
 however, the interest of natural individuals is centered. 
 While the corporation is a separate entity, yet it is one 
 owned by the stockholders, and if a part of the capital has 
 been raised from the issue of bonds, one upon which a hen 
 is held by the bondholders. When, then, these three 
 interests are found in conjunction, the problem immedi- 
 ately arises as to where the tax burden should be placed. 
 Should it be placed upon the corporation alone, upon both 
 the corporation and the stockholders, upon the bond- 
 holders as well, or upon all three classes of interests? 
 
 Assessment Difficulties. Difficulties continually arise 
 because of the overlapping of political jurisdictions. One 
 of the first which appears is the inhibition placed upon 
 the states from interfering with interstate commerce. 
 This has made particularly difficult the taxation of public 
 utilities, the lines of which extend into different states. 
 
340 OUTLINES OF PUBLIC FINANCE 
 
 Where a corporation has property in various states, or 
 where the situs of the property and the residence of the 
 stockholders and bondholders may be in different juris- 
 dictions, and attempts are made to tax the three forms, 
 the serious problem of the double or treble taxation of the 
 same property arises. 
 
 Difficult problems are found, also, within each state. 
 In some states the constitution contains what is known as 
 the uniform tax clause that is, that all taxation must be 
 uniform. This has prevented any taxation of corpora- 
 tions other than by the general tax system. Again, some 
 states have been fortunate in having progressive and wide- 
 awake officials, while other states have been burdened 
 with reactionaries. This causes a wide difference in the 
 tax methods used in the different states, and consequently 
 introduces the condition of varying tax burdens upon 
 similar, and often competing establishments in the vari- 
 ous states. 
 
 With these problems and difficulties, as well as many 
 others, existing in forty-eight jurisdictions, and with as 
 many sets of officials offering solutions, it is obvious that 
 anything but uniformity exists in the method of taxing 
 corporations. Not only is the general system different, 
 but the method of taxing the various classes of corpora- 
 tions differs. A wide variation also exists in the extent to 
 which the different states resort to corporation taxes for 
 revenue. Some states secure practically the whole amount 
 of the revenue for the budget of the state from this source, 
 while hi others the return is insignificant. It is impossible 
 to generalize accurately on the methods used in taxing 
 corporations, and it is undesirable, in a book of this nature, 
 to enter into the details of the various methods which are 
 in use. It will be profitable, however, to review some of 
 the more widely used plans for reaching corporate values, 
 and to note some of the problems which have arisen. 
 
 177. Taxes upon Capital Have Been Most General. 
 In attempting to impose an extra tax upon corporations, 
 
TAXATION OF CORPORATIONS 341 
 
 one of the first schemes hit upon was to place a levy of 
 some nature upon the capital stock. This continues to be 
 in use more than any other single plan, and is found in 
 more than half the states. Some of the schemes in vogue 
 are exceedingly complex, while others attempt no more 
 than to exact a small percentage each year on the amount 
 of capital stock. Since the state of New York is consid- 
 ered one of the most progressive states in matters of 
 taxation, an outline of the Annual Franchise Tax used in 
 that state may be given as an example of one of the more 
 detailed methods in which capital stock is used as the 
 basis for determining taxable values. 
 
 Annual Franchise Tax of New York. The annual fran- 
 chise tax, which was first adopted in 1880, and took prac- 
 tically its present form in 1906, does not replace the local 
 taxation of corporations, so that the inequalities of local 
 assessment still remain. Under the annual franchise tax 
 corporations which are subject to the tax are required to 
 make yearly reports to the comptroller, stating the amount 
 of authorized capital stock, the amount of stock paid in, 
 the date and rate of each dividend declared, the entire 
 amount of capital, and the amount of capital employed 
 in the state. The tax is to be paid in advance, and is to 
 be based upon the amount of capital stock employed 
 within the state during the preceding year. The capital 
 stock employed within the state is that proportion of the 
 entire capital stock that the assets within the state bear 
 to the entire assets. 
 
 The capital stock is classified, for the purpose of assess- 
 ing the tax, as follows: (1) If dividends have amounted 
 to 6 or more per cent upon the par value of the stock, the 
 tax rate is one fourth of a mill for each per cent of divi- 
 dends made or declared. (2) If dividends have been less 
 than 6 per cent and (a) assets do not exceed liabilities, ex- 
 clusive of capital stock, or (b) the average selling price of 
 the stock during the year has been below par, or (c) if 
 no dividend was declared, then the "rate of tax is three 
 
342 OUTLINES OF PUBLIC FINANCE 
 
 fourths of a mill. (3) If dividends have been less than 
 6 per cent and (a) assets exceed liabilities, exclusive of 
 capital stock, by an amount equal to or greater than the 
 par value of the stock, or (b) if the average selling price 
 of the stock has been above par, the tax rate is one and 
 one half mills: but the valuation of the stock shall not be 
 less than (a) par value; (b) difference between assets and 
 liabilities, exclusive of capital stock; (c) average selling 
 price of the stock during the year. (4) If a part of the 
 capital stock has paid more than 6 per cent dividend, 
 while a part has paid no dividend or less than 6 per cent, 
 the above rules are to be applied to each portion of the 
 stock as if it existed alone. (5) Corporations not assess- 
 able under the above rules are to be taxed by an amount 
 not less than would be produced by an assessment of (a) 
 one and one half mills on the actual value of the capital 
 stock, or (b) one and one half mills on the average selling 
 price during the year. 1 
 
 It is not intended that the reader will thoroughly under- 
 stand this system, nor is it the intention of the author to 
 attempt to clarify a system that has been involved in 
 litigation ever since its adoption. It is seen that the basis 
 for the tax is capital stock, while the rate is determined 
 by a number of variable factors dividends, market price 
 of the stock, and the financial condition of the corpora- 
 tion. The difficulties and uncertainties which arise from 
 the numerous complexities of the plan neutralize, to a 
 great extent, any advantages which are expected to come 
 from such a minute classification. 
 
 Massachusetts Plan. In contrast to the New York plan, 
 one may be cited which has been used for many years, 
 which is comparatively simple, and yet has given a large 
 
 1 Not all corporations are subject to the annual franchise tax. The 
 exemptions comprise banks, savings banks, insurance companies, trust 
 companies, manufacturing and laundering companies, mining companies, 
 and agricultural and horticultural associations. Public utility companies 
 are also exempt from this law, but are taxed upon the basis of earnings 
 and dividends by a system almost as complex as the annual franchise tax. 
 
TAXATION OF CORPORATIONS 343 
 
 measure of satisfaction. This is the plan of taxing the 
 corporate excess which is used in Massachusetts. It is 
 an attempt to assess the real intangible value of the cor- 
 porate privilege. This intangible value is arrived at by 
 the tax commissioner from two sets of data: one is the 
 assessed value of the plant which has been made by the 
 local assessor; the other is the market value of the shares 
 of stock which is obtained from detailed reports by the 
 corporation. The difference between this local valuation 
 and the valuation of the shares of stock represents the 
 excess value which can be attributed to the form of or- 
 ganization, and is taxed at the general tax rate. 
 
 Other Methods of Taxation. Various other methods 
 have been used in other states for reaching the capital 
 stock. In some cases the bonds have been added to the 
 capital in order to approach more nearly the true value of 
 the corporation. Some states use the par value of the 
 shares of stock, and others use the market value as the 
 taxable value. Either method is objectionable, and many 
 cases have arisen where neither would represent the ability 
 to meet tax payments. Two corporations with exactly 
 the same income may follow radically different policies, 
 which would be reflected in the value of the stocks. One 
 may follow the policy of putting the earnings back into 
 the business until it becomes immensely undercapitalized, 
 yet all this time the market value of the stock has been 
 low because no dividends, or only small ones, were paid. 
 The other corporation paid large dividends, but has put 
 nothing back into the business, and its stock would be 
 selling much higher than that of the first organization. 
 That the use of capital stock as a measure of taxable 
 value has not been satisfactory is evidenced by the num- 
 ber of corporations which have been removed from such 
 tax laws, and by the number of other plans which have 
 been used in taxing them. 
 
 178. Public Utilities Frequently Have Been Subject to 
 Special Taxes. The attempt to reach all classes of cor- 
 
344 OUTLINES OF PUBLIC FINANCE 
 
 porations by the same methods of taxation soon caused 
 dissatisfaction. It was found that assessments could not 
 all be made in the same manner, that much inequality 
 was resulting, and that much potential revenue was escap- 
 ing. It was, furthermore, being driven home with in- 
 creasing evidence that the general laws in application were 
 not securing justice between the public and certain classes 
 of corporations. It has gradually developed, therefore, 
 that some of these classes have been relieved from the 
 application of the general corporation tax law, and are 
 taxed in a special manner. 
 
 An outstanding example of this situation is the taxing 
 of public utility companies. More difficulties have arisen 
 in seeking a satisfactory scheme for taxing this class of 
 corporations, perhaps, than for any other. The problems 
 which have arisen, and the methods which have been 
 used to reach the taxable value of these companies, apply 
 in degree to all classes of corporations. A discussion of 
 some of these problems and methods, then, will have a 
 greater significance than that of its application to cor- 
 porations of this particular nature. 
 
 Problem of Valuation. The outstanding problem, in the 
 case of public utility taxation, as in the case of other cor- 
 porate taxation, is to ascertain the proper value upon 
 which taxes should be levied. This is a local as well as 
 a state problem, for generally these utilities are taxed 
 locally, even though special state laws formulate the 
 methods of taxation for other purposes. This problem of 
 local valuation is often somewhat different from the larger 
 valuation of the state, because of the limited extent 
 of the jurisdiction of local officials. Assessors are con- 
 fronted with placing a valuation on a small portion of a 
 railroad, pipe line, telegraph or telephone company, and 
 the difficulties encountered are at once obvious. Many 
 schemes have been tried, and many attempts have been 
 made by the courts to aid in arriving at some satisfactory 
 solution of the problem of local assessments. Methods 
 
TAXATION OF CORPORATIONS 345 
 
 and suggestions have included such bases as the original 
 cost of the plant; the cost of reproducing the plant; the 
 cost of reproducing the service; the value of the part of 
 a plant in a particular district as a proportionate part of 
 the whole; and the value of the plant as determined from 
 its earnings. A detailed discussion of each of these proc- 
 esses of valuation, with its inherent difficulties, would 
 take us too far afield. A discussion of some of the more 
 general methods of levying taxes upon public service 
 corporations, however, will be useful. These either involve 
 earnings or some form of valuation. 
 
 179. A Tax on Gross Earnings Presents Difficulties. 
 Extensive use has been made of earnings as a tax base in 
 an attempt to get away from the difficulty of placing a 
 taxable value upon public utility corporations. To make 
 this concrete, the state of New York may again be called 
 upon to furnish an illustration. Railroads are required to 
 pay, semiannually, a tax of five tenths of 1 per cent of the 
 gross earnings from business transacted in the state. All 
 water, gas, heating, lighting, and power companies, in 
 addition to a semiannual five tenths of 1 per cent fran- 
 chise tax upon gross earnings, must pay a 3 per cent 
 tax on dividends declared above 4 per cent on the capital 
 employed. Reports are required which show capital, earn- 
 ings, and dividends. Elevated roads, and surface roads 
 not operated by steam, must pay an annual tax of 1 per 
 cent of the gross earnings secured from business within 
 the state, and 3 per cent of the dividends declared in 
 excess of 4 per cent on the capital employed. The prin- 
 cipal basis in this system of taxes, it is easily detected, is 
 earnings gross earnings directly, and net earnings as 
 reflected in the amount of dividends declared. Some 
 states make even a more extensive use of gross earnings 
 as a base for taxes than does New York. 
 
 Advantages of Gross Earnings. Some practical advan- 
 tages in the use of gross earnings as a base for taxation at 
 once appear. Gross earnings is a very much more definite 
 
346 OUTLINES OF PUBLIC FINANCE 
 
 concept than any other form of earnings. With the ex- 
 tensive adoption of standard systems of accounting, the 
 determination of this item is comparatively easy. All 
 items of expense must be taken from the gross receipts, 
 a-nd it is not illogical to consider taxes an item of expense 
 along with rent, interest, and wages. The discretionary 
 power of officials can be dispensed with, in large measure, 
 since there is little chance of manipulating the gross re- 
 ceipts statement, while the tax can be computed by sim- 
 ple mathematical computation. Expenses of assessment 
 and collection are likewise reduced to a minimum, so that 
 the tax " takes out and keeps out of the pockets of the 
 people as little as possible over and above what it brings 
 into the treasury of the state." A gross earnings tax has, 
 moreover, a close conformity to the American idea of a 
 j ust base for taxation property. The tax would be absent 
 until a corporation was established upon an operating basis. 
 It would fluctuate with business conditions increase as 
 business prospered, and prove a smaller burden in times 
 of depression. It would eliminate the difficulty of at- 
 tempting to place an estimate upon all the intangible 
 franchise values which a company is supposed to possess. 
 Tax Officials Favor Gross Earnings Tax. Many tax 
 officials have recognized these advantages and are using 
 the gross earnings tax, or are strongly urging its adoption. 
 After a careful investigation and consideration, an On- 
 tario tax commission recommended it as being undoubt- 
 edly the best method for taxing railroads. A California 
 tax commission pointed out that the plan would result in 
 a closer approximation to justice than any other system 
 which the state might select. The burden would vary 
 with the fund out of which it was to be paid. In questions 
 of taxation, practical considerations naturally outweighed 
 theoretical ones, and this tax evidently possessed practi- 
 cal advantages. A Minnesota commission pointed out 
 that the greatest advantage was the elimination of the 
 necessity for valuing the complicated and peculiar prop- 
 
TAXATION OF CORPORATIONS 347 
 
 erties of the corporation, which had formerly been inac- 
 curate and but crude guesswork. Many other testimo- 
 nials could be presented, but, as illustrative of their gen- 
 eral nature, a brief quotation from a Connecticut report 
 will not be out of place. It said: 
 
 The tax on gross earnings avoids all the difficulties inherent in the 
 tax on net earnings. No corporation can do business without having 
 accounts which will at least show the amount of its gross earnings. 
 Gross earnings are a definite fact, ascertained by a glance at the ac- 
 counts, and incapable of argument or difference of opinion. The tax 
 on gross earnings can be evaded only by perjury of the most obvious 
 sort, and is capable of easy detection. The gross earnings tax, there- 
 fore, has the greatest advantage of simplicity, certainty, and ease of 
 administration. This is an advantage both to the corporation and to 
 the state. The amount of the tax on gross earnings fluctuates with 
 the prosperity or adversity of the business, and is, therefore, just to 
 all parties concerned. Moreover, it enters each year into the accounts 
 in a definite ratio, and can thus be counted on in advance. 
 
 A serious question remains to be answered. Will not the tax on 
 gross earnings be distinctly unfair on account of the great diversity 
 between different corporations in their ratios of expense to earnings? 
 The answer is that such injustice is to be avoided by classifying cor- 
 porations according to the prevailing ratio of net earnings to gross, 
 and imposing different ratios upon the gross earnings of the different 
 classes of corporations. 
 
 Investigation shows, for instance, that the ratio of net earnings to 
 gross is fairly uniform for the railroads of the country. In the same 
 way there is a general prevailing ratio of net earnings to gross for 
 telephone companies, for express companies, etc. Having determined 
 what this prevailing ratio is for each class of corporations, we are 
 enabled to fix ratios for each class which will make the tax on gross 
 earnings just to all. It is true that absolute justice as between individ- 
 ual corporations of the same class is not obtained. The resulting in- 
 justice, however, is not great. . . . Some inequality is unavoidable, but 
 the inequality thus resulting is distinctly less than can be easily shown 
 to result from any of the other schemes of taxation which are before 
 us. No tax system can be absolutely perfect, and it is not a valid 
 objection against a proposed scheme to point out a defect which is 
 present in even greater degree in each of the other possible alternative 
 
 1 Report of the Special Commission on Taxation of Corporations, State 
 of Connecticut, 1913. 
 
348 OUTLINES OF PUBLIC FINANCE 
 
 Objections to Gross Earnings. In spite of this wide ad- 
 vocacy, and its apparent success in many instances, the 
 gross earnings tax presents serious difficulties. Gross re- 
 ceipts do not represent earning capacity, and it is earning 
 capacity that makes a concern valuable and able to pay 
 taxes. It is what is left after expenses are paid that spells 
 success or failure. The gross receipts of two street railway 
 concerns, for example, might be the same, while the net 
 returns might be such as to make one a success and the 
 other a failure. The one might be operating under aus- 
 picious circumstances short lines, heavy traffic, level 
 streets, etc., while the operation of the other might have 
 the opposite conditions. 
 
 Similar conditions are found in varying degrees in all 
 classes of corporations, and it is too much to expect that 
 any system of classification can take them properly into 
 account. The experiences of Michigan and Wisconsin do 
 not stand out in support of the gross earnings tax. Both 
 states, after giving it a thorough trial, have abandoned it. 
 Wisconsin had used the system for nearly fifty years. 
 The reasons assigned by the officials of both states for its 
 failure to give satisfaction were practically the same- 
 uniformity could not be secured between the corporations, 
 and there was no relation between the tax paid on cor- 
 porate property and that paid on other property. The 
 governors under whose administrations the tax was given 
 up, had pledged themselves to equality in taxation. 
 
 1 80. Taxes on Net Earnings Have Not Been Satisfac- 
 tory. The difficulties of a gross earnings tax have led 
 some to advocate and others to refuse to give up net 
 earnings as the proper base for taxes. Net earnings can 
 be used, either as the direct base for the tax or as the 
 basis for finding the value of the company. If the capi- 
 talized net earnings be taken as the proper valuation of a 
 concern, then no account need be taken of capital that 
 may have been issued and squandered; of the different 
 forms of stock exchange manipulations; or of the watered 
 
TAXATION OF CORPORATIONS 349 
 
 stock a company may have. The factor under considera- 
 tion is what the enterprise is worth as a productive agent 
 or as a going concern. The original cost, or the cost of 
 reproduction, is not the controlling item which determines 
 value; this is determined by the one characteristic- 
 power to bring in a money return over and above expenses. 
 The capitalized net income will most nearly correspond 
 to what a purchaser would be willing to pay at a natural 
 sale and the courts have held this to be the value of 
 property. 
 
 Mr. W. S. Stevens, of the New York Public Service 
 Commission, expressed the opinion that the net earnings 
 tax was the one which would have the support of basic 
 principle. He said: 
 
 The only course open to the investor is to select those attributes 
 which, in his judgment, would create a desire for the property, and then 
 estimate how much that desire would induce a prospective purchaser 
 to surrender for its satisfaction. ... Its one characteristic which gives 
 it value is its supposed power to yield, directly or indirectly, a moneyed 
 return equal to the investment, with a profit thereon. Its value lies 
 not in what it is, but in what it will produce, or what it is believed it 
 will produce in money. This is the essential proposition upon which 
 all depends. Generally speaking, what it will produce in money will 
 depend upon its earning power, directly or indirectly. To the ordinary 
 investor it is its direct earning power as shown by the excess of revenues 
 over expenses. . . . This fundamental consideration indicates that the 
 net earnings rule, when properly and carefully applied with due regard 
 to all the features of the individual case, is probably the one having 
 the surest support of basic principle. It is also the one which accords 
 with the practice of shrewd, broad-minded, and successful men of 
 business. 1 
 
 Objections to Net Earnings. In spite of the apparent 
 logical and theoretical soundness of net earnings as a tax 
 basis, many practical difficulties are met in its adminis- 
 tration. One which has proved most troublesome is in 
 determining the true net earnings. Accounting systems 
 have been anything but uniform, and no comparison can 
 be had between net earnings of different enterprises. Even 
 
 1 Quoted in State and Local Taxation, 1912, p. 194, 
 
350 OUTLINES OF PUBLIC FINANCE 
 
 with uniform accounting, the difficulty still remains of 
 separating the earnings of a corporation from those of 
 its investments or subsidiary undertakings. Neither 
 would this system secure equality in assessment between 
 corporations and other forms of taxable property. The 
 difficulties which Wisconsin and Michigan found with the 
 gross earnings tax would be magnified here. A man's 
 farm and buildings are taxed, even though they are pro- 
 ducing no more than expenses. Yet a railroad with an 
 investment of several million dollars would not be taxed 
 until it became operative to the extent of having a sur- 
 plus above expenses. Because of the fluctuation of earn- 
 ings, moreover, the tax could not be counted upon as 
 being in any degree stable. The Connecticut commission, 
 quoted above, characterized the net earnings tax as fol- 
 lows: 
 
 To avoid serious inequality and evasion the tax On net earnings 
 would require for administration a thorough examination into the 
 accounts of every corporation taxed, together with strict rules as to 
 how these accounts should be kept. ... It would be a continual source 
 of irritation between the corporation and the taxing officials. It would 
 involve the most disagreeable inquisition into the accounts and busi- 
 ness of the corporations, and in the end would still remain room for 
 personal judgment, thus leaving open the door to political intrigue 
 and corrupt influence. . . . The practical difficulties in the way of 
 imposing a tax upon net earnings seem overwhelming. A further ob- 
 jection arises from the fact that a corporation might have no net earn- 
 ings whatever within a given year, and therefore escape taxation en- 
 tirely. While it is true that this might be perfectly just under a tax 
 system based fundamentally upon income, we should bear in mind 
 that the American tax system is to-day based upon property. The 
 individual whose property has yielded him no income in a given year 
 cannot offer that as a reason why he should not pay taxes upon his 
 property. While the importance of treating corporations and individ- 
 uals upon the same footing must not be stretched, there can be little 
 doubt that a tax system which would allow corporations having no 
 net earnings to escape taxation entirely, would be out of harmony 
 with the general tax system prevailing in America. 
 
 181. Taxes upon Value Are Becoming More Popular. 
 Many objections have been made to what has been known. 
 
TAXATION OF CORPORATIONS 351 
 
 as the ad valorem basis for taxing corporations. These 
 objections have arisen, largely, because of a misunder- 
 standing of the term, and because of the discrepancies 
 which arose in attempting to use different methods of 
 valuation. The discrepancies arose because of the limited 
 powers and abilities of the assessors, and because too few 
 factors were taken into account in arriving at the valua- 
 tion. The excess value of the stocks and bonds over real 
 estate has been tried; the average selling price of the 
 securities over a period of years has also been adopted. 
 In using these as bases for value, all the manipulations 
 of the market and outside influences must be considered, 
 which makes accurate results difficult. Likewise, in seek- 
 ing to determine the original cost, the cost of reproduction, 
 capitalized earnings, or the amount of business, the ad- 
 ministrative difficulties become so great as to forestall 
 satisfactory results in many cases. A value basis for tax- 
 ing corporations has consequently been condemned as 
 unusable. 
 
 Present Meaning of Ad Valorem. As the expression is 
 now used, however, an ad valorem tax means one placed 
 upon a corporation as a piece of property, rather than as 
 divided into several elements. The system further im- 
 plies a more or less expert valuation of the corporation 
 by some centralized state board. The fiscal officials of 
 Michigan and Wisconsin, upon discarding the earnings 
 basis, adopted the ad valorem plan, and have given their 
 unqualified approval of the results. The Virginia Joint 
 Committee on Tax Revision, after a careful analysis of 
 the different tax bases, said: "We believe that under an 
 ad valorem system, administered by a competent board, 
 untrammeled by any single prescribed standard or rule, 
 it is easier to establish justice in taxation than under any 
 other method. 77 l 
 
 Conditions Necessary for Success. The ability of the 
 ad valorem tax to secure justice depends, according to the 
 
 1 Report of the Joint Committee on Tax Revision, Virginia, 1914. 
 
352 OUTLINES OF PUBLIC FINANCE 
 
 Virginia committee, upon the competency of the assessing 
 board, and upon the extent of the power conferred upon 
 it. The importance of this contention is at once evident. 
 It would be considered absurd to send a man or group of 
 men whose lives had been spent as sailors, to value an 
 automobile. And it would be considered just as absurd 
 to instruct men who were capable of valuing an automo- 
 bile to arrive at such value by taking into consideration 
 only the wheels, or motor, or top, or electrical system, or 
 tires. A particular automobile might have no top, or no 
 electrical system, or the wheels might have been newly 
 painted, or the tires might just be worn out, so that no 
 one of these could be taken as the determining factor in 
 its value. Likewise the bearings, transmission, and cylin- 
 ders should be examined to discover how much they are 
 worn in short, all parts should be taken into considera- 
 tion in determining its value. 
 
 In determining the value of a corporation, likewise, the 
 board must not only be competent, but it must have broad 
 powers. It must be allowed to consider all the factors 
 which may contribute to value franchise, earnings, re- 
 production cost, etc. Not only must it be given power to 
 consider all these items, but it must be given access to 
 them. In order to carry out its work efficiently, the books, 
 accounts, and records of the corporation must be placed 
 at its disposal. It should be given power to examine wit- 
 nesses and require reports in short, given every possible 
 privilege which will enable it to make a proper valuation. 
 With this combination a competent board with extensive 
 powers the prevalent objections to ad valorem taxation 
 are somewhat minimized. 
 
 Relation Between a Tax on Value and a Tax on Earnings. 
 Where corporations are under regulation, as in the case 
 of public utilities, there is not such a variance between a 
 tax on value and a tax on earnings as it might at first 
 seem. Where the charges for services are not regulated, 
 there may be no definite relation between the value of the 
 
TAXATION OF CORPORATIONS 353 
 
 property in use and its earnings. Public utility commis- 
 sions are expected to fix rates so that but a fair return 
 will be realized. Of course there is no absolute rule for 
 determining the value upon which earnings shall be al- 
 lowed, and it is impossible to determine value so exactly, 
 or to fix rates so accurately in each case, that only a fair 
 return will be realized. But the more nearly this is ap- 
 proximated the more nearly will a tax on earnings corre- 
 spond to one on value. 
 
 It could make but little difference in a case of perfect 
 valuation and regulation of charges, where 10 per cent 
 were allowed as a fair return, whether 10 per cent of the 
 net earnings were taken or 1 per cent of the valuation. 
 Because of the indefinite relation between net and gross 
 returns, however, there could not be this close approxi- 
 mation between a gross earnings tax and a tax on value, 
 even if regulation could be such as to allow exactly a fair 
 return. Yet they would more nearly correspond than 
 under a system of no regulation. 
 
 Reform in Local Taxes. The adoption of some central 
 system of assessment would open the way for securing 
 reform in the local taxation of corporations, with but 
 little added burden of expense. The entire abolition of 
 local assessments might be secured if the localities could 
 be made to see that, by such a change, they would not 
 be the losers, and if legislators could be made to see that 
 greater equality could be secured thereby. Some states 
 have already recognized the advisability of having all 
 assessments made by central authorities, where the plants 
 extend into more than one taxing district. With the 
 central board and machinery already in existence and 
 making valuations, the addition of taxes for local pur- 
 poses could be made very easily, and the proceeds dis- 
 tributed to the local districts. 
 
 Difficulty might arise in choosing a basis for this 
 distribution. Possibilities would be the length of track- 
 age, line, or mains, the amount of business arising within 
 
354 OUTLINES OF PUBLIC FINANCE 
 
 the district, or the amount of property found there. The 
 first basis appears the most equitable, since the others 
 involve the valuation of parts of a business and open the 
 way for inequalities. Where business is greatest, more- 
 over, tracks, lines, or mains are duplicated, so that the 
 amount of business is reflected in the extent of these 
 factors. 
 
 182. Taxes on Public Utilities Are No Longer Needed 
 for Regulation. The important function of securing jus- 
 tice between the public and the corporation, which be- 
 longed to the early taxes upon public utilities, no longer 
 remains. The public service commissions are expected 
 to secure justice between the utility and the public as to 
 rates and services, which deprives the tax of its regulatory 
 aspects and leaves it only as a fiscal measure. To con- 
 tinue a tax for the purpose of regulation reflects on the 
 ability of these commissions to accomplish their purpose. 
 If their purpose is accomplished, however, no excess values 
 appear to be taken by special taxes. 
 
 Under regulation, then, the question of taxation re- 
 solves itself into this : Are the corporations to be regarded 
 as existing for the benefit of the users, for the community 
 viewed as a body of taxpayers, or for both? If regarded 
 as existing for the former, then the rates will be low and 
 there will be nothing left, above a fair return, for taxes; 
 if for the community of taxpayers, then high rates will be 
 charged for service, with some curtailment of use; if for 
 both, moderate rates will exist with a moderate surplus 
 for taxes. 
 
 When a corporation pays a tax under a system of regu- 
 lation, it merely acts as a collector of that tax from the 
 user of the product. The net earnings must be large 
 enough to allow a fair return. In ascertaining net earn- 
 ings, taxes are one of the items to be deducted from gross 
 receipts. If taxes were abolished, the total income of a 
 company could be reduced by the amount of the taxes 
 and the net earnings would remain the same. 
 
TAXATION OF CORPORATIONS 355 
 
 Since taxes increase the burden to the consumer, some 
 have advocated the abolition of taxes on public service 
 corporations, while others would make the taxes com- 
 paratively light. Such taxes are, of course, class taxes 
 taxes upon the particular class of individuals using the 
 product. This abolition would but mean a larger tax to 
 be paid by the owners of other property. When consid- 
 ering all classes of property, it would seem no more than 
 fair to tax the property of these regulated corporations 
 to the same extent that other property is taxed, and in 
 such a way as to equalize the burden on the different 
 classes of property. 
 
 183. New York Furnishes the Best Example of Special 
 Franchise Taxation. The system for taxing public utili- 
 ties in New York may again be called upon to furnish the 
 best illustration of an attempt to tax the special franchise 
 of a corporation. This is found in what is known as the 
 Special Franchise Tax law. The law was adopted in 1899 
 largely through the influence of Governor Roosevelt, and 
 with but little agitation from the public. The law at once 
 received extended favorable comment, and was heralded 
 by many as the last word in public utility taxation. Con- 
 trary to expectations, however, the principle has not been 
 adopted by other states, and has proved one of the most 
 troublesome features in New York's tax laws. 
 
 The provisions of the law are somewhat as follows: 
 Under the term "real estate" is included the value of all 
 franchises, rights, or permissions to construct, maintain, 
 or operate in, under, through, or above the streets, high- 
 ways, or public places. Each of these franchises is to be 
 assessed annually by the board of state tax commissioners, 
 and the value sent back to the clerk of the assessment dis- 
 trict where the franchise is located, as the tax is to be 
 collected for local purposes. All assessments by the com- 
 mission are subject to court review. Assessment difficul- 
 ties led to the modification of the original law, so that all 
 uses of public property outside of incorporated villages, 
 
356 OUTLINES OF PUBLIC FINANCE 
 
 of less than two hundred feet in length, are not considered 
 special franchises. 
 
 Problem of Valuation. The problem of finding a satis- 
 factory method of valuing these franchises has proved 
 almost insurmountable. The companies have not been 
 satisfied, and have filled the courts with litigation. In 
 New York City, where most of these franchises appear, 
 nearly one fourth of the taxes assessed against them from 
 the beginning still await final adjustment. Many rules 
 have been submitted for the proper mode of reaching the 
 special franchise values, but none has proved satisfactory. 
 The task of placing an annual value by a centralized 
 board upon some fourteen thousand special franchises 
 scattered over the state, presents a problem of some 
 magnitude. In reality, moreover, if the regulation by the 
 public service commissions be a success, there is no place 
 for these special franchise values to appear. Their re- 
 tention simply means that higher rates must be allowed 
 for services in order that the companies get what is con- 
 sidered a fair return. 
 
 184. Some Corporations Have Been Taxed in Special 
 Classes. Other kinds of corporations besides public utili- 
 ties have been put in special classes for the purpose of 
 taxation. Some of the most general of these classes are 
 banks, insurance companies, and, frequently, manufac- 
 turing industries. 
 
 Taxation of Banks. With the passage of the National 
 Banking Act, the taxation of banks by the states became 
 entangled with constitutional restrictions, and Federal 
 legislation and court decisions were necessary to establish 
 the status of bank taxation. This taxation by the various 
 states has been very unequal, varying from very lenient 
 legislation in some to almost repressive legislation in 
 others. This situation exists because of the difference in 
 the attitude which has been taken toward the taxation of 
 banking capital. Some have advocated a high tax, while 
 others favor complete exemption. The one class looks 
 
TAXATION OF CORPORATIONS 357 
 
 upon banks as favored creatures of the government, 
 while the other looks upon them as essential to business 
 prosperity, and seeks to establish them more extensively. 
 
 All sorts of productive capital might be more remu- 
 nerative if it were not taxed, yet the state must have 
 revenue. The banking business is not of such a nature as 
 to suggest any clear reason why it should bear especially 
 high or especially low taxes. The granting of franchises 
 to such institutions in no sense gives them a monopoly or 
 increases their earning power. Moreover, banks render 
 a necessary service and are essential to business opera- 
 tions. By furnishing credit when needed they help to 
 develop productive business enterprise, and thus enlarge 
 the basis of taxation. If banks are unduly burdened, 
 banking facilities will be correspondingly lessened. It 
 would seem reasonable, therefore, not to tax them to such 
 an extent as appreciably to hinder capital from seeking 
 that form of investment. Care should also be taken that 
 discriminating tax burdens are not placed upon essen- 
 tially competing institutions. The modern trust com- 
 pany, for example, has developed so many banking prac- 
 tices as to be a competitor with banks, and should be 
 treated as such by tax laws. 
 
 Taxation of Insurance Companies. Much discussion 
 has arisen over the proper method for taxing insurance 
 companies, especially those doing a life insurance busi- 
 ness. It is often contended that insurance companies 
 should be taxed very lightly, if at all, since the burden is 
 shifted to the policyholder. Life insurance is looked upon 
 as an institution which makes for the public welfare be- 
 cause, in providing for many who might otherwise become 
 dependents, it has cut down the burden of state expendi- 
 tures. In opposing such taxation, the beneficent features 
 are extolled; the provision for widows and orphans is em- 
 phasized; this wise provision for the future is pictured; 
 the incentive to providence and thrift is pointed out; 
 the assets of the company are shown to be the accumu- 
 
358 OUTLINES OF PUBLIC FINANCE 
 
 lated savings of the policy holders. A tax upon life in- 
 surance companies, then, falls upon this form of savings, 
 and is consequently undesirable. 
 
 Such a conclusion would condemn a large part of the 
 general scheme of taxation. All taxes are burdens upon 
 savings and restrictions upon thrift. The problem in tax- 
 ing insurance companies is to levy a tax upon them which 
 will be equitable with that placed upon other forms of 
 investment. Peculiar difficulties arise in that the length 
 of time a company has been in existence is an important 
 factor, the premiums are not income, the companies take 
 on so many different forms, and do business in so many 
 tax jurisdictions. 
 
 The tax which is most generally used by the states is 
 a percentage levy upon the gross premiums. While this, 
 no doubt, introduces some injustices, and while the rate 
 varies considerably from state to state, yet no other pro- 
 posed plan has appeared so satisfactory. An added justi- 
 fication for some payment is to maintain the insurance 
 department in the state which renders the companies 
 safer and more serviceable to the public. This is a special 
 service, and should at least command enough from those 
 benefited to pay the cost of the service. 
 
 Taxation of Manufacturing Corporations. In the earlier 
 history of corporation taxation, manufacturing concerns 
 were usually treated more leniently than other corpora- 
 tions, or were entirely exempt from taxes. A number of 
 states even yet exempt this form of industry, to a great 
 extent, from tax burdens. There is no good reason, how- 
 ever, why manufacturing concerns should not bear their 
 share of the public burden. They can no longer be con- 
 sidered as infant industries which need the fostering hand 
 of the state. The men who put capital into such enter- 
 uprises have no more claim to exemption than those who 
 invest hi other industries. The problem of taxing this 
 form of business is the problem of taxing capital in general 
 in a just and equitable manner. The taxation should be 
 
TAXATION OF CORPORATIONS 359 
 
 such, however, that there will be no discrimination in 
 favor of particular fields of business endeavor, and uni- 
 formity should be extended, if possible, throughout the 
 whole competitive district. 
 
 185. Taxation of Foreign Corporations Has Proved 
 Troublesome. A foreign corporation is one whose charter 
 is granted in some other state than the one in which the 
 business of the corporation is located. Corporations, 
 moreover, do not come under the " privileges and immuni- 
 ties granted to the citizens of the states" clause of the 
 Federal Constitution, but may be singled out for special 
 legislation. Two opposite policies have been followed in 
 treating this foreign capital either treat foreign corpora- 
 tions leniently to attract foreign capital, or treat them 
 severely to protect domestic capital. 
 
 With forty-eight states, each legislating on the matter, 
 no semblance of uniformity in the taxation of foreign 
 corporations can be expected. States sometimes adopt 
 retaliatory features in their tax legislation. These laws 
 provide that, if any other state impose heavier burdens 
 upon its foreign corporations than had been provided for 
 by domestic legislation, then foreign corporations of that 
 state shall be taxed to the same extent as it would inflict 
 burdens upon its foreign corporations. The result has 
 been the multiplication of taxes upon foreign corpora- 
 tions, and especially upon those engaged in life insurance. 
 
 Some uniform system of taxing such corporations would, 
 of course, be the most desirable, if states provided a uni- 
 form plan for taxing domestic corporations. This is not 
 to be expected, and foreign corporations should be taxed 
 in such a way that the burden upon them does not vary 
 greatly from the burden placed upon domestic concerns 
 in the same line of business. No good reason appears for 
 placing especially heavy burdens upon a business just 
 because it is incorporated in another state, nor is there 
 any reason for especial leniency. The most logical ideal 
 is to place the same burdens upon similar enterprises 
 
360 OUTLINES OF PUBLIC FINANCE 
 
 wherever they are organized, and to do this the same 
 methods of taxation must be used for domestic and for- 
 eign corporations. 
 
 It would be difficult to get equality of burdens in a 
 state that taxed the capital of domestic corporations if a 
 tax were placed upon earnings of foreign companies of 
 the same nature. Even if the same method be used, the 
 difficulty still remains of determining what part of a 
 corporation should be taxed to each of the various states 
 in which it may be doing business. One commonly used 
 plan is to compare the amount of assets within a state 
 to the total assets, and levy the tax accordingly. This 
 comparison is not always good. For example, an adver- 
 tising corporation might be doing a large business in 
 several states and have no assets except, perhaps, in one 
 state. A more just basis of comparison would be to levy 
 the taxes in proportion to the amount of business arising 
 in the different states. 
 
 1 86. The Federal Government Taxes Corporations. 
 For a number of years corporations were regarded as a 
 source of revenue solely for state purposes. More re- 
 cently, however, the Federal government has begun to 
 use the corporate form of organization as a source of 
 revenue. The introduction of the excess profits tax is a 
 familiar example of this situation which arose because of 
 the Great War. This aspect of the tax will be noted in a 
 later chapter. Even before the war, however, Congress 
 decided to tap this source of revenue, and in 1909 placed 
 a tax on the net earnings of corporations. 
 
 Law of 1909. The law of 1909 grew out of a discussion 
 of the Payne- Aldrich Tariff Act, as a part of which many 
 Senators favored enacting an income tax. The fear of un- 
 constitutionality of the income measure led to the sub- 
 stitution of the so-called excise tax on corporations in 
 proportion to their income, which is a part of the Tariff 
 Act of 1909. The law provides that every corporation, 
 joint stock company, or association, organized for profit 
 
TAXATION OF CORPORATIONS 361 
 
 and having a capital stock represented by shares, and 
 every insurance company now in existence or afterward 
 organized in the United States, or in any foreign country, 
 and doing business in the United States, shall be subject 
 to pay annually a special excise tax with respect to the 
 carrying on or doing business by such corporation, joint 
 stock company, or association, or insurance company, 
 equivalent to 1 per cent upon the entire net income over 
 and above five thousand dollars received by it from all 
 sources during the year. 
 
 The law goes into detail in specifying the deductions 
 which are allowed in calculating the net income. The 
 statement of the nature of the tax a special excise tax 
 equivalent to 1 per cent upon the entire net income was 
 evidently an attempt to get around the constitutional 
 limitations as to the levy of direct taxes by the Federal 
 government. The Supreme Court later acquiesced in 
 this interpretation, by holding that such a tax is not a 
 direct tax within the meaning of the Constitution, and 
 that it is within the power of Congress to indicate the 
 method by which an excise tax shall be measured. 1 
 
 187. Taxes Have Been Placed upon the Transfer of 
 Corporate Securities. In recent years some states have 
 placed a tax upon the transfer of corporate shares of 
 stock. In reality this is not a tax upon corporations, but 
 upon the exchange or sale of shares of stock which has 
 but an indirect effect upon the corporations themselves. 
 Several proposals for such a law were made in New York 
 before it was enacted in 1905. By this Act a tax of two 
 cents on every one hundred dollars face value was placed 
 upon the sale or exchange of shares and certificates of 
 stock of all foreign and domestic corporations. 
 
 Much opposition to the law developed and its consti- 
 tutionality was attacked from every possible angle. Both 
 the Court of Appeals of New York and the Supreme 
 Court of the United States refused to admit the conten- 
 
 1 For modifications brought about by the war, see Chapter XIX, p. 468. 
 
362 OUTLINES OF PUBLIC FINANCE 
 
 tions that such an Act was class legislation and inter- 
 fered with interstate commerce. The decision was that 
 the tax was not upon property, but upon the transfer of 
 property. Since it was uniform in operation on all trans- 
 fers, and upon all persons making them, it contravened 
 neither the state nor Federal constitutions. 
 
 Some administrative difficulties developed, such as 
 locating the transfers and preventing evasion through 
 the use of washed stamps. These difficulties have been 
 practically eliminated, and the tax is a resourceful, yet 
 little felt, source of revenue. It would be more just, per- 
 haps, if the tax were based upon the market value rather 
 than the par value of the stock. There is no very good 
 reason for taxing a one hundred dollar share selling for 
 twenty-five dollars, as much as one selling for three hun- 
 dred dollars. Such a basis, however, would greatly in- 
 crease the administrative difficulties. 
 
 During the Great War the Federal government imposed 
 a similar tax upon all sales or transfers of stocks. This 
 tax was also a tax of two cents on each one hundred dol- 
 lars or fraction thereof. If the shares have no face value, 
 the tax is two cents on each share, unless the market 
 value is more than one hundred dollars, in which case the 
 tax is two cents on each one hundred dollars or fraction 
 thereof. 
 
 ADDITIONAL HEADING 
 
 Seligman, Essays in Taxation, chaps, vi, vii, viii. 
 
 Report of Commissioner of Corporations on Systems of 
 Taxing Corporations. 
 
 Proceedings of the National Tax Association, 1911, pp. 
 139-231; 1912, pp. 177-211: 1914, pp. 132-150; 1919, 
 pp. 35-68, 230-260. 
 
CHAPTER XVI 
 
 THE SINGLE TAX 
 
 1 88. The Proposal for a Single Tax Is Not a New One. 
 The expression " Single Tax" is familiar to everyone 
 who has the least interest in fiscal reform. Because of the 
 extensive propaganda which has developed in recent years, 
 the single tax movement is often considered as a new pro- 
 posal and as having distinct application to the taxation 
 of land values. While the expression, in general, has come 
 to have such an interpretation, the fact must not be over- 
 looked that many different proposals have been made 
 for a single tax, and at various stages in the development 
 of economic history. 
 
 The Impdt Unique. One of the most interesting pro- 
 posals for a single tax was the impot unique, proposed and 
 championed in France about the middle of the eighteenth 
 century by the Physiocratic School, of which Turgot, 
 Quesnay, and Mirabeau were leaders. This school rea- 
 soned that the net product (produit net) of agriculture was 
 the basis of all progress, and in the final analysis the place 
 where the burden of all taxes rested. The basis of all 
 industry and commerce raw materials, food supplies, 
 etc. ultimately came from the land, and hence any tax 
 burden, wherever placed, must be met finally from the 
 products of land. A tax upon the products of land was 
 therefore preferred as a direct and open burden to some 
 other tax that would be shifted, perhaps by an expensive 
 process, to the same source. 
 
 Much was accomplished in putting the system into 
 effect until glaring inequalities in the tax burdens became 
 
364 OUTLINES OF PUBLIC FINANCE 
 
 apparent. Citizens with large incomes from stocks, with 
 unquestioned ability to meet fiscal burdens, were escaping 
 entirely, while the poor landowners were able to meet 
 the tax burden only with the greatest difficulty. The in- 
 justice became so marked, and the dissatisfaction so evi- 
 dent, that the impot unique was abandoned. 
 
 Single Tax on Incomes. Not all single tax proposals 
 have been for land taxes. As a means for social as well as 
 fiscal reform, the Socialists have proposed a single tax to 
 be levied upon incomes. The primary purpose of the 
 proposal is to accomplish a redistribution of wealth 
 through a steeply progressive rate. As Professor Plehn 
 has pointed out, such a scheme as an exclusive tax system 
 would fail because (1) it presupposes for its successful 
 administration a method of distribution of wealth very 
 different from that which the world now has; (2) it de- 
 mands a perfection in the technic of administration as 
 yet absolutely unattainable; (3) it would need, in order 
 to be administered fairly, more honesty than men have 
 yet shown in their dealings with the government. 1 The 
 income tax, no doubt, will come more and more into use 
 as a part of fiscal systems as income taxes come to be 
 looked upon with greater favor. The primary reason for 
 its use, however, will continue to be fiscal rather than 
 social. 
 
 189. Henry George Was Responsible for the Modern 
 Single Tax Proposal. The active propaganda for the 
 modern single tax has been in progress for less than half 
 a century, yet nearly every principle around which the 
 theory is formulated was propounded years before, in 
 various countries, by numerous writers. The exposition 
 of the nature of rent by Ricardo and Mill gave strength 
 to the ideas of social wealth and unearned increment. 
 The principle of the natural right to land was developed 
 by a number of early philosophical writers. Adam Smith 
 has many references to the nature of rents, and indicates 
 
 1 Carl C. Plehn, Introduction to Public Finance, third ed., p. 135. 
 
THE SINGLE TAX 365 
 
 their peculiar ability to bear the burden of taxes. Other 
 writers acquiesced, yet none went so far as to attempt to 
 make any practical application of their teachings. 
 
 Progress and Poverty. The first attempt to put these 
 teachings to practical use was made by Henry George, 
 in the publication of his well-known work, Progress and 
 Poverty, in 1879. Nor did he stop with the publication of 
 the principles in which he so firmly believed, but devoted 
 the rest of his life to securing their application to actual 
 economic conditions. For a number of years before the 
 publication of his work, George had lived in California, 
 where he had a chance to witness in a few years develop- 
 ments in land ownership which ordinarily occur only after 
 decades. The situation was caused by the phenomenal 
 development which followed the discovery of gold. While 
 most of the principles enunciated in Progress and Poverty 
 are not new, George did not know that they had been 
 stated previously, and they were formulated by him out 
 of his own thinking and experiences. While much other 
 literature has been written on the single tax, Progress and 
 Poverty still holds first rank as exponent of the doctrine. 
 
 190. The Single Tax Program Has a Broad Social as 
 Well as Fiscal Significance. The usual inference from the^ 
 mention of taxes is that something of a fiscal significance 
 is intended. The fiscal aspects of the single tax are over- 
 shadowed to some extent by the contemplated social re- 
 sults of its adoption. A study of the underlying principles 
 will elucidate this feature of the program. The fiscal part 
 of the scheme ends by declaring for the abolition of all 
 taxes except those on land values. 
 
 Social Vision of George. The reasoning upon which 
 George based his conclusion was somewhat as follows: 
 Land is a gift of nature, and not the product of man's 
 labor. Man has a right to possess only the products of 
 his labor, and therefore private ownership in land cannot 
 be justified. Man is not responsible for differences in 
 land values, nor for increases in values, consequently 
 
366 OUTLINES OF PUBLIC FINANCE 
 
 these differences and increases should go to society in the 
 form of taxes. The abolition of all other taxes naturally 
 follows, since they are a burden upon the product of labor, 
 and everyone has a natural right to the product of his 
 labor. George believed that more revenue would be 
 secured than under the existing system, which surplus 
 could be applied to the common benefit. He said: 
 
 We could establish public baths, museums, libraries, gardens, lecture 
 rooms, music and dancing halls, theaters, universities, technical schools, 
 shooting galleries, playgrounds, gymnasiums, etc. Heat, light, and 
 motive power, as well as water, might be conducted through our streets 
 at public expense; our roads be lined with fruit trees; discoverers and 
 inventors rewarded, scientific investigations supported; and in a 
 thousand ways the public revenues made to foster efforts for the pub- 
 lic benefit. 1 
 
 Platform of Single Tax League. That the advocates of 
 the single tax claim that it is much more than a mere 
 revenue system in fact, that it approaches a panacea 
 for all social miseries is evidenced by the platform 
 adopted by the National Conference of the Single Tax 
 League of 1890. The part which sets forth the anticipated 
 results of its adoption reads: 
 
 It would make the holding of land unprofitable to the mere owner, 
 and profitable only to the user. It would thus make it impossible for 
 speculators and monopolists to hold natural opportunities unused or 
 only half used, and would throw open to labor the illimitable field of 
 employment which the earth offers to man. It would thus solve the 
 labor problem, do away with involuntary poverty, raise wages in all 
 occupations to the full earnings of labor, make overproduction impos- 
 sible until all human wants are satisfied, render labor-saving inventions 
 a blessing to all, and cause such an enormous production and such an 
 equitable distribution of wealth as would give to all comfort, leisure, 
 and participation in the advantages of an advancing civilization. 
 
 Quasi Single Taxers. If the principles upon which the 
 single tax is based were recognized, generally, as sound, 
 and if it were believed that such an economic Utopia as 
 
 1 Progress and Poverty, bk. ix, chap. iv. 
 
THE SINGLE TAX 367 
 
 the one pictured in the above paragraph would result from 
 its adoption, a much wider use of the scheme would be 
 found, doubtless, than exists at present, and a much 
 larger number of ardent disciples would be seeking its 
 universal adoption. As it is, many of the present followers 
 have ceased to place emphasis upon the "Single" of the 
 scheme, and are content to secure the adoption of fiscal 
 principles which partake of the nature of the George pro- 
 posal as a part of a tax system. These might be called 
 quasi single taxers, and their proposals have been termed 
 by some as the single tax limited. Because the single 
 tax has been so extensively advocated, every citizen 
 should know something of the proposal, the tactics of 
 propaganda, and some of the economic effects of its adop- 
 tion. A brief study of some of the outstanding features 
 of the single tax principle will be undertaken in the fol- 
 lowing pages. 
 
 191. The Principle of Natural Rights Is Not Generally 
 Indorsed. That land is a gift of nature is accepted as a 
 matter of course; but the principle of natural rights, as 
 propounded by Henry George, has not been indorsed to 
 any great extent. It is for philosophers to decide when a 
 natural right exists, whether there ever was or will be such 
 a thing, or whether the same natural right will continue 
 to exist throughout all tune. As far as the single tax 
 proposal is concerned, an individual has a natural property 
 right to the fruits of his labor, but not to the gifts of 
 nature. The conclusion follows that property rights may 
 be had in the improvements on land, but not hi the land 
 itself. 
 
 A little consideration will show such a distinction to be 
 one without a difference or, at best, only a difference of 
 degree. Here is a farm, a gift of nature, and on it a 
 dwelling house, a product of man's labor. But when a 
 little closer consideration is given to the house, nature 
 appears to have played a considerable part in making 
 provision for it. The clay in the brick was taken from 
 
 24 
 
368 OUTLINES OF PUBLIC FINANCE 
 
 the hillside; the oak in the floors was taken from the 
 forest; the glass in the windows was accumulated from 
 various places. The entire building was a gift of nature- 
 man has no more power to create houses than to create 
 land. He simply changed the materials of nature to make 
 them more serviceable, the difference being that he 
 exerted more effort on some than on others. 
 
 Man also changes the nature of land, in a different way, 
 perhaps, to make it more useful. He plows under vege- 
 tation to make it more fertile; he plants the corn in rows 
 around the hillside to prevent erosion; he surrounds the 
 land with a fence to prevent destruction from the tres- 
 pass of animals. All this is work upon the land to make 
 it more useful, just as work was done upon the materials 
 in the house to make them more serviceable. Either 
 private ownership is justified in land or it is justified in 
 no material thing, for every material thing is based upon 
 some gift of nature. 
 
 192. Social Values and Unearned Increments Are Not 
 Confined to Land. It is quite true that man is not re- 
 sponsible for many of the differences in land values. 
 Nature is responsible for differences of fertility and loca- 
 tion, and society has been responsible, no doubt, for many 
 increases in value. The present owners of these better 
 farms or sites frequently have paid the capitalized rental 
 for the privilege of such ownership, and evidently would 
 take unkindly to the following proposition of Mr. George: 
 
 I do not propose to purchase or to confiscate private property in 
 land. The first would be unjust; the second, needless. Let the indi- 
 viduals who now hold it still retain, if they want to, possession of 
 what they are pleased to call their land. Let them continue to call it 
 their land. Let them buy and sell, and bequeath and devise it. We 
 may safely leave them the shell if we take the kernel. It is not neces- 
 sary to confiscate land; it is only necessary to confiscate rent. 1 
 
 Not All Land Values Unearned. The institution of 
 private property has been too firmly established, and the 
 
 1 Progress and Poverty, bk. viii, chap. ii. 
 
THE SINGLE TAX 369 
 
 principles of transfer and priority too deeply rooted, for 
 landowners to submit passively to any such proposition 
 as the above. A substitute proposal, which will be dis- 
 cussed later, that all future social values be taken in taxes, 
 has been made by some quasi disciples of Henry George. 
 It is interesting to speculate, moreover, as to what would 
 have been the nature of the development in the United 
 States had the single tax principles been active. The 
 government was interested in developing the West, and 
 either gave the lands to settlers or sold them at a few 
 dollars per acre. In successive years, transportation lines 
 would be built, cities would develop, and the lands would 
 increase in value, due to factors other than the efforts of 
 the owner. Under the single tax regime this increased 
 value would go to the state. Had this been the situation 
 there would have been no Western pioneer, and develop- 
 ment would have come only as the pressure of population 
 forced expansion. The expected increase in land values 
 was but the remuneration for the hardships of pioneering. 
 Likewise, expected increases in land values are often 
 figured as essential parts of industrial enterprises. The 
 establishment of such cities as Gary and Pullman are 
 examples of this. 
 
 Society Responsible for Other Values. If socially created 
 land values should be turned over to the state, then other 
 socially created values, if they be found to exist, should 
 be treated in a similar manner. A little consideration 
 will reveal the fact that values of every description are 
 more or less the product of society. Industrial stocks, for 
 example, are valuable because society demands the prod- 
 ucts of industry. One individual invests $10,000 in land, 
 and another $10,000 in sugar stock. Society increases its 
 demand for the product of the land and it becomes worth 
 $15,000 an unearned increment of $5,000. The demand 
 likewise increases for sugar, and this stock becomes worth 
 $15,000. One $5,000 is just as much an unearned incre- 
 ment as the other. 
 
370 OUTLINES OF PUBLIC FINANCE 
 
 A janitor in the Woolworth Building receives $75 per 
 month. He receives it because the desires of society have 
 demanded such a building, and his job therefore is a social 
 product. The demand for brick may so increase, or the 
 clay become so scarce, that the value of the house on the 
 farm will increase materially over its initial one. This is 
 a social product as much as the increased land value. So 
 it might be shown that the unearned increment element is 
 coextensive with industry, and that society has as just a 
 claim upon it in one branch as in any other. 
 
 Unearned Decrement. An increment, moreover, does 
 not always exist, but the change in value often takes the 
 form of a decrement. If a socially created value should 
 go to society, then the converse should be true, and so- 
 cially created losses should be given by society to the loser. 
 Little has been said of this aspect, yet when the broad 
 influence of society upon values is considered, its impor- 
 tance becomes one of no little magnitude. Farm values 
 have soared because of the high prices society has been 
 willing to pay for farm products, yet society may readjust 
 the monetary system, lower prices, and destroy values. 
 Legislation may repress an industry, and by so doing 
 destroy the value of its stocks. A new transportation 
 system may develop, thereby lowering the former value 
 of sites. The abandoned New England farm is a monu- 
 ment to a socially created loss. Such social losses are 
 continually being created just as much as social values, 
 and are simply opposite aspects of the same phenomenon. 
 
 193. The Social Claims for the Single Tax Have Not 
 Been Proved. The contention that the adoption of the 
 single tax would bring about a social millennium is opti- 
 mistic in the extreme. The basis for the optimism, how- 
 ever, is difficult to discover. One claim for its adoption is 
 the relief which will be afforded to urban congestion. It 
 is in the large cities where the agitation for the single tax 
 is most aggressive. It is here, because a large landless 
 class exists, that the land appears scarce. The adoption 
 
THE SINGLE TAX 371 
 
 of the proposed measure, however, would neither increase 
 the amount of land nor decrease numbers. It could only 
 hope to force into use lands which are now idle, which in 
 the congested districts of our large cities are so small in 
 amount as to be negligible. The claim cannot be made 
 that there is a scarcity of land in fact, there is abundance 
 of land in the outskirts of the cities, or in the undeveloped 
 West. The people in the cities, however, do not want 
 this land they prefer to stay in the congested dis- 
 tricts, endure the hardships, and pay the landlord, rather 
 than accept the responsibilities of freedom where land 
 may be had. It is largely a case of preference of the in- 
 dividual, and the confiscation of land values would not 
 change the preference. 
 
 Low rents, high wages, increased production, and other 
 such desirable conditions depend upon factors which have 
 a far greater significance than the taking of land values 
 by the state. It is contended that the exemption of build- 
 ings from tax will cause a large increase in construction, 
 and rents will automatically fall. A capital fund must 
 first be secured, however, and this is not idly waiting for 
 buildings to be untaxed. Neither is there a fund waiting 
 to go into increased production or higher wages. When 
 the fundamental principles of rents and production are 
 considered, it is difficult to see how the single tax program 
 could materially affect social conditions. 
 
 194. The Use of the Single Tax Would Reveal Undesir- 
 able Features and Difficulties. The adoption of the single 
 tax proposal in toto would mean the abolition of all other 
 forms of taxes, whether they be primarily sumptuary or 
 for revenue purposes. It would mean the abolition of 
 customs duties and excise taxes, as well as the numerous 
 regulatory taxes and licenses imposed under the police 
 power. By securing all revenues from land values, and 
 by taking the whole of these, elasticity, that necessary 
 element to every effective revenue system, would be 
 totally destroyed. The city, the commonwealth, and the 
 
372 OUTLINES OF PUBLIC FINANCE 
 
 nation must rely year after year upon the rental value of 
 land, whether it produce a surplus or a deficit. There 
 would be no way of increasing the tax rate or of taxing 
 new bases in order to increase the income to meet an 
 emergency such as a war. 
 
 Effect on Public Activities. The nature of the state's 
 business under the proposed scheme would be materially 
 changed. Its expenditures would now have to be gov- 
 erned by its income, rather than its income be governed 
 by its expenditures. This income, too, would be subject 
 to wide and unforeseen fluctuations, so that officials could 
 map out no definite program. In years of prosperity the 
 income would be large, while it might be seriously reduced 
 during periods of industrial depression. The support of 
 all public enterprises, furthermore, would be coming from 
 a very small percentage of the public those who held 
 title to land. It has always been considered an unwise 
 political expedient to give one class of individuals the 
 power to vote the expenditure of funds which another 
 class has contributed. Under such circumstances little 
 consideration is given to the relative importance of public 
 needs, while waste and extravagance are fostered. The 
 plan, moreover, seeks to overthrow the established prin- 
 ciple of ability to pay as the just basis for taxes and reverts 
 to the inadequate basis of benefits received. 
 
 Administrative Difficulties. The problem of adminis- 
 tration appears to be practically insurmountable. It is 
 the problem of separating the value of the bare land from 
 the value of the improvements on, or in, that land. The 
 problem applies both to urban and rural communities, 
 but in a somewhat different way. Most city improve- 
 ments are on the land in the form of buildings; improve- 
 ments in the country consist not only of buildings on the 
 land, but of labor and capital invested irrevocably in the 
 land. 
 
 Assume three farms in different parts of the country, 
 each having a selling value of $300 per acre for the land. 
 
THE SINGLE TAX 373 
 
 One piece is comparatively new, and has been cultivated 
 but little; another was swampy and comparatively worth- 
 less until a dredge ditch was constructed; the other has 
 been farmed intensively for generations, and has its pres- 
 ent fertility and value only because of scientific cultiva- 
 tion, rotation of crops, and extensive fertilization. The 
 attempt to assess land values equally under the general 
 property tax has proved so farcical that it would seem 
 folly to attempt to separate the value of the bare land 
 from that of the improvements in such cases as the above. 
 
 The problem of valuation would not be so hopeless in 
 cities since the improvement usually consists in a sepa- 
 rable building. Generally, however, no separate value 
 has been placed upon the site and the building in making 
 sales. The entire increase in site values, moreover, often 
 does not represent unearned gains. The owner frequently 
 makes no allowance for building depreciation, but calcu- 
 lates that the increase in the value of the site will offset 
 the depreciation of the building. Such situations but 
 magnify the difficulty of making assessments to deter- 
 mine the value of the bare land. 
 
 If the state had been the universal landlord from the 
 beginning, and had proceeded to accurately measure and 
 collect the economic rent from year to year, the single tax 
 plan would involve no particular burden. The resulting 
 condition would be that land would have no selling value. 
 The insurmountable difficulties and injustices of destruc- 
 tions of values which have grown up over a period of 
 time appear, however, when it is suggested that a social 
 group adopt the single tax after the system of private 
 property in land has been in vogue for several generations. 
 
 Modifications of Single Tax Plan. Because of these 
 very evident obstacles in the way of the adoption of the 
 single tax principles in toto, some of the thorough single 
 taxers at heart have temporized somewhat in their prac- 
 tical demands. These temporizations must not be con- 
 sidered, however, as the single tax, but merely as partak- 
 
374 OUTLINES OF PUBLIC FINANCE 
 
 ing somewhat of the nature of it. Some would allow other 
 taxes to remain, especially those used for regulatory pur- 
 poses under the police power. A few have gone so far as 
 to advocate the Federal income tax not that they believe 
 hi the income tax, but that they consider it better than 
 an increase in the taxes on commodities. 
 
 Many are in favor of letting bygones be bygones, and 
 advocate the taking of future increases in land values for 
 the state. Different methods of collecting have been sug- 
 gested, such as taking the increase at the time of sale, or 
 increasing the amount of tax at regular intervals. The 
 same difficulties occur here in determining what part of 
 the increase in value belongs to the bare land, and what 
 part to the results of labor on and in the land. Moreover, 
 if a purchaser of land knows that when he sells the land 
 all increased values will be confiscated, or that the tax is 
 to be increased gradually, proper allowances will be made 
 in the purchase price, and there will be no unearned in- 
 crement except that which could not be foreseen. 
 
 This scheme of increased taxation could be carried out 
 only through the practice of deception the purchaser 
 must be made to believe the tax will not be levied, and 
 then the levy be made. The separate assessment of land 
 and buildings, the placing of a lower rate of tax on build- 
 ings than on land, and the gradual reduction of taxes on 
 buildings, are looked upon favorably by single tax enthu- 
 siasts as being possible entering wedges for the broader 
 program. 
 
 Apportionment of Revenue. One other difficulty de- 
 serves to be mentioned; that is, the apportionment of 
 revenue. All the revenues of the various political units 
 are to come from the single source land. Upon what 
 basis shall it be decided how much shall go to the Federal 
 government, to the states, to the counties, cities, town- 
 ships, and school districts? On the basis of the claim that 
 this revenue belongs to society since it has been created 
 by society, it would seem just and logical that th revenue 
 
THE SINGLE TAX 375 
 
 should be distributed to the parts of society which have 
 been instrumental in causing its accumulation. The dif- 
 ficulty which one would encounter in attempting to dis- 
 tribute the annual rental from the Woolworth site on such 
 a basis is easily apparent. 
 
 195. The Burden of the Single Tax Would Be Most 
 Severely Felt by Rural Districts. Much discussion has 
 been carried on as to what effect the adoption of a tax on 
 land values to secure the amount of revenue which is 
 now needed would have in changing the tax burden, par- 
 ticularly as between rural and urban communities. It 
 has been set forth by its advocates, in order to win the 
 rural population to its support, that rural communities 
 under such a system of taxation would pay proportion- 
 ately less taxes than at present. In some cases this might 
 be true, but a little calculation should convince one that, 
 as a general proposition, the opposite situation will prevail. 
 
 Comparison of Rural and Urban Values. The enormous 
 land values of the city are pictured a block in the loop 
 district in Chicago, for example and then the insignifi- 
 cant value of an acre of farm land is offered hi compari- 
 son. The deceitfulness in such a portrayal lies in the fact 
 that the total value of all the agricultural land in an assess- 
 ment district is not compared with the total value of all 
 city lots. If this be done it will be found that in most 
 cases agricultural land values exceed the values of city 
 lands. The other aspect of vital importance is the pro- 
 portion which the value of other assessable property bears 
 to the value of land in each case. In general, the propor- 
 tion is much higher in cities than in the country. When 
 these two features are taken into consideration, the con- 
 clusion inevitably follows that, if land values were made 
 to shoulder the entire tax burden, a larger proportionate 
 amount would be exacted from the rural districts than 
 before the inauguration of the plan. 
 
 Suppose an agricultural section and a city in the same 
 taxing district. The assessed value of the rural land has 
 
376 OUTLINES OF PUBLIC FINANCE 
 
 been $5,000,000 and the assessment of other rural prop- 
 erty $2,000,000. In the city the assessed value of the 
 land has been $4,000,000, and of other property, $3,000,- 
 000. The total tax collected has been $200,000, shared 
 equally between city and country because the assessment 
 was the same. With the exemption of all but land values 
 this equality is disturbed, and more than half the amount 
 will be assessed against the rural communities. 
 
 While it is the predominating condition generally, in 
 agricultural communities, that the value of land exceeds 
 the value of other property, exceptions are not hard to 
 find. In some of the poorer communities land serves but 
 little purpose, as in some of the states of the Southwest, 
 or among the abandoned farms of New England. Here a 
 large part of the taxable property consists of other than 
 land, and the effect of adopting the single tax on land 
 values would be tragic. Officials would be confronted 
 with the task of extracting revenues from a source which 
 had a bare existence. 
 
 The Individual Owner. The aggregate relation between 
 land values and other values becomes the concern of the 
 individual property owner when it is suggested to make 
 the land the sole basis of taxes. Suppose the aggregate 
 relation is 50 per cent land values, and 50 per cent a prop- 
 erty valuation, which is to be discarded. An individual 
 whose property was made up of these proportions would 
 find no difference in his tax burden; one whose land 
 represented 75 per cent, and other property 25 per cent 
 of the total value, would be the loser by the change; one 
 whose land was 25 per cent of his total property, and other 
 property 75 per cent, would be the gainer. A few years 
 ago, when there was agitation for the untaxing of build- 
 ings in New York City, the land values of Manhattan 
 represented 64 per cent of the total, and buildings 34 per 
 cent. Consequently, only persons who had land worth 
 more than 64 per cent of the building on it would have 
 lost by the change. 
 
THE SINGLE TAX 377 
 
 196. Various Tactics Have Been Employed in Propagat- 
 ing the Single Tax. Many direct attempts have been 
 made to secure the adoption of the single tax program, 
 while many of the attempts have been indirect and con- 
 cealed. The use of political campaigns, legislative action, 
 and general education to the principles have been most 
 employed. The followers of Henry George have not 
 always held the same opinion as to the most successful 
 method of propaganda, nor was Mr. George always of the 
 same mind. The scheme which has had the most promise 
 of success at a particular time and place has been the one 
 generally used. 
 
 Early Propaganda. -The first active campaign for the 
 adoption of the principles of Progress and Poverty was 
 staged by Mr. George in the political campaign for the 
 election of Mayor of New York City in 1886. His book 
 had had a wide reading among the laboring classes, and 
 he had come to be looked upon as the champion of the 
 oppressed and downtrodden. He was chosen as the peo- 
 ple's candidate for mayor, after he had refused to accept 
 the nomination unless thirty thousand signatures could 
 be obtained in favor of his making the race. The issues 
 of the campaign were clear-cut, and while Mr. George 
 and his principles were defeated, the magnitude of the 
 vote which they commanded indicates what a hold they 
 had gained upon the people. Mr. George received 68,100 
 votes, while the other candidates, Mr. Hewitt and Mr. 
 Roosevelt, received 90,552 and 60,435, respectively. En- 
 couraged by the large vote, candidates were entered hi 
 future campaigns, both in state and in city elections, and 
 at times the principles have entered actively into national 
 political campaigns. Mr. George again entered the New 
 York City mayoralty race in 1897, but died a few days 
 before the election. Death was no doubt due to over- 
 exertion during the campaign. 
 
 Educational Campaign. The basis for a general educa- 
 tional campaign lies in the gifts of persons of means who 
 
378 OUTLINES OF PUBLIC FINANCE 
 
 have been interested in the movement. The most im- 
 portant provision for the educational work is the Joseph 
 Fels Fund, started by Joseph Fels a rich soap manufac- 
 turer of Cincinnati. He created funds, not only in the 
 United States, but in various other countries, offering to 
 match every dollar up to certain amounts that others 
 might contribute. From the resources thus provided, 
 much literature has been distributed, and the financing of 
 many campaigns has been made possible. A number of 
 periodicals have been established which are devoted to 
 the dissemination of single tax principles. 
 
 Legislative Attempts. In recent years much effort, tune, 
 and money have been spent in attempting to secure legis- 
 lation, which, while it has not been directly single tax 
 proposals, will form an entering wedge for the adoption 
 of the principles. Movements to secure the initiative 
 and referendum have been actively supported by those 
 who are interested in the development of the single tax. 
 Much money from the Fels Fund has been spent to secure 
 the adoption of these principles in different states. Where 
 the initiative exists, the opportunity for conducting cam- 
 paigns through the circulation of petitions is made pos- 
 sible, and the way is opened for more extensive educa- 
 tional operations. All propositions which have for their 
 end the separate assessment of land and buildings have 
 of course had the active indorsement of all single tax 
 enthusiasts. Such assessments bring into closer review 
 the so-called unearned land values. 
 
 Attempt to Secure Local Option. The proposition which 
 has been most heartily supported when it has come before 
 the legislative body, and the one whose adoption the 
 single taxers have labored most strenuously to secure, is 
 what is generally called home rule, or local option, in 
 taxation. It is the proposal to allow the various political 
 units to be self-determining on matters of taxation. The 
 belief is held that, if this be secured, some districts would 
 decide to adopt the single tax principles, and that others 
 
THE SINGLE TAX 379 
 
 would then be impelled or compelled to follow their ex- 
 ample. In some of the campaigns for securing this prin- 
 ciple, the propaganda has been openly of a single tax 
 nature, while in others there has been an attempt at 
 the concealment of this aspect. The method which 
 seemed to indicate the most favorable results has usually 
 been followed. The end and not the means has seemed 
 to be the important consideration in most single tax 
 campaigns. It is the consensus of opinion that most of 
 the campaigns would not have been waged had it not 
 been for single tax influences. 
 
 Aside from the legislative activities, the single tax en- 
 thusiasts are becoming more active in putting candidates 
 in the political campaigns. In some states the Single Tax 
 Party has become a force of considerable strength. The 
 fact that a National single tax ticket appeared on the 
 ballots hi the November, 1920, election, is evidence that 
 the political ambitions are not local in scope. 
 
 A number of single tax clubs and organizations scat- 
 tered over the country continually attempt to scatter 
 single tax influences. These organizations, moreover, 
 keep alert to any political or economic conditions which 
 will favor the adoption of their principles. Lecture bu- 
 reaus have been established to place speakers before in- 
 fluential meetings. Many novel schemes of advertising 
 have been used at various times. As a whole, the move- 
 ment can be characterized as one of active propaganda 
 from the beginning. 
 
 197. The Single Tax Campaign in Oregon Did Not 
 Show Substantial Results. When Joseph Fels established 
 his fund for single tax propaganda, it was his purpose to 
 have the single tax in actual operation somewhere in the 
 United States within five years, and to this end the com- 
 mission hi charge of the fund began operations. Because 
 the state of Oregon presented the most fruitful prospects, 
 all efforts were concentrated there for the time being. 
 Because of the strenuous fight which was waged, and the 
 
380 OUTLINES OF PUBLIC FINANCE 
 
 methods which were used, a somewhat detailed account 
 of the contest will not be out of place, even in a book of 
 this nature. 
 
 The factor which led the Fels Fund Commission to 
 choose Oregon as its base of operations was the fact that 
 a substantial single tax interest was already manifest 
 there. Through an initiative petition the single tax work- 
 ers succeeded in submitting a constitutional amendment 
 to popular vote in 1908. The amendment, to a large ex- 
 tent, embodied single tax principles, and the campaign 
 was openly a single tax one. The amendment did not 
 carry, but the vote in its favor was so large that its sup- 
 porters were encouraged to look for victory in the not far 
 distant future. An interesting feature of the vote, espe- 
 cially to those who supported the measure, was that the 
 county in which Portland is located almost rendered an 
 affirmative decision. 
 
 Struggle for Local Option. From the indications of the 
 vote on this amendment, it seemed likely that the single 
 tax could be installed in some of the counties if by some 
 means county local option could be secured in Oregon. 
 In 1910, therefore, the following amendment was pre- 
 sented to the voters: 
 
 No poll or head tax shall be levied or collected in Oregon; no bill 
 regulating taxation or exemption throughout the state shall become a 
 law until approved by the people of the state at a regular general elec- 
 tion; none of the restrictions of the Constitution shall apply to meas- 
 ures approved by the people declaring what shall be subject to taxa- 
 tion and exemption and how it shall be taxed or exempted, whether 
 proposed by the Legislative Assembly or by initiative petition; but 
 the people of the several counties are hereby empowered and author- 
 ized to regulate taxation and exemptions within their several counties, 
 subject to any general law which may be hereafter enacted. 1 
 
 Unlike the previous campaign, the contest over this 
 amendment was not carried through on a single tax basis. 
 The single tax nature was kept in the background, while 
 
 of Oregon Board of State Tax Commissioners, 1911. 
 
THE SINGLE TAX 381 
 
 the amendment and its title were worded so as to appeal 
 to a large constituency. The poll tax feature, for exam- 
 ple, attracted many voters because of the general dis- 
 tastefulness of these taxes. The result was that the 
 amendment carried by a small majority. 
 
 The adoption of this amendment but marked the be- 
 ginning of the real single tax fight. The opponents of 
 the measure arose in disgust and declared the people had 
 been fooled and hoodwinked. The victors became radiant, 
 threw off their cloak of disguise, and exultingly declared 
 it was the greatest victory that had ever been won for 
 the single tax principles. They immediately announced 
 the single tax as the leading issue of the next election. 
 Under the local option amendment, measures were brought 
 forth in three counties to exempt all improvements and 
 personal property from taxation. A state single tax meas- 
 ure was also submitted. A furious bombardment of lit- 
 erature and speeches came from both contending forces. 
 When the polls finally gave the results of the battle it 
 was found that the amendments had been overwhelmingly 
 defeated. A few other attempts have been made at amend- 
 ments, but they were defeated until 1918, when the State 
 Tax Commission succeeded in getting some changes sub- 
 mitted and adopted. Provision is made for uniformity of 
 taxation, and for the levying and collection of taxes under 
 general laws which are to operate uniformly throughout 
 the state. 
 
 198. The Advocates of the Single Tax Have Been Active 
 in Other States. While one of the most important battles 
 for the single tax was staged in Oregon, much activity has 
 been found in other states. Campaigns of more or less 
 intensity have been carried on in some of the other Western 
 states, principally Washington, California, Colorado, and 
 Missouri. Much the same tactics have been used as in the 
 Oregon campaigns, with the same general results. Seattle 
 voted down the proposition on two successive occasions. 
 The city of Everett, on the other hand, voted in favor of 
 
382 OUTLINES OF PUBLIC FINANCE 
 
 its adoption. The State Tax Commission of Washington, 
 however, ruled such a proposition to be unconstitutional, 
 and the ruling has never been questioned. 
 
 The propaganda for single tax adoption has been carried 
 on somewhat extensively among cities of Colorado, since 
 they are granted a large measure of home rule. In only 
 one case has a favorable vote been secured. This was in 
 the city of Pueblo, but before the measure had a chance 
 to work itself out it was repealed. The people of Cali- 
 fornia, through an initiative petition, voted upon a single 
 tax amendment in 1916, and definitely refused to adopt 
 it. Somewhat earlier a strenuous campaign was staged in 
 Missouri to secure the adoption of a state single tax 
 amendment. Here, again, an attempt was made to con- 
 ceal the identity of the propagators. The opposition was 
 not to be deceived, and directed a vigorous anti-single tax 
 campaign. The result was an overwhelming defeat of the 
 proposal. 
 
 Situation in Eastern States. The economic conditions 
 in the Eastern states differ somewhat from the conditions 
 in the Western states, consequently the methods used in 
 propagating the single tax have not always been the same. 
 The state of New York has always been the source of 
 much agitation. Some of the so-called tax reform asso- 
 ciations have been active for a number of years in at- 
 tempting to secure legislation favorable to the single tax 
 creed. The separate assessment of land and buildings has 
 been secured, while repeated attempts have been made to 
 secure a reduction of the assessment on buildings. So 
 far the legislature has turned a deaf ear to such appeals. 
 
 The legislature of Pennsylvania has the distinction of 
 first authorizing a reduction of the assessment on build- 
 ings. In 1913, it provided for a gradual decrease of build- 
 ing assessments for cities of the second class Scranton 
 and Pittsburg until by 1925 the rate was to be 50 per 
 cent of that on land. Two years later the law was re- 
 pealed, but the repeal was vetoed by the Governor on the 
 
THE SINGLE TAX 383 
 
 ground that there was so much conflict of opinion, and 
 that the law had not been tried a sufficient length of time 
 to prove its merits or defects. The law continues to be 
 in force, and the deductions in assessment are being made 
 as provided for. 
 
 Many other examples might be given of the activities of 
 these disciples of the taxation of land values. In some 
 states, especially in New York, preparations are being 
 made for waging still more aggressive campaigns. The 
 failure to have accomplished any material results in the 
 past has but spurred the leaders to greater activity. One 
 other enterprise, somewhat different from the undertak- 
 ings which have been discussed in the preceding para- 
 graphs, deserves brief consideration. This is the Fair- 
 hope single tax colony, which is often pointed out as the 
 blueprint of the single tax ideal. 
 
 The Fairhope Colony. The holdings of the Fairhope 
 Single Tax Corporation consist of several thousand acres 
 of land located in Alabama. The members in the asso- 
 ciation attain this privilege by the payment of a fee, and 
 then lease the village site or farm land from the corpora- 
 tion. The lease price is determined by the differential 
 advantage of the site, or land. No other taxes are col- 
 lected upon the buildings and improvements. In spite of 
 criticisms which have arisen from some of the members, 
 the project seems to have prospered. Perhaps, however, it 
 would have developed under other systems of ownership 
 and taxes. Henry George would attach little importance 
 to any success which it might claim, because he did not 
 believe the single tax could be fairly tried on a small scale 
 in districts where other fiscal systems prevailed. 
 
 199. The Single Tax Has Found Adherents Outside the 
 United States. The single tax movement has not been 
 confined to the United States. In fact, when adherents of 
 the proposal wish to cite examples of its successful opera- 
 tion, they invariably choose them from the cities and prov- 
 inces of western Canada. In a number of these towns and 
 
384 OUTLINES OF PUBLIC FINANCE 
 
 cities land has been practically the sole object of taxation, 
 and under the system the country, towns, and cities grew 
 and prospered. Land values rose rapidly, the taxes were 
 comparatively low, and the burden of providing for the 
 needs of the public purse was scarcely felt. The cities of 
 the United States, especially in the West, have been 
 urged, if they would be prosperous, to throw off the octo- 
 pus of taxing improvements and adopt the system used 
 by Vancouver or Edmonton. 
 
 Situation in Canada. Present reports from experts who 
 have made a study of the situation, and from the officials 
 themselves, indicate that the tax system in these Cana- 
 dian cities is becoming far from satisfactory. Land values 
 are ceasing to rise in the accustomed ratio, which auto- 
 matically affects revenues. The justice of exempting rich 
 brokers, bankers, and merchants from taxes is being 
 questioned by an increasing number of citizens. An offi- 
 cial of the city of Edmonton has just pointed out the fact 
 that when land values are rising rapidly, and taxes are 
 low, the system works admirably; but that now land 
 values are not increasing, while the need for revenue is 
 increasing. Other sources of revenue must be found or 
 the taxes on land will become unbearable. 
 
 A few figures will indicate the present condition of Van- 
 couver's prosperity when land values cease to rise rapidly. 
 In 1912 building permits reached over $19,000,000, but 
 in a few years had fallen to less than $2,500,000. Tax 
 arrears were about $510,000 in 1912, $4,220,000 in 1916, 
 and $5,038,000 in 1918. The mill tax rate has gone up 
 from about 16 to nearly 25. The debt has gone from 
 $22,500,000 in 1912 to $40,000,000 in 1918. 1 In a number 
 of cities the rate is being increased to such an extent that 
 refusal to pay the tax is the result, and numerous lots are 
 being taken over in payment for taxes. It has been 
 pointed out by many observers that these conditions do 
 not prevail in the eastern cities, which have not been 
 
 1 F, C. Wade, Bulletin of National Tax Association, April, 1918, 
 
THE SINGLE TAX 385 
 
 affected by the magic of the single tax. It is significant 
 that, in a recent Ottawa municipal election, the proposi- 
 tion to adopt the single tax as a basis for her revenue 
 system was defeated by a three to one vote. 
 
 It is becoming increasingly evident that the claims that 
 have been made for the tax system of western Canada 
 can no longer be substantiated. A marked dissatisfaction 
 with the system is becoming more apparent. Marked 
 ability to pay taxes is seen among the class of bankers, 
 merchants, and manufacturers, yet they frequently escape 
 almost entirely. Demands are being made that these 
 classes, who are enjoying the benefits of the government, 
 contribute to its support, and future fiscal development 
 may be expected to take the direction of an extension of 
 the bases for the levy of taxes. 
 
 The Principle in Europe. Some of the principles of the 
 single tax may be found in use hi some European and 
 Asiatic countries, yet these features have no place as a 
 part of the Henry George single tax movement. The 
 Lloyd George scheme for land taxes of 1909 has been 
 pointed out as a single tax achievement. In reality it 
 was simply a plan to secure some return from the vast 
 estates which were being held tax-free, since taxes had 
 been assessed upon the annual rental instead of upon 
 capital value. The unearned increment tax has been used 
 extensively, however, in Germany and Australia. 
 
 200. The Single Tax Agitation Has Emphasized Defects 
 in Our Fiscal System. Most economists and fiscal au- 
 thorities condemn the theoretical and practical principles 
 of the single tax, yet none will deny that the agitation has 
 served to emphasize some of the defects of our fiscal sys- 
 tem. The evils and discrepancies of general property 
 taxes have been forcefully portrayed. Examples are not 
 infrequent of where the low assessment of unoccupied 
 lands and sites has been a factor in stimulating specula- 
 tion. It has been shown, too, that increased values and 
 abilities have arisen, and that they have not been made 
 
386 OUTLINES OF PUBLIC FINANCE 
 
 to bear their fair share of the tax burden. Such portrayals 
 should inspire the authorities to reach these sources 
 through more accurate valuations, and to make exactions 
 from property when its ability to bear tax burdens be- 
 cause of the action of society can be actually measured. 
 Much can be done to eliminate the evils which the single 
 taxers portray, however, without the confiscation of land 
 values. 
 
 ADDITIONAL READING 
 
 Seligman, Essays in Taxation, chap. iii. 
 Young, Single Tax Movement in the United States. 
 Carver, Essays in Social Justice, chap. xi. 
 Proceedings of the National Tax Association, 1914, pp. 
 405-465; 1917, pp. 375-381. 
 
CHAPTER XVII 
 
 PUBLIC INDEBTEDNESS 
 
 201. Indebtedness Is Characteristic of Modern Fiscal 
 Systems. In the early existence of governments, borrow- 
 ing was looked upon as an extraordinary means of secur- 
 ing revenue. This method was to be employed when all 
 others failed, or when the need was occasioned by an 
 emergency, such as war or pestilence, and the ordinary 
 sources of revenue were inadequate to meet such sudden 
 demands. In some of the earlier states, moreover, there 
 was no need, even in cases of emergency, for the use of 
 public credit. As need arose, the state simply demanded 
 more services from its citizenship, or extended its power 
 to confiscate any commodities of which it might be in 
 need. As the state evolved from this condition of direct 
 appropriation of materials and services, and as constitu- 
 tional government gradually took on more definite form, 
 the institution of public credit gradually became more 
 prominent. 
 
 The present widespread use of public borrowing was 
 reached only after a long and slow development. Its 
 history would not be the same in all states. In most of 
 the older states it developed with the growth and remodel- 
 ing of fiscal systems, while some of the newer states, in 
 imitation of the already established governments, have 
 used their credit as a source of revenue from the start. 
 Whatever the development, the institution of borrowing 
 has assumed a place of such importance in modern fiscal 
 systems, that few governmental units can be found which 
 do not practice the policy of deficit financiering. This 
 
388 OUTLINES OF PUBLIC FINANCE 
 
 condition not only applies to national units of both mo- 
 narchical and democratic types, but to the minor political 
 units, such as the commonwealth, county, and munici- 
 pality. 
 
 Money Market Necessary. Before public borrowing can 
 be successfully carried out, a money market must be in 
 existence, and public credit must be established. It is 
 evident that before a government can borrow money, the 
 people of that government, or some other, must have 
 money to loan that is, there must be a money market in 
 existence. Since a money market is characteristic of a 
 people of somewhat intense commercial life, it naturally 
 follows that public borrowing can develop only in coun- 
 tries whose citizenship is of the commercial type. 
 
 It already has been indicated that, among early states, 
 a new prince or ruler frequently repudiated the debts of 
 his predecessor. Under such conditions the institution of 
 public credit was indeed weak, while the loans of the 
 individuals were frequently of an involuntary nature. It 
 was only with the development of constitutional govern- 
 ment, wherein the citizenship gained control over the 
 affairs of the government, that guarantees began to be 
 made against repudiation. With these guarantees public 
 credit grew stronger and public debts grew apace. 
 
 The Republic of Venice is usually credited with having 
 inaugurated successfully the policy of public borrowing. 
 England did not use it until the time of William III. At 
 present, however, a political unit which is free from debt 
 is very exceptional. Many of the debts, indeed, are of 
 such magnitude that the meeting of the interest charge 
 entails such an enormous burden upon the citizenship 
 that any effort to pay off the principal seems out of the 
 question. 
 
 Failure of a Reserve Fund. The policy of public borrow- 
 ing has not always received the sanction of students of 
 fiscal problems. In the earlier stages of political develop- 
 ment the maintenance of a reserve fund, or "war chest/' 
 
PUBLIC INDEBTEDNESS 389 
 
 as it was called, was looked upon as the most feasible 
 method for meeting an emergency. This was gradually 
 abandoned until, in recent years, Germany has been the 
 only important state which still followed this policy. 
 
 The maintenance of a reserve fund by the state received 
 the sanction of early fiscal authorities because it appeared 
 that this was the only way to relieve the state from 
 financial embarrassment in time of emergency. Subse- 
 quent developments, however, have led to the almost 
 total abandonment of the policy. One reason for its fail- 
 ure has been the inability of a state to acquire and main- 
 tain a reserve of sufficient size to meet the need which 
 modern emergencies impose. The insignificance of Ger- 
 many's war chest of $30,000,000 is apparent when the 
 total of her war expenditures are calculated. To secure 
 and maintain a fund sufficient to meet such an emergency 
 expenditure as the Great War entailed upon its partici- 
 pants, would require sacrifices which no citizenship would 
 be willing to endure. 
 
 The time and occasion for the use of the reserve fund, 
 moreover, are uncertain, and individuals discount the 
 future to such an extent that they are unwilling to make 
 any great sacrifice hi the present to meet a remote and 
 uncertain need. The subtracting of a large amount of 
 gold from the monetary supply of the country, if the 
 reserve be kept in this form, must curtail commercial 
 and industrial development, and thus lessen the patri- 
 mony of the state. If the state keep its reserve in the form 
 of securities, it constantly faces the danger of having to 
 dispose of them in a poor market, while an element of 
 instability is introduced in the market for securities be- 
 cause of the possibility of the state unloading its holdings 
 at any time. 
 
 The modern state, hi order to meet not only extraor- 
 dinary expenditures, but frequently ordinary ones, enters 
 the money market alongside individuals, and bids for the 
 use of capital. National, state, and municipal bonds are 
 
390 OUTLINES OF PUBLIC FINANCE 
 
 so extensively used in modern fiscal systems that they 
 are accepted, without question, as an ordinary occurrence. 
 One needs but to glance over the list of securities which 
 leading banking and brokerage houses offer, to see the 
 importance of the role which the various forms of public 
 evidences of indebtedness play in our modern security 
 markets. 
 
 202. All Aspects of Public and Private Debts Are Not 
 the Same. While public borrowing in general partakes 
 of the nature of private indebtedness, yet in some respects 
 differences may occur. In both cases some form of credit 
 must be established, and a source of loanable funds must 
 be in existence. One important difference, however, is 
 the sovereignty of the state. Because of this sovereignty 
 the state cannot be compelled to fulfill any contract it 
 has made. In the United States, for example, no common- 
 wealth can be sued by an individual without its consent. 
 Hence, if a state should wish to repudiate a debt, as has 
 been frequently done, the creditor has no redress. 
 
 In the case of states, then, there is no political or legal 
 method of enforcing the fulfillment of contract. As a 
 matter of fact, however, there does exist a strong eco- 
 nomic force which acts as a compelling motive to the 
 keeping of obligations. The fear of the inability to place 
 future contracts in a satisfactory manner compels the 
 state to be cautious about violating present contracts. 
 The old adage that "the truth itself is not believed from 
 one who often has deceived," has a public as well as an 
 individual significance. The fact that states were slow to 
 recognize this accounts, in large part, for the slow develop- 
 ment of public credit. 
 
 Payment of Public Debts. Public borrowing differs 
 from private, also, in the purposes for which it may be 
 undertaken, and in the basis for the payment of the in- 
 terest and principal. In modern private borrowing the 
 great majority is for commercial enterprises of a produc- 
 tive nature. As long as borrowing was for consumptive 
 
PUBLIC INDEBTEDNESS 391 
 
 purposes, ecclesiastical as well as political authorities for- 
 bade the exaction of interest on the ground that the bor- 
 rowed capital did not create any ability to meet an inter- 
 est charge. The devices which were used to evade these 
 restrictive measures when capital came to be demanded 
 for productive purposes soon led to the legalizing of in- 
 terest payments. A large part of borrowed capital, then, 
 because of the productive uses to which it is put, has in 
 itself the ability to meet the interest charge, and perhaps 
 in time even to provide for the repayment of the principal. 
 There is a mutual gain the creditor gets interest while 
 the debtor gets productive capacity. 
 
 These conditions of private borrowing may be true in 
 the case when the state is the debtor, but frequently are 
 not. The important difference in the two kinds of debts 
 is that the state does not have to depend upon the pro- 
 ductivity of its borrowed funds to meet the payment of 
 the interest or principal. The payment of interest some- 
 times represents the charge for a public sacrifice, rather 
 than for a public benefit. The funds may have been 
 squandered in some worthless industrial venture or ex- 
 pended on a war in which defeat was the outcome. And 
 defeat usually comes to one of the contending belligerents. 
 
 In private enterprise the squandering of funds, or fail- 
 ure of the undertaking, frequently means the inability to 
 meet liabilities. In the case of the state, however, lia- 
 bilities can be met from the general taxing power. As 
 long as taxes can be secured, the interest and the principal 
 of debts can be paid. The ability of an individual to meet 
 a liability depends upon the success of his particular in- 
 dustry, while the ability of the state to meet liabilities 
 depends upon the success of industry in general. It is 
 because of this broad patrimony that the state is often 
 able to secure funds on better terms than individuals. 
 
 Purpose of Debts. -The power of a state to meet its 
 indebtedness charges from general revenues has led to 
 much discussion of what constitutes the legitimate pur- 
 
392 OUTLINES OF PUBLIC FINANCE 
 
 poses for public borrowing. Some have held that a state 
 should borrow only in those cases where the use of the 
 funds will provide the means of paying the interest and 
 principal. No modern state restricts its borrowing to 
 such narrow limits. No definite rule can be given as to 
 when a state should borrow, and the best measure of 
 justification can be found in comparing the benefits de- 
 rived from the debt, with the sacrifices involved because 
 of it. Difficulty creeps hi here because many important 
 public services, such as protection, education, and parks, 
 are of such an immaterial nature that no money standard 
 can be placed upon them. 
 
 It has generally been conceded to be bad fiscal policy 
 for a state to expect to meet continually its regularly re- 
 curring expenditures from borrowing. No one would jus- 
 tify such a method of procedure on the part of individuals. 
 It often happens, however, with both states and individ- 
 uals, that revenues are less than were anticipated, or that 
 expenditures are greater. It may be necessary to borrow 
 to tide over until new revenues are available from the 
 ordinary sources, or from new ones. When states borrow 
 under these conditions it is only for a short period, and 
 the intention is not to create permanent indebtedness. 
 
 Modern public borrowing, with no difficulty in justify- 
 ing it, goes much farther than this. It is the pride of the 
 American people to improve and extend public property. 
 Large municipal bond issues are continually being floated 
 for the purpose of improving streets and parks, for better- 
 ing educational facilities, or for undertaking some public 
 enterprise, such as the waterworks or the electric plant. 
 The national government, as a rule, has made its ordinary 
 improvements, such as the improvement of rivers and 
 harbors, with funds which regularly flow into the treasury 
 each year. When some gigantic project is undertaken, 
 such as building the Panama Canal, borrowing has been 
 used to supplement the other sources of revenue. 
 
 In such capitalistic enterprises as some that have been 
 
PUBLIC INDEBTEDNESS 393 
 
 suggested, where the returns are expected to be more than 
 enough to make them self-supporting, there is little ques- 
 tion about the feasibility of borrowing the funds to estab- 
 lish them. The justification of borrowing for giving in- 
 tangible benefits will depend upon the ideas which are 
 held as to the function of the state, and since these are so 
 diverse, no generally accepted opinion can be given. The 
 tendency, however, is for borrowing to occupy a more 
 important place among the sources of public revenues. 
 
 203. The Economic and Political Effects of Public In- 
 debtedness Are Important. Much has been said and 
 written concerning the economic and political feasibility 
 of public borrowing. Opinions have varied from the ut- 
 most condemnation to the heartiest approval. The earlier 
 writers were usually extremists in whichever view they 
 took, while modern opinions have been tempered by ex- 
 perience. No longer are a nation's debts looked upon as 
 gold mines, or the creators of an equal amount of capital, 
 or as an institution necessarily destructive of national life. 
 Certain results do appear, however which are worthy of 
 notice, 
 
 Competitor for Capital. The first obvious effect of pub- 
 lic borrowing is that the government enters the money 
 market as a competitor against individuals for capital. 
 This increase in the demand for capital naturally tends to 
 increase interest rates. The state has the advantage over 
 individual competitors that, since it is not dependent 
 upon the productivity of the borrowed capital to meet 
 the interest or principal charge, it may bid for the capital 
 by offering high or excessive rates of interest. It has the 
 further advantage that, in offering the normal or a lower 
 rate of interest, it can often appeal to patriotism, or make 
 special concessions to its creditors. The real industrial 
 effects of public borrowing will depend upon the method 
 used in securing the loans, and the purpose to which the 
 capital is applied. 
 
 If the government enters the money market, and offers 
 
394 OUTLINES OF PUBLIC FINANCE 
 
 the normal rate of interest with no special concessions, 
 the effects upon industry will be scarcely noticeable. If 
 funds are secured, they will come from a supply of free 
 capital, for industry will not readjust itself to supply this 
 demand. Industrial effects would result, however, when 
 public loans are sought through offering a high rate of 
 interest. In the first place, this will bring forth more 
 savers, and a greater amount of saving from the previous 
 class of savers. Money that has been spent for the prod- 
 ucts of industry will now be turned over to the govern- 
 ment. The lessened demand decreases the profitableness 
 of industry, until it is probable that investments of capi- 
 tal which are bringing a smaller return than that offered 
 by the government, when readjustments become possible, 
 will seek government securities rather than a continuation 
 in industry. Under such conditions production under in- 
 dividual management will decrease, accompanied by a 
 decrease in the demand for labor. 
 
 Use of Borrowed Funds. The use to which a state puts 
 borrowed funds is an important factor hi determining the 
 ultimate effects of public borrowing. If debts are con- 
 tracted for the purpose of carrying on some industrial 
 enterprise, such as constructing and operating canals, 
 railroads, or other similar enterprises, the effects of bor- 
 rowing may be negligible. It may simply mean that the 
 state is supplying a commodity by using capital and em- 
 ploying labor that would be demanded otherwise by indi- 
 viduals. Assuming the degree of efficiency to be the same 
 in either case, borrowing by the government would have 
 no effect on the social income or upon the prices paid in 
 the money or labor market. 
 
 The ability of the state to undertake industrial enter- 
 prises of such long duration and of such gigantic propor- 
 tions that they would not appeal to individuals, may often 
 enable the state to increase the social income by increas- 
 ing the opportunities for the use of capital by individuals, 
 as well as by increasing the effectiveness of capital already 
 
PUBLIC INDEBTEDNESS 395 
 
 in use. Borrowing by the United States government for 
 constructing the Panama Canal, or for its numerous rec- 
 lamation projects, are examples of this sort. 
 
 Not all the returns from borrowing, however, are spent 
 in fostering productive enterprise. In fact, a large part 
 has been used in the destruction of productive capacity, 
 for a large percentage of borrowed funds has been used in 
 the prosecution of war. In such cases a derangement of 
 the industrial system occurs. Individual enterprises 
 change the nature of their production in order to supply 
 the materials of war, which the government is demanding. 
 These materials are largely for immediate consumption, 
 and with their consumption a large amount of capital and 
 labor is destroyed. The result is that, for a time at least, 
 after the emergency is past, the amount of commodities 
 which can be produced is less than what is desired. This 
 results in higher prices. It is not meant to infer that these 
 effects are inherent in the institution of credit they 
 merely arise from the use which the state makes of its 
 funds. Borrowing simply increases the ease of securing 
 funds. 
 
 Social and Political Effects. Public indebtedness, if car- 
 ried to extremes, may also influence social and political 
 institutions. The fear has often been expressed that the 
 public securities will, to a great extent, fall into the hands 
 of a wealthy few, and thus help to create an idle leisure 
 class. It is also quite possible that this class of security 
 holders may secure enough political power to influence 
 legislatures in prolonging a state's indebtedness longer 
 than the economic situation might justify. The situation 
 exists, of course, that a part of the citizenship is taxed to 
 pay the other part. Too frequently the holders of public 
 securities bear little of the burden of taxes to meet interest 
 or principal charges. 
 
 Experience has shown that these fears have not been 
 entirely unfounded. Fortunes have been swelled through 
 the manipulations of the public security market. The 
 
396 OUTLINES OF PUBLIC FINANCE 
 
 Civil "War furnishes a number of examples of this. That 
 the securities tend to fall into the hands of a few is illus- 
 trated by the fact that before the Great War the entire 
 amount of United States bonds was held by less than one 
 thousand individuals and six hundred corporations. At 
 present about one fifth of the holders of United States 
 bonds live in one state, and these hold nearly one third of 
 the total issue. 
 
 Another danger of public borrowing is that since the 
 burden of present expenditures is not realized, legislators 
 may undertake ventures, the wisdom of which would be 
 seriously questioned if the funds had to be secured from 
 taxes. In other words, where public borrowing can be 
 resorted to with little difficulty, the citizenship will feel 
 less obligation to guard closely the public purse strings 
 than if expenditures had to be met through the channels 
 of taxation. This danger was recognized in the formation 
 of most of the constitutions of the American common- 
 wealths. These generally contain strict limitations upon 
 the power of the legislatures to issue bonds. Similar re- 
 strictions are generally placed upon the governing bodies 
 of municipalities. 
 
 International Complications. The holding of the securi- 
 ties of one country by another may become the source of 
 political difficulties. Numerous examples have arisen 
 where smaller nations have become involved with larger 
 ones because of debt obligations. International law has 
 established the principle that any unsatisfied debts of one 
 nation held by another are sufficient grounds for diplo- 
 matic intervention. This intervention has often taken 
 the form of armed force. Egypt became a British pro- 
 tectorate, among other reasons, because she abused the 
 credit which England had extended to her. The same 
 influence was potent in the French domination of Tunis. 
 The Monroe Doctrine has been called into use to prevent 
 the forcible seizure- of property to settle debt claims 
 among some of our southern neighbors, especially Mexico. 
 
PUBLIC INDEBTEDNESS 397 
 
 It is entirely possible for bonds issued by some common- 
 wealths to be held by a foreign power. The political en- 
 tanglements with the Federal government, which a forced 
 collection of such an obligation would entail, can be easily 
 imagined. As public credit becomes more firmly estab- 
 lished, and as nations less frequently repudiate either 
 principal or interest, these difficulties automatically dis- 
 appear. 
 
 204. All Countries Have Not Taken the Same Attitude 
 Toward Extinguishing the Public Debt. The question 
 naturally arises as to what disposition shall be made of a 
 public debt after it has been contracted. The answer 
 which ordinarily occurs to American students is that the 
 debt will be canceled at the earliest convenience. The 
 American people have shown little sympathy with the 
 policy of perpetuating a debt. Most other countries, to 
 a greater or less degree, do not share this attitude. Eng- 
 land, to some extent, assumes the American viewpoint, 
 while the countries of Latin origin generally show little 
 concern in regard to the extinction of their indebtedness. 
 Since these two viewpoints are prevalent, it is of impor- 
 tance to note the reasons advanced for the adoption of 
 each policy. 
 
 Reasons for Extinguishing Debts. A factor of primary 
 importance in the consideration of debts is the burden 
 placed upon the citizens of a country, and it is upon this 
 phase, largely, that the policy of debt extinguishment dif- 
 fers. The payment of a debt necessarily means heavier 
 taxation with a corresponding burden upon industry. If 
 the principal is allowed to stand, however, the burden can 
 gradually be decreased by the natural expansion of indus- 
 try, and gradual increase of the social income and wealth. 
 With this development the burden of an interest charge 
 gradually becomes less because the financial ability of the 
 citizenship has been increased. In England, for example, 
 in 1815, the interest charge of the public debt was slightly 
 less than 10 per cent of the annual social income. By 1880 
 
398 OUTLINES OF PUBLIC FINANCE 
 
 the same interest charge represented less than a 3 per 
 cent burden upon the social income. The same situation 
 is, of course, true in many other countries. 
 
 The tendency for money to depreciate in value also 
 lessens the burden of indebtedness. In periods when the 
 value is appreciating, as following 1873, however, the op- 
 posite effect will ensue. When the present indebtedness 
 of most countries is taken into account, however, it is too 
 much to hope that currency depreciation will make any 
 appreciable diminution in the burden. Debts are fre- 
 quently contracted at times when currency is at the peak 
 of depreciation in periods of war inflation and the 
 chances are that the subsequent changes in the value of 
 the currency will enhance, rather than decrease, the bur- 
 den of indebtedness. 
 
 The burden which the extinction of a debt will place 
 upon the industry of a country has often been over- 
 emphasized. It is true that the state has no independent 
 source of capital out of which to pay the bondholders. 
 It must resort to taxation, and taxes are paid from the 
 capital or income held by the citizenship. What the state 
 does is to collect a fund from one class of citizens, the tax- 
 payers, and turn it over to another class the bondholders. 
 In order that nothing be lost by the transfer, the second 
 class must use the funds as efficiently as the first class 
 would have used them. It is not at all unlikely that they 
 may be used more efficiently. If taxes are so contrived 
 that they take funds for the state that otherwise would 
 have been squandered, then productive capacity may 
 actually be increased by the payment of debts. 
 
 The productive capacity of a country would be de- 
 creased, of course, if its debts were paid when the security 
 holders lived in another country. This is usually true to 
 such a small extent as to have little influence in shaping 
 the course of action. Cancellation of debts may have a 
 further wholesome effect upon industrial workers, in that 
 their minds are relieved from the thought that a part of 
 
PUBLIC INDEBTEDNESS 399 
 
 the products of their exertions is going to the class of 
 bondholders, and perhaps is assisting to maintain them as 
 an idle class. 
 
 205. Public Debts May Take a Number of Forms. Not 
 all public debts are of the same nature, and may differ 
 materially in a number of ways. One of the first distinc- 
 tions to be drawn was between funded and unfunded 
 debts. As the terms indicate, a funded debt was one 
 against which some particular fund or collateral was 
 placed to insure payment, while an unfunded one was 
 simply a debt contracted on general credit. These terms 
 are still in common usage, yet their significance has lost 
 much of the defmiteness of the earlier years. Not infre- 
 quently the terms bonded and floating debts are used as 
 almost synonymous with the two older expressions. In 
 general, the important distinction between a funded or 
 bonded debt, and an unfunded or floating one, is the time 
 element. The old idea of security has disappeared to a 
 large extent, and in many cases has been reversed. Mod- 
 ern long-term obligations, as a rule, are issued upon the 
 general public credit, while short-term obligations fre- 
 quently have specific revenues pledged for their redemp- 
 tion. Public borrowings for short periods, such as to meet 
 a deficiency of revenue, or a small unexpected call upon 
 the treasury, which can soon be taken care of from general 
 revenues, take the form of floating debts. A good exam- 
 ple of borrowing of this nature was the large amount of 
 treasury certificates issued by the Federal government 
 during the Great War in anticipation of revenue from the 
 Liberty Loans and taxes. The Liberty Loans, of course, 
 would be classed as bonded or funded debt. 
 
 The use of the expressions " short time" and "long 
 time," hi the above distinction, is far from definite. It 
 is, however, the best that can be made. There is no uni- 
 formity among writers or fiscal authorities in the various 
 political units as to what constitutes a short-term or a 
 long-term obligation. With some, a short-term loan may 
 
400 OUTLINES OF PUBLIC FINANCE 
 
 extend over a period of years, while with others it may 
 not be considered proper to extend over as many weeks. 
 It is to be hoped that some more definite distinction will 
 gradually be adopted. It might not be disadvantageous 
 if the commercial distinction between short and long term 
 obligations would convey similar ideas when applied to 
 fiscal transactions. 
 
 Methods of Originating Debts. A second distinction in 
 public securities may be based upon the difference in the 
 way in which the obligation originates. The sovereign 
 power of the state gives it the advantage over the individ- 
 ual borrower, in that it can force loans from its citizen- 
 ship. These forced loans frequently take the form of 
 short-term obligations, such as the treasury certificates 
 which have frequently been issued in payment for goods 
 or services at times when funds were scarce. These cer- 
 tificates are usually interest-bearing, and made payable 
 as soon as sufficient revenue is expected to accrue. Cities 
 frequently make use of similar forms of obligations to tide 
 over a shortage of funds. The action of the state in issu- 
 ing fiat money is somewhat similar to a forced loan, yet 
 in the strict sense it cannot be called a credit transaction. 
 The importance of forced loans, in the modern state, is 
 comparatively insignificant. 
 
 The class of public loans which is by far the most im- 
 portant comprises those obligations in which a voluntary 
 agreement has been entered into between the state as 
 debtor, and the individual as creditor. There may be 
 many terms about which the agreement must be made, 
 and it is on the basis of these terms that voluntary 
 loans, or, as some call them, contract loans, may be 
 classified. 1 
 
 The debtor-creditor relation with the state often arises 
 through comparatively simple transactions, in which the 
 fact that the state becomes a debtor is often not consid- 
 
 1 For an excellent classification of contractural debts, see Introduction to 
 Public Finance, by Plehn, third ed., p. 389. 
 
PUBLIC INDEBTEDNESS 401 
 
 ered. In these cases the redemption of the debt does not 
 depend wholly, or even in part, upon the credit of the 
 state, but upon additional assurances. When an individ- 
 ual purchases a postal money order, he becomes the 
 creditor of the state, yet he feels, in no sense, that the 
 credit of the state is involved. The numerous cases in 
 which some form of collateral is required before business 
 transactions are permitted, are other examples. Insur- 
 ance companies are often required to deposit bonds before 
 engaging in business, while national banks must deposit 
 bonds with the Federal treasury before circulating notes 
 may be issued. In all these cases the amount received by 
 the government is kept for redeeming the obligation, so 
 that its credit is an insignificant factor. Much the same 
 situation exists between the government and the holders 
 of its representative paper money. The holder of gold 
 and silver certificates is protected by a 100 per cent de- 
 posit of specie. 
 
 In the more purely credit transactions, differences in 
 the contract frequently exist. The state may agree to 
 pay no more than interest. This is true when a govern- 
 ment issues a perpetual bond, which is frequently done 
 by some European countries, and was formerly attempted 
 in the United States. It may be true that the government 
 agrees to pay no more than the principal. This situation 
 is approximated when a state uses redeemable paper 
 money. The most ordinary contract is one in which the 
 state agrees to make payment of both principal and inter- 
 est, the details of which will depend upon the time for 
 which the capital will be needed, the general condition of 
 the money market, and the pressure of the state's need. 
 Loans have been negotiated frequently on some annuity 
 plan of payment, in which the creditor is to receive a fixed 
 payment for a definite number of years or for life. In all 
 these cases the creditor has been a voluntary partner to 
 the contract, and expects the state to comply to the terms 
 agreed upon. 
 
102 OUTLINES OF PUBLIC FINANCE 
 
 206. Many Problems Arise in Floating a Bond Issue. 
 Many problems confront the fiscal authorities when they 
 decide to float an issue of public securities. The rate of 
 interest is an important consideration, as well as the 
 method of securing subscriptions to the loans. Other con- 
 siderations are from what source the funds will come, the 
 special privileges which shall attach to the holders of the 
 securities, and the length of tune they are to run. Many mi- 
 nor considerations exist, also, which must not be neglected. 
 
 Interest Rate. The rate of interest which the securities 
 are to draw, while it is not a distinct factor unrelated to 
 other conditions, is of primary importance in determining 
 the conditions of a bond issue. Ordinarily the attempt 
 will be made, if the bonds are to be put on the market 
 and sold, to have the rate of interest as near as possible 
 to the current rate. If it should be below this, the bonds 
 will sell below par, and the principal of the indebtedness 
 will be larger than the amount which becomes available 
 for the use of the state. If the provision is imposed that 
 the bonds must be accepted at par, the state will be dis- 
 appointed in finding a market for its securities unless a 
 strong element of patriotism be hi existence. Franklin 
 experienced this situation in attempting to borrow from 
 European countries during the Revolution. Because of 
 the low rate of interest he was authorized to pay, no aid 
 could be secured except from France, and this was given 
 from other than economic motives. It may happen at a 
 time when funds are scarce, and the needs of the govern- 
 ment are pressing, that the rate of interest will have to be 
 higher than the current rate in order to draw funds to the 
 use of the government. 
 
 Other Conditions. The success of a loan, where all the 
 conditions are predetermined by the fiscal authorities, 
 depends upon their ability to judge the money market 
 and the desires of the prospective purchasers. Frequently 
 these predetermined conditions are designed to attract 
 buyers for the securities. Freedom from ordinary taxes is 
 
PUBLIC INDEBTEDNESS 403 
 
 perhaps the most general privilege attached to govern- 
 ment securities. Tax privileges are not always the same, 
 as is evidenced by the various issues of the Liberty Loans. 
 The method of interest payment is made as attractive as 
 possible. Frequently bonds of the same issue are partially 
 of the registered type, and the remainder coupon bonds. 
 Registered bonds appeal to investors who seek protection 
 from loss and theft, while the others are more convenient 
 to the general investor. 
 
 In determining the clientele of purchasers, the size of 
 the bond is an important item. Where it is desired that 
 the subscribers come from the general population, the de- 
 nominations of the bonds will be comparatively small. 
 The fifty dollar "baby bond" used in the Liberty Loans 
 is a familiar example of appeal to popular subscription. 
 The war saving stamps and war certificates were designed 
 to appeal to still smaller investors. The length of time 
 the bond is to run has much to do with its desirability as 
 an investment, therefore this feature is often varied to 
 appeal to different classes. 
 
 Disposal of Securities. Where comparatively small 
 sums are desired, the state need not predetermine the 
 interest rate, but has the alternative of accepting bids for 
 the supplying of the needed funds. The fiscal authorities 
 can make it known to banking and brokerage houses, and 
 the general public, if considered desirable, that a certain 
 amount is needed for a certain length of time, that the 
 securities will bear certain privileges, and let the compe- 
 tition of the prospective lenders decide the interest rate. 
 In this case the burden of the speculative element in the 
 money market rests to a greater extent on the purchaser 
 of the securities. If the market for securities becomes 
 more favorable within the period of the loan, the purchaser 
 may sell and be the gainer; should the market become 
 less favorable, the loss must be his. 
 
 In disposing of a bond issue, government officials may 
 make use of a number of agencies. The need for different 
 
404 OUTLINES OF PUBLIC FINANCE 
 
 methods of appeal varies with the size of the loan as well 
 as with the number and classes of citizens whom the offi- 
 cials desire to interest. Everyone is familiar with the 
 various methods of approach which the Federal govern- 
 ment used in selling the different Liberty Bonds, Adver- 
 tising campaigns were carried on by the use of billboards, 
 in magazines, and in the newspapers. Literature was 
 mailed to the individual, while appeals were made in the 
 churches and theaters. The features of patriotism, duty, 
 sound investment, and even loyalty, were emphasized. 
 Different forms of banking institutions were used exten- 
 sively as government agents in disposing of the securities, 
 while many other business houses, as well as individuals, 
 gave unstintedly of their time and energy to push the 
 sales. In short, practically every method of salesmanship 
 is open to the government, and extensive use has been 
 made of the various methods of approach. 
 
 207. Administering a Public Debt Presents Complex 
 Problems. We have already noticed that public credit 
 may take the form of perpetual bonds, a principal and 
 interest charge, or some form of annuity payment. In 
 administering these various forms, especially the princi- 
 pal and interest charge, perplexing problems often arise. 
 Problems occasionally arise when a state with perpetual 
 bonds or life annuities decides to reduce its indebtedness, 
 but these do not occur as frequently as the problems of 
 conversion or payment of a terminable debt. 
 
 Conversion of Debt. A state may frequently desire to 
 change the nature of a bond issue. It is not able to cancel 
 the indebtedness, but has an opportunity to put it into 
 a more favorable form. It often happens that the exten- 
 sive government borrowings are made in times of strin- 
 gency, and the rate of interest is necessarily high. Had 
 it been possible to wait a few years much better terms 
 might have been secured. It is the problem of the fiscal 
 authorities, while they cannot cancel the debt, to refund 
 or convert it into an issue of more favorable terms. Most 
 
PUBLIC INDEBTEDNESS 405 
 
 modern government bonds are so drawn as to aid this 
 procedure. A 5-30 bond, for example, is one which may 
 be paid any time after five, and before thirty years from 
 the time of issue. If, after five years, a loan can be con- 
 tracted for on much better terms than the original one, 
 the fiscal authorities need but float a new issue of securi- 
 ties and use the proceeds to take up the old obligations. 
 It often happens that a number of conversions of the same 
 original debt may take place until satisfactory terms are 
 the result. The holders of the old obligations are fre- 
 quently given the privilege of exchanging them for issues 
 of the new, at a fixed rate of exchange. These processes 
 are not designed to reduce the indebtedness, but simply 
 to change its form. 
 
 Use of Sinking Fund. The general tendency has been 
 for countries to adopt the policy of debt extinction. The 
 use of this policy creates the problem of securing funds to 
 meet the debt obligation when it falls due. Conversion 
 may be used to postpone payment, but it does not cancel 
 it. A scheme for debt payment which was developed in 
 England, and which is widely used, is known as the sink- 
 ing fund. Under this scheme, in order to meet a debt 
 obligation when it matures, there is set aside a certain 
 sum from the general revenue each year, so that the sum 
 of the accumulations will equal the debt. 
 
 The early use of the sinking fund was very popular 
 in England because of the fallacious idea that it provided 
 a burdenless method of paying indebtedness. A small 
 amount of bonds were to be purchased and retained by 
 the government, and the interest on these bonds the next 
 year was to be used in buying more bonds. This was to 
 continue until these interest payments canceled the debt. 
 The scheme, no doubt, would eventually cancel the debt, 
 but the burden of doing so would still fall on the taxpayer. 
 The annual interest charge which made the purchasing 
 power had to come from somewhere, and taxation was the 
 only source. 
 
406 OUTLINES OF PUBLIC FINANCE 
 
 Any justification for the use of a sinking fund does not 
 come from the reduction of burdens, but from providing 
 the assurance that a source of funds will be on hand, out 
 of which the payment of debts can be made when they 
 fall due. The maintenance of such a fund may even en- 
 hance burdens. The administration of the fund must be 
 provided for. It must be kept separate from other gov- 
 ernment funds, so that the treasury will not be subjected 
 to the evils of a surplus, and so that the fund will not be 
 used for other purposes than the cancellation of the debt. 
 The fund should, of course, be used in some productive 
 capacity, or it will entail the burden of putting capital 
 out of use. Yet it must be kept absolutely safe or the 
 scheme fails. The administration of such a fund grows 
 into a task of no little magnitude. 
 
 Sinking Fund in the United States. The various politi- 
 cal units in the United States have made extensive use of 
 some sinking fund arrangement. At the end of the Revo- 
 lution the early English scheme of an accumulating in- 
 terest fund was adopted. A little later specified revenue 
 receipts were added to this. Much the same provision 
 was made during the Civil War to insure debt payment. 
 Customs receipts were to go to the payment of interest 
 and to redeem a part of the debt. The redeemed debt, as 
 well as its interest charge, was to be used as a sinking 
 fund. 
 
 The sinking fund arrangement has again been invoked 
 to take care of the liquidation of the Liberty Loans. The 
 period required by the arrangement is twenty-five years. 
 Experience has shown, however, that such arrangements 
 have not been needed by the Federal government, for its 
 debts in the past have been canceled more rapidly than 
 the sinking fund provision anticipated. American states 
 and cities have made, of necessity, a wide use of this prin- 
 ciple of debt payment. State constitutions generally 
 make it obligatory that, upon the contraction of a debt 
 by the sta,te or its cities, provision for the payment of the 
 
PUBLIC INDEBTEDNESS 
 
 407 
 
 debt must immediately be made through the establish- 
 ment of some sinking fund arrangement. 
 
 208. A Study of Indebtedness in the United States Pre- 
 sents Interesting Conclusions. Statistics of indebtedness 
 of the Federal government and some of the minor political 
 divisions, inaccurate as they may be, present some inter- 
 esting comparisons. The following table gives the com- 
 parative net indebtedness of the Federal, state, and city 
 governments for five successive years. 1 
 
 NET INDEBTEDNESS 
 
 STATES 
 
 NATION 
 
 CITIES WITH MORE 
 
 THAN 30,000 
 
 POPULATION 
 
 Year 
 
 Total 
 
 Per 
 
 Capita 
 
 Total 
 
 Per 
 Capita 
 
 Total 
 
 Per 
 Capita 
 
 Not 
 avail- 
 able 
 $77.53 
 77.78 
 76.64 
 75.56 
 
 1919 
 1918 
 1917 
 1916 
 1915 
 
 $519,887,000 
 502,493,000 
 501,943,000 
 459,661,000 
 424,155,000 
 
 $4.95 
 
 4.86 
 4.93 
 4.59 
 4.31 
 
 24,479,302,000 
 10,924,281,000 
 1,908,635,000 
 989,220,000 
 1,090,148,000 
 
 $232.95 
 104.59 
 18.56 
 9.77 
 10.95 
 
 $2,698,000,000 
 2,661,451,000 
 2,587,083,000 
 2,473,104,000 
 2,355,149,000 
 
 A comparison of these figures shows a general increase 
 in indebtedness, and an enormous increase in the indebted- 
 ness of the Federal government, a part of which can be 
 accounted for by the Great War. In normal years the 
 national indebtedness has been much more than double 
 that of the states. The city indebtedness, on the other 
 hand, has been more than double that of the Federal 
 government. 
 
 Indebtedness of States. No uniformity can be found in 
 comparing the indebtedness of individual states. The 
 following table, which shows the indebtedness of some of 
 the states, indicates that the Eastern states and newer 
 Western states have an indebtedness far exceeding that 
 of the Central states. This can be explained readily when 
 due cognizance is taken of the fact that in the Eastern 
 
 1 This table and the ones following in this chapter, unless otherwise indi- 
 cated, were compiled from reports of the Bureau of the Census. 
 
408 
 
 OUTLINES OF PUBLIC FINANCE 
 
 states much public improvement is being undertaken, 
 while in the newer states the process of initial develop- 
 ment is still present. In the Central states, however, the 
 developmental stage is past, and they have not as yet 
 begun the stage of intensive improvements. The state of 
 Pennsylvania appears an exception to this generalization. 
 This situation is explained by the fact that it is a part of 
 her fiscal policy to avoid as nearly as possible the creation 
 of indebtedness. 
 
 TABLE SHOWING THE NET INDEBTEDNESS OF PARTICULAR STATES (1918) l 
 
 State 
 
 Total 
 Indebtedness 
 
 Per 
 Capita 
 
 Funded 
 
 Floating 
 
 Arizona 
 
 $ 3 509 000 
 
 $13 10 
 
 $ 3,009,000 
 
 
 Illinois 
 
 3,997,000 
 
 0.64 
 
 243,000 
 
 $1,814,000 
 
 Massachusetts 
 Pennsylvania. . . 
 
 134,158,000 
 4,645,000 
 
 35.57 
 54 
 
 130,618,000 
 1,072 000 
 
 534,000 
 52,000 
 
 Virginia 
 
 23 931 000 
 
 10 84 
 
 22 112 000 
 
 1 689 000 
 
 Colorado 
 
 5881 000 
 
 5 96 
 
 4 548 000 
 
 
 Oklahoma 
 New York 
 
 7,856,000 
 241,164,000 
 
 3.37 
 
 22.85 
 
 6,329,000 
 236,215,000 
 
 669,000 
 
 
 
 
 
 
 The growth of the indebtedness of a progressive state 
 such as New York, over a period of years, is interesting, as 
 is also the growth in a central state, such as Illinois, which 
 has not as yet undertaken such extensive public works. 
 The comparative tables follow. Illinois is now beginning 
 road building, so that in the future it is possible the wide 
 differences in indebtedness may disappear. 
 
 NET INDEBTEDNESS OF THE STATE OF NEW YORK 
 
 Year 
 
 Total 
 
 Per Capita 
 
 Funded 
 
 Floating 
 
 1890 
 
 $ 4,964,000 
 
 $ 0.30 
 
 $ 4,964,000 
 
 
 1900 
 
 10,941,000 
 
 1 31 
 
 10,941,000 
 
 
 1910 
 1912 
 1918 
 
 58,532,000 
 111,457,000 
 241,164,000 
 
 3.86 
 9.05 
 22.85 
 
 57,919,000 
 110,391,000 
 236,215,000 
 
 $ 612,000 
 1,066,000 
 669,000 
 
 1 The addition of the funded and floating indebtedness does not give 
 the total indebtedness because a few items are not considered in either 
 class. 
 
PUBLIC INDEBTEDNESS 409 
 
 NET INDEBTEDNESS OF THE STATE OF ILLINOIS 
 
 Year 
 
 Total 
 
 Per Capita 
 
 Funded 
 
 Floating 
 
 1890 
 
 $1,811,000 
 
 $0.47 
 
 $1,184,000 
 
 $ 626,000 
 
 1900 
 
 2,180,000 
 
 0.45 
 
 1,685,000 
 
 495,000 
 
 1910 
 
 2,244,000 
 
 0.40 
 
 1,830,000 
 
 413,000 
 
 1912 
 
 2,275,000 
 
 0.39 
 
 1,831,000 
 
 441,000 
 
 1918 
 
 3,997,000 
 
 0.64 
 
 243,000 
 
 1,814,000 
 
 Indebtedness of Cities. The indebtedness of cities is 
 found to vary directly with the size of the city. In nearly 
 every case the floating debt is less than the funded. The 
 limitations placed upon the indebtedness of some munic- 
 ipalities prevents figures from indicating the extent to 
 which borrowing would be used if the restrictions were 
 absent. The following table shows the indebtedness of 
 some cities, the population of which varies: 
 
 NET INDEBTEDNESS OF PARTICULAR CITIES (1918) 
 
 City 
 
 Total 
 
 Per 
 Capita 
 
 City 
 
 Total 
 
 Per 
 Capita 
 
 New York. . . . 
 Chicago 
 
 $1,005,055,000 
 72,728,000 
 
 $175.17 
 
 28.55 
 
 Albany 
 Harrisburg. . . . 
 
 $7,770,000 
 2,555,000 
 
 $72.87 
 34.86 
 
 Cincinnati. . . . 
 
 66,706,000 
 
 95.93 
 
 Topeka 
 
 1,670,000 
 
 33.72 
 
 Many cities in the various groups will have a total and 
 per capita indebtedness out of proportion to the popula- 
 tion. The city of Chicago, for example, has a remarkably 
 low indebtedness for its size. If space permitted to show 
 figures for a large number of cities, the tendency for in- 
 debtedness to increase in proportion to the population 
 could easily be traced. 
 
 209. The Indebtedness of Many Countries Has Reached 
 Vast Proportions. The indebtedness of the principal na- 
 tions of the world has become so large as to be almost 
 incomprehensible. The Great War was responsible to a 
 large extent, of course, for this situation. The following 
 table of the approximate indebtedness of a few nations, 
 before and after the war, will indicate to what extent 
 this was responsible for the present situation. 
 
410 
 
 OUTLINES OF PUBLIC FINANCE 
 
 APPROXIMATE INDEBTEDNESS OP IMPORTANT NATIONS BEFORE AND AFTER 
 THE GREAT WAR l 
 
 Country 
 
 Debt, August 1, 1914 
 
 Debt, January 1, 1920 
 
 United States 
 
 $1,000,000,000 
 
 $26,000,000,000 
 
 Great Britain 
 
 3 500 000 000 
 
 42 000 000 000 
 
 France 
 
 6,500,000,000 
 
 33 000 000 000 
 
 Russia 
 
 4,600,000,000 
 
 30,000,000,000 
 
 Italy.. 
 
 2,800,000,000 
 
 13,000,000,000 
 
 German Empire 
 
 5 200,000,000 
 
 45 000 000 000 
 
 
 
 
 The real meaning of such an immense indebtedness can 
 be understood only when the burden upon the citizenship 
 is considered. The indebtedness of the United States was 
 contracted through the four Liberty Loans, the Victory 
 Loan, and by issuing thrift stamps and war saving cer- 
 tificates. The interest rate, conditions of payment, and 
 other items, varied with the different loans, the details of 
 which will be discussed in the chapter on Financing an 
 Emergency. The figures in the above table are so large 
 as to be beyond comprehension. A debt is important and 
 burdensome to a nation, however, only as it affects par- 
 ticular factors. Some of the important items to be con- 
 sidered are the burdens placed upon each individual, as 
 well as upon the national wealth or the national income 
 of a country. The real significance of the present vast 
 indebtedness can best be appreciated by attempting an 
 estimate of some of these classes of burdens. 
 
 It is estimated that the national wealth of the United 
 States is between $275,000,000,000 and $300,000,000,000. 
 If this be correct, the indebtedness amounts to between 
 5 and 8 per cent of the national wealth, and is a per capita 
 burden of about $225. An item exists, however, which 
 should be deducted from this. About $10,000,000,000 
 was loaned to foreign countries under the stipulation that 
 its liquidation should be used to cancel an equal amount 
 of the national debt. This amount of the debt, then, 
 
 1 These figures are taken from a booklet, The World's War Debt, published 
 by the Mechanics and Metals National Bank, 
 
PUBLIC INDEBTEDNESS 411 
 
 should entail no burden upon the citizenship of the United 
 States. 
 
 The burden of the annual charge upon the national 
 income is no less significant. It has been estimated that 
 the annual social income of the United States is approxi- 
 mately $60,000,000,000. The interest charge alone 
 amounts annually to about $1,000,000,000. To meet this 
 a little more than $1.60 must be taken from each $100 of 
 the national income. In addition to this the burden of pro- 
 viding for the sinking fund must be added. This entails 
 nearly another half billion dollars. This, added to the 
 interest charge, would take a little less than $2.50 from 
 each $100 income, or about $15 per capita. Here, again, 
 the loan to foreign countries has a significant effect. 
 When the interest and sinking fund burden of the $10,- 
 000,000,000 is deducted, it leaves an annual per capita 
 burden of something less than $10, or approximately $2 
 from every $100 income. In other words, the actual an- 
 nual burden of indebtedness on the people of the United 
 States amounts to a little less than 2 per cent of the 
 national income. 
 
 This charge may appear large to a people that has been 
 accustomed to practically no debt burden, but it sinks 
 into insignificance when it is compared with the burden 
 that the debt of other countries is placing upon their 
 citizenship. The debt of Great Britain is about $36,- 
 000,000,000, or a per capita burden of about $780. Her 
 national wealth is somewhere around $120,000,000,000, 
 with a national income of about $15,000,000,000. This 
 means an annual interest charge of about $10 out of every 
 $100 income, or what would be equivalent to a 10 per 
 cent income tax on the entire national income. Great 
 Britain, however, has loaned about $5,000,000,000 to her 
 allies, the payment of which would lower proportionately 
 her burden. 
 
 The burden upon France and Germany is still more 
 startling, while that upon Italy is somewhat less. France 
 
412 
 
 OUTLINES OF PUBLIC FINANCE 
 
 has a debt about the size of that of Great Britain, but with 
 a national wealth only about three fourths as large, and 
 an annual income about four fifths as large. This makes 
 her per capita debt between $900 and $1,000, with about 
 $15 out of every $100 of her income needed to meet the 
 interest charge. Germany's debt is something less than 
 $40,000,000,000, her wealth between $75,000,000,000 and 
 $80,000,000,000, and her income something over $10,- 
 000,000,000. This makes her per capita indebtedness 
 about $600, while the annual charge requires nearly $20 
 out of every $100 income. Italy's per capita debt is ap- 
 proximately $350, and the annual burden about $7.50 
 out of every $100 income. 
 
 These figures will hold as approximately correct for the 
 middle of 1919, when the indebtedness of most countries 
 had reached its maximum. The relative status of the 
 various countries under consideration may be gained 
 readily from a glance at the computations in the following 
 tabulated form. A few other calculations have been 
 added because they show interesting comparisons. 
 
 INDEBTEDNESS CONDITION OF IMPORTANT COUNTRIES l 
 
 Country 
 
 Debt 
 in 
 Billions 
 
 Per 
 Capita 
 Debt 
 
 Wealth 
 in 
 Billions 
 
 Income 
 in 
 Billions 
 
 Per 
 
 Capita 
 Income 
 
 Burden 
 on 
 $100 
 Income 
 
 Per 
 Capita 
 Interest 
 Charge 
 
 United States. . 
 Great Britain. . 
 France . . 
 
 $24 
 36 
 36 
 
 $225 
 780 
 900 + 
 
 $275-300 
 120 
 90 
 
 $60 
 15 + 
 12 
 
 $555 
 335 
 300 
 
 $ 1.50 
 10.00 
 15.00 
 
 $ 9.25 
 34.25 
 45 00 
 
 Germany 
 
 40 
 
 600+ 
 
 75-80 
 
 10 
 
 205 
 
 20.00 
 
 30-00 
 
 Italy . 
 
 12+ 
 
 350 
 
 40 
 
 7+ 
 
 155 
 
 7.50 
 
 15.25 
 
 
 
 
 
 
 
 
 
 A moment's reflection upon these figures causes one to 
 realize the pressing burden of indebtedness which rests 
 upon these countries, especially the European nations. 
 It must be remembered, too, that only the national in- 
 debtedness has been considered, and that the minor polit- 
 
 1 These figures are taken, very largely, from a booklet published in 1919 
 by the Bankers Trust Company. 
 
PUBLIC INDEBTEDNESS 413 
 
 ical divisions generally have a heavy debt charge of their 
 own. This, added to the enormous interest charge, makes 
 the total burden of public indebtedness so large that it 
 can be materially lessened only after a considerable lapse 
 of time. 
 
 ADDITIONAL READING 
 
 Adams, Public Debts. 
 
 Bankers Trust Company, Our Public Debt. 
 
CHAPTER XVIII 
 
 THE ADMINISTRATION OF PUBLIC FUNDS 
 
 210. The Importance of Proper Fiscal Administration 
 Sas Been Underestimated. Previous chapters have indi- 
 cated that, during the first stages of the development of 
 fiscal systems, the question of revenue was of greatest 
 concern. Gradually, consideration has been directed to 
 the use to which the funds were put, until fiscal students 
 have become much concerned about public expenditures. 
 A third important phase of public funds their adminis- 
 tration has been recognized only recently as being of 
 any particular consequence. It is true that in the very 
 early development of fiscal systems much attention was 
 given to methods for handling revenues and expenditures. 
 As the pressure for funds became more pronounced, how- 
 ever, attention became concentrated on sources of rev- 
 enue, while little was thought or said concerning the man- 
 agement of the public funds. It is only recently that the 
 importance of this aspect has again begun to receive due 
 consideration. 
 
 Various factors have caused modern fiscal students to 
 emphasize the importance of the proper administration 
 of public funds. Expenditures, in numerous political 
 divisions, have become so large that the burden of the 
 revenue charge is felt keenly. Many political units have 
 reached the limit of indebtedness, as well as the maximum 
 tax rate, while a scarcity of funds still exists. Under such 
 conditions the question naturally arises whether the rev- 
 enues and expenditures have been properly handled. The 
 increased emphasis which has been placed recently 
 
THE ADMINISTRATION OF PUBLIC FUNDS 415 
 
 proper methods of accounting in private business enter- 
 prises, has no doubt stimulated interest in the handling 
 of public funds. A modern business firm keeps in close 
 touch with revenues and expenditures through its skilled 
 accountants, and because of this demand the importance 
 of the accounting profession has increased many tunes. 
 Since this close management has proved so beneficial to 
 private enterprise, many have seen the need for a similar 
 policy in handling public funds. The continual increase 
 in the number of charges of graft and misappropriation 
 of funds on the part of fiscal officials has no doubt been 
 an important factor in leading citizens to demand a 
 stricter account of the services which these officials ren- 
 der. It is the purpose of this chapter to indicate some of 
 the deficiencies in methods that have been used in han- 
 dling public funds, and to suggest some improvements. 
 
 211. The Administration of Public Funds Should Har- 
 monize with Other Institutions. When the amount of 
 funds which fiscal officials handled was small, the method 
 in which they were administered was of little concern to 
 others than the officials. As the amount of funds began 
 to increase with the gradual extension of government ac- 
 tivity, it became quite possible that the method of han- 
 dling the funds would be of interest to others than the 
 officials into whose hands the funds were placed. 
 
 Adam Smith's axiom that taxes should be paid at a time 
 when it was most convenient is worthy of consideration. 
 In the supply of capital there are seasons of scarcity and 
 seasons of plenty. It is indicative of poor judgment on 
 the part of the fiscal officials, if the collection of revenue 
 is so arranged that the time for its payment comes when 
 the contributor is least able to meet it that is, at the 
 season when money is already scarce. If such an arrange- 
 ment exists, it will mean a still greater strain upon bank 
 reserves than what would nominally occur, with a corre- 
 sponding raise in the discount rate. If, on the other hand, 
 fiscal officials so arrange that substantial payments by 
 
416 OUTLINES OF PUBLIC FINANCE 
 
 the government are made at times when money is already 
 plentiful, the difficulties of a cheap money are increased 
 by such action. In the formulation of fiscal plans, more- 
 over, the possible effects on individual industries have not 
 always been given due consideration. 
 
 Many illustrations of these difficulties have occurred in 
 the revenues and expenditures of various political units. 
 One of the outstanding examples, however, has been in 
 the fiscal machinery of the Federal government. In the 
 establishment of the first and second United States banks 
 consideration was given to their ability to aid individual 
 enterprise. President Jackson went to the extreme in 
 using the government funds for the aid of general indus- 
 try when he distributed them among the banks of his 
 choice. The resulting speculation, followed by the panic 
 of 1837, led to the adoption of the independent treasury 
 system. The system was not put into actual operation 
 until 1847, and has since remained in some form. 
 
 The Independent Treasury. The original intention of 
 the plan of the independent treasury was to keep all the 
 funds of the government in this treasury or the sub- 
 treasuries for which provision was made. The chief diffi- 
 culty with this arrangement was that large sums of capi- 
 tal, which might otherwise have been used as the basis for 
 bank credit, or for productive enterprise, were held in the 
 vaults of the government until they were needed to meet 
 some obligation. These payments were of course at ir- 
 regular intervals, and frequently had a noticeable effect 
 on the money market. After some years the Secretary of 
 the Treasury was authorized to make deposits, under cer- 
 tain conditions, with national banks. Such deposits were 
 made at the discretion of the Secretary, and the opinions 
 of all Secretaries were not the same, nor could a definite 
 policy of any particular one be relied upon. 
 
 The result has been an element of uncertainty in the 
 banking system and in the money market. It could not 
 be foreseen just what policy would be followed by the 
 
THE ADMINISTRATION OF PUBLIC FUNDS 417 
 
 Secretary of the Treasury. Banks did not know whether 
 to anticipate deposits or withdrawals. There was no law 
 which regulated these activities, and the practice was so 
 diverse that no definite action could be anticipated. As 
 there has been no uniformity in the receipts and disburse- 
 ments of the government from year to year, or from 
 month to month, so there has always been more or less 
 uncertainty as to how banks and other industries would 
 be affected by these variations in the operation of the 
 treasury. The result has been a constant speculation 
 among banks as to what the action of the Secretary of the 
 Treasury would be. The Secretary has been hi no way 
 connected with the banks or other industries, yet has had 
 control over a factor which vitally affected their w r elfare 
 a situation under which it has been impossible to ex- 
 pect satisfactory cooperation. The independent treas- 
 ury system still exists, but it has sunk into insignificance 
 to such an extent since the adoption of the Federal Re- 
 serve Banking System that its influence is scarcely felt. 
 
 212. The Expenditure of Federal Funds Is Carefully 
 Scrutinized. In the establishment of the Treasury De- 
 partment there was a diversity of opinion as to what form 
 it should take. Many felt that it would be unwise to in- 
 trust the handling of the nation's finances to any particu- 
 lar individual, and contended that the funds should be 
 handled by a commission. Many considered that it would 
 be impossible to secure a man who would be honest 
 enough to intrust with so much responsibility. After 
 much debate the Treasury Department was established 
 under one head, the Secretary of the Treasury. Unlike 
 other departments, this department is independent of the 
 control of the President, but is closely allied to Congress. 
 To obtain information on financial matters, Congress may 
 inquire directly of the Treasury Department, without the 
 consent of the President. 
 
 Organization of Treasury Department. The internal or- 
 ganization of the Treasury Department was carefully 
 
418 OUTLINES OF PUBLIC FINANCE 
 
 worked out, and was designed to be a system of checks. 
 At times it has proved rather cumbersome. Besides the 
 Secretary there was to be appointed an assistant Secretary, 
 a comptroller, an auditor, a treasurer, and a register. As 
 the business of the department expanded it became neces- 
 sary to increase the number of some of these officers, and 
 to assign particular funds to their jurisdiction. It is the 
 duty of the comptroller to scrutinize the correctness of the 
 accounts, and to countersign warrants drawn by the Sec- 
 retary of the Treasury. The register must preserve 
 vouchers and bills, while the treasurer sees that no funds 
 are improperly paid. The auditor must see that the 
 accounts are properly kept. In order to secure funds 
 from the United States Treasury, it is first necessary that 
 an appropriation be made by Congress, and that the war- 
 rant be signed by the Secretary, countersigned by the 
 comptroller, and recorded by the register. 
 
 Later Modifications. As the business of the treasury 
 expanded, the number of auditors and comptrollers was 
 increased, and a portion of the accounts was distributed 
 to the different branches. To use all the checks, however, 
 which were first intended, began to prove too complex 
 and cumbersome. In 1894 Congress modified the system 
 by abolishing all the comptrollers except one. Such de- 
 tailed revisions of accounts as had formerly been practiced 
 were also modified. There now are six auditors, whose 
 duties are divided hi the following manner: the first 
 auditor takes care of the accounts of the Treasury De- 
 partment; the second auditor handles the accounts of 
 the War Department; the third auditor handles the ac- 
 counts of the Department of Interior; the fourth auditor 
 reviews the Navy Department accounts; the fifth auditor 
 is concerned chiefly with the accounts of the State De- 
 partment; while the sixth auditor looks after the accounts 
 of the Post Office Department. 
 
 Under the present arrangement the work of the auditors 
 is not reviewed by the comptroller, unless he has reason 
 
THE ADMINISTRATION OF PUBLIC FUNDS 419 
 
 to question it, or unless some claimant makes an appeal 
 which necessitates a review. The comptroller keeps a 
 record of congressional appropriations, and on the basis 
 of these appropriations opens a credit account with the 
 various departments of the amount of funds at then 1 dis- 
 posal. Warrants, when properly indorsed, are debited to 
 these accounts, and it is one of the duties of the comptrol- 
 ler to see that warrants are not drawn hi excess of the 
 appropriations. Claims against the government which 
 the Treasury Department refuses to recognize may be 
 reviewed in the Court of Claims, or carried from here to 
 the Supreme Court. Recourse may also be had, of course, 
 in petitioning Congress against any decision of the Treas- 
 ury Department. 
 
 There has been little question as to the integrity of the 
 Treasury Department, while the system of checks, cum- 
 bersome and time-consuming as it often is, has served the 
 purpose for which it was intended. The funds of the 
 government are closely guarded, and warrants are paid 
 only to those who are expected to receive funds. It has 
 not been deemed necessary, as in a number of countries, 
 to have the accounts of the department audited by a legis- 
 lative committee. Such an experiment was tried by the 
 House of Representatives in the early years of the depart- 
 ment, but was not continued. The fact that the depart- 
 ment officials may be called upon at any tune to make a 
 report to Congress, or may be subject at any time to an 
 investigation of then* affairs, has seemed to maintain the 
 efficiency and integrity of the department at a compara- 
 tively high level. An avenue is left open to fraud, how- 
 ever, which would be difficult to detect under the present 
 arrangement. 
 
 213. Revenues and Expenditures Should Be Closely 
 Correlated. The fact that some close relation should 
 exist between a government's expenditures and revenues 
 seems too obvious to mention. Yet fiscal officials have 
 often lost sight of this first principle of sound financiering. 
 
420 OUTLINES OF PUBLIC FINANCE 
 
 Funds have often been voted in excess of ordinary rev- 
 enues, and without knowledge as to where revenue could 
 be obtained. Revenues, on the other hand, have fre- 
 quently exceeded the anticipated expenditures a situa- 
 tion which usually leads to the squandering of public 
 funds. The most common arrangement for a proper co- 
 ordination of expenditures and revenues has been through 
 the use of some form of a budget system. 
 
 Meaning of Budget. The term "budget" has no fixed 
 general meaning. Its origin is probably from the Latin, 
 bulga, meaning bag or purse. In the middle of the eight- 
 eenth century, when the Chancellor of the Exchequer in 
 England made his speech on the finances, he took his 
 accounts from a brugette (French for bag). Thereafter the 
 term budget was applied to this speech. A little later it 
 was used in France to denote an estimate of receipts and 
 expenditures. In some cases it is practically synonymous 
 with revenue and appropriation legislation. 
 
 A comprehensive budget system, however, should in- 
 clude more than this. It should be a definte plan to 
 include all the fiscal operations of a government for a 
 specified time. It may involve different features, one 
 logically following the other. A comprehensive budget 
 system, for example, might comprise, as an initial measure, 
 a careful estimate of expenditure and revenues by some 
 competent authority. These estimates should be given 
 the sanction of the legislative body through their incor- 
 poration into appropriation and revenue bills. Provision 
 should be made for the execution of the plan under legal 
 direction, while checks should be provided through proper 
 auditing and accounting methods. The fiscal, systems of 
 some countries possess some of these features and omit 
 others, while the officers to which the administration is 
 given in different countries are likewise not always the 
 same. For this reason mere reference to a budget system 
 is unintelligible. 
 
 The citizenship of a state has a right to demand the 
 
THE ADMINISTRATION OF PUBLIC FUNDS 421 
 
 most capable management of public funds. Government 
 expenditures necessarily mean public burdens. The more 
 the funds are squandered, the greater are the burdens 
 upon the citizens in proportion to the rendition of the 
 services for which the state was formed that is, the 
 things which can be done more efficiently by a collective 
 organization than by individuals. The use of a budget 
 a systematic administration of revenues and expenditures 
 such as that outlined above should, therefore, be de- 
 manded by every citizen hi order to make his government 
 susceptible to intelligent popular control and responsi- 
 bility, and so that each taxpayer may know where and 
 why he is paying. 
 
 214. England Has Done Much to Systematize Her Fis- 
 cal Operations. Great Britain has worked out a more 
 detailed system for handling her fiscal operations than, 
 perhaps, any other country, and her system has been 
 adopted almost in its entirety by India and Egypt. Be- 
 cause of the degree of perfection which is found hi this 
 organization, and because of the influence it has had m 
 the formulation of other fiscal programs, it deserves a 
 somewhat detailed exposition. 
 
 Formation and Passage of Budget. The British fiscal 
 year begins April 1st. Each year is complete in itself, and 
 no appropriations hang over from one year to the next. 
 The various departments of the government make esti- 
 mates of expenditures which form the basis for the figures 
 of the Treasury Department. These estimates are made 
 up at the request of the Treasury Department about 
 December 1st. They are then compiled and reviewed by 
 the Chancellor of the Exchequer, who has the power to 
 reduce them. Should the Chancellor not agree with the 
 Treasury Department, appeal is made to the Prime Minis- 
 ter as arbitrator. 
 
 With the list of revenues which has been prepared by 
 the Treasury Department, a balancing of possible receipts 
 and expenditures is undertaken. The result is some well- 
 
422 OUTLINES OF PUBLIC FINANCE 
 
 formulated plan one which usually makes provision for 
 a rather large surplus. It then becomes the duty of the 
 King to lay the proposed fiscal scheme before Parliament. 
 The estimates are printed in well-organized and summa- 
 rized form, and placed in the hands of each member of 
 Parliament, where it becomes the duty of the Prime 
 Minister to pilot the bill, while its various items are de- 
 fended by the Chancellor, who is a member of the House 
 of Commons. 1 
 
 The various divisions of the budget, usually about one 
 hundred and forty hi number, are acted upon by the House 
 as a committee of the whole. Each section is discussed 
 and voted on. Items may be reduced but cannot be 
 increased except under closely restricted conditions. 
 Much debate marks the discussion of these items, and fre- 
 quently wanders far afield from the subject of the budget. 
 After the bills have been made acceptable to the com- 
 mittee, they are passed in Parliament proper, under the 
 title of the Consolidated Fund Act; this is usually ac- 
 complished before the end of the fiscal year. The pas- 
 sage of the appropriation measure is followed later by a 
 finance Act which levies the taxes for the year. 
 
 Classes of Expenditures and Revenues. The expendi- 
 tures of the United Kingdom are of two kinds, permanent 
 appropriations and supply appropriations. The former 
 need not be voted year after year, but have been voted to 
 continue until the Act under which they are authorized is 
 repealed. Examples of expenditures of this nature are 
 those for the sinking fund, pensions, debt charge, courts, 
 and the civil list. The supply appropriations, however, 
 must be voted repeatedly, and contain such items as the 
 appropriations for the army and navy, revenue depart- 
 ment, post office, railroads, and the civil service. Such an 
 arrangement not only simplifies the budget preparation, 
 but makes it possible to concentrate attention on the more 
 
 1 Army and navy bills are defended by representatives from these de- 
 partments. 
 
THE ADMINISTRATION OF PUBLIC FUNDS 423 
 
 difficult and fluctuating items, while it tends to give a 
 feeling of security to activities undertaken by the state. 
 
 The revenue is likewise of two kinds, one permanent, 
 and the other provided for currently. About three fourths 
 of the entire revenue comes in the first class, so that it is 
 necessary to provide in the finance bill the amount above 
 this which is required to meet the needs of the appropria- 
 tions bill, or about one fourth of the total amount. These 
 estimates of expenditures and receipts are so closely an- 
 ticipated that the actual amounts do not usually vary 
 more than 2 per cent from the expectations. The funds 
 are placed in the Bank of England, and are at the control 
 of the comptroller and auditor-general. 
 
 In England's fiscal machinery it is seen that absolute 
 responsibility for the success of the budget rests in the 
 ministry. The finance minister has a seat in the legisla- 
 tive body, which hi turn has complete control over ex- 
 penditures. Another interesting feature is that one branch 
 of the legislative assembly has practically the entire con- 
 trol over the budget. No doubt the marked centralization 
 of control over the fiscal system has had much to do with 
 the success of the system. 
 
 215. Many European States Use a Form of Budget. 
 England must be given the credit for having the most 
 systematic fiscal scheme, yet many of the systems of the 
 continental states have made an approach toward an 
 orderly arrangement of their fiscal machinery. Space will 
 be taken only to give the bare outlines of two of the better 
 organized systems. 
 
 The German Fiscal Plan. In Germany, before the war, 
 the budget estimates originated in much the same manner 
 as in the English system. A set of estimates was made up 
 by local and provincial authorities and turned into the 
 hands of the general treasury, where an attempt was made 
 to eliminate any difficulty. It was the duty of the Im- 
 perial Chancellor to act as arbitrator if necessary. The 
 Various estimates were of minute detail, and were first 
 
424 OUTLINES OF PUBLIC FINANCE 
 
 voted upon by the upper chamber of the government. 
 Army and navy appropriations were for a period of seven 
 years, while all established institutions were assured of 
 continued support. The question of funds for current ex- 
 penditures was, therefore, the one around which discus- 
 sion centered. If the system is continued under the new 
 governmental regime it can doubtless be made more satis- 
 factory, since the former Emperor granted very limited 
 powers to the fiscal authorities. 
 
 French Fiscal Plan. Under the French system the esti- 
 mates are much less accurate than those in England. 
 Here the fiscal year coincides with the calendar year, 
 while the estimates are made a full year in advance of the 
 actual expenditures. With the lapse of a year between 
 the time an estimate is made and the time it goes into 
 effect, it is, of course, impossible to have a close estimate. 
 The budget is prepared by the Treasury Department, but 
 the Minister of Finance has much less power in modifying 
 the estimates than has the English Chancellor. 
 
 After the Minister of Finance has compiled the estimates 
 in presentable form, they go to the Chamber of Deputies. 
 Here the budget takes the form of a bill, with schedules 
 authorizing certain expenditures. The bill is prepared 
 by a joint committee from the two houses, which fre- 
 quently pays little attention to the estimates which have 
 been submitted. After much time has been consumed 
 here, the bill, with its seven or eight hundred chapters, is 
 presented to the Chamber of Deputies, where each chap- 
 ter is discussed and voted upon separately. Motions for 
 changes may be made by any member, and because of the 
 lack of any centralized responsibility, much extravagant 
 expenditure results. The President cannot veto, but may 
 suggest a reconsideration of the items. 
 
 An estimate of the revenues forms a part of the budget. 
 The major part of these comes from indirect taxes. As 
 might be expected, since such a long period elapses before 
 the estimates are put into effect, it frequently becomes 
 
THE ADMINISTRATION OF PUBLIC FUNDS 425 
 
 necessary to pass additional and special budget Acts. 
 This necessity is alleviated somewhat by the practice of 
 transferring funds from one purpose to another within the 
 various departments, although they are not transferred 
 between departments. These difficulties, however, show 
 the evil consequences of having the estimates and expend- 
 itures so widely separated in point of time. The real 
 administration of the budget and the auditing of the ac- 
 counts is under the control of a committee of accounts. 
 
 216. The Fiscal Machinery of Canada Resembles That 
 of England. The influence of the Mother country, as 
 might be expected, is clearly discernible in the fiscal sys- 
 tem of Canada. Estimates are prepared by the Ministers 
 of the departments and presented to the Minister of 
 Finance. Changes are made, if considered necessary, by a 
 conference with the Minister of the department concerned. 
 After the budget has met the approval of the Cabinet, 
 the Minister of Finance presents it to the House of Com- 
 mons, where items may be reduced, but not increased. 
 Since the Cabinet belongs to the dominant party in the 
 House, the bill usually goes through with comparatively 
 little difficulty. It is quite evident that the system closely 
 resembles the English practice of centralization and Cabi- 
 net responsibility. 
 
 Of the entire appropriations in the Canadian budget, 
 about three eighths are permanent. Some of the more 
 important appropriations in this class are for debt 
 charges, collection of revenue, court maintenance, and 
 salaries. If it becomes necessary to maintain existing 
 institutions, and the House has failed to pass the budget, 
 the Governor-General is empowered to issue special war- 
 rants for expenditures to meet the needs. 
 
 The subject of revenues arises after a decision has been 
 reached on the appropriation part of the budget. The 
 House goes into a committee on ways and means for this 
 purpose, and the finance Minister presents the plan for 
 raising revenues. The most important sources of revenue 
 
426 OUTLINES OF PUBLIC FINANCE 
 
 are customs duties, excise taxes, the sale of public lands, 
 and the post office. Tariff Acts are frequently passed 
 outside of budgetary consideration, while Acts authoriz- 
 ing the borrowing of funds usually have nothing to do 
 with the budget. The expenditures are controlled by the 
 auditor-general, who makes an annual report to Parlia- 
 ment. A careful study of the report aids in securing more 
 successful fiscal legislation for the ensuing year. 
 
 217. Budget Development in the United States Has 
 Been Toward an Unsystematic System. The above out- 
 lines of different budgetary systems has been given to 
 indicate the tendency toward a systematic procedure in 
 arriving at expenditures and revenues. The same tend- 
 ency exists in many other countries. In the United 
 States, however, as a brief historical review of our fiscal 
 system will show, the development has been away from 
 systematic estimates of revenues and expenditures. 
 
 Ideas of Early Officials. The evidence is strong that 
 the founders and early leaders of our government had in 
 mind the establishment of a fiscal system very similar to 
 the one used in England. Under the government by the 
 Articles of Confederation, committees were appointed for 
 the purpose of making estimates of the expenditures. 
 From what can be gathered from the debates over fram- 
 ing the Constitution, it appears certain that some such 
 system as the English was intended to be incorporated in 
 our basic law. The Constitution includes in the duties of 
 the President, "to give Congress information on the state 
 of the Union, and to recommend to its consideration 
 such measures as he shall judge necessary and expedient." 
 The people, moreover, are given control over the Federal 
 revenues and expenditures. This safeguard is shown in 
 such provisions as the following: "No money shall be 
 drawn from the treasury but in consequence of appro- 
 priations made by law." "All bills for raising revenue 
 shall originate in the House of Representatives, but the 
 Senate may propose or concur with amendments." "A 
 
THE ADMINISTRATION OF PUBLIC FUNDS 427 
 
 regular statement and account of the receipts and expend- 
 itures of all public money shall be published from time 
 to time." While all the details of the fiscal machinery 
 were left to be provided by statute or custom, it seems 
 probable that some such arrangement as was used in Eng- 
 land was anticipated. 
 
 At the very beginning the House of Representatives 
 went into a committee of the whole, where revenue meas- 
 ures were discussed, which corresponded to the English 
 method of considering such measures. The relation of 
 the Treasury Department to Congress was made very 
 close, and the law which established the department made 
 it the duty of the Secretary "to prepare and report esti- 
 mates of the public revenue and the public expenditures." 
 Somewhat later an Act imposed upon the Secretary the 
 duties of digesting, preparing, and laying before Congress 
 at the beginning of each session a report containing esti- 
 mates of revenue and expenditures, as well as plans for 
 increasing the revenues. The intense political feeling 
 kept these plans from being fully realized, while the 
 President neither insisted upon any constitutional right 
 to present administrative proposals, nor accepted the re- 
 sponsibility for doing so. 
 
 Modification of Early Plans. It was not long after the 
 beginning of the government that important modifica- 
 tions began to be made. In 1796 the Ways and Means 
 Committee was established in the House of Representa- 
 tives, with the right to initiate fiscal legislation. Little 
 administrative initiative existed after the administration 
 of J. Q. Adams. The Cabinet members were barred from 
 holding seats in Congress. Real disintegration of au- 
 thority began in 1865, when the Committee on Appro- 
 priations was appointed, with the power to initiate all 
 expenditure bills. This action gave the power over rev- 
 enues and expenditures to two separate committees. In 
 1880 the power of this committee was curtailed when the 
 Committee on Agricultural Appropriations was formed, 
 
428 OUTLINES OF PUBLIC FINANCE 
 
 and still further reduced when the Rivers and Harbors 
 Committee was created a few years later. Further dis- 
 integration has continued to the present, until no sem- 
 blance of centralized responsibility remains. 
 
 The Senate, moreover, has so developed its power that 
 it practically rewrites revenue bills which come to it from 
 the House. Decentralization of authority, moreover, has 
 taken place in the Senate, until fiscal bills are acted upon 
 by a number of committees that function independently 
 of the other Senate committees, and of the House com- 
 mittees. The trend in the United States, then, has been 
 toward a decentralization of the fiscal machinery the 
 opposite of the development in other countries. 
 
 218. The Present Plan of Estimating Revenues and 
 Expenditures Is Unsatisfactory. It is instructive to know 
 the condition which has resulted from the fiscal develop- 
 ment which we have just traced. The Secretary of the 
 Treasury has become little more than an outlet through 
 which reports of estimates may reach the House of Rep- 
 resentatives. The power of making estimates was taken 
 from him and placed in the hands of the various depart- 
 ments, as well as in those of some independent establish- 
 ments. It then became the duty of the Secretary to re- 
 cord these estimates in the "Book of Estimates," which 
 he transmitted to the House. Such a sweeping decen- 
 tralization of power soon evidenced its weakness in that 
 some expected estimates were not made, and others did 
 not take the proper form, and it became necessary to em- 
 power the Secretary to see that all estimates were made 
 and that they were in the desired form. 
 
 Still more recent legislation has conferred upon the 
 Secretary of the Treasury the duty of submitting to Con- 
 gress an estimate of receipts and expenditures for the 
 current and ensuing years. It is now his duty, as soon as 
 estimates of expenditures are received, to make an esti- 
 mate of the revenues for the ensuing year. Should the 
 estimated revenues not equal the estimated needs, it be- 
 
THE ADMINISTRATION OF PUBLIC FUNDS 429 
 
 comes the duty of the President, after a consideration of 
 all the estimates, to recommend to Congress how the ap- 
 propriations should be reduced or the revenues increased 
 to make the revenue correspond to appropriations. These 
 are steps in the right direction, but do not go far enough 
 to insure centralized responsibility. 
 
 No Budget System. The budget does not exist in the 
 United States hi the sense that other countries use it. 
 About September of each year the various spending de- 
 partments begin to make estimates for the year to com- 
 mence the next July. These come to the Secretary of 
 the Treasury to be transmitted to Congress in the "Book 
 of Estimates." The estimates of the various departments 
 are usually far from the actual needs. Past experience 
 has shown that Congress is likely to reduce materially the 
 appropriations from the estimates, consequently the de- 
 partments fortify themselves by padding their require- 
 ments. Under such a situation the estimates become of 
 little value. These estimates are transmitted to the House 
 without revision, with no comparison of the demands of 
 the different departments, and with no consideration of 
 the possible revenue. As already indicated, the Secretary 
 submits separately lists of estimated revenues and ex- 
 penditures, while the President may recommend methods 
 for increasing revenues or decreasing expenditures. Esti- 
 mates may also come from army engineers and from the 
 Court of Claims. 
 
 Fiscal Legislation. The actual preparation of the ap- 
 propriation and revenue bills really begins in Congress 
 before or at the time the "Book of Estimates" is received. 
 About fifteen separate committees that have the power to 
 originate appropriations exist in each branch of Congress, 
 each working separately from the others, and independ- 
 ently of the Secretary of the Treasury. Still other com- 
 mittees can make demands on the treasury. Still others 
 have power over the revenues. The appropriation and 
 revenue bills may be under the process of formation at 
 
430 OUTLINES OF PUBLIC FINANCE 
 
 the same time, entirely independent of each other, with 
 nothing for guidance but past bills. The personnel of the 
 committees is often not exactly what is desired in the 
 consideration of such problems. Members are chosen ac- 
 cording to the lengths of term in Congress by a regular 
 system of promotion rather than for any special fiscal 
 knowledge. That such special knowledge is often not 
 found is indicated by the occupations which a number of 
 the committeemen have followed before taking seats hi 
 Congress. 
 
 The reporting of an appropriation bill from its commit- 
 tee does not end its career. It is next placed before the 
 House, where individual members may propose amend- 
 ments. The Senate committee on the same subject must 
 have its turn at considering it, and then the floor of the 
 Senate. It is fortunate if it does not have to go before 
 an adjustment conference committee of members from 
 each House, where a bill is framed which is finally adopted. 
 It is evident under this method of procedure that Con- 
 gress initiates as well as ratines appropriation and revenue 
 bills. The House no longer has the balance of power in- 
 tended by the Constitution, while bills carrying appro- 
 priations are strung throughout the entire session, with 
 little consideration as to the source of funds. The revenue 
 bill usually comes up late in the session, and for the last 
 few years has not been sufficient to meet the appropria- 
 tions. Deficiency bills have been used to make up the 
 difference. 
 
 Lack of Control and Responsibility. The control of Con- 
 gress over fiscal administration practically ceases with 
 the passage of the appropriation and revenue bills. The 
 system of control over payments has been indicated. 
 While the Secretary of the Treasury must make an annual 
 report to Congress, no action is taken upon it. There is 
 a committee in Congress for each of the departments, 
 which has jurisdiction to examine the reports as to accu- 
 racy and conformity to the appropriations. Such investi- 
 
THE ADMINISTRATION OF PUBLIC FUNDS 431 
 
 gations rarely occur unless initiated by some political 
 motive. The Treasury Department has been remarkably 
 free from suspicion, hence there has been little agitation 
 for a systematic auditing of accounts. The present ar- 
 rangement is, of course, no auditing at all, for there can 
 be no systematic check where one department audits its 
 own receipts and expenditures. Even though the various 
 committees did avail themselves of the right to audit 
 accounts, no verified result of expenditures and revenues 
 as a whole could be obtained from the nine committees, 
 the work of which would not be related. In no other 
 country does there exist such a lack of restraint upon the 
 Treasury Department. 
 
 The one outstanding criticism which appears from this 
 survey of the Federal fiscal methods is the lack of unity 
 and centralized authority from beginning to end. Appro- 
 priation and revenue bills arise and are modified in hap- 
 hazard ways, and with no one really responsible. Such 
 methods cater to the familiar "pork barrel legislation. " 
 Expenditures which will please the constituency of the 
 Senator and Representative take rank of first importance, 
 whether nationally desirable or not, because the future 
 support is desired. These "log rolling" practices have no 
 doubt been responsible for the waste of millions of dollars 
 in constructing needless Federal buildings and in "im- 
 proving" rivers and harbors where rivers and harbors can 
 scarcely be found. 
 
 Not only is this initial waste of funds apparent, but the 
 nation is saddled with an unnecessary upkeep charge in 
 providing for the current needs of these institutions of 
 political favoritism. Yet real responsibility for the many 
 needless expenditures can be traced to no one, for no one 
 in particular is responsible. The lack of coordination is 
 further emphasized by the failure of Congress to exercise 
 any further supervision over the funds after passing the 
 bills of appropriations and revenue, and by the failure to 
 provide some intelligent system of auditing accounts so 
 
432 OUTLINES OF PUBLIC FINANCE 
 
 that it could be determined easily how much money is 
 being spent and for what purpose. The situation as por- 
 trayed by Secretary Glass was that " Congress votes with 
 a lavish hand stupendous sums, conceived in a magnificent 
 spirit of generosity, with a view to the enhancement of 
 the prestige of the nation, or for the benefit of this or that 
 element in the community." l 
 
 2ig. Much Agitation for Budget Reform Has Devel- 
 oped. The evils which have resulted from the lack of 
 centralized fiscal control and corresponding lack of re- 
 sponsibility have caused much demand for some change. 
 These demands began to take definite form under the 
 administration of President Taft. He was instrumental 
 in securing from Congress an appropriation of $100,000 
 for the purpose of making investigations into the efficiency 
 of the various executive departments. The investigations 
 were made by ably trained men who composed the Com- 
 mission on Economy and Efficiency. A part of their 
 report attempted to show the need for a budget system, 
 and suggested a remodeling of the fiscal program to con- 
 form to a real budget plan. 
 
 The President made an attempt to have our fiscal sys- 
 tem remodeled, but at this time both the Senate and the 
 House were antagonistic and the attempt failed. Much 
 wholesome publicity had been gained, however, and de- 
 mands for reform have continued from an ever increasing 
 number of individuals and organizations. Each of the 
 important political parties has declared in its platforms 
 for fiscal reform, which has been unmistakable in the 
 declaration for a businesslike budget. It has been, per- 
 haps, only the more pressing problems brought on by the 
 Great War which have delayed the expected changes. It 
 is not too much to expect that, in the near future, the 
 widespread demand for some system which will be more 
 efficient and economical will bear fruit through some form 
 of budgetary procedure. 
 
 1 Statement before a Select Committee on the Budget. 
 
THE ADMINISTRATION OF PUBLIC FUNDS 433 
 
 Suggestions for Reform. Suggestions as to the exact 
 form our budget should take have not always been the 
 same, though all have sought to centralize responsibility. 
 A satisfactory plan, however, should provide for the ac- 
 complishment of such features as the following. The 
 preparation of estimates should be made by some respon- 
 sible member of the executive department, perhaps the 
 President, or Secretary of Treasury. The estimate should 
 be considered by Congress, but not in a number of sep- 
 arate and independent committees. During the legisla- 
 tive consideration the executive responsible for the recom- 
 mendations should be called upon to defend his proposals, 
 and changes should be made only with his consent. The 
 proposal should be made early hi the legislative session, 
 and general publicity facilitated in every possible way. 
 After the budget has been voted upon by Congress it is 
 incumbent upon the executive department to execute it 
 properly. In the performance of this duty it should be 
 held strictly accountable to the legislative department. 
 
 Such provisions as these have been embodied in a num- 
 ber of bills and resolutions which have been before Con- 
 gress in recent sessions. It is evident that the proposals 
 are gaining in favor on their own merits, as well as because 
 of the pressure which is being brought by outside agencies, 
 and it is not too much to expect that some form of budget 
 procedure will be in operation in the not distant future. 
 Congress, in 1920, passed a law which provided for rather 
 extensive centralized budgeting machinery for Federal 
 finances. This was vetoed, however, by President Wilson, 
 because some of the details did not conform to his ideas 
 of what a budget system should be. 
 
 Recent Legislation. Budgetary legislation was one of 
 the important matters acted upon by the Sixty-seventh 
 Congress. Under the leadership of Senator McCormick 
 a budget bill passed the Senate on April 26, 1921, and 
 under the leadership of Representative Good a similar 
 bill passed the House on May 5, 1921, One important 
 
434 OUTLINES OF PUBLIC FINANCE 
 
 difference was that the McCormick bill centered respon- 
 sibility in the Treasury Department, while the Good bill 
 centered it in the Executive Department. An immediate 
 conference on the bills was arranged so that the new sys- 
 tem could be put into operation at the beginning of the 
 fiscal year, July 1, 1921. The conference report was 
 adopted May 27, 1921. 
 
 The McCormick-Good budget bill provides that the 
 President shall transmit a budget to Congress on the first 
 day of each regular session. This is to contain estimates 
 of expenditures and appropriations necessary, in his judg- 
 ment, for the support of the government for the ensuing 
 fiscal year. He is to send, as well, an estimate of the 
 receipts under the existing laws and under the proposals 
 made by him. A statement of expenditures and receipts 
 for the previous year is also to be made. The condition 
 of the Treasury for the last fiscal year, the year in prog- 
 ress, and for the ensuing year, should the budget be 
 adopted, as well as all essential facts regarding indebted- 
 ness, are to be a part of the report. Any other data that 
 will depict the financial conditions of the government may 
 also be included. Provision is also made for the trans- 
 mission of supplemental or deficiency budgets. 
 
 No estimate or request for an appropriation, and no 
 request for an increase in any item of the estimate, and 
 no recommendation as to how the revenue needs of the 
 government shall be met are to be submitted to Congress 
 or any congressional committee by any officer or employee 
 of any department or establishment unless at the request 
 of either house of Congress. 
 
 The plan adopted, however, is not so wholly an execu- 
 tive budget as the foregoing statements might indicate. 
 Section 207 of the law creates in the Treasury Depart- 
 ment the bureau of the budget. It is to consist of a direct- 
 or and an assistant director, appointed by the President, 
 with salaries of $10,000 and $7,500, respectively. This 
 bureau, under such regulations as the President may pre- 
 

 THE ADMINISTRATION OF PUBLIC FUNDS 435 
 
 scribe, is to prepare the budget for him, as well as any 
 deficiency budgets that may be needed. It has the power, 
 further, to assemble, correlate, revise, reduce, or increase 
 the estimates of the several departments or establishments. 
 
 Modifications are also made in the accountancy work of 
 the Treasury Department. The offices of Comptroller of 
 the Treasury and Assistant Comptroller of the Treasury 
 have been abolished, and in their place has been substi- 
 tuted a Comptroller-General and an Assistant Comptrol- 
 ler-General. A general accountancy office has been estab- 
 lished which is independent of the executive departments, 
 and is placed under the direction and control of the 
 Comptroller-General. All books, accounts, etc., are to 
 come to the general accountancy department. 
 
 Time will test the wisdom of some of the provisions of 
 the law, such as the combination of the Executive with 
 the Treasury Department. With Congress and the Presi- 
 dent so heartily in favor of budgetary procedure, there is 
 every reason why a marked improvement will result. 
 That President Harding was favorable toward budgetary 
 legislation is indicated by the following quotation: 
 
 I need not emphasize to you, gentlemen, the anomalous situation of 
 the government heretofore in having a great number of spending com- 
 mittees, apportioning moneys to various purposes, without any study 
 of the relationship between these various purposes, and regardless of 
 the relationship of these aggregated spendings to the revenue in sight. 
 No business, no humblest household, could be thus conducted without 
 leading into disaster. Establishment of a budget system is the founda- 
 tion upon which reorganization must be based. It is hardly conceiv- 
 able, indeed, that a proper budget system could be established and 
 carried on for any considerable time without forcing attention to the 
 evils and effecting the reform of many deficiencies in the present 
 system. 1 
 
 220. The Budget System of Fiscal Administration Is 
 Found in Many American States. The recommendations 
 which were made by President Taft's Commission on 
 
 1 President Harding, in a speech delivered before the Academy of Polit- 
 ical Science, at the Hotel Astor, May 23, 1921. 
 
436 OUTLINES OF PUBLIC FINANCE 
 
 Economy and Efficiency created much interest among 
 the various states, and soon began to bear fruit in these 
 political units, although the report was not adopted by 
 Congress. The question of the budget soon acquired an 
 important place in state politics and became a plank in 
 many party platforms. The systematic procedure which 
 the budgetary proposal emphasized presented a strong 
 appeal to those states that were financially embarrassed, 
 and many states quickly legislated some form of budget 
 into law. In fact, the adoption has been almost too rapid, 
 for frequently the plan hit upon was not adapted to the 
 needs of the state, or did not give the desired centralized 
 responsibility. So rapid was the principle accepted, that 
 by the end of 1919 there were less than half a dozen states 
 in which some form of budget had not been adopted. 
 In some cases, of course, the plan was very unsatisfactory, 
 but it represented a start toward more efficient fiscal 
 management. 
 
 Forms of State Budgets. While the budget laws of the 
 states vary greatly in their requirements, yet it is possi- 
 ble, in a general way, to classify them. The type which 
 has been most in favor might be called the executive bud- 
 get. More than half of the states have this form, and it 
 is particularly significant that really all budgets which 
 have been recently adopted have been of this type. As 
 indicated by the name given to this class of budget, the 
 responsibility is placed upon the Governor. In some states 
 a designated group of the administrative officers is made 
 responsible for the budget. The Governor is usually made 
 a member of this group. Still another scheme which is 
 used to some extent is to have the budget prepared by a 
 joint committee of representatives from the legislature 
 and administrative officers. In two or three cases, more- 
 over, the responsibility for the formation of the budget is 
 placed upon a legislative committee. 
 
 Maryland Budget. It would take us too far afield to 
 examine the details found in the budget systems of the 
 
THE ADMINISTRATION OF PUBLIC FUNDS 437 
 
 various states. As an example, however, of a compre- 
 hensive executive budget, and one which has been widely 
 copied, the scheme used by the state of Maryland deserves 
 notice. The form and classification of all estimates are to 
 be determined by the Governor, while he is given the 
 power to revise all the estimates except those of the 
 legislature, the judiciary, and the public schools. Two 
 budgets must be prepared, one for each of the two suc- 
 cessive years. If the Governor has held office for one year 
 the budget must be submitted within twenty days after 
 the opening of the legislative session. If he has not held 
 office for one year, he is given thirty days to submit the 
 budget. The budget bill is presented to the presiding 
 officer of each house by the Governor, and these officers 
 are required to introduce it immediately to their respec- 
 tive branches of the legislature. The Governor, however, 
 and such administrative officers as he may designate have 
 the right to appear and be heard with respect to the bill 
 at any time it is under consideration. They are required, 
 furthermore, to appear at the request of either branch of 
 the legislature. 
 
 The Maryland law goes farther than most states m 
 limitations upon the legislature and hi the details which 
 are required in the budget bill. No amendments may be 
 added which would change any obligations required by 
 the constitution, or the funds for public schools. The 
 legislature may either increase or decrease items which 
 relate to the judiciary or general assembly. All other 
 items may be reduced or eliminated, but cannot be in- 
 creased. No special appropriation bill can be considered 
 until the general budget bill has been finally passed. When 
 special appropriation bills arise they must be limited to a 
 single purpose, while the bill must provide some form of 
 tax, its method of levy and collection, for the purpose of 
 securing the necessary revenue. Such bills must receive 
 the majority vote of the elected members of each legisla- 
 tive branch, and are subject to the veto of the Governor. 
 
438 OUTLINES OF PUBLIC FINANCE 
 
 The items in each of the budgets presented at the open- 
 ing of the legislative session are divided into two parts 
 those for governmental appropriations and those for gen- 
 eral appropriations. The governmental appropriations 
 contain estimates of expenditures for the general assem- 
 bly, executive department, the judiciary, principal and 
 interest of the state debt, salaries allowed by the constitu- 
 tion, and other purposes sanctioned by the constitution. 
 All other estimates fall under the general expenditures. 
 The bill, moreover, must outline a definite plan for all 
 contemplated expenditures and revenues, and show how 
 any anticipated surplus or deficit of funds is to be han- 
 dled. The bill must contain, in addition, statements 
 showing revenues and expenditures for each of the two 
 preceding years, a balance sheet, funds and debts, an 
 estimate of the fiscal condition at the end of each year 
 covered by the budget, and any explanations the Governor 
 may wish to make. 
 
 Other States. Many states have not gone to such a 
 degree of detail as is found in Maryland; in others the 
 required details differ, while still others have gone even 
 farther in the reorganization of the fiscal department. 
 Illinois illustrates one of the best examples of an attempt 
 to reorganize thoroughly the fiscal machinery. In this 
 state all administrative offices, except two elective boards, 
 and those provided for in the constitution, are consoli- 
 dated into nine departments. A director, appointed by 
 the Governor, with the approval of the Senate, heads each 
 of the departments. The finance department has pro- 
 vided for a uniform system of accounting to be used in 
 each department. It examines all accounts and approves 
 or disapproves all vouchers. A list of the anticipated ac- 
 tivities of each department, together with their estimated 
 cost, must be presented to the finance department before 
 appropriations become available. This department is 
 further required to prepare the budget, and in the per- 
 formance of this duty is given extensive investigating 
 
THE ADMINISTRATION OF PUBLIC FUNDS 439 
 
 powers to enable accurate estimates to be formed. The 
 budget goes from this department through the Governor 
 to the legislature, upon which no restrictions have been 
 placed as to rejecting or changing the items. 
 
 Budgetary procedure in the states has been of too short 
 duration to draw any sweeping conclusion as to its suc- 
 cess in accomplishing the desired results. As might be 
 expected, many deficiencies have appeared in the laws, 
 which a little time and experience will modify. The con- 
 sensus of opinion is that the use of the system has been a 
 marked success and is saving the public much in the form 
 of taxes. Whether it is but another example of a "new 
 broom sweeps clean' 7 remains to be seen, but one is con- 
 fident in predicting continued favorable results from such 
 a detailed budget as the Maryland system, and such cen- 
 tral supervision as exists in Illinois. 
 
 221. The Administration of Municipal Finances Is Re- 
 ceiving Much Attention. As much importance has been 
 attached to the proper administration of municipal 
 finances hi recent years as to that of any political division. 
 A number of circumstances may be found to account for 
 this situation. Municipal expenditures have increased 
 more rapidly than those of other divisions. The increase 
 has been more rapid than the growth of wealth or popula- 
 tion, consequently the burden has been increasing. The 
 gradual expansion of the tax rate was viewed with appre- 
 hension by property owners, and soon they began to inquire 
 if there were no method of relief. In cities where the tax 
 rate was limited, borrowing was resorted to until the limit 
 of indebtedness was reached, when the difficulty encoun- 
 tered was a periodic shortage of funds. It was such prob- 
 lems as these which led the public to demand something 
 better in the methods of handling municipal funds. This 
 awakening of civic interest has found expression in the 
 formation of civic organizations, such as bureaus of 
 municipal research, citizens 7 unions, and national associa- 
 tions and leagues, such as the National Municipal League. 
 
440 OUTLINES OF PUBLIC FINANCE 
 
 Municipal Accounting. One of the first demands which 
 the aroused citizenship made was a more accurate system 
 of accounting. The Bureau of the Census has defined 
 municipal acounting in a way which is comprehensive 
 and complete. It says that it is 
 
 the art of applying accounts as aids in administration of business, or 
 the science of analyzing, recording, and summarizing data relating to 
 business in such a way as to disclose its condition or state at any time, 
 to express the results of its operation for any given period, and to 
 furnish all other information that such analyzing, recording, and sum- 
 marizing can provide for its systematic and most successful ad- 
 ministration. 1 
 
 The need for better accounting methods was evidenced 
 by the laxity which generally prevailed in handling 
 municipal finances a few years ago, and which still pre- 
 vails in many cities. Absolutely no uniformity existed 
 The comptroller's memory was often the only record of 
 receipts and expenditures, while a comparison of resources 
 and liabilities could not be made. Comptroller Metz of 
 New York City, in 1909, described the situation which 
 prevailed in a large number of cities. He said that "the 
 comptroller is practically helpless to protect the city ex- 
 cept there be a reorganization of the department of finance 
 and complete revision of the city's administrative and ac- 
 counting methods," and that by hard work the comptrol- 
 ler has been able to "catch a few things here and a few 
 things there, but the mass of details is so great that with 
 all the vigilance one man can exercise, the city treasury 
 is being plundered from all sides." 2 
 
 One organization which has been particularly active in 
 securing reform in methods of municipal accounting is 
 the Committee on Uniform Municipal Accounting and 
 Statistics, which was organized by the National Munic- 
 
 1 Special Reports of the Bureau of Census. Statistics of Cities, 1908, 
 p. 13. 
 
 2 This statement was made in an address before the City Club of New 
 York in 1909. 
 
THE ADMINISTRATION OF PUBLIC FUNDS 441 
 
 ipal League. It is the duty of this committee to investi- 
 gate systems of accounting used in different cities, and 
 make suggestions which will increase efficiency. No uni- 
 form system is drawn up for general adoption, because 
 the requirements of the individual cities, while similar, 
 will not permit of the exclusive use of any one system. 
 The committee aims to design a practicable scheme which 
 will meet peculiar individual needs. Many other organi- 
 zations have been active in securing the same results, 
 while the favorable response from the cities indicates 
 that they are entering upon an era of more efficient fiscal 
 administration. 
 
 System in New York City. New York City furnishes a 
 good example of a city with a thoroughly reorganized 
 accounting system. With an annual expenditure of more 
 than $100,000,000, the need for systematic fiscal proce- 
 dure is apparent. Before the reorganization the finance 
 department consisted of a series of separate jurisdictions, 
 which were presided over by practically independent divi- 
 sion chiefs. These were theoretically responsible to the 
 city comptroller, but in practice each exercised complete 
 control in his district. The accounting and auditing func- 
 tions were so broken up that one department found itself 
 forced to duplicate records kept hi other departments, 
 which, of course, resulted in confusion, inefficiency, and 
 waste of time. Under the present plan the accounting 
 and auditing functions have been centralized the former 
 separated bureaus have been brought together under one 
 control. Each step in the process is definitely outlined, 
 while all fiscal information is kept on file in one place for 
 the common use of all. It is, therefore, much easier to 
 know the exact fiscal standing at any particular time and 
 to keep in touch with exactly what is being done with the 
 public funds. 
 
 Municipal Budgets. Another mark of progress which 
 has been gaining prominence in municipal fiscal adminis- 
 tration is the use of some form of budget in calculating 
 
442 OUTLINES OF PUBLIC FINANCE 
 
 expenditures and revenues. The general plan has been 
 for the city council to follow much the same scheme as 
 has been described in connection with our national 
 finances. The increased use of commission and city man- 
 ager forms of government made it easier, of course, to 
 centralize responsibility. In many cities the estimates of 
 revenues and expenditures are carefully drawn up and sub- 
 mitted, and the program is definitely acted upon. The 
 public is given opportunity to know just what the city 
 expects to do, and can much more easily guard its funds. 
 The accuracy with which the estimates are made is, of 
 course, a factor which will help determine the success of 
 the budgetary method. 
 
 Municipal Indebtedness. A question which has con- 
 fronted municipal fiscal authorities, particularly in recent 
 years, is the enormous growth in indebtedness. The big 
 problem, of course, with the ever increasing pressure for 
 funds, is to be able to meet the indebtedness when it falls 
 due. The system which was most in favor for a number 
 of years was the establishment of a sinking fund. Many 
 factors have combined to make this method unsatisfac- 
 tory. It necessitates the investment of the funds which 
 are set aside, and the addition of interest to the fund. 
 The authorities who have been intrusted with the proper 
 investment of the fund have often failed to do all that was 
 expected. Funds have been lost from poor investments, 
 or have been invested primarily for the benefit of particular 
 individuals. City authorities have failed to set aside the 
 required amount, and have often miscalculated as to what 
 should be set aside to meet the debt. The result has been, 
 in a large number of cases, in spite of carefully planning 
 the sinking fund, that funds have not been available to 
 meet the debt when it matured. 
 
 The situation just described has led many modern fiscal 
 authorities to favor the use of serial bonds instead of the 
 sinking fund. By this method a part of the bond issue 
 becomes due in successive years, and is met from taxes. 
 
THE ADMINISTRATION OF PUBLIC FUNDS 443 
 
 For instance, one tenth of a particular issue might be 
 paid each year for ten years. Other adjustments, of 
 course, are possible, so that the burden of principal and 
 interest would be exactly equal for each year of the loan, 
 or so that some years would escape with comparatively 
 little or no burden. This plan has the advantage of dis- 
 charging the debt and interest charge as funds are avail- 
 able. It does away with accumulations of funds and the 
 possibility of unwise investments, followed by a lack of 
 means to meet the indebtedness when it is due. The 
 chance for miscalculation is minimized, and the tempta- 
 tion to use public funds for private gain is removed. As 
 a whole, the serial bond method has proved more eco- 
 nomical and satisfactory than the use of sinking funds. 
 
 222. The Outlook for Proper Fiscal Administration Is 
 Encouraging. With the adoption of a Federal budget 
 system and the extension of the plan among the states, 
 the public will have a better opportunity, at least, to know 
 what use is being made of its funds, and upon what grounds 
 charges of graft and inefficiency are made. The United 
 States is no longer in the stage of youth, as described by 
 Ambassador Bryce, with a superabundant revenue, so 
 that it may commit fiscal wrongs without feeling the evil 
 effects. The magnitude of the present indebtedness with 
 its interest charge, together with the immense reconstruc- 
 tion expenses, is making the public more insistent upon 
 proper fiscal procedure, and demands the use of every 
 device that will make for honesty and efficiency. 
 
 The recent action of Congress and the rapid adoption 
 of scientific budget and administrative systems by the 
 states has been gratifying, and there is no reason to be- 
 lieve but that the systems will speedily be modified into 
 more efficient conservators of public funds. The neces- 
 sity that has driven some cities to seek better fiscal pro- 
 cedure with gratifying results will no doubt lead others 
 to seek relief through the same channels. The many or- 
 ganizations that are exerting influences to secure better- 
 
444 OUTLINES OF PUBLIC FINANCE 
 
 ment will be able to accomplish more after the successful 
 start has been made, and there is little doubt that the 
 adolescent stage in the growth of our fiscal administrative 
 policies has been passed. 
 
 ADDITIONAL READING 
 
 Collins, The National Budget System and American 
 Finance. 
 
 Willoughby, The Problems of a National Budget. 
 Cleaveland, Municipal Administration and Accounting. 
 
CHAPTER XIX 
 
 FINANCING AN EMERGENCY 
 
 223. Expenditures for War Furnish the Best Example 
 of Emergency Financiering. The question of how to meet 
 emergencies which may overtake a nation or any of its 
 minor political units has always assumed an importance 
 of some magnitude. Emergencies have frequently arisen 
 when there has been an immediate demand for funds in 
 excess of those provided in the regular budget. Modern 
 fiscal systems can be much more definitely organized than 
 could those of earlier generations. Preparation can now 
 be made beforehand for many events which previously 
 came unexpectedly, and which entailed increased expendi- 
 ture. The preventive measures, also, which governmental 
 units have undertaken, have done much to eliminate un- 
 expected and unprepared-for events. 
 
 Famine and pestilence formerly were common examples 
 of emergencies with which states were compelled to cope, 
 yet they are seldom given a second thought by the officials 
 of modern civilized countries. The regular expenditure of 
 funds to eliminate the cause of such occurrences is con- 
 sidered a better method of meeting the situation. The 
 expense entailed in exterminating the mosquito, for exam- 
 ple, is considered preferable to an expenditure to cope 
 with an epidemic of yellow fever. Likewise the expendi- 
 tures in experiment stations and colleges, where systems 
 of increased and stabilized production are devised and dis- 
 seminated, are considered much wiser than the attempt to 
 take care of hundreds and thousands of famine sufferers. 
 
 While states have done much to eliminate the necessity 
 
446 OUTLINES OF PUBLIC FINANCE 
 
 of emergency expenditures, they will never succeed in 
 making the elimination complete. Forces of nature are 
 still to be reckoned with, and emergencies which arise 
 therefrom can never be foreseen nor prevented. Earth- 
 quakes and volcanic eruptions will likely continue to 
 occur and leave in their wake suffering and loss, the alle- 
 viation of which will often call for the aid of governments. 
 Tornadoes, cyclones, fires, and floods will also continue to 
 occur with similar results, so that officials can never hope 
 to be entirely free from some unexpected expenditures. 
 
 The importance of the funds which have been used and 
 are still needed for the classes of emergencies just indi- 
 cated, sinks into utter insignificance when the costs of 
 war are taken into consideration. Whatever may be the 
 future status of war, nations in the past have not suc- 
 ceeded in eliminating this greatest of all emergencies, but 
 have been compelled, continually, to face it as a possi- 
 bility if not a probability. The attempt to make provi- 
 sion through the maintenance of a war chest, and its im- 
 practicability, have been indicated in a previous chapter. 
 The enormous cost of modern warfare, where expendi- 
 tures of a single day exceed the outlay of a total conflict 
 of a century ago, with the enormous burden which is 
 imposed upon a nation's citizenship, makes a study of this 
 class of expenditure of vital importance. The principles 
 of war finance present, in a magnified form, the principles 
 underlying all emergency financiering. In this chapter, 
 then, consideration will be made of some of the underlying 
 principles which should be taken into account in raising 
 funds to prosecute a war, as well as the systems which 
 different countries have employed. 
 
 224. The Problem Is to Secure Revenue or Materials. 
 After the breakdown of the war chest as a method of 
 financing emergencies such as war, other methods of secur- 
 ing funds had to be found. Various schemes were hit 
 upon, the efficacy and advisability of which caused no 
 little discussion from fiscal authorities and theorists. The 
 
FINANCING AN EMERGENCY 447 
 
 demands of the Great War renewed and intensified the 
 interest in this subject. The sums demanded by the vari- 
 ous countries surpassed those contemplated by the wildest 
 imaginations, while the estimated expenditures for a year 
 usually sank into insignificance when compared with the 
 sums which were actually demanded. 
 
 Superficial Aspect of Money. While the demands for 
 revenue have been monetary, and the calculations have 
 been in terms of money, in reality the money represents 
 but a superficial aspect of the situation. During the 
 Revolutionary War, when the revenue was insufficient 
 to meet the needs of the government, requisitions of goods 
 were made upon the Colonies. In the end, the demand 
 of the government is for goods clothing, munitions, food 
 and it is with these that the war is actually fought. 
 The situation is much the same as with the money income 
 and real income of individuals the important item is 
 what the money will purchase. When the war is over the 
 stock of money may be intact or increased, while it is the 
 goods, over which it has given command, which have 
 been used up. The value of the goods destroyed, more- 
 over, may vastly exceed the total stock of money values, 
 for the same money may be used more than once by a 
 government in making purchases. Funds secured from 
 taxes, for example, may be used to purchase uniforms; 
 the manufacturers of uniforms will purchase bonds and 
 the same funds will be used again by the government. 
 
 Burden upon Present Production. A large part of the 
 goods must be taken from present production, though it 
 is possible that both past and future incomes might be 
 made to contribute. Past production could be made to 
 pay by the indefensible scheme of taxation so severe that 
 it would deplete a part of the capital which had already 
 been produced. Future income could be made the basis 
 of payment by buying the goods abroad and mortgaging 
 future production to pay for them. Neither of these plans 
 can be used extensively; consequently the burden falls 
 
448 OUTLINES OF PUBLIC FINANCE 
 
 upon present production. This cannot be accomplished 
 without some rearrangements and, perhaps, hardships in 
 industry. The slogan, " business as usual," current in in- 
 dustrial circles at the beginning of the Great War, presents 
 an impossible situation. The demands of war are not the 
 demands of peace, and industry does not have time to go 
 through a process of evolution to meet the demands of 
 war, but must adjust itself by revolution. This may be 
 done in a number of ways. Capital and labor, which have 
 been producing goods nonessential to the conduct of the 
 war, may be put to producing necessary materials. 
 Machinery which has been idle one third of the day may 
 be run the full day. The public may substitute cheaper 
 products for more costly goods, and save hi productive 
 energy. All these changes necessitated by the sudden 
 demands will bring about some deviation from former 
 business procedure. 
 
 In securing funds, then, the fiscal authorities should 
 keep continually in mind not only the securing of revenue, 
 but what effect the method of securing it will have in the 
 ultimate source of all revenue the wealth of the citizen- 
 ship. The maintenance of the patrimony of the state is 
 an important consideration, and this patrimony should 
 be impaired just as little as possible. In the securing of 
 the funds, such questions as the probable incidence, the 
 equalization of burden, the return, and the effect on future 
 generations should not be overlooked. The means for 
 securing revenue lies in the power of the state to tax, to 
 borrow, and to issue fiat money. Any combination of 
 these three possible methods might also be used. The 
 insufficiency of the use of fiat money to any extent has 
 often been demonstrated, consequently most of the pres- 
 ent discussion as to means of raising revenue is concerned 
 with the relative merits of taxation and borrowing as 
 methods of supplying the government with funds. 
 
 225. Borrowing Possesses Some Evident Advantages. 
 Opinions vary greatly as to the proper method of war 
 
FINANCING AN EMERGENCY 449 
 
 finance. Some contend that the entire burden should be 
 met from taxes, while others go to the opposite extreme 
 and conclude that the proper method to pursue is to rely 
 entirely upon borrowing to secure the necessary funds. 
 Many others would adopt some combination of the two 
 processes as the most logical course of procedure. It will 
 be profitable to review some of the advantages and 
 disadvantages arising with the use of each method, 
 which should be kept in mind in formulating a fiscal 
 system. 
 
 Produces Revenue Quickly. The demands made by war 
 upon the Treasury will likely be greater than the ordinary 
 sources of revenue can provide unless the entrance into 
 it has been premeditated and proper provision has been 
 made for the needed funds. Recourse must be had to 
 some plan that will provide funds quickly, and borrowing 
 is adapted to meet this need. This is true because, in 
 making a loan, the individual does not feel the sense of 
 sacrifice which is involved in the payment of taxes. Loans 
 to the government are looked upon as investments an 
 annual return is paid in the form of interest, while the 
 principal is also payable in the future. In the mind of the 
 individual, the bond which he has purchased simply rep- 
 resents his property in another form. Taxation, on the 
 other hand, even if adequate machinery were hi existence 
 to secure results, would be felt by the individual as a 
 burden from which no remuneration would be received. 
 
 Borrowing likewise possesses the advantage of quickly 
 mobilizing idle capital and putting it to work in the prose- 
 cution of the war. At any time there is more or less idle 
 capital seeking investment, but because of the uncertain- 
 ties which exist at the time of a declaration of war, the 
 amount is likely to be larger than usual. The government 
 can secure this idle capital by a proper appeal to the in- 
 vestment it offers, supplemented, perhaps, by the appeal 
 to patriotism, and can much more quickly put it to serv- 
 ing the needs of war than through the use of any other 
 
450 OUTLINES OF PUBLIC FINANCE 
 
 policy. The more idle capital which can be secured, the 
 less will be the necessary demands upon existing industry, 
 and to that extent the derangement of business caused 
 by the war will not be so keenly felt. 
 
 226. Borrowing Is Likely to Increase the Costs of War. 
 The outstanding objection to the use of fiat money as a 
 means for meeting an emergency is that the inflation of 
 the currency causes a higher price level, which not only 
 enhances the cost of the war since the government must 
 buy at the new level but places a burden upon all who 
 purchase goods. It is possible that borrowing will cause 
 an inflation of purchasing power, and consequently an 
 increase in prices, but just to what extent it is difficult to 
 determine. Under the modern system of exchange a vast 
 amount of purchases is made with credit, and to the ex- 
 tent that borrowing manufactures credit instruments 
 which can be used directly or indirectly as purchasing 
 power, a rise in prices will result. In so far as bonds are 
 purchased with funds which would otherwise enter the 
 market and command goods, this effect is not felt. The 
 government has simply substituted itself as purchaser for 
 the individual from whom the funds were secured. 
 
 Causes Expansion of Credit. The expansion of credit 
 from borrowing is likely to come through the institution 
 of the modern bank. Individuals, spurred on by patriotic 
 zeal, may secure credit accommodation which would not 
 otherwise be considered, and turn this over to the govern- 
 ment in exchange for bonds. The banks themselves have 
 been relied upon extensively as aids to the government. 
 The percentage of reserve has been decreased, frequently, 
 in order to extend credit to the government. The govern- 
 ment, hi order to help the banks lend assistance to itself, 
 has made deposits of specie on the implied condition that 
 aid would be given. With this specie as a basis, several 
 times as much credit could be extended in the purchase 
 of bonds or certificates of indebtedness. The use of the 
 obligations of the government, moreover, as the basis for 
 
FINANCING AN EMERGENCY 451 
 
 the issue of bank notes, forms another means for the in- 
 crease in purchasing media. The issue of the Federal 
 Reserve Bank notes, based upon certificates of indebted- 
 ness, forms a good example of this form of transaction. 1 
 
 From the nature of the case it is impossible to calculate 
 just how much purchasing power exists because of the 
 issue of evidences of indebtedness, which would not other- 
 wise be found. Even if this could be accurately deter- 
 mined, to calculate the precise effects on prices would 
 still be more or less of a conjecture because of the derange- 
 ment in the production of commodities caused by the war. 
 The fact remains, however, that it is quite likely that 
 government borrowing will cause a perceptible expansion 
 of purchasing power, and with it a consequent increase in 
 the general price level. 
 
 Effects of Increased Price. To the extent that borrow- 
 ing increases prices, the effect is much the same as the 
 issue of fiat money. The burden is increased to the gov- 
 ernment and, ha varying degrees, to the citizenship. The 
 materials for war are, to a large extent, purchased in the 
 open market, and the inflated prices must, of course, be 
 paid. While this burden may not be insignificant, it does 
 not compare to that felt by the citizens, since they too 
 must buy at the higher price level. Wages do not rise as 
 rapidly as prices, thereby entailing a burden upon the 
 laboring classes which often brings about a derangement 
 of industry because of the increased prevalence of strikes. 
 Individuals and institutions whose income is fixed, en- 
 counter the most severe difficulties. Industries such as 
 public utilities fall in this class. The rates for their 
 services are fixed, while expenses mount with the price 
 changes. 
 
 Some industries, on the other hand, reap benefits from 
 the situation. Manufacturers who are paying wages and 
 buying raw materials at one price level, and selling finished 
 
 1 See p. 499 for statistics showing the increase in purchasing media during 
 the Great War. 
 
452 OUTLINES OF PUBLIC FINANCE 
 
 products at a higher price level at a later period, find a 
 larger differential to go to the profit account. Enterprisers 
 in the extractive industries, such as farming, mining, and 
 lumbering, usually find that increased expenses do not 
 absorb the increased returns. The interest secured from 
 the increased expansion of bank credit tends to make the 
 situation a profitable one for banking institutions. The 
 net result of borrowing, then, in so far as it increases 
 prices, is to saddle a burden upon the citizenship by neces- 
 sitating greater government expenditure, and by causing 
 a greater expenditure by individuals to secure the same 
 commodities. 
 
 The interest charge, moreover, is no small item in the 
 total cost when the length of time which government 
 securities usually run is taken into consideration. Sup- 
 pose, for instance, that a war were entirely financed by the 
 issue of twenty-five-year 4 per cent bonds. The cost in 
 this case would be doubled, since the interest charge 
 would amount to as much as the principal. Even if there 
 were no effect on prices, the interest charge which results 
 from borrowing necessarily makes a war more costly. 
 
 227. Borrowing Does Not Shift the Burden of War to 
 the Future. One of the most popular of the arguments 
 which have been used to justify extensive borrowing to 
 finance a war is that future generations are recipients of 
 the benefits, and hence should share the burdens. It is 
 believed they share the burden by paying off the bonds 
 which are issued during the progress of the war. There 
 is no question but that war entails a burden upon the 
 future the sinking of battleships and merchant marine, 
 the destruction of factories, cities, mines, railroads, and 
 agricultural lands, which otherwise would have been 
 handed down to posterity, is conclusive evidence that war 
 places a burden upon the future. The contention, how- 
 ever, that the burden may be shifted has, in reality, no 
 foundation. In only one way can this be possible. If 
 the nation which borrows secures its loans from a foreign 
 
FINANCING AN EMERGENCY 453 
 
 country, and in turn purchases abroad the products with 
 which to prosecute the war, it may continue to live 
 as usual and the burden will fall when the bonds are 
 payable. 
 
 Burden Felt During War. The usual situation is for 
 loans to be made at home, and the revenue thus secured 
 to be spent within the country. In this case the burden, 
 as far as the national aspects are concerned, cannot be 
 shifted. A war is waged by using up large numbers of 
 men and vast quantities of goods; consequently men 
 who will reach maturity, and goods which will be pro- 
 duced twenty or thirty years hence, cannot be used to 
 fight present battles. An individual who has one thou- 
 sand dollars has a command over commodities, but just 
 as soon as he turns this over to the government in exchange 
 for a bond he gives up this command. It is impossible 
 to eat one's cake and have it too one cannot spend his 
 money for goods and at the same time turn it over to the 
 government to purchase war materials. 
 
 Borrowing, then, does not lessen present material sac- 
 rifices, for just as much private consumption must be 
 forgone, just as many commodities are destroyed, as if 
 the war were financed by gifts or taxes. The difference 
 to future generations is that, in the case of borrowing, 
 bonds are handed down to them which they must be taxed 
 to pay, while if no bonds had been issued they would be 
 saved the expense of going through the process of taxing 
 themselves to pay for their bonds. 
 
 The above reasoning applies where the same class which 
 purchases the bonds is to be taxed to redeem them. Take 
 a simple illustration. If there were no discounting of the 
 future, in what light would an individual consider the 
 purchase of a ten-year 5 per cent bond if the interest and 
 principal were to be met by the bondholder? He is simply 
 compelled to save enough each year to pay the interest 
 to himself, and at the end of the ten years must have 
 saved enough to pay him his principal. If the conditions 
 
454 OUTLINES OF PUBLIC FINANCE 
 
 of this assumption were true, and realized, very little 
 popularity would be attached to the purchase of bonds. 
 
 Shifting Burden of Payment. The future is discounted 
 to such an extent that the sale of bonds might still be 
 popular even if it were realized that there could be no 
 shifting of the burden of payment. There exists, how- 
 ever, the possibility of shifting the burden of payment to 
 different individuals or to a different class of society from 
 the purchaser of the bonds. As already indicated, bonds 
 must eventually be paid from some form of taxes. If, in 
 the coming generation, the plumber class can be taxed 
 to pay the interest and principal of the bonds which the 
 carpenter class owns, then there is a shifting of the burden 
 from one class of society to another. The plumbers are 
 made to recoup the carpenters for the burden they have 
 shouldered. The bond which the carpenter 's son inherited 
 from his father represents that much claim upon the pro- 
 ductivity of the sons of plumbers. 
 
 Shifting of this nature represents a situation, moreover, 
 which is very likely to occur. When the war is on and the 
 feeling of patriotism is high, a call for loans meets with a 
 generous response from the wealthy class. This is as it 
 should be, because of the evident ability to carry burdens. 
 When taxes are levied to pay the interest and principal, 
 however, they are not likely to fall upon the wealthy class 
 in nearly the same proportion that it has subscribed to 
 loans. Customs duties and excise taxes have been exten- 
 sively used, and because of the influence of the wealthier 
 classes in legislative bodies, the fiscal system may be so 
 framed that an undue part of the taxes will fall upon the 
 poorer classes. To the extent that this is true, borrowing 
 causes the burden of war to be regressive. 
 
 228. The Extensive Use of Taxes Has Much to Com- 
 mend It. Opposed to those who advocate the extensive 
 use of loans for financing a war are the advocates of the 
 extensive use of taxation. Since the burden must be met 
 from taxes eventually, whatever the method adopted at 
 
FINANCING AN EMERGENCY 455 
 
 the time, the extensive use of taxes from the beginning is 
 considered to have many advantages. Since loans, in a 
 material sense, do not decrease the burden which falls 
 upon a people engaged in conducting a war, the taking of 
 the necessary amount by taxation would not cause a 
 greater burden than borrowing. One significant result of 
 postponing taxes by borrowing is to make them much 
 heavier in the end. 
 
 Taxation and Prices. The extensive use of taxes, on 
 the other hand, will be conducive of much good. The bur- 
 den to the government and its citizens will be materially 
 lessened. The probability of inflation which comes from 
 loans is lessened, consequently the resulting rise in price 
 does not occur, and neither the government nor individ- 
 uals must pay increased prices for the products which 
 they demand. It may be possible to use the tax system 
 also as a means for stabilizing prices. Before the advent 
 of war, individuals have been accustomed to spend their 
 incomes for certain classes of goods. After the advent of 
 the war they cannot buy as many goods because produc- 
 tion has been deranged to supply the materials necessary 
 for the prosecution of the war. The result is likely to be 
 an increase in price for the materials which are available 
 for individual consumption. If, however, taxation were 
 increased in proportion as the available goods were de- 
 creased, then prices would tend to remain the same and 
 no burden would be felt. The individual gets just as 
 many goods, the only difference being that he does not 
 have to turn over more money to get them. 
 
 Drastic taxation at the beginning of a war may accom- 
 plish other benefits for its prosecution than the supplying 
 of revenue. One of the necessary adjustments, and one 
 which must be made quickly, is the transfer of men and 
 women workers from nonessential industries to the pro- 
 duction of war materials. A taxation so severe that little 
 would be available to be spent for nonessentials, would 
 cause the production of such commodities to cease, and 
 
456 OUTLINES OF PUBLIC FINANCE 
 
 their producers to seek places where there is a demand for 
 their services. This would not only supply the needed 
 workers, but would take them from those industries from 
 which they can best be spared. 
 
 Exaggerated Objections. Some objections to the exten- 
 sive use of taxes are frequently exaggerated. Much is still 
 made, in some quarters, over the fact that borrowing is 
 the time-honored method of financing a war. But with 
 the successive breaking of historic precedence during the 
 Great War, this statement bears no weight, unless reasons 
 be advanced for continuing the policy. The objection 
 that taxation will have a deterrent effect upon industry, 
 at a time when it needs all possible encouragement, is more 
 searching. As to this situation, however, much will de- 
 pend upon the kind of the tax, the height of patriotic 
 zeal, the possibilities of evasion, and similar considera- 
 tions. War is a period of prosperity for the industries 
 which survive, and they are, to an increased extent, able 
 to meet the burden. Large returns are received from war 
 contracts, prices are rising, and profits are swelling, while 
 the derangement of industry causes hesitation in the in- 
 vestment of the newly created capital. A tax which is 
 wisely imposed may take a large part of this war-created 
 wealth without causing any check upon the exertions of 
 labor or capital. Taxes may, indeed, often be a spur to 
 greater effort, so as to secure a larger differential margin 
 after the tax is paid. 
 
 Individual Attitude. If patriotism is running high, 
 there is scarcely a limit to the tax burdens which individ- 
 uals and industry will willingly bear. If the motivating 
 force hi production is patriotism rather than private gain, 
 there need be no fear of seriously handicapping produc- 
 tive enterprise by heavy taxes. After the war, however, 
 this patriotic motive will have passed, and it may be 
 much more difficult to put into effect a satisfactory 
 scheme of taxes. Those who are most able to bear the 
 burden will be much more concerned about shifting it to 
 
FINANCING AN EMERGENCY 457 
 
 other shoulders. To be successful during a war, a tax 
 system should be accompanied by an efficient adminis- 
 trative machine, so that justice can be secured in reaching 
 all the sources which should contribute. Not only should 
 all the sources be reached, but evasion of the tax should 
 be made difficult, and it should be made difficult for the 
 burden to be shifted to others than those who should bear 
 it. To accomplish this in its entirety, of course, is impos- 
 sible, but the more nearly the ideal is approximated, the 
 more just and successful will be the use of taxes. 
 
 Equalization of Burden. The extensive use of taxes 
 tends to equalize the burden of a war upon the different 
 classes of citizens to a much greater extent than the use 
 of extensive borrowing. Not only is this true of the civil- 
 ian classes, but the burden is more equally divided be- 
 tween the soldier and the civilian. Suppose, for instance, 
 two citizens, at the beginning of a war, each of whom is 
 receiving a salary of $10,000. One goes to the front and 
 gives up his salary; the other remains at work and buys 
 bonds with all above mere living expenses. As far as 
 monetary sacrifice is concerned, each is giving up the same 
 amount. The situation changes, however, after the war. 
 The returned soldier enters his old position, and both are 
 taxed to pay for the bonds held by the one who remained 
 at his job. To have equalized the burden, the amount 
 taken from the civilian should have been in the form of 
 taxes rather than loans. 
 
 Consideration of Expediency. Much care must be used 
 in formulating a tax system which will meet both the re- 
 quirements of justice and expediency. That system will 
 most nearly approximate justice which imposes an equal 
 burden upon all classes. To go the limit which justice 
 might sanction, however, might not be expedient. A 
 government, for example, might be justified in taking all 
 the returns of industry which have arisen from war ac- 
 tivities, or even all returns which are not specifically 
 needed for reinvestment in essentially war activities. The 
 
458 OUTLINES OF PUBLIC FINANCE 
 
 effect of such a policy on economic activity might be dis- 
 astrous, and so expediency suggests an approximation of 
 justice through the use of steeply progressive tax rates. 
 A more extensive use can be made of taxes upon business, 
 with less burden, than upon other bases, because there is 
 less risk in business undertakings. A larger percentage of 
 necessities is being produced for which the market is more 
 assured, than for other classes of goods. Expediency 
 would sanction, also, the use of taxes upon commodities, 
 but because of their regressive nature their use should be 
 tempered by the requirements of justice. 
 
 229. Borrowing Usually Has a Legitimate Place in 
 Emergency Financiering. The case for the extensive use of 
 taxes in financing a war is strong, yet various circumstances 
 usually exist which make it impracticable to attempt 
 to raise all the needed revenues from this source. The 
 important thing to be kept continually before the minds 
 of the fiscal authorities is that a policy must be adopted 
 which will see the war through. The source of the revenue 
 must not be used up, so that the treasury will find no 
 more funds available when the conflict is only partially 
 finished, but the source must be kept intact so that each 
 successive demand will be met with a forthcoming supply. 
 The tree must not be cut down to get the fruit, but must 
 be left to produce more fruit as it is needed to supply the 
 recurring wants. 
 
 Administrative Machinery. The revenue system which 
 is in existence at the outbreak of a war is a consideration 
 of first magnitude when proposals are made to increase 
 many fold the amount secured from taxes. If the policy 
 of taxation is contemplated, it is most certainly true that 
 preparation for war should be made in tune of peace. In 
 order to meet the excess demands, the revenue system 
 must be one which is capable of rapid expansion. This 
 can be done only when the revenue system of peace times 
 is broad in its scope; and if its rates are less than the maxi- 
 mum revenue rates. If this be true, all that needs 
 
FINANCING AN EMERGENCY 459 
 
 to be done when the crisis comes is to increase 
 the rates up to the maximum revenue yield, if neces- 
 sary. If, however, the maximum revenue is already 
 being received, the officials are confronted with the task 
 of devising new taxes and new administrative machinery, 
 both of which are tune-consuming propositions. New 
 taxes, moreover, are generally unpopular, and a period 
 of education is necessary before people will pay them 
 willingly. The needs of the government will not wait, 
 and while an adequate tax system is being arranged it 
 may be necessary to resort to borrowing. 
 
 Importance of Personal Element. Human nature is an 
 important factor with which fiscal authorities must always 
 reckon. It has already been indicated that individuals 
 discount the future. The fact that taxes must at some 
 time be levied to the full amount of all loans does not 
 weigh heavily enough upon the present generations to 
 induce them to shoulder the entire burden in taxes at 
 present, in order to avoid the future tax payments. While 
 the material sacrifice may be just as great in lending an 
 amount as if it had been taken in taxes, the personal loss 
 is much less in the case of the loan. To the individual 
 the bond merely represents his property in another form. 
 The use of borrowing, therefore, will generally result in 
 a much heartier response, and will secure more adequate 
 returns when funds are needed quickly, because it appeals 
 to human nature. 
 
 Confidence in Government. The confidence which the 
 citizenship has in its government, and the strength of the 
 sentiment in favor of the undertaldng, will be somewhat 
 of a guide to the authorities in determining the sources of 
 revenue. If the cause is close to the hearts of the people, 
 and the patriotic zeal at a high pitch, greater personal 
 sacrifices will be willingly borne, and consequently taxes 
 can be used more extensively than if the interest were 
 merely lukewarm. As long as the administration of the 
 government has been conducted in such a way as to 
 
460 OUTLINES OF PUBLIC FINANCE 
 
 strengthen the confidence of the people, great sacrifices 
 will be made to support it in its undertakings. An ad- 
 ministration which possesses the absolute confidence of 
 its citizenship, and which embarks upon a cause which 
 meets with their undivided approval, can rely extensively 
 upon taxes to secure the needed revenue. 
 
 Industrial Considerations. The effect of the fiscal policy 
 on the productive capacity of the country must always be 
 kept in the foreground. The appeals must be made in 
 such a way that each will bring results in the form of 
 revenue, and yet always act as a spur to increased energy 
 in production, and never as a discouragement. This is 
 particularly true in the first stages of the conflict, when 
 industry is burdened with discouragements. Some have 
 endured a hard transition from unessential lines of en- 
 deavor to the production of war materials. Industry, 
 moreover, has likely been hard hit by the withdrawal of 
 labor to the army. The precipitation of any unexpected and 
 unprepared-f or heavy tax burden upon industry under such 
 conditions could scarcely help having a deterrent effect. 
 In order to keep up the productive capacity under these 
 circumstances, a resort to borrowing may be preferable. 
 
 The general economic and industrial condition of the 
 country, as compared with the magnitude of the demands, 
 is a factor to be kept in mind. It would be suicidal to 
 attempt to collect in taxes an amount greater than the 
 national income. It may be true, however, that the 
 necessary revenue will exceed this sum. In the case of a 
 life and death struggle it may become necessary to spend 
 many tunes as much as the national income. In such 
 cases borrowing must be resorted to, from a foreign coun- 
 try, if possible, and the loan be repaid gradually from the 
 income of succeeding years. 
 
 230. The Proper Combination of Loans and Taxes 
 Forms the Best War Finance Policy. The foregoing dis- 
 cussion points to the conclusion that, while an extensive 
 pr exclusive reliance upon taxes is theoretically advisable, 
 
FINANCING AN EMERGENCY 461 
 
 yet the practical aspects of the case nearly always make 
 some use of loans desirable. The problem of the revenue 
 administrators is to hit upon the proper combination in 
 the use of these two sources. It will usually happen that 
 greater reliance must be placed upon loans at the begin- 
 ning of the emergency. Revenue systems are not usually 
 in operation which will permit of sufficient expansion to 
 meet the immediate demands. Public sentiment, likewise, 
 may have to be developed before individuals are willing 
 to endure the feeling of sacrifice. At the beginning, then, 
 the extensive use of the borrowing power may be the 
 proper solution. This does not mean that it should be the 
 permanent policy. The authorities should at once begin 
 to develop new taxes and to expand the old where it is 
 possible. As time goes on, the habit of paying more taxes 
 will be formed, and little opposition will be encountered. 
 As public sentiment becomes more favorable, taxation 
 can be pushed more rapidly, until it may be made the 
 chief source of revenue. 
 
 If any policy for the proper procedure of officials were 
 to be formulated it would be something like this: use 
 taxes at the beginning as much as possible, but not to 
 such an extent as to antagonize individuals or discourage 
 industry; introduce taxes as rapidly as possible, so that 
 as time goes on the majority, if not all, of the needed 
 revenue shall come from this source. In the light of the 
 underlying principles which have been discussed in the 
 preceding pages, it will be instructive to review some of 
 the methods which have been used in financing wars, to 
 see how closely they have adhered to these principles, 
 and to note the degree of success which was attained. 
 
 231. Earlier Wars of the United States Were Financed 
 Largely Through Borrowing. Between the Revolutionary 
 War and the Great War, only two conflicts have appeared 
 in American history which have placed any real burden 
 upon the people. These were the War of 1812 and the 
 Civil War. The fiscal measures of the Revolution do not 
 
1<i2 OUTLINES OF PUBLIC FINANCE 
 
 represent a predetermined and definite plan, but are ex- 
 amples of a government of little power attempting to 
 secure funds in any possible manner. The issue of paper 
 money was extensively relied upon at the beginning of 
 the struggle, but its rapid depreciation proved the in- 
 effectiveness of this plan. Many attempts were made to 
 requisition both money and materials from the states, 
 while borrowing, both at home and abroad, was pressed 
 to the limit. Attempts to establish a national system of 
 taxation proved unsuccessful, and resort was finally made 
 to the establishment of a bank to extend aid to the gov- 
 ernment. In the War of 1812 and the Civil War, however, 
 an attempt was made to adhere to a more definite policy. 
 
 The War of 1 812. Secretary of the Treasury Gallatin 
 was responsible for the plan used to finance the War of 
 1812. Congress heartily consented to the plan which he 
 proposed, while only an occasional individual member 
 voiced an objection. Reliance was to be placed entirely 
 upon borrowing to meet the increase of expenditure be- 
 cause of the war, and an earnest attempt was made to 
 adhere to this policy. The Secretary advised that taxes 
 be increased sufficiently to meet the interest upon the 
 loans, but Congress was unwilling to digress from the 
 policy of borrowing even to this extent. 
 
 The flotation of the first loan was not accompanied by 
 any marked degree of success. This was attributed to 
 the fact that the provisions of the bonds were not attrac- 
 tive enough. The response to successive issues, however, 
 was even worse, and the depreciation on the market con- 
 tinued to increase, until in 1814 the government had 
 practically reached its limit in the expansion of long-time 
 credit. The failure of the loans to produce the desired 
 amount led to the frequent and extensive use of treasury 
 certificates. The policy clearly demonstrated the fact 
 that borrowing cannot be conducted successfully unless 
 some inclination is shown to provide a means for the 
 redemption of promises. When Mr. Dallas took up the 
 
FINANCING AN EMERGENCY 463 
 
 Treasury portfolio in 1814 he condemned in no uncertain 
 language the policy which had been so closely followed. 
 He attributed the breakdown of the credit machinery to 
 the failure to use adequate taxation to form a basis for 
 credit expansion. His foremost proposal, in an effort to 
 retrieve the mistakes of his predecessors, was to put into 
 force an adequate system of taxes. 
 
 The Civil War. The system adopted to finance the 
 Civil War was practically a repetition of that of the War 
 of 1812. The same general plan was followed with the 
 same general results. Almost exclusive reliance was 
 placed upon borrowing, followed by a collapse of the credit 
 system. The real difference was the step in advance of 
 thr earlier policy when the treasury notes, or greenbacks, 
 were given legal tender qualities to settle individual debts. 
 No comment is needed, to those who are familiar with our 
 economic history, upon their rapid depreciation and con- 
 sequent economic effects. Secretary Chase, in his recom- 
 mendations to Congress, advised taxes of sufficient amount 
 to take care of ordinary expenses of interest on the debt 
 obligations, and of a start toward a sinking fund. Some 
 new taxes were proposed, but these were intended to 
 make up the deficit in the revenue caused by the war. 
 The most important of these was the inauguration of 
 income taxes and internal revenue duties. The war had 
 progressed nearly three years before Congress could be 
 made to realize that the loan policy was proving disas- 
 trous. The interest rate had to be increased and the dis- 
 count at which the bonds sold was becoming more marked. 
 When Congress became convinced, near the end of 1863, 
 that resort must be made to other than borrowing, a 
 vigorous tax plan was pursued, with most gratifying re- 
 sults. Not only was it demonstrated that the citizens 
 seemed willing to meet the tax burden, but that many 
 appeared anxious to do so. Had this vigorous tax policy 
 been pursued earlier in the conflict, the credit of the 
 government, without question, would have remained more 
 
 30 
 
464 OUTLINES OF PUBLIC FINANCE 
 
 firm, the effect of which upon the South and upon foreign 
 countries would have been quite salutary. 
 
 232. The United States Made Extensive Use of Taxes 
 in Financing the Great War. In a discussion of methods 
 used to finance war, those used by the various countries 
 to provide funds for the recent world conflict command 
 the interest of students of fiscal problems. A brief review 
 of some of the more important attempts to secure revenue 
 in the principal combating countries is all that can be 
 undertaken here. Neither is there space for any extended 
 criticism of these measures. 
 
 Revenue Act of 1916. The United States, in reality, 
 began her provision for war revenue before a state of war 
 actually existed. The Revenue Act of 1916 was largely a 
 preparedness measure, as was also in some respects the 
 Revenue Act of 1914. The revenue provisions of the law 
 of 1916 dealt particularly with income taxes, inheritance 
 taxes, a tax on the manufacture of munitions, and some 
 miscellaneous taxes. The changes in the income tax were 
 noted in the chapter on Income Taxes. 1 The inheritance 
 tax was introduced as a Federal measure for the first time 
 since 1902. The tax was imposed upon the transfer of 
 the entire net estate, less certain allowances, rather than 
 upon the amount of each share, and made no differentia- 
 tion between collateral and direct heirs. The rate was 
 progressive from 1 to 10 per cent, and the gradations 
 ranged from $50,000 to $5,000,000. A tax of 12J^ per cent 
 was placed upon the net profits of manufacturers of 
 munitions. Under the title of miscellaneous taxes the 
 duties were increased upon a number of commodities, such 
 as liquors and tobacco, and some changes were made in the 
 treatment of corporations, amusement houses, and brokers. 
 
 This law was amended in some ways before it was made 
 the basis for the War Revenue Act, signed October 3, 1917 
 the one real revenue Act of the war. The Act contained thir- 
 teen provisions, most of them dealing with various classes 
 
 igee. 303. 
 
FINANCING AN EMERGENCY 465 
 
 of taxes. The provisions of this law did not repeal previous 
 legislation, but, with a few exceptions, supplemented it for 
 the purpose of securing a war revenue. The most impor- 
 tant item in the Act were titles I and II, which dealt with 
 income taxes and excess profits taxes, respectively. 
 
 Income Tax of 1 91 7. 1 Drastic changes were made in 
 the taxation of incomes. To the normal rate of 2 per 
 cent, under the 1916 law, there was added another normal 
 rate of 2 per cent for war purposes. The exemptions, 
 moreover, were reduced from $3,000 and $4,000 to $1,000 
 and $2,000. This placed a normal tax of 4 per cent on 
 all incomes of more than $3,000 or $4,000. The Act 
 imposed a surtax to be added to the additional taxes im- 
 posed by the former laws. The number of grades was 
 large, and the rates steeply progressive, from 1 per cent 
 on the amount of income between $5,000 and $7,500, to 
 50 per cent on the amount of income over $1,000,000. 
 Most incomes were thus subject to four taxes. The in- 
 come of more than $1,000,000 of an unmarried person was 
 subject to the normal tax of 2 per cent on all income above 
 $3,000, and the war normal of 2 per cent on all over $1,000. 
 To this was added the additional taxes up to 13 per cent 
 on the various grades of income, followed by the war sur- 
 plus taxes up to 50 per cent on the amount of income over 
 $1,000,000. This made a total income tax which ap- 
 proached, but of course fell somewhat short of, 67 per cent 
 an extreme which was approximated in no other country. 
 
 Excess Profits Tax. The use of taxes upon excess 
 profits was practically an innovation in our fiscal policy. 
 The embryo of this might be found, however, in the tax 
 on the profits of munition manufacturers, which began to 
 take definite form in the March, 1917, Revenue Act. The 
 tax was evidently designed to take, for the benefit of the 
 government, a part of the profits created by the war. 
 The rule provided for arriving at excess profits was to 
 deduct the average rate of profits earned upon the capital 
 invested in the three pre-war years (1911-1913), provided 
 
 1 For changes made in 1921 see note p. 483. 
 
466 OUTLINES OF PUBLIC FINANCE 
 
 this rate was between 7 and 9 per cent. Whatever the 
 previous return, however, the minimum deduction in any 
 case was 7 per cent, and the maximum 9 per cent. The 
 tax applied to corporations, partnerships, and individuals, 
 the only distinction being that the maximum exemption 
 allowed to corporations was somewhat smaller than that 
 allowed to individuals and partnerships. The rates were 
 progressive, according to the following schedule: 
 
 Per Cent Profit Rate of Tax 
 
 Between 7 to 9 and 15 20 per cent 
 
 " 15 " 20 25 " " 
 
 " 20 " 25 35 " " 
 
 25 " 33 45 " " 
 
 Over 33 60 " " 
 
 Inheritance Tax and Other Provisions. Another impor- 
 tant modification of the previous law was the increase in 
 the inheritance tax rates. The 1916 schedule of rates had 
 been modified earlier in the year to range from lj/2 to 15 
 per cent. By the revenue law under discussion, additional 
 rates were imposed upon the same grades from J^2 of 1 
 per cent on the lowest grade to 10 per cent on the highest 
 the amount by which a bequest exceeded $10,000,000. 
 The maximum inheritance tax which could be collected, 
 therefore, would be 25 per cent. 
 
 Other provisions of the Act, which can only be indicated 
 here, were concerned with increasing tax rates upon goods 
 which were already taxed, and with tapping new sources 
 of revenue. The taxes upon distilled spirits, beer, and 
 tobacco were raised materially. The search for new 
 sources of revenue resulted in the placing of tax levies in 
 many new and unexpected fields. Freight, express, and 
 passenger transportation, and telegraph and telephone 
 messages, were made taxable. The manufacturers of a 
 large class of semiluxuries, such as automobiles, musical 
 instruments, jewelry, sporting goods, and many other 
 articles, were required to pay a tax on their product. A 
 10 per cent tax, to be paid by the purchaser, was placed 
 upon tickets of admission, and also upon the dues, initia- 
 
FINANCING AN EMERGENCY 467 
 
 tion, and membership fees of various clubs. Postal rates 
 were modified so as to bring a greater return, and a long 
 list of legal papers were made subject to stamp taxes. 
 
 Revenue Act of 1918. Just as some of the measures 
 enacted before the opening of hostilities should be classed 
 as war legislation, so the revenue measure which was 
 passed within a few weeks after the signing of the armis- 
 tice was in large part a war revenue bill. It was largely 
 formulated before hostilities ceased, and the need for 
 huge expenditures did not stop with the signing of the 
 armistice. The previous revenue bill was closely followed, 
 and only a few of the more important changes can be 
 noticed. The law of 1918 modified the income tax sched- 
 ule as to normal rates, which were to be 6 per cent on the 
 first $4,000 income above the exemption, and 12 per cent 
 on the remainder. The exemptions remained the same 
 as in the preceding law, except that $200 was now allowed 
 for each dependent instead of for each dependent child. 
 In each succeeding year after the 1919 income tax pay- 
 ment, the normal rates are to be 4 and 8 per cent, respec- 
 tively, while the surtax rates remain the same. The 
 graduation was slightly modified and strengthened, so 
 that the maximum surtax is 65 per cent. 
 
 Under the law of 1918 the income of an unmarried per- 
 son of over $1,000,000 for the calendar year of 1918 
 would be subject to the 6 per cent normal tax on $4,000, 
 and the 12 per cent normal tax on $995,000. In addition 
 to these normal taxes there were the surtaxes on the dif- 
 ferent grades up to 65 per cent on the amount over $1,- 
 000,000. This made the total tax approach the limit of 
 77 per cent. Since there was an exemption, and only a 
 6 per cent normal tax on $4,000, and since all the grades 
 were not subject to the 65 per cent surtax, the total tax 
 would be much less than 77 per cent of the entire income. 
 
 The excess profits tax was somewhat clarified and modi- 
 fied under this new legislation, and, due to the pressure 
 from the states, the rates on inheritances were lowered. 
 
468 OUTLINES OF PUBLIC FINANCE 
 
 The reductions are in the lower grades, for the rate on the 
 amount of inheritance over $10,000,000 is still 25 per 
 cent. Taxes were extended to a number of consumption 
 goods, either with the hope of securing revenue or of dis- 
 couraging the purchase of goods. 1 
 
 Corporation Taxes. Under each of these revenue Acts 
 the tax upon the net income of corporations was increased. 
 The 1916 law placed it at 2 per cent, while the Act of 1917 
 imposed an additional tax of 4 per cent, making a total 
 tax of 6 per cent. The Act of 1919 went still farther and 
 made the rate 12 per cent for the calendar year of 1918, 
 and 10 per cent for each succeeding year. Many details 
 exist in the law as to exemptions, deductions, evasions, 
 calculation of income, and administrative procedure. 
 
 233. Administrative Problems Developed from the Tax 
 Laws. Such a wide expansion of existing taxes and the 
 adoption of so many new forms of revenue precipitated, 
 as might be expected, a number of problems with which 
 the administrative officials had to cope. It was extremely 
 fortunate, however, that the income tax was already in 
 operation, that its administrative machinery was organ- 
 ized, and that it was capable of such a wide expansion. 
 The difficulties which arose from the extensive use of this 
 tax were therefore reduced to a minimum. 
 
 Much difficulty arose, however, in obtaining satisfac- 
 tory results from the excess profits tax. Profits were to be 
 calculated on the amount of invested capital, but the 
 amount of invested capital was not always easy to deter- 
 mine. The administrative machinery became swamped 
 with cases held under advisement, and millions of dollars 
 of potential revenue were held up until proper adjustments 
 could be made. The progressive levy worked injustice in 
 the cases where the returns were divided among several 
 
 1 An attempt to go into the details of this law as it relates to incomes 
 and excess profits would take us too far afield. A number of technical 
 treatises have been published and are available to anyone wishing to make 
 a more thorough study of these forms of taxes in the United States. 
 
FINANCING AN EMERGENCY 469 
 
 owners as against a comparatively close division that is, 
 it was not based upon the ability to pay. Difficulty arose, 
 also, in attempting to get a semblance of justice between 
 businesses of different forms of organization. In the re- 
 vision, the tax was made to apply only to corporations, 
 with the expectation that partnerships would be reached 
 through the individual members. The arrangement, even 
 yet, cannot be said to be satisfactory, and tax injustices 
 between close competitors, with different forms of busi- 
 ness organization, frequently occur. The fact that the 
 tax was made one upon excess profits rather than upon 
 profits arising from war, suggests the intention that it 
 might continue as a part of the peace-time taxes. The fact 
 that it retained such an important place in the important 
 post-war Revenue Act also points to the same conclusion. 
 Much agitation has arisen for its repeal, however, and it 
 may be given up in the not distant future. 
 
 A nation could not hope to make such an extensive use 
 of taxes without some friction and dissatisfaction. On 
 the whole, the taxes fulfilled what was expected of them. 
 It is perhaps true that more energy was exerted in at- 
 tempting to find fields for new and increased taxes than 
 was exerted in establishing the machinery to take care of 
 the taxes as they were levied. A large part of the dissatis- 
 faction which was voiced arose from this cause. There 
 appeared little unwillingness to bear tax burdens, but 
 individuals did object to bearing heavy burdens when 
 others equally able to bear burdens were escaping. The 
 sooner the administrative machinery can be so perfected 
 as to be able to iron out these inequalities, the more suc- 
 cessfully, extensively, and peacefully can taxes be used to 
 meet the burdens of reconstruction. 
 
 234. The United States Borrowed Extensively During 
 the Great War. In spite of the strenuous efforts to secure 
 revenue from taxes, it was found necessary to secure the 
 larger part of the needed funds by borrowing. The dif- 
 ferent loans were well organized and were carried through 
 
470 OUTLINES OF PUBLIC FINANCE 
 
 very successfully. The existence of the Federal Reserve 
 banking system proved of inestimable worth. The Fed- 
 eral Reserve Act provides that these banks could be made 
 to act as fiscal agents of the government, and the Secre- 
 tary of the Treasury was not slow in enlisting their serv- 
 ices. Each of the twelve reserve banks acted as centers 
 and were responsible for making the loan projects success- 
 ful. These banks and their members, as well as the other 
 banking institutions, were enthusiastic agents of the gov- 
 ernment in taking subscriptions for the loans, and were 
 large purchasers of the bonds themselves. The advance 
 of money and credit which they continually made to the 
 government was another valuable service. 
 
 Bond Issues. Five issues of bonds were floated, and the 
 success of each issue left nothing to be desired. Strong 
 appeal was made, both to patriotic and economic senti- 
 ment, and the pressure exerted at times was so strong 
 that subscription became more nearly coercive than vol- 
 untary. Wide publicity was given through newspaper, 
 magazine, and poster advertising, as well as through short 
 speeches at moving picture theaters, churches, and other 
 public gatherings. Various organizations throughout the 
 country took up the burden of enlightening the public 
 and securing subscriptions to the bonds. The issues were 
 made in convenient denominations, the fifty dollar "baby 
 bond" being especially designed to attract the small in- 
 vestor. The privilege of paying for the bonds on the in- 
 stallment plan was a further aid in securing subscriptions. 
 
 Treasury Certificates. In anticipation of the return 
 from the various loans and taxes, an extensive use was 
 made of the treasury certificates. These were carried 
 very largely by the banks, and were canceled when the 
 anticipated revenue was realized. By this process the 
 government did not have to wait for funds, but was 
 financed from the credit which banks could extend, and 
 a large part of the expected revenue was actually spent 
 before it was received. The total amount of these cer- 
 
FINANCING AN EMERGENCY 
 
 471 
 
 tificates of indebtedness exceeded the returns from the 
 loans. The sale of war savings certificates and thrift 
 stamps was inaugurated to appeal to the class of savers 
 who could not purchase bonds, and incidentally to secure 
 some additional revenue from those who had made bond 
 purchases. The post office was used extensively as the 
 agent for these sales. 
 
 Success of Loan Policy. This brief outline of our loan 
 policy cannot but bring into contrast the effectiveness of 
 the methods employed as compared with those used in 
 attempting to secure loans at the time of the Civil War. 
 The possibility of employing private agencies was seized 
 eagerly, and every possible means was used to create a 
 desire for the securities. Recognition was made of the 
 fact that, in order for the public to buy, they must either 
 be supplied with what they want, or be made to want 
 what is supplied. Not only were the bonds made attrac- 
 tive, but every effort was made to create desire for them. 
 Even the titles Liberty Loan to each of the first four 
 issues, and Victory Loan to the fifth indicate that a 
 psychological appeal was intended. Some of the varia- 
 tions in the bonds, together with the success of the issues, 
 is indicated in the following table : l 
 
 
 8 
 
 
 
 
 
 
 Date 
 
 Amount Ask 
 in Billions 
 
 Amount 
 Subscribed 
 
 Amount 
 Accepted 
 
 Number of 
 Subscribers 
 
 Is 
 
 !* 
 
 Redeem- 
 able or 
 Payable 
 
 June 15, '17 
 Nov. 15, '17 
 
 2 
 3 
 
 $3,035,226,850 
 4,617,532,300 
 
 $2,000,000,000 
 3,808,766,150 
 
 4,500,000 
 9,420,000 
 
 3.5 
 4 
 
 1922-47 
 1927-42 
 
 May 9, '18 
 
 3 
 
 4,176,516,850 
 
 4,176,516,850 
 
 18,376,000 
 
 4.25 
 
 1928 
 
 Oct. 24, '18 
 
 6 
 
 6,993,073,2,50 
 
 6,993,073,250 
 
 21,000,000 
 
 4.25 
 
 1933-38 
 
 May 21, '19 
 
 4.5 
 
 5,249,908,300 
 
 4,500,000,000 
 
 12,000,000 
 
 4.75 
 
 1923-24 
 
 1 This table is given in practically this form by E. L. Bogart, in his study 
 Direct, and Indirect Costs of the Great World War, under the allspices of the 
 Carnegie Endowment for International Peace. A more elaborate table 
 could be compiled which would show the tax exemptions of the different 
 issues, the conversion privileges, ete. 
 
472 OUTLINES OF PUBLIC FINANCE 
 
 235. Fiscal Problems Did Not End with the War. If 
 the fiscal problems and difficulties caused by a war would 
 end with the war, the task of the fiscal official would be 
 materially lessened. The problems, however, do not 
 cease, but, on the other hand, the return of peace fre- 
 quently makes the solution of the problems more diffi- 
 cult. The cessation of hostilities does not immediately 
 disband armies or pay interest on a huge public debt, so 
 that war expenditures really last much longer than the 
 war. The end of the war, however, produces a change in 
 the nature of the taxpayer. Taxes that were willingly 
 paid while the war was in progress are now evaded or 
 grudgingly paid. The low prices of the readjustment 
 period make taxpaying all the more burdensome and dis- 
 tasteful. Some important sources of revenue, such as 
 excess profits or war profits, begin to melt away. Legisla- 
 tors are confronted with the problem, then, of readjusting 
 the revenue system so that a sufficient amount of funds 
 will be received with as little injustice and objection as 
 possible. 
 
 Many Changes Suggested. There has been no dearth 
 of remedies suggested to Congress as a cure for the pres- 
 ent ailments in the fiscal system. Some have suggested 
 that a tax on the undistributed earnings of corporations, 
 and a flat tax on corporation profits or incomes, be sub- 
 stituted for the now dwindling and highly unsatisfactory 
 excess profits tax. Another suggestion has been to re- 
 model the tariff on a purely revenue basis. Some have 
 advocated a tax on gasoline as well as one of varying 
 amounts on the owners of passenger automobiles. An in- 
 creased taxation of land values, especially upon those of 
 unimproved land, has had its share of advocates. Opin- 
 ion has generally been favorable to the removal of the 
 excess profits tax and the higher surtaxes on personal 
 incomes. 
 
 Secretary of the Treasury Mellon made some recom- 
 mendations to Congress for remedying the situation. He 
 
FINANCING AN EMERGENCY 473 
 
 would repeal the excess profits tax and make good the 
 loss of revenue by means of some other tax on corporation 
 profits or by an addition to the income tax on corpora- 
 tions. He would readjust the income tax rates so that 
 for 1921 the maximum combined normal and surtaxes 
 would be 40 per cent, and 33 per cent thereafter. He 
 asked for the retention ofcmany of the sales taxes, such as 
 those on transportation*; admissions, and such goo3s as 
 tobacdo, but asked for the elimination of those thgt had 
 proved a nuisance, such as taxes upon sales at soda foun- 
 tains. 
 
 Advantages of Sales Tax. One of the most strongly 
 advocated and widely discussed changes has been for the 
 adoption of a general sales or turnover tax. This might 
 take a number of forms, but the plan that has been most 
 widely advocated has been a 1 per cent tax upon all 
 sales of whatever nature. The Tax League of America 
 has set forth the following arguments in favor of the sales 
 tax: (1) It will undoubtedly produce all the revenue 
 needed. (2) Under it the flow of revenue will be prompt, 
 constant, and dependable. (pj^It willjbgjpaid by the 
 whole body of thepeojple, but m infinitely small amounts, 
 by each individual. (4) It is^jmple i^ operation and will 
 be promptly, completely, and economically collected, 
 without burdening anybody. (5) When supplemented by 
 ^moderate income tax it will rest equitably upon all. 
 (6) It will abolish the present harmful method of class 
 taxation, and business will promptly get back on its feet 
 and prosperity return. (7) It will reduce the high cost of 
 living without reducing the profits of the producer. 
 
 iSany advocates of the tax refer to its successful use in 
 other countries, such as the Philippines, Canada, and 
 France. The dissimilarities in the tax used, or in the busi- 
 ness conducted, however, make the argument from ana- 
 logy of little weight. 
 
 Objections to Sales Tax. The favor with which the 
 proposition of a sales tax was at first received decreased 
 
474 OUTLINES OF PUBLIC FINANCE 
 
 materially as it became more generally studied and dis- 
 cussed. The important objections that have been brought 
 out have been summed up as follows: (JTJ) The general 
 sales tax is essentially unjust in that it is a tax levied ac- 
 cording to needs rather than according to ability to pay. 
 (2) The general sales tax is grossly discriminatory. In 
 so far as "the tax cannot be shifted, it is distributed accord- 
 ing to gross income, which furnishes no measure of tax- 
 paying ability. The tax treats as being alike transactions 
 which are fundamentally unlike; it subjects to very un- 
 equal risks taxpayers in substantially similar positions; 
 it affords an indefensible bounty to the large, integrated 
 industry, as compared with smaller industrial units. (3) 
 The tax rests upon an artificial basis in that it turns upon 
 the mere form of business transactions, and would lead 
 to undesirable changes in business practice. 1 
 
 Shifting and Incidence. One of the most common and 
 weighty objections to the sales tax as well as to most 
 forms of corporation taxes is that the burden will be 
 shifted to the consumer. Consequently, the mass of the 
 population with small and moderate incomes will be bear- 
 ing the bulk of the tax burden. This appears particularly 
 objectionable in the sales tax, since it is thought all the 
 taxes on sales from the production of the raw materials 
 to the final disposal of the finished product will be pyra- 
 mided and rest on the consumer. The American Federa- 
 tion of Labor and numerous other organizations are, con- 
 sequently, opposed to the introduction of the sales tax. 
 ^Protests have also been registered by a number of manu- 
 facturers' and merchants' associations, which would indi- 
 'cate that they are not so sure about the possibilities of 
 shifting the burden. 
 
 The same underlying principles of shifting and incidence 
 that were discussed in Chapter VIII apply to sales taxes 
 and the various taxes on corporations. The laws of price 
 
 1 Arthur A, Ballantine, The Annals of (he American Academy of Political 
 and Social 8cience t vol xov, p. 214, 
 
FINANCING AN EMERGENCY 475 
 
 are the determining factors. No one will want a good to 
 any greater extent because it is taxed, and consequently 
 will be willing to pay no more for it* In case the demand 
 for the good be very inelastic, then it will be possible to 
 shift practically the entire burden and dispose of the same 
 number of goods. A review of the principles upon whicrA 
 the shifting of taxes is based will indicate that it is impos- | 
 sible to categorically state whether or not sales taxes and ] 
 corporation taxes will be shifted. 
 
 236. England Financed the War Through a Combina- 
 tion of Loans and Taxes. The war came upon England 
 as a bolt from the clear sky, and she consequently had no 
 time to put her fiscal house in order to meet the unwel- 
 come guest. The first problem which presented itself, 
 and which demanded quick action, was the protection of 
 the domestic financial institutions and of the country's 
 gold supply. This the government attempted to do by 
 setting aside the note issue requirements of the Peel Act, 
 issuing a paper currency which was loaned to the banks, 
 raising the rate of discount at the Bank of England, and 
 closing the Stock Exchange. When these objects were ac- 
 complished, attention was turned to securing needed 
 funds. The first measures, however, indicate a striking 
 feature of the war policy in that, throughout the war, a 
 rapid increase in the amount of paper currency was in 
 evidence. 
 
 Loan Policy. The first use of the loan policy was in 
 the issue of short-term treasury obligations which were 
 readily discounted at the banks. The paralyzed condition 
 of industry had increased the funds in the banks to such 
 an extent that the chance to use them in this way was 
 welcome. The rapidly growing needs, however, could not 
 be long sustained by the treasury certificates, and long- 
 term bonds were issued early. Several other issues of 
 bonds were made, with varying rates of interest and tax 
 exemptions. An extensive use of the treasury certificates 
 was made, however, throughout the war. Borrowing 
 
476 OUTLINES OF PUBLIC FINANCE 
 
 abroad was also carried on to some extent. As in the 
 United States, small savings were secured through war 
 savings certificates a feature which was urged, however, 
 more extensively than in this country. 
 
 The English plan of borrowing incorporated some pecul- 
 iar features which are of interest. The short-term obliga- 
 tions were not offered entirely to the banks, but were 
 open to purchase by the public after the first few months 
 of hostilities. The sale was generally at a rate favorable 
 to the government. During the latter part of the war a 
 continuous short-term obligation and bond sale was in- 
 augurated. The advantage claimed for this was that it 
 did away with the expense and excitement of particular 
 drives. Special subscription days and weeks were fre- 
 quently inaugurated, however, and enthusiastic individ- 
 uals would sometimes offer prizes to those who would 
 draw securities with a certain number. The revenue from 
 this continuous sale generally proved to be satisfactory in 
 amount. England, of course, was interested in securing 
 credit in this country to enable her to purchase goods. 
 One method by which she accomplished this was to buy 
 up American securities from her subjects with the pay- 
 ment of short-term obligations, and in turn using these as 
 collateral to obtain credit here. 
 
 Tax Policy. The fiscal officials were severely criticized 
 in many quarters for not making a heavier use of taxes. 
 Precedent had been set of meeting nearly half of such 
 extraordinary needs from taxes, and many considered 
 that the precedent should not be broken. As the war 
 progressed, taxes tended to form a larger part of the bud- 
 get. The budget had been passed shortly before the out- 
 break of the war, and was not remodeled. Substantial 
 increases in revenue over the previous budget were pro- 
 vided, however, for the purpose of carrying out an exten- 
 sive social program. The increases in the next budget 
 were slight, consisting in small increases in the taxes on 
 incomes, tea, and beer. 
 
FINANCING AN EMERGENCY 477 
 
 The appalling increase in expenditures, and the increas- 
 ing strain upon the credit machinery, caused the recogni- 
 tion of the need for heavier taxes. The normal income 
 tax was raised to over 17 per cent, and the exemption was 
 lowered to about $650. The rates of the supertax were 
 also raised. In addition, a war profits tax was inaugu- 
 rated. This took 50 per cent of the profits which arose 
 from war activities. It differed from the excess profits 
 tax of the United States in that it did not attempt to 
 reach abnormal profits except as they arose from the war. 
 In order that those with incomes of less than the exemp- 
 tion amount might help share the burden, the tax upon 
 generally consumed goods was raised 50 per cent. The 
 budget of the following year placed a progressive rate upon 
 incomes which reached 25 per cent for those over $12,500, 
 while the war profits tax was iner eased to 60 per cent. 
 The rates on consumable goods were raised and more 
 commodities were added to the taxable list. Somewhat 
 later the war profits tax was increased to 80 per cent, 
 while the last budget that properly can be called a war 
 budget increased income taxes slightly and introduced 
 taxes upon luxuries. 
 
 237. The Revenue of France Was Secured Largely by 
 Borrowing. The opening of the war found France in a 
 very different economic condition than that which pre- 
 vailed in England. The finances were none too sound, 
 and the current revenue was not meeting current expendi- 
 tures, while a bond issue had been provided to make up 
 the deficiency. Payment on this bond issue was to be 
 made in installments, two of which had been made at the 
 outbreak of the war. The general derangement after this 
 event put the treasury in a condition of distress; first, 
 because individuals could not secure funds to meet the 
 remaining installments on their loan subscription, and, 
 second, because the occupation of one of the richest sec- 
 tions of France wiped out the accustomed revenue from 
 this territory. The problem of France at first was much 
 
478 OUTLINES OF PUBLIC FINANCE 
 
 the same as that of England to stabilize the domestic 
 credit system. This she attempted to do through regulat- 
 ing the withdrawal of bank deposits, closing and super- 
 vising the Stock Exchange, and declaring a moratorium. 
 
 Bank Aid and Loans. Those who are acquainted with 
 the nature of the bank of France would expect the govern- 
 ment to rely upon it extensively for aid, which proved to 
 be the situation throughout the war. This aid was given 
 through the large loans to the government, and through 
 the large increase in the number of bank notes. The en- 
 larged mass of this cheap currency began to endanger the 
 gold supply, and specie payments were stopped. So much 
 of the specie had been hoarded that a scarcity of money 
 for small transactions was felt and paper notes of small 
 denominations were struck. The needs of the government 
 soon outgrew any aid the banks could give, and treasury 
 bills were issued and sold both at home and abroad. Their 
 insufficiency was soon manifest, and resort was made to 
 long-term loans. Because of the weakened credit condi- 
 tions, the terms upon which they could be sold were un- 
 favorable to the government. Citizens loaned their Amer- 
 ican securities to the government, and these were used as 
 collateral in securing credit from America. The entrance 
 of the United States into the war, and the subsequent ex- 
 tension of credit, improved the situation. 
 
 Tax Measures. Nothing was done for more than a 
 year after the outbreak of hostilities to increase the rev- 
 enue from taxes, but the authorities were finally driven 
 to adopt more stringent tax measures. The income tax, 
 adopted two years before, became operative in 1916. The 
 rate was 2 per cent, but the exemptions were so arranged 
 as to make it progressive. The war profits tax was also 
 inaugurated in 1916 after much opposition, and imposed a 
 50 per cent tax on such returns. At the same time various 
 other new taxes were levied, while some of the old rates 
 were increased. In 1917 still other new taxes were imposed 
 on business profits, and on the turnover in retail establish- 
 
FINANCING AN EMERGENCY 479 
 
 ments. Other rulings were that taxes should be placed 
 upon agricultural profits, salaries, and similar returns. 
 Had this policy been adopted earlier, the credit of the 
 nation would doubtless have remained more firm. 
 
 Other Allied Countries. The fiscal policy of the other 
 Entente allies was just as indefinite, but space does not 
 permit a review of the systems used. Suffice it to point 
 out that Canada, after appealing to banks for aid, started 
 a vigorous system of taxes which, of course, did not prove 
 adequate, and loans were resorted to at various tunes. 
 In Australia public works were being built with borrowed 
 funds, yet her war loans were successful, as was also the 
 income tax. In Russia taxes were used only sparingly, 
 but most reliance was put upon loans and the issue of 
 paper. In Italy, first resort was taken to aid from banks, 
 followed by the use of both new and old taxes to secure 
 revenue. A liberal amount of borrowing was also done. 
 
 238. The Central Powers Used Loans Most Extensively. 
 Germany, unlike the allied nations, entered the war 
 with closely laid fiscal plans, which had been formulated 
 and developed through long years of preparation. The 
 method for securing funds was based upon the military 
 plan of a short and victorious war, with large indemnities 
 hi settlement. The reliance upon an extensive system of 
 credit instruments was the result, the expectation being 
 to redeem these with the funds secured from the indemni- 
 ties. The defeat of the military program was consequently 
 reflected in the breakdown of the fiscal program. 
 
 Preparatory Measures. The credit machinery which 
 was in existence at the declaration of the war, or which 
 was immediately put into existence, showed that careful 
 preparation had been made for such a crisis. A few months 
 before the break, the amount of gold in the war chest had 
 been increased from $21,000,000 to more than $50,000,000. 
 Systematic attempts had been made for some years to 
 increase the gold reserve of the country as a basis for the 
 issue of notes when the need came. The central banking 
 
480 OUTLINES OF PUBLIC FINANCE 
 
 institution had been given more extensive control over the 
 banking machinery of the country in order that the gov- 
 ernment might be better able to control the gold fund. 
 Some preparatory attempts were even made to prevent 
 the disturbance in the money market which usually ac- 
 companies the opening of hostilities. 
 
 The outbreak of the war called into clear relief the 
 preparations which had been made, and their efficacy in 
 meeting the demands. In spite of the anticipations of 
 the government, panic seized many, and they began to 
 demand gold from the banks. This led the central bank 
 to suspend specie payments. The preparation for creating 
 circulating instruments, however, was more successful. 
 The war chest fund was transferred to the bank as a basis 
 for note issue, and a large amount of bank notes continued 
 to be issued, which were made legal tender, but which 
 would not be redeemed in specie. Along with these suc- 
 cessive issues of bank notes, treasury notes were put out 
 by the government which were also made legal tender, 
 and denied specie payment. As might be expected, the 
 notes depreciated and prices became inflated. When 
 merchants refused to accept the notes at face value, the 
 regulation was adopted making it illegal to discount cur- 
 rency, whereupon prices went still higher. 
 
 Loan Policy. A vital part of the previous preparation 
 was to liquify the wealth of the country so as to make 
 it available for the government. As a part of the machin- 
 ery for accomplishing this, vario usbanks were established 
 throughout the country for the purpose of extending 
 credit upon collateral. Stocks, bonds, merchandise, and 
 nearly anything would be accepted as the basis for credit 
 expansion. A number of regular war loans were floated, 
 and these banks were used extensively to issue credit as 
 a basis for the purchase of loans. Even the loans to be 
 purchased were sometimes taken as collateral upon the 
 loan made. As the war progressed, however, the credit 
 machinery became more strained and the weakness of the 
 
FINANCING AN EMERGENCY 481 
 
 loan policy became unsuccessful to an embarrassing de- 
 gree. 
 
 Use of Taxes. As indicated above, taxes were not used 
 in the earlier years of the war because it was considered 
 they were not needed. It was thought that the good will 
 of the citizens would be increased if this extra burden were 
 not placed upon them. The failure of the military ma- 
 chine to accomplish its purpose as scheduled, and the 
 consequent weakening of the accepted fiscal policy, led the 
 Finance Minister, in desperation, to turn to taxes as a 
 supplementary source of revenue during the latter part 
 of the struggle. At first they were so slight as to meet 
 scarcely the interest charge, but near the end of the war 
 they were increased so as to secure a noticeable return. 
 It should be noted that the imperial government was 
 somewhat handicapped, since it could make no use of 
 direct taxes. The first war taxes were increased tele- 
 phone, telegraph, and postal rates, as well as new taxes 
 or increased rates upon war receipts, tobacco, bills of 
 lading, and a few other articles. Later these rates were 
 raised, and duties were levied upon railway tickets and 
 coal. When the war was nearly over a much more ex- 
 tensive use of taxes was attempted, and business transac- 
 tions, beverages, and many luxuries were subject to taxa- 
 tion. The revenue from these sources, while not great in 
 proportion to the need, aided somewhat hi establishing a 
 firmer fiscal system. 
 
 System in Austria and Hungary. The fiscal systems 
 used in Austria and Hungary followed closely that de- 
 scribed for Germany, yet more importance was attached 
 to taxes than was found in Germany. The impaired state 
 of the finances at the opening of hostilities made it more 
 difficult to carry out a sound policy for meeting the war 
 needs. Bank credits and national loans were relied upon 
 extensively, which resulted in a marked depreciation of 
 the currency. This, it seemed, the taxes could not pre- 
 vent. The direct tax on incomes was the principal source 
 
482 OUTLINES OF PUBLIC FINANCE 
 
 of revenue, although taxes were placed upon other bases. 
 The rate on incomes was extremely high, as were those on 
 directors' fees, land revenues, etc. The tardy introduc- 
 tion of extensive taxes, however, could not overcome the 
 bad fiscal situation which had been caused by the borrow- 
 ing policy. 
 
 239. The Methods Used by the Different Countries 
 Present Interesting Comparisons. The fiscal systems of 
 no two countries were exactly alike, yet no purpose would 
 be served in outlining that used in any except the more 
 important belligerents. The interest in these countries 
 attaches to the amount of revenue raised, the methods 
 used in raising it, and the general effect on the citizenship. 
 Interest attaches also to the method of publicity for 
 securing loan subscribers, and to what extent loans were 
 used in proportion to taxes. 1 
 
 The United States and Great Britain stand out pre- 
 eminently as the two countries that placed most reliance 
 upon taxes. Reasons for this in the United States might 
 be that she had more time to prepare before entering the 
 conflict. Many so-called authorities advocated a pay- 
 as-you-go policy, which no doubt had an influence. The 
 net result, however, was that loans greatly exceeded the 
 amount secured from taxes. As a whole, probably a little 
 less than one third of the revenue was raised from taxes. 
 
 England's precedent in using so large a proportion of 
 taxes to finance a previous war gave her an ideal toward 
 which to work, and this no doubt had much to do with the 
 expansion of her tax system. The unexpected demand, 
 of course, could only be met by credit until the tax system 
 could be put into operation. This was done quite effec- 
 tively, however, and about the same proportion of the 
 entire fund was raised from this source as in the United 
 States. In both countries the results of inflation from 
 the issue of more bank notes, and the many securities, was 
 
 1 For an interesting comparison of the sources of revenue of the impor- 
 tant countries, see table on p. 497. 
 
FINANCING AN EMERGENCY 483 
 
 quickly reflected in the rapidly rising prices. France did 
 not use taxes early in the conflict, but strongly favored 
 borrowing, and this formed the source of the bulk of the 
 revenue until the breaking credit system needed to be 
 braced. The proportion of the entire expense which was 
 met from taxes was less than that of England or of the 
 United States. 
 
 Germany and Austria-Hungary form the best example 
 of recent emergency financiering, in which borrowing and 
 bank credits were relied upon almost exclusively. The 
 proof that it does not work successfully over a period of 
 years, with an excessive demand for funds, is clearly 
 demonstrated by the events in these countries. Deprecia- 
 tion of the currency, a failure of the credit machinery, 
 followed by a resort to taxes as a method of alleviation, 
 was simply a repetition of the story which has been writ- 
 ten each tune that a nation has tried to use borrowing 
 to excess. 
 
 ADDITIONAL READING 
 
 Laughlin, Credit of the Nations. 
 Bogart, Direct and Indirect Costs of the War. 
 Bogart, War Costs and Their Financing. 
 Annals of the American Academy of Political and Social 
 Sciencej vol. Ixxv, vol. xcv, pp. 193-220. 
 
 NOTE: 
 
 The Revenue Act of 1921, signed by President Harding on November 
 23, 1921, has made many important changes. Some of the more important 
 are: Every individual with a gross income of $5,000 or more must file a 
 return, whatever his net income may be. The normal rates of 8 per cent 
 on net incomes of more than $4,000, and of 4 per cent on smaller incomes, 
 were not changed. The surtax rates were changed to range from 1 per cent 
 to 50 per cent on net incomes in excess of $5,000. The 50-per-cent rate 
 applies to all net incomes in excess of $200,000. The exemption allowed 
 to a head of a family is $2,500 if his net income is not in excess of $5,000, 
 otherwise it is $2,000. A deduction of $400 is allowed for each dependent. 
 The 1921 law repeals the tax on excess profits and fixes the tax on the net 
 income of corporations at 12 y> per cent. 
 
CHAPTER XX 
 
 THE COST OF WAR 
 
 240. The Cost of War Presents a Variety of Aspects. 
 The Great War exhibited the most significant example of 
 a fiscal emergency that has ever confronted the nations of 
 the world, and it is to be hoped they will be called upon 
 to meet no such emergency in the future. Few have any 
 concept as to the burden that was entailed, and, indeed, 
 it is next to impossible to form any adequate concept, 
 because of the enormity of the demands which were made. 
 Figures can be compiled as to the monetary outlay, but 
 the amounts are so staggering as to be almost beyond the 
 possibility of comprehension. Statistics were omitted in 
 the previous chapter, with the idea that they would be 
 more significant and important when viewed as an at- 
 tempt to interpret war costs. Some of the statistical tables 
 will serve, nevertheless, as valuable illustrations of part of 
 the discussion which is found in the preceding chapter. 
 
 Citizens not only have a right to know, but should 
 know, the magnitude of this burden which has been in- 
 voluntarily thrust upon them. This is the more impor- 
 tant, too, in these days, when the demands upon the 
 functions of the state have become so extended as to make 
 the securing of funds for ordinary expenditures a real 
 problem. Many citizens, moreover, may now or in the 
 future be in positions of political power and influence, 
 and by having an adequate understanding of the conse- 
 quences of war, they should hesitate to thrust a country 
 into a state of hostilities without the maturist deliberation. 
 
 Money Costs. The first significant factor that appears 
 in the mention of the cost of war is that large sums of 
 
THE COST OF WAR 485 
 
 money are demanded and expended. It has already been 
 noted that this aspect is but superficial, for in reality the 
 actual money is of no service except as it will command 
 ships, artillery, munitions, and supplies. A period of war, 
 in fact, is almost without exception marked by a per- 
 ceptible increase in the circulating medium. If the direct 
 money expenditures were the only cost of war, the calcu- 
 lation would be comparatively easy and the burden would 
 be materially lessened. War costs do not begin, however, 
 with the opening of hostilities, nor do they cease with 
 treaties of peace. The expense of maintaining the mili- 
 tary machine in Germany was an enormous burden, while 
 the maintenance of armies and navies in countries which 
 were considered as unprepared for war, has formed no 
 little proportion of their entire expenditures. 
 
 Other Costs. The direct money expenditures for war, 
 its preparation and aftermath, are not the only conse- 
 quences to which a fiscal importance can be attached. 
 The need for safeguarding the patrimony of the state has 
 already been emphasized, and the possible effects of war 
 upon the potential sources of revenue cannot be over- 
 emphasized. The decrease in productive capacity which 
 arises from the destruction of capital and man power is 
 an item which at once presents itself. The diversion of 
 industry from productive enterprises to those of produc- 
 ing for destruction; the disarrangement of trade and 
 commerce; the decreased productive capacity of those 
 left physically and morally deficient; the destruction of 
 the virile manhood which leaves a larger proportion of 
 the weaklings to propagate the race; the sums which 
 must be expended to take care of those left dependent or 
 partially dependent these all must be considered in the 
 invisible and visible costs of war. Because of these re- 
 sults, the state is handicapped in raising funds for prose- 
 cuting the many progressive enterprises which are con- 
 tinually calling for its support. 
 
 Returns from War. To endure such costs as indicated 
 
486 OUTLINES OF PUBLIC FINANCE 
 
 above, the returns from war should be great. These re- 
 turns are often exaggerated. The claim of the militarists 
 has been that war makes for strength and manhood, and 
 unless military training be given, the male population 
 would degenerate into weaklings. The fallacy of such 
 reasoning was clearly demonstrated when the strength 
 and vitality of the peace-bred American soldier was pitted 
 against the one of militaristic breeding on the Western 
 front. War does, no doubt, stimulate progress, but it is 
 impossible to measure the amount of progress which has 
 been dependent upon war. Necessity is the mother of 
 invention in time of war, if at any time, and may bring 
 rapid advancement in scientific progress. The develop- 
 ment of the air craft, for example, received a remarkable 
 stimulus from the Great War, and it is impossible even 
 to estimate how many years of peace it would have taken 
 to have arrived at the same place. While some such bene- 
 fits may come, they sink into insignificance when com- 
 pared with the cost. 
 
 An attempt will be made to show briefly some of the 
 costs which have been found to accompany war, with the 
 general effects upon the citizenship. The figures which 
 will be found may be far from accurate, but they form a 
 valuable basis of comparison. 
 
 241. The United States Was Not Free from War Costs 
 During Its Early History. Few citizens, before the ad- 
 vent of the Great War, have stopped to consider that the 
 direct or indirect expenditures for war have placed a 
 larger burden, in the form of Federal expenditures, upon 
 the people of the United States, than the burden has been 
 for all other expenditures. A moment's reflection upon 
 this statement cannot but impress upon the reader the 
 cost of war, of its preparation and consequences, even in 
 a country that has enjoyed as many years of peace as has 
 the United States. 
 
 Cost of Early Wars. The War of 1812 was, of course, 
 the first actual experience with warfare which can be 
 
THE COST OF WAR 
 
 487 
 
 attributed to the United States. That does not mean 
 that the early citizens were free from the burden of war, 
 for fiscal reminders of the Revolution were ever present. 
 Expensive Indian wars also occurred. The attempt will 
 be made, so far as possible, to refrain from the use of 
 burdensome statistics, yet there is no better way to show 
 the weight of war costs during the first years of our gov- 
 ernment than to give a table of comparative expenditures 
 for some of the early years. To arrive at war burdens 
 the first three columns must be offset against the fourth, 
 or compared with the total. Even this does not quite 
 tell the story, for under the miscellaneous expenditures is 
 included the amount which was expended for pensions as 
 well as the civil expenditures. 
 
 EXPENDITURES OF THE UNITED STATES 1 
 
 Year 
 
 War 
 
 ,' 
 
 Navy 
 
 Interest 
 on 
 Debt 
 
 Miscellane- 
 ous 
 
 Total 
 
 1791 
 
 $ 633,000 
 
 
 $1,178,000 
 
 SI, 286 000 
 
 $ 3 097 000 
 
 1794 
 
 1797 
 1800 
 1802 . . 
 
 2,639,000 
 1,039,000 
 2,561,000 
 1,179,000 
 
 $ 61,000 
 382,000 
 3,448,000 
 915,000 
 
 2,752,000 
 3,172,000 
 3,402,000 
 4,239,000 
 
 844,000 
 1,414,000 
 1,401,000 
 1 642000 
 
 6,297,000 
 6,008,000 
 10,813,000 
 7 976000 
 
 1804 
 
 875,000 
 
 1,189,000 
 
 4,185,000 
 
 2,287 000 
 
 8637000 
 
 1806 
 
 1 224 000 
 
 1 649 000 
 
 3368000 
 
 3 206 000 
 
 9 449000 
 
 1808 
 1810 . .. 
 
 2,900,000 
 2,294,000 
 
 1,884,000 
 1,654,000 
 
 2,557,000 
 3,163 000 
 
 1,719,000 
 1 362000 
 
 9,061,000 
 8474000 
 
 1811 
 
 2,032,000 
 
 1,965,000 
 
 2,585,000 
 
 1,594,000 
 
 8,178,000 
 
 War of 1812 -The advent of the War of 1812 very 
 largely increased the visible war costs. The above table 
 extended through the War of 1812 is as follows: 
 
 Year 
 
 War 
 
 Navy 
 
 Interest 
 on 
 Debt 
 
 Miscellane- 
 ous 
 
 Total 
 
 1812.. . 
 
 $11 817000 
 
 $3 959 000 
 
 $2 451 000 
 
 $2 052 000 
 
 $20 280 000 
 
 1813 
 1814 
 1815 
 
 19,652,000 
 20,350,000 
 14,794,000 
 
 6,446,000 
 7,311,000 
 8,660,000 
 
 3,599,000 
 4,593,000 
 5,990,000 
 
 1,983,000 
 2,465,000 
 3,499,000 
 
 31,681,000 
 34,720,000 
 32,943,000 
 
 l The statistics for these early expenditures are taken from Dewey, 
 Firunicial History of the United States. The figures under "War" and 
 "Navy" are for these respective departments, 
 
488 
 
 OUTLINES OF PUBLIC FINANCE 
 
 The immense increase in expenditures which a war en- 
 tails is clearly illustrated from this table, even though 
 the percentage of expenditure for the weapons of war in 
 times of peace may be large. In the above tables it its 
 seen that in 1811, the last year before open hostilities, the 
 war costs were over 95 per cent of the entire expenditures. 
 The burdens, however, did not cease with the signing of 
 the treaty, but the outlays for war machines, the payment 
 of interest and pensions, continued. 
 
 Peace Expenditures. The following table, in which 
 years are chosen rather at random from our history fol- 
 lowing the War of 1812, portrays to what extent the bur- 
 den of war continued to fasten its tenons upon the citi- 
 zenship of the country: 
 
 EXPENDITURES OP THE UNITED STATES FOR YEARS FOLLOWING 181 2 l 
 
 Year 
 
 War 
 
 Navy 
 
 Pensions 
 
 Interest 
 on 
 Debt 
 
 Miscellane- 
 ous 
 
 Total 
 
 1816... 
 
 $16,012,000 
 
 $3,908,000 
 
 $ 189,000 
 
 $7,823,000 
 
 $3,264,000 
 
 $31,196,000 
 
 1819... 
 
 6,506,000 
 
 3,847,000 
 
 2,415,000 
 
 5,211,000 
 
 3,530,000 
 
 21,511,000 
 
 1825... 
 
 3,659,000 
 
 3,049,000 
 
 1,308,000 
 
 4,366,000 
 
 3,472,000 
 
 15,856,000 
 
 1830... 
 
 4,767,000 
 
 3,239,000 
 
 1,363,000 
 
 1,912,000 
 
 3,859,000 
 
 15,141,000 
 
 1835... 
 
 5,759,000 
 
 3,864,000 
 
 1,954,000 
 
 57,000 
 
 5,935,000 
 
 17,537,000 
 
 1840... 
 
 7,095,000 
 
 6,113,000 
 
 2,603,000 
 
 174,000 
 
 8,326,000 
 
 24,314,000 
 
 1845... 
 
 5,746,000 
 
 6,297,000 
 
 2,400,000 
 
 1,040,000 
 
 7,450,000 
 
 22,954,000 
 
 1846... 
 
 10,413,000 
 
 6,455,000 
 
 1,811,000 
 
 842,000 
 
 7,738,000 
 
 27,261,000 
 
 1847... 
 
 35,840,000 
 
 7,900,000 
 
 1,744,000 
 
 1,119,000 
 
 8,315,000 
 
 54,920,000 
 
 1848... 
 
 27,688,000 
 
 9,408,000 
 
 1,227,000 
 
 2,390,000 
 
 6,902,000 
 
 47,618,000 
 
 1849... 
 
 14,558,000 
 
 9,786,000 
 
 1,328,000 
 
 3,565,000 
 
 14,259,000 
 
 43,499,000 
 
 1850... 
 
 9,687,000 
 
 7,904,000 
 
 1,866,000 
 
 3,792,000 
 
 17,706,000 
 
 40,948,000 
 
 1855... 
 
 14,648,000 
 
 13,327,000 
 
 1,477,000 
 
 2,314,000 
 
 26,832,000 
 
 58,630,000 
 
 1856... 
 
 16,963,000 
 
 14,074,000 
 
 1,296,000 
 
 1,953,000 
 
 34,438,000 
 
 68,726,000 
 
 1857... 
 
 19,159,000 
 
 12,651,000 
 
 1,310,000 
 
 1,593,000 
 
 32,919,000 
 
 67,634,000 
 
 1858... 
 
 25,679,000 
 
 14,053,000 
 
 1,219,000 
 
 1,652,000 
 
 31,378,000 
 
 73,982,000 
 
 1859... 
 
 23,154,000 
 
 14,690,000 
 
 1,222,000 
 
 2,637,000 
 
 27,287,000 
 
 68,993,000 
 
 1860... 
 
 16,472,000 
 
 11,514,000 
 
 1,100,000 
 
 3,114,000 
 
 30,968,000 
 
 63,201,000 
 
 1 The expenditures listed under "War" include some items, such as ap- 
 propriations for rivers and harbors, which are not strictly war costs. This 
 would somewhat lower the percentage of war costs, yet the amount found 
 in these items is usually comparatively small and would not change the 
 ratio to any great extent, 
 
THE COST OF WAR 489 
 
 The figures in the above table cover a period in our 
 history when war and its fiscal influences are most likely 
 to be forgotten. There has not been a year, however, 
 when its presence has not been felt in the sums which 
 have been contributed to the government. While some 
 fluctuations occur in the expenditures of the War and 
 Navy Departments, the general trend of their expenditure 
 has been upward. The item for pensions has been an 
 ever-present one, as has also the interest charge. A part 
 of the interest charge has arisen from other causes than 
 war and the preparation for war, yet these factors have 
 been so largely responsible for creating public debts that 
 it would not be far wrong to consider the interest charge 
 as a war cost. Borrowing iisually would be found unnec- 
 essary if the army and navy expenditures did not exist. 
 For two or three years in the early ' thirties no interest 
 charge occurred. This table, again, illustrates the visible 
 increase of expenditure during the actual progress of war. 
 The years during the Mexican War show the increases in 
 the costs of the War Department, while the few succeed- 
 ing years reflect its effect on the interest charge. It is 
 interesting to note that, in the year during the period 
 covered by the table, when the proportion of expenditure 
 for pensions and the departments of War and Navy were 
 lowest, it represented about 60 per cent of the total 
 outlay. 
 
 242. The Civil War Augmented Our War Burden. It 
 has been seen that, through our years of peaceful develop- 
 ment, the outlay for the instruments of war gradually 
 increased. When the Civil War was precipitated upon 
 the nation, however, the costs leaped to sums which would 
 have been looked upon as impossible a few years before. 
 The expenditures for the war are given in the following 
 table. Pensions, an item of comparatively small impor- 
 tance at this time, are included in the miscellaneous 
 item. 
 
490 
 
 OUTLINES OF PUBLIC FINANCE 
 
 EXPENDITURES DURING THE CIVIL WAR 
 
 Year 
 
 1861... 
 1862... 
 1863... 
 1864... 
 1865... 
 
 War 
 
 Navy 
 
 Miscellane- 
 ous 
 
 Interest 
 on 
 Debt 
 
 Total 
 
 $ 23,001,000 
 389,173,000 
 603,314,000 
 690,391,000 
 1,030,690,000 
 
 $12,387,000 
 42,640,000 
 63,261,000 
 85,705,000 
 122,617,000 
 
 $27,226,000 
 24,564,000 
 27,428,000 
 35,186,000 
 64,395,000 
 
 $ 842,000 
 13,190,000 
 24,729,000 
 53,685,000 
 77,395,000 
 
 $ 66,650,000 
 469,569,000 
 718,733,000 
 864,968,000 
 1,295,099,000 
 
 No comment is necessary upon these figures. The 
 enormity of the burden as the war proceeded, when com- 
 pared with that borne at the beginning, is evident. Yet 
 the fiscal burden as represented by the expenditures of 
 the Federal government is not the only one to be con- 
 sidered. The increased burdens which were imposed by 
 the minor political divisions must be added. Increased 
 fiscal burdens had to be borne, moreover, because of the 
 effects of currency inflation. The issue of greenbacks 
 furnishes an excellent example of the added sacrifice a 
 state may impose upon its subjects. That the issue of the 
 fiat money actually increased the fiscal burdens is evident 
 when consideration is given to the fact that the govern- 
 ment was a purchaser in the market at the prevailing 
 prices. The rapid advance in prices due to greenback 
 inflation caused an increase in Federal expenditure which 
 has been estimated at from $500,000,000 to $900,000,000. 
 
 The inflated prices, moreover, imposed a direct burden 
 upon the citizenship. Between 1860 and 1865 prices in- 
 creased something like 115 per cent, while wages were 
 increased less than 50 per cent. Many other incomes 
 were fixed, so that real hardship was felt because of the 
 falling off in purchasing power. Labor disturbances re- 
 sulted, the effects of which upon industry cannot be over- 
 looked. The payment of standing indebtedness in the 
 depreciated currency imposed a burden upon the creditor 
 class which was not insignificant. It need not be said 
 that the burden caused by the loss of life, the derange- 
 ment of industry, and the destruction of goods was also 
 
THE COST OF WAR 
 
 491 
 
 great. While most of these aspects cannot be measured in 
 terms of money, yet the sacrifices which they caused were no 
 less real than if a money measure could be assigned to each. 
 
 Post-war Costs. The cost of the Civil War has not yet 
 been paid. This is evident to everyone who has heard an 
 "old soldier " speak of his pension, or who has seen or 
 visited a soldiers' home. While the immediate direct 
 costs were enormous, the costs for decades following, in 
 the form of interest and pensions, which can be directly 
 attributed to this war, have not been inconsiderable. 
 The maintenance and enlargement of the army and navy, 
 and the building of fortifications and defenses continued, 
 so that war has not ceased to claim the lion's share of the 
 expenditures of the Federal government. 
 
 While no proof is needed to convince the student that 
 the costs of a war as long ago as the Civil War are still 
 with us, yet a few figures will illustrate the part that the 
 demands of war have made upon our treasury. It will be 
 unnecessary to enter into such detail as in the preceding 
 period, because it has already been established that the 
 burden of war is a continuous one. Professor Bullock has 
 made some calculations which will serve our purposes as 
 well as any others which might be given. 1 These figures 
 more accurately portray the war costs than those given 
 above, because the river and harbor expenditures have been 
 deducted from the expenditures of the War Department. 
 
 WAR EXPENDITURES OF THE UNITED STATES 
 
 Year 
 
 1870 
 1880 
 1890 
 1897 
 1900 
 1902 
 
 Army 
 and 
 
 Navy 
 
 Pensions 
 
 Interest 
 
 Total 
 for War 
 
 Total 
 Expenditures 
 
 Per 
 Cent 
 for 
 War 
 
 $79,435,000 
 43,640,000 
 54,851,000 
 69,829,000 
 172,009,000 
 165,128,000 
 
 $28,340,000 
 56,777,000 
 106,936,000 
 141,053,000 
 140,877,000 
 138,488,000 
 
 $129,235,000 
 95,757,000 
 36,099,000 
 37,791,000 
 40,160,000 
 29,108,000 
 
 $237,010,000 
 196,174,000 
 197,886,000 
 248,673,000 
 353,046,000 
 332,724,000 
 
 $293,565,000 
 264,847,000 
 297,736,000 
 365,774,000 
 487,713,000 
 471,190,000 
 
 80.7 
 74.0 
 66.4 
 68.0 
 72.4 
 70.6 
 
 1 "The Growth of Federal Expenditures," in Political Science Quarterly, 
 vol xyiii, p, 97, 
 
492 
 
 OUTLINES OF PUBLIC FINANCE 
 
 Per Capita Cost. The total costs, however, are only 
 one aspect of the situation. It is of much concern whether 
 a burden can be divided among many, or whether it must 
 be borne by comparatively few. It might be true that a 
 continually increasing expenditure for war would entail a 
 smaller individual burden if the population were increas- 
 ing more rapidly than the increase in expenditure. The 
 following table will illustrate the relation the per capita 
 expenditures for civil and military affairs have borne to 
 each other at various tunes in our history, as well as the 
 increase in the per capita burden. The table clearly por- 
 trays how exceptionally low the civil expenditures have 
 been in comparison with the others. Even these figures 
 do not show the annual exactions which have been made, 
 because the sums which had to be raised to cancel war in- 
 debtedness, both at home and abroad, have not been 
 included in the figures. 
 
 PER CAPITA EXPENDITURES OF THE UNITED STATES 
 
 Year 
 
 Civil 
 
 All 
 Purposes 
 
 Year 
 
 Civil 
 
 All 
 Purposes 
 
 1800 
 
 $0 25 
 
 $2 04 
 
 1860 
 
 $0 98 
 
 $2 01 
 
 1810 
 
 18 
 
 17 
 
 1870 
 
 1 19 
 
 6 80 
 
 1820 
 
 30 
 
 90 
 
 1880. . . . 
 
 1 36 
 
 5 28 
 
 1830 
 
 30 
 
 18 
 
 1890 
 
 1.59 
 
 4 75 
 
 1840 
 
 0.48 
 
 .42 
 
 1900 
 
 1.76 
 
 6.39 
 
 1350 
 
 76 
 
 76 
 
 1902 
 
 1 75 
 
 5 96 
 
 
 
 
 
 
 
 It is evident from these figures that the business of war 
 and the maintenance of the machinery for war have been 
 the one overwhelming item of expense to the Federal 
 government. This becomes all the more significant, too, 
 when it is remembered that our country has not been 
 considered militaristic to any appreciable extent. The 
 negative burden appears when one stops to consider what 
 might have been done in a positive and constructive way 
 with the funds which have been thus expended. 
 
 No attempt will be made to show the past burden of 
 war to other countries, although more startling figures 
 would appear, in many cases, than are those for the 
 
THE COST OF WAR 493 
 
 United States. It would be superfluous, moreover, to 
 compile figures for the United States for the first years of 
 the present century. The results would simply show an 
 increasing proportion of expenditures for army and navy. 
 A great amount of interest will be found, however, in 
 noticing some of the burdens, directly or indirectly attrib- 
 utable to the recent conflict, which have been placed upon 
 the principal nations of the world. 
 
 243. The Cost of the Great War Eclipsed Any Previous 
 War Expenditures. A number of insurmountable diffi- 
 culties are at once encountered when an attempt is made 
 to arrive at the costs of a war so recent and of such magni- 
 tude as the Great War. A large number of the war ex- 
 penses continue to exist, and, as indicated in the above 
 discussion, will continue to exist for generations to come. 
 But many of the more immediate costs are not yet paid 
 and should still be considered. Demobilization has not 
 been completed, armies have not ceased to police the con- 
 quered territory, men are still in the hospitals or in voca- 
 tional training all these entail an expense which might 
 be said to arise from the more immediate aftermath of 
 the war, and should in reality be counted as a part of the 
 cost of the war period. 
 
 The actual expenditure during the war period is greater 
 than should be attributed to war costs, because states 
 would be making expenditures even if the war did not 
 exist. A part of the expenditures, as for food and cloth- 
 ing, and for the shelter of the soldiers, are but substituted 
 for those which would otherwise be made by individuals. 
 To arrive at an approximate war cost, consequently, the 
 amount of the expenditures for civil purposes should be 
 estimated and deducted from the aggregate expenditures. 
 The value of devastated land areas and of destroyed 
 capital can only be estimated, and from this should be 
 deducted the value of permanent additions to capital, 
 such as merchant marine, railroad equipment, and the 
 added stimulus to invention, as in the perfection of the 
 
494 OUTLINES OF PUBLIC FINANCE 
 
 air craft. The rapid depreciation in the value of the 
 various monetary units must also be considered. 
 
 Because of all these problems, any figures which have 
 been computed are at best only approximations. Our 
 concern, however, is not to deal with actualities, but to 
 attempt to convey, in some measure, the magnitude of 
 the burden, and the total figures are so great that a few 
 million dollars either way would make little difference. 
 
 Since the signing of the armistice, November 11, 1918, 
 a number of writers have attempted to calculate the cost 
 of the war. 1 The figures deal most extensively with taxes 
 and borrowings, while in some cases attempts have been 
 made to estimate the burden of the indirect costs, such as 
 loss of life, property, etc. The aggregate figures of the 
 direct money costs are so appalling as to have no real 
 meaning. The estimates which have been made range 
 from a little more than $210,000,000,000 to about $240,- 
 000,000,000. Because of the incomprehensibleness of these 
 figures some detailed analysis must be undertaken hi 
 order to appreciate their significance. 
 
 Daily Costs. The effect of the war upon the indebted- 
 ness of the principal belligerents was discussed in the 
 chapter on Public Indebtedness. Reference should be 
 made to this in seeking to estimate the burden which the 
 debts have placed upon present and future generations 
 through the mortgaging of the social income. 2 Some idea 
 of the cost of the war while it was in progress may be 
 gained by a summary of the daily expenditures of the 
 
 1 The best treatments on the cost of the war to date (1921) are Direct 
 and Indirect Costs of the Great World War, by E. L. Bogart, published by 
 the Carnegie Endowment for International Peace; "The Cost of the War, 
 and How It Was Met," by Edwin R. A. Seligman, in The American Eco- 
 nomic Review, vol. ix, No. 4; and "Debts, Revenues, and Expenditures, 
 and Note Circulation of the Principal Belligerents," by Louis Ross Gott- 
 lieb, in The Quarterly Journal of Economics, vol. xxxiv, No. 1. The author 
 wishes to acknowledge his indebtedness to these publications for many 
 of the figures herewith presented. Some of the tables are given exactly as 
 presented by these authors, while others are modified to more nearly suit 
 the purpose in hand. 2 See Chapter XVI, p. 409. 
 
THE COST OF WAR 
 
 495 
 
 principal nations. The daily expenditures of the pre-war 
 year have been deducted from the total daily expenditures. 
 The table not only shows the actual expenditures, but 
 shows the growth as the war progressed. The dates given 
 are approximate, and the data are gathered from a table 
 given by Professor Seligman. It is interesting to note 
 that in the beginning the daily expenditures of Germany 
 exceeded those of the other countries. 
 
 AVERAGE DAILY EXPENDITURES IN MILLIONS OP DOLLARS 
 
 Date 
 
 Great 
 Britain 
 
 France 
 
 Italy 
 
 Austria 
 
 Germany 
 
 1914-15 
 
 $ 9 46 
 
 $ 8 5 
 
 $ 4 4 
 
 $ 6.4 
 
 $13 3 
 
 1915-16 
 
 18.16 
 
 12.2 
 
 7.5 
 
 8.7 
 
 15 9 
 
 1916-17 
 
 26.69 
 
 17.6 
 
 10.4 
 
 10.4 
 
 22 7 
 
 1917-18 
 
 33.36 
 
 32.4 
 
 6.5 
 
 12.3 
 
 31.0 
 
 A glance at this table dispels the notion that the nations 
 were financially exhausted.- In every case except Italy 
 there was a continuous and rapid increase in the amount 
 of money which was spent daily. As large as these sums 
 appear, they were eclipsed by the expenditures of the 
 United States after her entry into the war. A more de- 
 tailed analysis of these sums will be of interest to American 
 students. The figures represent the actual war expendi- 
 tures, and are also from a table given by Professor Seligman. 
 
 WAR EXPENDITURE OP THE UNITED STATES IN MILLIONS 
 
 
 19 
 
 17 
 
 19 
 
 18 
 
 19 
 
 19 
 
 Month 
 
 Total 
 
 Average 
 Daily 
 
 Total 
 
 Average 
 Daily 
 
 Total 
 
 Average 
 Daily 
 
 January 
 
 
 
 $1,030 
 
 $33.2 
 
 $1,902 
 
 $61.4 
 
 February 
 
 
 
 952 
 
 34.0 
 
 1,129 
 
 40.0 
 
 March 
 
 
 
 1,096 
 
 35.9 
 
 1,319 
 
 42.5 
 
 April 
 
 $ 219 
 
 $ 8.0 
 
 1,155 
 
 38.5 
 
 1,369 
 
 45.6 
 
 May 
 
 467 
 
 15.0 
 
 1,448 
 
 46.7 
 
 1,052 
 
 33.9 
 
 June 
 
 350 
 
 11 7 
 
 1,452 
 
 48.4 
 
 749 
 
 24.9 
 
 July 
 
 602 
 
 19.4 
 
 1,548 
 
 49.9 
 
 
 
 August 
 
 697 
 
 22.5 
 
 1,745 
 
 46.8 
 
 
 
 September 
 October 
 
 686 
 
 884 
 
 22.9 
 29.5 
 
 1,497 
 1,605 
 
 49.9 
 51.8 
 
 
 
 
 
 November 
 December 
 
 926 
 1,045 
 
 30.9 
 33.7 
 
 1,875 
 2,001 
 
 62.5 
 64.5 
 
 .... 
 
 
 
 32 
 
496 OUTLINES OF PUBLIC FINANCE 
 
 The reader will be able to find many interesting com- 
 parisons from this table and the preceding one. The 
 rapid increase in the expenditures and the enormity which 
 they reached is almost startling. The highest daily ex- 
 penditure of Great Britain was about $33,000,000, while 
 that of the United States was nearly double that sum. 
 Another interesting feature is that the greatest expendi- 
 ture came after the armistice was signed, and that it was 
 still large months thereafter. 
 
 Source of Revenue. The item of interest which next 
 commands attention is what was the source to which the 
 administrators of these various countries could contin- 
 ually turn and always find a supply of funds ready to be 
 used? The two sources upon which greatest reliance was 
 placed were, of course, loans and taxes. In the light of 
 the discussion of these methods as factors in war finance 
 in the preceding chapter, a comparison of the amounts 
 secured from each source by the principal nations will be 
 interesting. The following table presents these facts in 
 tabulated form, and also shows the extent to which each 
 country relied upon taxes. The total receipts and dis- 
 bursements of the United States for the war years, and 
 for preceding years, as well as some ratios, are given hi 
 another table. 1 
 
 These tables present a number of interesting aspects. 
 The United States and England, it will be noticed, raised 
 a much larger percentage of their revenue from taxes 
 than did the other countries, in that from 25 to 30 per cent 
 came from taxes. The others were much lower. The fact 
 is clearly demonstrated that, in spite of the great increase 
 in taxes, the majority of the revenues came from loans. 
 Then, too, it is interesting to notice the comparative use 
 that was made of direct and indirect taxes. In the table 
 of revenues and expenditures for the United States, the 
 growing importance of the direct system for securing 
 
 1 These two tables are taken, somewhat modified, from Gottlieb. See 
 note, p. 494. 
 
tio 
 ax 
 
 Ra 
 of T 
 eceipts 
 pendit 
 
 11 
 f-& 
 
 w 
 
 ax 
 pts 
 
 "H o 
 
 CD O t ^ i- ' 
 
 CO CO rH il i-H 
 
 OS f>. Tt< OS O 
 
 "7 -^ 10 Tji r-I 
 C^ C^ i i 1-1 1-1 
 
 CJ * CO 1-1 
 
 00*-. -co 
 
 "i ^ "*i : * 
 
 C5 00 <M - N 
 
 oc *o -<-( o 
 M 06 o a o 
 
 M CO *O -H O 
 
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 ^^ os oo "^ co 
 o ?o O5 oo ** 
 
 oo" i-T co~ T^ TJ^ 
 
 C5 C5 CS X Ci 
 
 CO 
 
 M. S *s. 
 
 CO i-H rH 
 
 United States 
 Great Britain . 
 France 
 Italy 
 Germ 
 
 g 
 
 i 
 I s 
 
 * 1 
 
 i 
 
 s 
 
 i s 
 
 8 Q 
 
 1 5 
 
 S 
 
 O i-H 
 
 co" 
 
 CO Q 
 CO CO 
 
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 s 
 
 'co~ 
 
 CO -^ GO -^ 
 1O CO 00 
 
 O 
 
 a - 
 
 ' 
 
 rH CO 
 & ' ^ 
 
 oo" 
 
 r o co 
 05 50 oo 
 
 (N TJI 
 
 CO _ - CO 
 
 CO 
 
 CO - - O^ 
 CO co 
 
 (N "1< ^ 
 
 ^88 
 
 00 >0 
 
 
 8 d S 
 
 3 ; 
 
 " 
 
 
 
 i'Sa'i 
 rt rt 
 
498 OUTLINES OF PUBLIC FINANCE 
 
 revenue is illustrated. The change from a less than 10 
 per cent to over 65 per cent reliance upon this form 
 goes to establish its efficacy. 
 
 A similar study of the use of direct and indirect taxes 
 hi the other countries will reveal a wide variation in the 
 extent to which each was used. In England the percent- 
 age of direct taxes rose to nearly 75. In Italy slightly 
 more reliance was placed upon direct taxes than before 
 the war, but their use was not extended. France is the 
 exception, for the percentage of the revenue which was 
 raised from direct taxes continued to fall until it reached 
 about 25 per cent, when it began to rise again. In Ger- 
 many the habit of the government had been to rely 
 mainly upon indirect taxes. This policy was followed 
 rather closely until near the end of the war, when some 
 direct taxes were used. In studying the relative merits of 
 these two forms as suitable for emergency financiering, much 
 consideration should be given to the incidence of the tax, so 
 that one class of citizens would not be unduly burdened. 
 
 244. The Expansion of Money and Credit Greatly Af- 
 fected the War Cost. During the Great War, owing to 
 the advanced systems of banking found in most countries, 
 the issue of fiat money was used much less extensively 
 than during our Civil War. Much the same results were 
 effected, however, by the rapid expansion of bank notes, 
 and these results were, of course, magnified in the coun- 
 tries where specie payments were stopped. The rapid in-, 
 crease in prices, in the terms of which the governments 
 had to buy goods, made the money expenditures appear 
 much greater, as the war progressed, than was the actual 
 consumption of goods. It has been estimated that the 
 value of goods demanded by the war at the pre-war price 
 level would be about one half of the total monetary out- 
 lay. Since such a large part of the finances came from 
 loans, however, which must be paid from taxes during a 
 presumably lower price level, the demand upon goods will 
 be greater than the figures represent at present. 
 
THE COST OF WAR 
 
 499 
 
 Expansion in Different Countries. A comparison of the 
 amount of notes in circulation in the various nations just 
 before the war and about the middle of 1919 shows the 
 increase to be about twentyfold. With this must be 
 considered, also, the state of industry, in which production 
 fell off so that there were fewer goods to be exchanged for 
 the money. Russia took the lead in the amount of per 
 capita note expansion, which was carried to such a degree 
 as to make the gold reserve practicably negligible. France 
 came second hi the amount of per capita inflation, yet her 
 reserve was maintained to a much better degree than that 
 of either Austria-Hungary or Turkey, where inflation was 
 not so marked. In the total circulation of notes, Russia 
 increased her amount about forty-five times; Germany 
 and Austria-Hungary about eighteen times; Great Brit- 
 ain a little less than ten times; while the increase in the 
 United States, Italy, and France was about four times. 
 The following table will portray at a glance the changes 
 in the note circulation during the war period, for the im- 
 portant countries. In addition to the increase hi note 
 issues, some of the countries made large issues of treasury 
 notes, as in England, for example, which of course in- 
 creased the inflation. 
 
 NOTE CIRCULATION OF BELLIGERENT COUNTRIES IN MILLIONS OP DOLLARS 1 
 A. Allied Countries 
 
 Country 
 
 BEFORE THE WAR 
 
 AFTER THEYWAR 
 
 Date 
 
 Total 
 Amount 
 
 Per 
 
 Capita 
 
 Date 
 
 Total 
 Amount 
 
 Per 
 
 Capita 
 
 United States. . 
 Great Britain . . 
 France 
 Italy 
 
 July 1, '14 
 July 29, '14 
 July 30, '14 
 July 31, '14 
 Aug. 1, '14 
 Aug. 1, '14 
 Mar. 19, '14 
 July 31, 14 
 
 $ 715 
 223 
 1,290 
 518 
 163 
 842 
 186 
 46 
 
 $6.70 
 4.84 
 
 32.49 
 14.11 
 2.81 
 4.62 
 24.29 
 9.29 
 
 Aug. 1, '19 
 Aug. 6, '19 
 Aug. 7, '19 
 May 20, '19 
 June 28, '19 
 Aug. 31, '19 
 July 24, '19 
 June 23, '19 
 
 $ 3,340 
 2,331 
 6,805 
 2,695 
 582 
 38,474 
 882 
 257 
 
 $55,366 
 
 $ 31.32 
 50.58 
 171.41 
 73.40 
 10.03 
 211.18 
 115.17 
 31.92 
 
 $114.88 
 
 Japan 
 
 Russia 
 
 Belgium . 
 
 Greece 
 
 Total 
 
 $3,983 
 
 $8.26 
 
 
 
 1 This table is taken, somewhat modified, from Gottlieb. See note, p. 494. 
 
500 OUTLINES OF PUBLIC FINANCE 
 
 B. Central Powers 
 
 Country 
 
 BEFORE THE WAR 
 
 AFTER THE WAR. 
 
 Date 
 
 Total 
 Amount 
 
 Per 
 Capita 
 
 Date 
 
 Total 
 Amount 
 
 Per 
 
 Capita 
 
 Germany. , . 
 
 July 23, '14 
 July 23, '14 
 July 1, '14 
 Sept. '13 
 
 $ 528 
 432 
 9 
 36 
 
 $7.93 
 
 8.25 
 0.42 
 6.52 
 
 July 7, '19 
 Aug. 15, '19 
 April '19 
 Mar. '19 
 
 $10,109 
 8,400 
 704 
 390 
 
 $149.07 
 160.40 
 33.09 
 70.68 
 
 Aus. -Hungary . 
 Turkey 
 
 Bulgaria 
 
 
 Total 
 
 $1,015 
 
 $6.91 
 
 
 $19,603 
 
 $133.38 
 
 
 
 Grand Tot 
 
 Ell 
 
 $4,998 
 
 $7.95 
 
 
 $74,969 
 
 $119.20 
 
 
 
 Effects of Price Changes. There is no question but that 
 this greatly inflated currency was one of the principal 
 causes of the rapidly rising prices. In some countries the 
 above table does not show the entire increase in circulating 
 medium. In the United States, for example, the amount 
 of gold com almost doubled between 1913 and 1919. 
 While this did not actively circulate to any extent, yet it 
 formed the basis for extending a much larger volume of 
 credit and, consequently, purchasing power. 
 
 The burden which resulted from this inflation was re- 
 flected hi the nation-wide and world-wide expression, "the 
 high cost of living. " Various index numbers have been 
 compiled to show the general price changes during the 
 war period, and from the results it appears that wholesale 
 prices in the United States were about 100 per cent higher 
 in 1919 than in 1913. In some of the other countries the 
 increase was much greater. Some classes were benefited 
 by this situation, especially those industries whose ex- 
 penses of production did not rise as rapidly as prices. 
 This was particularly true of extractive industries, and a 
 large number of industrial concerns. It could not help 
 being a benefit to plants producing for the government on 
 the basis of cost plus contracts. The higher the level of 
 prices the greater their expenses, and the larger their 
 percentage of return. 
 
 These gains from inflated prices were more than offset 
 by the burdens imposed upon other classes. While no 
 
THE COST OF WAR 501 
 
 accurate index of general wage changes has been compiled, 
 it is well known that wages did not rise as rapidly as prices, 
 and it is to these classes, that must buy at the inflated 
 prices, but with incomes that have not risen proportion- 
 ately, that the high cost of living has its real significance. 
 The situation represents an unjust distribution of the war 
 burdens in fact, it is a tax upon one class of the popula- 
 tion in favor of the class that gains from rising prices. 
 Inflated prices, also, may work a long-run injustice as 
 well. The increased prices have added to the costs, and 
 hence to the amount borrowed by the government. The 
 loans come to a large extent from those who have gained 
 from the increased prices. The levy of taxes in the future 
 to repay the loans will, without doubt, fall with an unjust 
 proportion upon the classes which have been injured by 
 the inflated prices during the war. 
 
 245. The Indirect Costs of the War Must Not Be Over- 
 looked. Thus far, in considering the effects of the Great 
 War, attention has been directed almost entirely to the 
 money outlays. While these were difficult to measure, 
 yet some approximation could be reached. In addition 
 to these direct costs, moreover, are many indirect costs, 
 which are no less burdensome to individual citizens and 
 the nation as a whole. Upon some of these costs a rough 
 money estimate can be placed, while many others are of 
 such an intangible nature that little more can be done at 
 arriving at a measure of their burden than to point them 
 out. 
 
 Loss of Life. One of the first drains upon the resources 
 of the nation which immediately occurs to everyone was 
 the overwhelming destruction of productive energy 
 through the loss of human life. This has always been a 
 wasteful feature of war, but the number of casualties due 
 to the Great War makes all wars of the past appear as 
 mere pygmy occurrences. It is too soon to have accurate 
 figures, but the estimates are near enough to the truth for 
 purposes of comparison. The casualties of the more im- 
 
502 
 
 OUTLINES OF PUBLIC FINANCE 
 
 portant wars of the nineteenth century, together with the 
 length of duration, are as follows : l 
 
 Loss OP LIFE IN NINETEENTH-CENTURY WARS 
 
 War 
 
 Duration 
 
 Dead 
 
 Napoleonic, 1790-1815 
 
 9,000 da 
 730 
 135 
 40 
 1,350 
 210 
 995 
 548 
 238 
 
 ys 
 
 2,100,000 
 785,000 
 3,500 
 45,000 
 700,000 
 184,000 
 9,800 
 160,000 
 462,000 
 
 Crimean, 1854-56 
 
 Prussian-Danish, 1864 
 
 Prussian- Austrian, 1866 
 
 American Civil, 1861-65 
 
 Franco-Prussian, 1870-71 
 
 English-Boer, 1899-1902 
 
 Russian- Japanese, 1904-05 
 Balkan, 1912-13 
 
 
 Total.. 
 
 
 4,449,300 
 
 The significance of these figures becomes apparent when 
 comparison is made with the following table. While not 
 all the figures have been taken from official sources, they 
 are approximately correct: 
 
 CASUALTIES OF THE GREAT WAR, 1914-18 
 
 Country 
 
 Known 
 Dead 
 
 Seriously 
 Wounded 
 
 Otherwise 
 Wounded 
 
 Prisoners 
 or Missing 
 
 United States 
 
 107 284 
 
 43000 
 
 148,000 
 
 4912 
 
 Great Britain 
 
 807,451 
 
 617740 
 
 1,441,394 
 
 64,907 
 
 France 
 
 1,427,800 
 
 700,000 
 
 2,344,000 
 
 453,500 
 
 Russia 
 
 2,762,064 
 
 1,000,000 
 
 3,950,000 
 
 2,500,000 
 
 Italy 
 
 507,160 
 
 500,000 
 
 462,196 
 
 1,359,000 
 
 Belgium 
 
 267,000 
 
 40000 
 
 100,000 
 
 10,000 
 
 Serbia 
 
 707,341 
 
 322,000 
 
 28,000 
 
 100,000 
 
 Rumania 
 
 339 117 
 
 200000 
 
 
 116,000 
 
 Greece 
 
 15,000 
 
 10,000 
 
 30,000 
 
 45,000 
 
 Portugal 
 
 4000 
 
 5,000 
 
 12,000 
 
 200 
 
 Japan 
 
 300 
 
 
 907 
 
 3 
 
 
 
 
 
 
 Total 
 
 6,938 519 
 
 3 437 740 
 
 8,516,497 
 
 4,653,522 
 
 Germany 
 
 1,611,104 
 
 1,600,000 
 
 2,183,143 
 
 772,522 
 
 Austria-Hungary 
 
 911 000 
 
 850 000 
 
 2 150000 
 
 443,000 
 
 Turkey . . . 
 
 436,924 
 
 107 772 
 
 300,000 
 
 103,731 
 
 Bulgaria 
 
 101,224 
 
 300,000 
 
 852,399 
 
 10,825 
 
 
 
 
 
 
 Total 
 
 3 060,252 
 
 2 857,772 
 
 5,485,542 
 
 1,330,078 
 
 
 
 
 
 
 Grand Total. 
 
 9 998,771 
 
 6 295 512 
 
 14 002 039 
 
 5 983,600 
 
 
 
 
 
 
 1 Taken from Bogart. 
 source. 
 
 See note, p. 494. The next table is from the same 
 
THE COST OF WAR 503 
 
 When the final results are known the list of dead will, 
 of course, be much larger. Many who are accounted for 
 above in the wounded and missing columns will have to 
 be reckoned with the dead. Various estimates have been 
 made as to what the number will be that will have to be 
 transferred, but the most conservative would raise the 
 list of dead to nearly 13,000,000 men. The task of placing 
 an economic value upon this loss of life is, of course, diffi- 
 cult. The economic worth of men is different, and varies 
 for different countries. Various authorities have attempted 
 to place an estimate upon the value of human lives, yet 
 these estimates have ranged anywhere from $1,000 to 
 more than $6,000. In his estimation of the value of lives 
 lost, Professor Bogart chose estimates which varied for 
 the different countries, and assumed that one half the 
 wounded would be incapacitated. On the basis of this 
 calculation the value of human life given up in the war 
 was more than $33,551,000,000. While this is necessarily 
 more or less arbitrary, that it at least errs on the side of 
 conservatism, if at all, is seen when the value of the men 
 lost is arrived at by using the average worth of an individ- 
 ual as estimated by the various authorities. By this cal- 
 culation the total loss amounts to more than $45,000,- 
 000,000. 
 
 Other Indirect Costs. No attempt will be made to go 
 into detail in describing the numerous other indirect costs. 
 Many of them have been known and felt by every reader. 
 One which will have to be reckoned with for years to come 
 will be the effects of disease whose start can be traced 
 to the camps or trenches. While the medical staff was no 
 doubt more efficient, and greater precautionary measures 
 were taken than in any previous conflicts, yet the burden 
 of disease will not be inconsiderable. The hardships borne 
 by the civil population, moreover, has decreased their 
 stamina and vitality so that they are a more ready prey 
 to disease, and a marked increase in the death rate has 
 already been noted. The psychic, and often the physical 
 
504 OUTLINES OF PUBLIC FINANCE 
 
 burden endured by the families of the men in the service, 
 and which are still being endured where the men did not 
 return, is of course incapable of measurement. Such 
 phases of war must be accepted and silently borne without 
 counting the cost. 
 
 One or two other phases, however, present features of 
 a nature more concrete. An estimate can be placed upon 
 the value of goods destroyed, and everyone can think of 
 services that the states might have rendered with the 
 funds which were used up in the war. Then there was a 
 loss sustained by neutral countries, the loss from dis- 
 turbed production in all countries, and the loss from the 
 continued upheaval in the industrial and political world. 
 To the costs which have been enumerated should be 
 added, also, the vast amount spent by civilian organiza- 
 tions in the various phases of war work. The activities 
 of such organizations as the Young Men's Christian Asso- 
 ciation, the Red Cross, the Salvation Army, and the 
 Knights of Columbus, as well as the many societies for 
 various phases of war relief, are well known. 
 
 In concluding this survey of the cost of war, nothing 
 more significant can be done than to give Professor 
 Bogart's summary of his carefully estimated direct and 
 indirect costs of the Great War, followed by his conclusion. 
 
 DIRECT AND INDIRECT COSTS OF THE GREAT WAR 
 
 Total direct costs, net $186,333,637,097 
 
 Indirect costs: 
 
 Soldiers $ 33,551,276,280 
 
 Civilians 33,551,276,280 
 
 Property costs: 
 
 On land 29,960,000,000 
 
 Shipping and cargo 6,800,000,000 
 
 Loss of production 45,000,000,000 
 
 War relief 1,000,000,000 
 
 Loss to neutrals 1,750,000,000 
 
 $151,612,542,560 
 Total indirect costs $151,612,542,560 
 
 Grand Total $337,946,179,657 
 
THE COST OF WAR 505 
 
 The figures presented in this summary are both incomprehensible 
 and appalling, yet even these do not take into account the effect of 
 the war on life, human vitality, economic well-being, ethics, morality, 
 or other phases of human relationships and activities which have been 
 disorganized and injured. It is evident from the present disturbances 
 in Europe that the real costs of the war cannot be measured by the 
 direct money outlays of the belligerents during the five years of its 
 duration, but that the very breakdown of modern economic society 
 might be the price exacted. 1 
 
 1 Bogart, p. 299. See note, p. 494. 
 
CHAPTER XXI 
 
 CONCLUSION 
 
 246. The Fiscal Burden Will Continue to Be Large. 
 In the preceding chapters an attempt has been made to 
 give an outline of the growth of public expenditures, of 
 the development of revenue systems to meet this growth, 
 and of some of the problems which have been encountered 
 because of this rapid growth in the amount of expendi- 
 tures and revenues. The public has become accustomed 
 to large expenditures our first billion-dollar Congress a 
 few years ago caused considerable comment, yet no one 
 expects that a single Congress will again spend so little. 
 The expenditures of the Federal government, at that time, 
 were little noticed because of the reliance upon indirect 
 taxes customs duties and internal revenues for practi- 
 cally the entire amount of its income. While these taxes 
 are no less burdensome than direct taxes, yet the burdens 
 are not known, and consequently cause less objection from 
 those who pay them. Indirect taxes, therefore, are of 
 advantage to the state, in that large sums may be raised 
 with practically no complaint from its citizenship. They 
 are objectionable, however, in that their incidence cannot 
 be accurately determined; hence it is difficult to use them 
 extensively in a system of taxes which is expected to con- 
 form to the principles of justice. 
 
 Change in Public Activity. As civilization and states 
 develop, two tendencies appear states take on a greater 
 number and variety of functions, and direct taxes occupy 
 a place of greater fiscal importance in the revenue system. 
 These have been amply illustrated in the United States. 
 
CONCLUSION 507 
 
 The functions of government have been gradually ex- 
 tended, previous privately conducted industries have 
 been taken over by the various political units, and the 
 services often given free or at a small fraction of the 
 actual cost. 
 
 The most extensive illustration of this changed condi- 
 tion is found in education and in highways. The patrons 
 of the districts no longer build schoolhouses and hire 
 teachers, nor are the users of the highways longer incon- 
 venienced by tollgates. Such services are now freely 
 given, but entail, necessarily, a situation which calls for 
 additional revenue. Another situation which has devel- 
 oped in the United States is the disappearance of the dif- 
 ferentiation between the functions of various states and 
 those of the Federal government. The Federal govern- 
 ment can now aid in the construction of highways, in the 
 advancement of education, in the eradication of disease 
 and destructive insects, without the fear of being criti- 
 cized for interfering with the rights of the states. 
 
 The states more and more take the attitude that they 
 will accept the residual functions that is, let the Federal 
 government do what it will and they will do what is left. 
 This gradual extension of the activities of the Federal 
 government to services of such a tangible nature that the 
 citizens can appreciate and measure some of the benefits, 
 has made it possible to enlarge the use of direct taxes. 
 The constitutional provisions placed extensive limitations 
 upon the use of this form of revenue, but amendments 
 and court interpretations have practically destroyed the 
 former prohibitory restrictions. The removal of the re- 
 strictions was sanctioned because of the services of a 
 tangible nature that the Federal government was ren- 
 dering. 
 
 Present Public Burdens. The present burdens inflicted 
 by the Federal government are so familiar as to need little 
 comment. In 1900 the per capita expenditure was about 
 five dollars; in 1915 about eight dollars; while in 1920 it 
 
508 OUTLINES OF PUBLIC FINANCE 
 
 was about thirty-five dollars. This, of course, is abnormal, 
 but it cannot be expected that the burdens will ever re- 
 turn to the pre-war basis. The war has added burdens 
 which will continue to be felt for decades to come. The 
 interest and sinking fund charges are now larger than the 
 total expenditures before the war, and will continue to be 
 felt. These, with the constant expansion of functions, 
 will continue to keep the exactions of the Federal govern- 
 ment from its citizens at a high figure. 
 
 Increased expenditures are found also in the states and 
 local political units. Each of these conditions is an illus- 
 tration that a government is an institution of increasing 
 cost. Even though no more functions be undertaken, 
 the per capita cost increases as the population grows. 
 But states and cities also, due to the demands of their 
 inhabitants, are increasing the services which they render. 
 Figures were given to show this increase, and there is no 
 indication but that it will continue. 
 
 There is, Jhowever, a difference between an increased 
 tax and an increased burden a situation which has been 
 especially applicable in the last few years. When com- 
 modity prices rise for individuals, they rise, pan passu, 
 for the state. This means that the state may supply 
 exactly the same services, but at a greater cost, which 
 will be reflected in the higher taxes. From the standpoint 
 of the taxpayer it will mean that he is paying in a cur- 
 rency of less purchasing power, and hence the burden will 
 be no greater than when the taxes were less. While taxes 
 have increased in all states and cities, in most cases the 
 increase has not been in proportion to the general rise in 
 prices. 
 
 247. Different Political Units Will Use the Same Bases 
 for Taxes. The Constitution of the United States is 
 rather insistent upon a separation of sources of revenue 
 for the Federal government and for the states. Thus 
 customs duties were reserved entirely for the use of the 
 central authorities, while close restrictions were placed 
 
CONCLUSION 509 
 
 upon the use of direct taxes. Excise taxes were allowed 
 and have been used extensively since the Civil War. 
 The states are not forbidden to use this source of revenue, 
 but they have left it to the almost exclusive use of the 
 Federal government for so long that the presumption has 
 been against their entering this field. Direct taxation of 
 property was looked upon as the primary legitimate 
 source of revenue for the states and local political units, 
 and for many years the systems remained almost true to 
 form. 
 
 Overlapping of Sources. The changed economic and in- 
 dustrial conditions and the enlargement of the functions 
 of the government called for changes which have taken 
 place very rapidly in the last few years. These have 
 taken two opposite directions one toward an overlap- 
 ping of sources of revenue, and the other toward a separa- 
 tion of these sources. The first can be noticed in the case 
 of the Federal government. It has not been content to 
 secure funds to meet its increased needs by an extended 
 use of customs and excise taxes, but has continued to 
 reach out to other fields. This has taken place until the 
 net income and profits of corporations, inheritances, and 
 the income of individuals are called upon to help supply 
 the bases for the funds. 
 
 The state authorities have looked upon this expansion 
 with no little concern, and have frequently voiced strong 
 objections. Some of the sources, as profits and inheri- 
 tances, were tapped to supply the extraordinary demands 
 of war, and may be given up quickly, yet no one expects 
 but that income taxes will be a permanent feature of Fed- 
 eral fiscal machinery. Even before the Federal govern- 
 ment began its expansion of sources, the states had ceased 
 to place entire reliance on property taxes. The other 
 sources of importance which have been adopted are taxes 
 upon corporations, inheritances, and various classes of 
 licenses. Incomes are taxed in some states, and it is likely 
 that this source will become more popular as a method of 
 
510 OUTLINES OF PUBLIC FINANCE 
 
 state levy. Thus there has developed an overlapping of 
 the sources of Federal and state revenues which is likely 
 to continue. 
 
 Separation of Sources. There has been much agitation, 
 on the other hand, for a separation of the sources of rev- 
 enue for states and localities. It has been suggested that 
 the property taxes should be left to the localities, while 
 the state seek its revenue from such sources as corpora- 
 tions, inheritances, licenses, and incomes. Some progress 
 has been made in this direction, but in most states, while 
 the local governments rely upon property as the chief 
 source of revenue, the state governments have not en- 
 tirely removed property taxes from their category of rev- 
 enues. Recently, moreover, local political units have 
 shown a tendency to expand their source of revenue to 
 include a number of licenses, many of them upon the 
 same objects which have been the basis of license taxes 
 imposed by the states. The licenses which are levied 
 against automobiles and against various occupations by 
 both states and municipalities are good examples of this 
 tendency. Duplication of taxes upon the same base by 
 the different political units, even though it may involve 
 a form of double taxation and make the shifting of taxes 
 more difficult to trace, appears to be gaining a stronger 
 foothold in our fiscal system, and will doubtless be a per- 
 manent feature. 
 
 248. The Social Point of View Has Gained in Promi- 
 nence. Tax systems may and must be looked at from 
 many angles from the revenue standpoint, the ease of 
 administration, the effect upon the individual or industry 
 upon which the burden is placed, and from the social con- 
 sequences. In the formation of fiscal systems some one 
 of these phases generally has an outstanding influence. 
 In a system of indirect taxes, for example, much impor- 
 tance is attached to the consideration of revenue and the 
 administrative problems. Frequently a consideration of 
 the individual has been the center of thought each indi- 
 
CONCLUSION 511 
 
 vidual should bear tax burdens in accordance with his 
 ability. And through the attempt to apply this idea of 
 ability, the studies of shifting and incidence, of proper ad- 
 ministrative machinery, and of the effects of borrowing, 
 have resolved themselves into studies of the individual 
 and his burdens. 
 
 Faculty and Utilitarian Principles. In recent years the 
 idea of faculty has begun to take on a more expansive 
 aspect, and social considerations are beginning to have a 
 place. The fact is being recognized that privileges granted 
 by the state are factors which contribute to the ability to 
 meet burdens, and these are being included in the basis 
 for taxes. This takes a variety of forms, but two of the 
 best examples occur hi the taxation of the privilege of 
 inheritance and in the privilege of corporate organization. 
 This same tendency is also seen hi the wide extension of 
 the use of the license system, and hi the use of taxes for 
 sumptuary and regulatory purposes. While taxes may 
 not be the best method of handling undesirable practices, 
 yet their use for this purpose shows that social aspects 
 have received consideration. 
 
 More consideration is also being given to the general 
 social effects of taxes, or what was designated in an earlier 
 chapter as the utilitarian principle. It is recognized, for 
 example, that two industries may have exactly the same 
 ability to meet burdens, yet the curtailment of one by a 
 tax, or the increase hi the price of its products through a 
 process of shifting, would work a much greater hardship 
 upon society than would a similar tax placed upon the 
 other industry. Consequently, in the formulation of fiscal 
 principles, more attention is being directed to the ultimate 
 effects and burdens, and a greater effort is being made to 
 secure the greatest good to the greatest number. 
 
 249. The Employment of Fiscal Experts Is Encouraging. 
 The formulation of fiscal legislation, not many years 
 ago, was characterized by the selfishness and caprice of 
 politicians. The men who secured berths on committees, 
 
512 OUTLINES OF PUBLIC FINANCE 
 
 empowered with the business of shaping fiscal legislation, 
 were generally qualified as politicians rather than in the 
 fundamental principles and facts of Public Finance. In 
 the administration of fiscal laws the system was no better. 
 The force of the spoils system placed the valuable politi- 
 cian in office rather than an efficient administrator, and 
 haphazard, inefficient, and wasteful methods were the re- 
 sult. Too frequently the elected official, as the local as- 
 sessor, was dependent upon his constituency for con- 
 tinuance in office, and the result was favoritism at the 
 price of justice and efficiency. 
 
 In Federal Government. To some extent this situation 
 is still true, but, as a general proposition, it is rapidly 
 changing. A few years ago members of Congress, to a 
 great extent, were all-wise beings, and felt the need of no 
 expert advice. The present situation of having, perhaps, 
 our greatest authority on fiscal matters as chairman of 
 an advisory tax board for the United States Internal 
 Revenue Department, would have been looked upon, a 
 decade or two ago, as a somewhat superfluous arrange- 
 ment. Yet, that the situation exists, indicates that pub- 
 lic officials have come to recognize the need of expert ad- 
 vice. The establishment of a tariff commission points in 
 the same direction. 
 
 In State Governments. The use of trained experts has 
 made greater progress in the fiscal program of states and 
 localities than in that of the national government. The 
 pressure for revenues and the limitation of sources de- 
 manded that something be done. First, honesty of officials 
 was demanded, but it was soon found that this was not 
 enough. Cities began to see that, just as private business 
 grew through strong centralization, so efficient and re- 
 sponsible administration demanded a central and qualified 
 corps of officials. The adoption of the commission or the 
 city manager plan of government has been the result. In 
 addition, there have been added, in many municipalities, 
 expert accountants, bureaus of public efficiency, and 
 
CONCLUSION 513 
 
 similar officials, each prepared for his particular duty, all 
 for the sake of securing a more efficient administration of 
 the public revenues and expenditures. 
 
 The Tax Commission. The states, likewise, have shown 
 the inclination to get away from politics in fiscal affairs, 
 and to center more or less responsibility in some body of 
 men, usually called the State Tax Commission, chosen on 
 the basis of their expert knowledge of fiscal affairs. The 
 powers of the boards vary all the way from the mere act 
 of advice to the centralizing of the entire fiscal system of 
 the state in their hands. The tenure of office is usually 
 made long enough, and the salary high enough, to attract 
 men who, because of training and experience, are qualified 
 to handle wisely and efficiently the problems which are 
 placed before them. 
 
 In addition to the regular commissions, the special tax 
 commission has been an institution of frequent occurrence 
 in recent years. To this body of experts, of which these 
 commissions are composed, is assigned some special prob- 
 lem for investigation and solution. The difficulty still 
 remains, however, to a somewhat marked degree, that 
 legislatures are not willing to accept the advice of these 
 standing and special commissions, and to put into effect 
 the fiscal policies which they formulate. 
 
 250. The Study of Fiscal Subjects Is Increasing. That 
 a .greater interest is being taken in the expenditures and 
 revenues of the various political units is evidenced by the 
 increased study of these problems which is being carried 
 on, both by those directly connected with the formation 
 and administration of tax laws, and by those who act in 
 no official capacity. It is a hopeful sign that a systematic 
 study of fiscal problems is rapidly finding a place in the 
 curriculums of our colleges and universities. The old idea 
 that an education consists almost entirely in gaining a 
 knowledge of the so-called " cultural" subjects is passing, 
 and the notion is gaining prevalence that higher educa- 
 tional institutions should impart more knowledge having 
 
514 OUTLINES OF PUBLIC FINANCE 
 
 immediate application to the world in which the student 
 lives. The emphasis, consequently, is no longer being 
 placed so exclusively on Lathi, Greek, and Mythology, 
 but the facts of modern society are given more attention. 
 In practically all the large universities, and in many of the 
 smaller institutions, therefore, courses are found which 
 deal specifically with fiscal problems. Such a develop- 
 ment of study is hopeful, for it should place in each com- 
 munity a group of leaders who should be vitally interested 
 in the expenditures and revenues of then* district, as well 
 as those of the state and nation. 
 
 These leaders, who have learned to think sanely and 
 clearly on the principles, will be able to peer beneath the 
 surface and separate the true evidence from the false, and 
 will be deeply enough grounded that they should not be 
 easily swayed by partisan politics or party slogans, when 
 the issue is essentially one of economic interests. It has 
 been a source of much gratification to the author to note 
 the interest his students have displayed in working up 
 reports on the expenditures and revenues of their home 
 communities. That this interest has not been merely a 
 passing one is evidenced by the letters which are received 
 from former students, in which attention is called to dif- 
 ferent fiscal situations which have come under their ob- 
 servation, and that they are now able to see the facts hi 
 the case. 
 
 Outside the colleges and universities the same tendency 
 to study fiscal problems is making itself manifest. Or- 
 ganizations, both national and state, have been established 
 for this purpose, and are doing a good work. Authorities 
 in various fields work out their respective problems and 
 usually assemble at least once a year to discuss the fiscal 
 situation and to interchange ideas. The National Tax 
 Association is the best illustration of this form of organiza- 
 tion on a national basis. The annual state conferences on 
 taxation in New York are largely for the purpose of 
 studying the fiscal problems of that state. Conferences of 
 
CONCLUSION 515 
 
 various classes of officials are also frequently held for the 
 purpose of studying problems peculiar to their duties. 
 Conferences of local assessors, for example, frequently oc- 
 cur to discuss the problem of the discovery and valuation 
 of property. 
 
 The study which has been done, and that which is being 
 carried on at present, will facilitate the future investiga- 
 tion of fiscal problems. There is gradually being collected 
 a quantity of valuable literature, both in this country and 
 hi other countries, which is common property to all pres- 
 ent and future students. The reports which have been 
 published by the various special and permanent commis- 
 sions are supplemented by published proceedings of the 
 numerous conferences which are held every year. 
 
 251. A More Enlightened Public Is Needed. One of 
 the outstanding needs hi the further perfection of fiscal 
 systems, and one which can only come with the gradual 
 dissemination of knowledge as to the nature of expendi- 
 tures and revenues, is an enlightened public. The nature 
 of public expenditure is too often overlooked, or not under- 
 stood. Individuals and communities frequently assume 
 the attitude that it makes little difference whether any 
 return is rendered for receipts from public treasuries. 
 The Congressman who succeeds in getting a massive gov- 
 ernment building for his home village has been a benefac- 
 tor. The discharged soldier points with pride to the 
 equipment he managed to purloin from the government. 
 These illustrations but represent an aspect as it appears 
 at first sight. Governments generally depend upon their 
 citizens for their funds, since they have no magic source 
 of supply. A government expenditure, then, is a removal 
 of funds from one pocket for the purpose of putting them 
 into the other, with some deductions for the expense of 
 handling. If the amount is not taken from the pockets of 
 the particular individuals who receive the benefits, it 
 must be taken from those of their neighbors, so there is 
 no gain to society. When individuals realize that it is 
 
516 OUTLINES OF PUBLIC FINANCE 
 
 their demands upon the government that cause the in- 
 crease in tax burdens, they will be more concerned about 
 the demands which are made. 
 
 It naturally follows that the citizenship of a state should 
 have some adequate knowledge of what constitutes proper 
 expenditures. Obviously this will depend upon the con- 
 ception which may be held as to the proper functions of 
 the state. An anarchist and a socialist, for example, 
 would have difficulty in coming to an agreement on the 
 proper lines of activity upon which a state may properly 
 enter. Yet, in order that the citizenship may have some 
 notion as to whether they are receiving a value commen- 
 surate with the tax burden, they should have hi mind 
 some measure of the proper activities for state initiative. 
 In general, the citizen should feel that a greater value is 
 being given when the funds are being expended through 
 his public representatives than if they had been left to be 
 expended by himself. A study of public expenditures, 
 with this in mind, will lead to a closer scrutiny of the acts 
 of public officials, and will hold them to a more strict ac- 
 countability for the way hi which public funds are spent. 
 
 The citizen, moreover, should become so enlightened 
 that he will demand the efficient management of public 
 funds. It has frequently been said that if the business 
 principles which are used hi conducting the various politi- 
 cal units were applied to a private enterprise, it would 
 soon be forced to bankruptcy. Too many candidates who 
 run on efficiency platforms leave the platforms behind 
 when they assume the duties of office. The citizens have a 
 right to demand, and in the interest of reducing the public 
 burden and in securing value received for their taxes, should 
 demand, as exacting business principles in the conduct of 
 the state as in the conduct of private business enterprise. 
 
 With an increased study of fiscal problems by the 
 officials who must administer them, and by students who 
 are to become the leaders in civic life, through whom 
 knowledge will be disseminated to the public as a whole, 
 
CONCLUSION 517 
 
 problems of expenditure and revenue may be expected to 
 be handled much more efficiently in the future than they 
 have been in the past. 
 
 252. Tax Laws Need Simplification. It has been the in- 
 tention in the preceding pages to mention and discuss 
 only some of the more important considerations that con- 
 front fiscal students and officials. Many others have 
 doubtless occurred to the reader. Each locality, of course, 
 has its own peculiar problems and difficulties, which could 
 not be specifically treated. It is hoped, however, that a 
 study of the previous pages will prove an aid in the better 
 understanding and solution of the problems which have 
 not been specifically treated. 
 
 One objective that is worthy of the efforts of every 
 official and taxpayer who desires a simpler fiscal system, 
 is to eliminate the complexity that is now found in many 
 of our tax laws. Of the complexity existing at present 
 examples need be cited only of the Federal income tax 
 law, the excess profits tax law, and many of the state 
 laws, such as the New York system for taxing corpora- 
 tions. Individuals and corporations desire to have some 
 reasonable idea as to how much tax they will have to pay 
 without the necessity of employing an attorney to aid in 
 making the calculations. The difficulties do not even 
 stop here, for the courts are crowded with tax-adjustment 
 proceedings, many of which are of years' standing. This 
 element of uncertainty is disconcerting both to the tax- 
 payer and to the officials who must calculate the amount 
 of revenue which will be received. The state tax commis- 
 sions of some states have done much to secure a simplifica- 
 tion of fiscal statutes, but much remains to be done in 
 both the Federal and state laws. 
 
 253. Attempts Have Been Made to Outline a Model 
 System of Taxation. The difficulties which have been 
 considered in the foregoing pages have weighed heavily 
 upon the minds of fiscal students and officials who have 
 been interested in a greater degree of justice and simpli- 
 
518 OUTLINES OF PUBLIC FINANCE 
 
 fication in the tax system as a whole. Attempts have 
 been made to formulate schemes which have been called 
 " model tax systems.' ' If only one political unit were to 
 be considered, this could be done with comparative ease. 
 Where there are as many competing jurisdictions as are 
 to be found in the United States, however, the difficulties 
 which are encountered by one who attempts to formulate 
 a tax system which embodies the principles of justice, 
 simplicity, and adequacy can be readily imagined. After 
 much consideration and deliberation, a committee which 
 worked under the auspices of the National Tax Associa- 
 tion formulated a plan which embodies these principles in 
 a high degree. The model tax system, as given by this 
 committee, is worthy of the study of those who may have 
 occasion to be interested in tax reform. The report em- 
 bodies the following principles: l 
 
 (1) Every person having taxable ability should pay some sort of 
 direct personal tax to the government under which he is domiciled, and 
 from which he receives the personal benefits that government confers. 
 
 (2) Tangible property, by whomsoever owned, should be taxed by 
 the jurisdiction in which it is located, because it there receives protec- 
 tion and other governmental benefits and services. 
 
 (3) Business carried on for profit in any locality should be taxed for 
 the benefits it receives. If the owners of the business are residents of 
 the state, this principle need not be appealed to, since the ordinary 
 methods of taxation may be considered to provide for such a case. 
 
 (4) A personal income tax is the best method of enforcing the per- 
 sonal obligation of the citizen for the support of the government under 
 which he lives. This tax may be levied only upon persons, and in the 
 states where they are domiciled. 
 
 (5) There should be a tax upon tangible property, levied exclusively 
 at the place where such property is located. Intangible property of all 
 descriptions should be exempt from taxes. 
 
 (6) A properly constituted business tax should be a part of the 
 system. 
 
 (7) Much improvement must be accomplished in fiscal administration. 
 
 1 Proceedings of the Twelfth Conference of the National Tax Associa- 
 tion, pp. 426-470. 
 
INDEX 
 
 Ability to pay, theory of taxes, 108; 
 applied to inheritance taxes, 317. 
 
 Abominations, tariff of, 193. 
 
 Accounting, by state tax commis- 
 sion, 275; municipal, 440; com- 
 mittee on uniform municipal, 440; 
 in New York City, 441. 
 
 Activity, public, change in, 506. 
 
 Adams, H. C., fiscal writer, 14. 
 
 Adams, T. S., 167 n. 
 
 Administration of public funds, im- 
 portance of underestimated, 414; 
 reasons for increased interest in, 
 414; should harmonize with other 
 institutions, 415; expenditures 
 carefully scrutinized, 417; sys- 
 tematic in England, 421; in other 
 countries, 423; unsystematic in 
 the United States, 426; outlook 
 encouraging, 443. 
 
 Administration of revenues, early 
 study, 10; importance of, 20. 
 
 Administrative expenditures, 57. 
 
 Administrative machinery, for cus- 
 toms duties, 187; for excise 
 duties, 213. 
 
 Ad valorem, defined, 99; difficulties 
 with, 186; applied to corpora- 
 tions, 351. 
 
 Agricultural Appropriations, com- 
 mittee on established, 427. 
 
 Aid, early revenue, 95. 
 
 Alaska, part of public domain, 79. 
 
 Amendment, income tax, 299; to 
 constitution of Oregon, 380. 
 
 American Federation of Labor, on 
 sales tax, 474. 
 
 American writers, 14, 15. 
 
 Annual franchise tax of New York, 
 341 , 
 
 Apportioned taxes, 115; results of, 
 236. 
 
 Apportionment of revenue, under 
 single tax, 374. 
 
 Appropriation bill, course of, 430. 
 
 Armies, cost of maintaining, 53; 
 functions of, 55. 
 
 Arthur, President, appoints tariff 
 commission, 196. 
 
 Articles of Confederation, fiscal pro- 
 visions of, 150. 
 
 Assessment, defined, 100; equaliza- 
 tion of, 273; control of, 274; of 
 corporations, 276. 
 
 Assessment day, 239. 
 
 Assessor, the, 238; and oath, 261; 
 in New York City, 274. 
 
 Assessors' reports, on property tax, 
 253. 
 
 Assistant Comptroller-general, of- 
 fice created, 435. 
 
 Auditing, by state tax commission, 
 275. 
 
 Augustus, Emperor, use of inherit- 
 ance tax, 310. 
 
 Australia, income tax in, 296; in- 
 heritance tax in, 333; financing 
 Great War in, 479. 
 
 Austria, income tax in, 296; in- 
 heritance tax in, 333; financing 
 Great War in, 481; daily expen- 
 diture for Great War in, 495; 
 expansion of note circulation in, 
 499. 
 
 Authority, lack of centralized, 431. 
 
 Automobiles, licensing of, 228. 
 
 B 
 
 Back tax argument for inheritance 
 
 tax, 317. 
 Ballantine, Arthur A., on sales tax, 
 
 474. 
 
520 
 
 OUTLINES OF PUBLIC FINANCE 
 
 Bancroft, Blakemore and, on in- 
 heritance taxes, 318. 
 
 Bankers Trust Company, statistics 
 of indebtedness, 412. 
 
 Banks, taxation of, 356; use of in 
 war finance, 470, 475, 478. 
 
 Base, defined, 99. 
 
 Bastable, writer, 14. 
 
 Bede, early revenue, 95; early use 
 in Prussia, 146. 
 
 Belgium, increase in expenditure, 
 29; inheritance tax in, 333. 
 
 Benefit, expenditures classified ac- 
 cording to, 49. 
 
 Benefit theory, 106; difl&culties, 107; 
 attitude of courts, 108; applied 
 to inheritance tax, 315. 
 
 Benevolence, early revenue, 95; 
 special fund, 140. 
 
 Bentham, on inheritance tax, 311. 
 
 Blakemore and Bancroft, on in- 
 heritance taxes, 318. 
 
 Bodin, early writer, 11, 12; on pub- 
 lic funds, 23; classification of 
 revenues, 76. 
 
 Bogart, E. L., on cost of war 494, 
 503, 504. 
 
 Bonds, capitalization of tax on, 168; 
 concentration of in hands of few, 
 395; problems connected with 
 floating, 402 ; freedom from taxes, 
 402; size of, 403; disposal of, 
 403; use of serial in cities, 442; 
 issued by the United States dur- 
 ing Great War, 469. 
 
 Book of estimates, transmitted to 
 Congress, 429. 
 
 Borrowing, limitation of, 267; pro- 
 duces revenue quickly, 449; 
 causes expansion of credit, 450; 
 does not shift burden to future, 
 452; burden may be shifted to 
 other classes, 454; has legitimate 
 place in emergency financiering, 
 458; used in War of 1812, 462; 
 used in Civil War, 463; of the 
 United States in Great War, 469. 
 
 Bounties, 68; compared with tariff, 
 69; under McKinley tariff, 196. 
 
 Brushaber vs. Union Pacific Rail- 
 road, 301 n. 
 
 Budget, meaning of, 420; forma- 
 tion and passage of in England, 
 421; in Germany, 423; in France, 
 424; in Canada, 425; in United 
 States unsystematic, 426; much 
 agitation for reform, 432; recent 
 legislation, 433; in American 
 states, 435; in municipalities, 
 441. 
 
 Buildings, early tax on in Prussia, 
 146; shifting of tax on, 166; 
 separate value on land and, 373. 
 
 Bullock, C. J., 30 n; on war costs, 
 491. 
 
 Burden, fiscal, will continue to be 
 large, 506; present public, 507. 
 
 Burdenless taxes, conclusion re- 
 garding, 169. 
 
 Bureau of internal revenue, 213. 
 
 "Business as usual," not possible 
 during war, 448. 
 
 Business taxes, 224; in France, 224; 
 in Prussia, 225; in America, 226; 
 objections and advantages, 227. 
 
 California, inheritance tax in, 332; 
 tax commission favors gross earn- 
 ings tax, 346; single tax campaign 
 in, 381. 
 
 Canada, reciprocity treaty with, 
 182; income tax in, 296; inherit- 
 ance tax in, 333; single tax in, 
 383; budget in, 425; financing of 
 Great War in, 479. 
 
 Canons of Taxation, 101. 
 
 Capital, and income, 280; stock 
 and ability, 249; burden of in- 
 heritance tax on, 319; tax on of 
 corporations, 340; state competi- 
 tor for, 393. 
 
 Capitalization theory, criticized, 
 167; correction of injustice caused 
 by, 168. 
 
 Capitation taxes, 202 n; in Ameri- 
 can states, 222; objections to, 
 223, 
 
INDEX 
 
 521 
 
 Carafa, classification of expendi- 
 tures, 23. 
 
 Carnegie, Andrew, on inheritance 
 tax, 312. 
 
 Census bureau, classification of ex- 
 penditures, 47; classification of 
 revenues, 90. 
 
 Centralization of fiscal authority, 
 advantages of, 274. 
 
 Characteristics of fiscal systems, 15. 
 
 Charity, expenditures for by public, 
 66; by individuals, 67; relief 
 through insurance and pensions, 
 67. 
 
 Chase, Secretary, and excises, 217; 
 and Civil War finance, 463. 
 
 Circulation, expansion of note dur- 
 ing Great War, 499. 
 
 Cities, expenditures of, 33, 34, 52; 
 for protection, 55; for education, 
 61; and forced loans, 400; in- 
 debtedness of, 407, 409, 442; ad- 
 ministration of finances, 439. 
 
 Citizenship, as base for tax levy, 246. 
 
 City equalization boards, 259. 
 
 Civil War, direct tax of, 152; tariffs 
 of, 195; income tax of, 297; 
 method of financing, 463; cost 
 of, 489; war costs following, 491. 
 
 Classification of property, 235; 
 court interpretation of, 263; 
 status of, 264; principle of, 264; 
 results of, 265; in Pennsylvania, 
 266; in Connecticut, 266. 
 
 Clay, Henry, and tariff, 194. 
 
 Coercive services, 74. 
 
 Cohn, writer, 12; classification of 
 expenditures, 49. 
 
 Collateral inheritance, 314 n. 
 
 Collection of revenue, expenditures 
 for, 60. 
 
 Colorado, and property classifica- 
 tion, 264; single tax in, 381. 
 
 Commissioner of internal revenue, 
 and excise tax, 213, 214; and in- 
 come tax, 305. 
 
 Common benefit, miscellaneous ex- 
 penditures for, 65; increase in 
 imoprtance, 72. 
 
 Commutation, meaning, 107. 
 
 Compensating tariff, 182. 
 
 Compensatory theory of taxes, 117. 
 
 Compromise tariff, 193. 
 
 Comptroller-general, office created, 
 435. 
 
 Connecticut, classification of prop- 
 erty in, 266; report of special tax 
 commission on corporations, 347, 
 350. 
 
 Conscience fund, 136. 
 
 Constant cost, shifting of tax on 
 goods produced under, 174. 
 
 Constitution, Federal, fiscal provis- 
 ions of, 150; limitation upon 
 states, 153; amended for income 
 tax, 299. 
 
 Constitutionalism, growth of, 16. 
 
 Consular service, expenditure for, 
 60. 
 
 Consumption taxes, early in Prus- 
 sia, 147. 
 
 Contract loans, 400. 
 
 Control over income and expendi- 
 ture, 16. 
 
 Conversion of debt, 404. 
 
 Corporate excess, taxation of, 343. 
 
 Corporations, assessment by tax 
 commission, 276; hostile attitude 
 of public to, 335; failure of exist- 
 ing taxes against, 336. 
 
 Corporation taxes, found in states, 
 155; reasons for special, 335; 
 take form of franchise taxes, 338; 
 taxation of franchise to be, 339; 
 upon capital, 340; on public util- 
 ities, 343; advantages and diffi- 
 culties with on gross earnings, 
 345; on net earnings unsatisfac- 
 tory, 348; upon value, 350; re- 
 form in local, 353; not needed 
 for regulation, 354; on foreign 
 corporations, 359; by Federal 
 government, 360; upon transfer 
 of shares, 361 ; of Great War, 468; 
 shifting and incidence of, 474. 
 
 Corrective institutions, 68. 
 
 Costs of war, presents variety of as- 
 pects, 484; in early history of the 
 
522 
 
 OUTLINES OF PUBLIC FINANCE 
 
 United States, 486; augmented 
 by Civil War, 489; following 
 Civil War, 491; other eclipsed by 
 cost of Great War, 493; influ- 
 enced by expansion of money and 
 credit during Great War, 498; 
 indirect must not be overlooked, 
 601; in loss of life, 501; other 
 indirect, 503. (See Great War.) 
 
 Counties, expenditures of, 51. 
 
 County equalization board, 260. 
 
 Court decisions, influence on fiscal 
 development, 256; on Civil War 
 income tax, 297; on income tax 
 of 1894, 299; on income tax of 
 1913, 300. 
 
 Credit, expansion of from borrow- 
 ing, 450; expansion of and cost 
 of Great War, 498. (See Public 
 Credit.) 
 
 Credit instruments, taxation of, 250. 
 
 "Customary duties," 140. 
 
 Customs duties, denned, 99, 177; 
 in England, 141; reasons for, 177, 
 178; incidence of, 183; borne by 
 importer, 184; problems with 
 levy, 185; administrative ma- 
 chinery, 187; importance of 
 definite principles, 187. 
 
 Dallas, Secretary, and emergency 
 borrowing, 462. 
 
 Dane-geld, 139. 
 
 Daniels, W. M., writer, 15; on char- 
 acteristics of fiscal systems, 15. 
 
 Death duties, in England, 141. 
 
 Debts, creation of fictitious, 248; 
 tax on secured in New York, 266. 
 
 Declaration, personal, of income, 
 287. 
 
 Decreasing cost, shifting of tax on 
 goods produced under, 174. 
 
 Decrement, unearned, 370. 
 
 Deductions, for inheritance tax, 322. 
 
 Defectives, care of, 67; expendi- 
 tures for insane, 68. 
 
 Degressive taxes, n-with in- 
 comes, 285. 
 
 Demand, relation to shifting, 160; 
 effect of elastic on shifting, 175; 
 elastic and customs duties, 183. 
 
 Democratic party, and tariff, 196. 
 
 Dewey, D. R., statistics from, 487. 
 
 Diffusion of wealth, argument for 
 inheritance tax, 314. 
 
 Diminishing utility, law of, applied 
 to incomes, 284. 
 
 Dingley tariff, 197. 
 
 Diplomatic service, expenditure for, 
 60. 
 
 Direct consumption tax, 203. 
 
 Direct inheritance, 314 n. 
 
 Direction of shifting, 175. 
 
 Direct tax, 105; early in Franco, 
 143; of War of 1812, 152; of 
 Civil War, 152; modern in 
 France, 144; in Federal Consti- 
 tution, 151, 152. 
 
 Dispensary system, in South Caro- 
 lina, 221. 
 
 Diversification of industry, under 
 protective duty, 180. 
 
 Domicile, as base fbT~ta"x ievy, 246; 
 as base for inheritance tax, 326. 
 
 Donum, early revenue, 95. 
 
 Double taxation, 245; evils of, 245. 
 
 Dual taxation, 245. 
 
 Duty, early revenue, 95. 
 
 E 
 
 Earnings, relation between a tax on 
 value and, 352. (See Gross Earn- 
 ings and Net Earnings.) 
 
 Economic effects of public borrow- 
 ing, 393. 
 
 Economy and Efficiency, commit- 
 tee on, 432. 
 
 Edmonton, single tax in, 384. 
 
 Education, cause of expenditure, 37, 
 61; expenditure of individuals 
 for, 63. 
 
 Eheberg, on public and private ex- 
 penditures, 25. 
 
 Elastic demand, effect on shifting, 
 175. 
 
 Elastic supply, effect on shifting, 
 175. 
 
INDEX 
 
 523 
 
 Elizabeth, Queen, grants monopo- 
 lies, 220. 
 
 Emergency, war best example of 
 financing an, 445; problem to 
 secure materials, 446; borrowing 
 has advantages, 448; use of taxes 
 in, 454; borrowing has legitimate 
 place, 458; administrative ma- 
 chinery important, 458; com- 
 bination of loans and taxes forms 
 best policy, 460. 
 
 Emergency tariff bill, 198. 
 
 Eminent domain, 74, 136. 
 
 England, increase in expenditures, 
 29; fees in, 125; early taxes in, 
 139; tariff in, 178, 199; excise 
 tax in, 219; gave up property 
 tax, 255; income tax in, 289; in- 
 heritance tax in, 333; early bor- 
 rowing in, 388; formation and 
 passage of budget, 421; classes 
 of expenditures and revenues, 
 422; method of financing Great 
 War, 475. 
 
 English writers, 12 ff. 
 
 Equalization boards, 259. 
 
 Equalization of assessments, 273. 
 
 Escheat, 136; extension of, 313. 
 
 Esprit des lois, 11. 
 
 Essays in Taxation, 15. 
 
 Ethics and Public Finance, 7. 
 
 Europe, single tax in, 385. 
 
 Evasion, distinguished from shift- 
 ing, 157; under income tax, 287; 
 under inheritance tax, 319, 324. 
 
 Everett, and single tax 381. 
 
 Excess profits tax, of 1917, 465; 
 difficulties with, 468; law exam- 
 ple of complexity, 517. 
 
 Excise duties, defined, 99; taxes 
 upon consumption, 203; shifting 
 and incidence of, 204; modern 
 form of, 204; problems connected 
 with use of, 205; classes of goods 
 taxed, 206; industrial and social 
 effects, 207; to counteract pro- 
 tective tariff, 208; as sumptuary 
 tax, 209; methods of levy, 210; 
 objects taxed, 211; importance 
 
 in fiscal systems, 211; adminis- 
 trative machinery, 213; local 
 machinery, 214; early use in 
 United States, 215; since Civil 
 War, 217; in foreign countries, 
 218. 
 
 Executive budget, in states, 436. 
 
 Exemption, of property from taxes, 
 agitation f or u 242,; classes of, 243 ; 
 of government activities, 244; 
 from income tax, 284; from in- 
 heritance tax, 322. 
 
 Expenditures, of Federal govern- 
 ment, 31; of states, 32, 51, 52; 
 of cities, 32, 34; of incorporated 
 places, 33, 51; unjustifiable, 41; 
 and national income, 44; during 
 peace, 488, 491. (See Public Ex- 
 penditure.) 
 
 Expense of service, argument for 
 inheritance tax, 315. 
 
 Experiment station, expenditure 
 for, 63. 
 
 Experts, fiscal, employment of, 511; 
 in Federal government, 512; in 
 state governments, 512; tax com- 
 mission example of, 513. 
 
 Export duties, restriction upon, 152; 
 in modern fiscal systems, 178. 
 
 Extension of escheat, 313. 
 
 Faculty theory, 108; problems in 
 measuring ability, 109 ff; not 
 always followed, 118. 
 
 Fairhope, single tax colony, 383. 
 
 Famine, example of emergency, 445. 
 
 Federal government, expenditures 
 of, 31; for protection, 52; ad- 
 ministrative expenditures, 57; 
 legislative expenditures, 58; for 
 consular and diplomatic services, 
 61; taxes corporations, 360; 
 taxes transfer of shares, 362. 
 (See United States.) 
 
 Fee, defined, 121; examples of, 121; 
 semi compulsory, 122; character- 
 istics of, 123; and police power, 
 125; in England, 125; in France, 
 
524 
 
 OUTLINES OF PUBLIC FINANCE 
 
 126; in United States, 126; as 
 salary, 127; social and political 
 aspects, 128; and special assess- 
 ment, 130. 
 
 Fels fund, for single tax propa- 
 ganda, 378. 
 
 Fels, Joseph, originator of Fels 
 fund, 378. 
 
 Feudalism, expenditures under, 24. 
 
 Field of government activity, 15. 
 
 "Fifteenths," form of revenue, 140. 
 
 Finance, meaning, 2; administra- 
 tion of municipal, 439. 
 
 Financial and fiscal, 3. 
 
 Finanzwissenschaft, 12. 
 
 Fines, 137. 
 
 Fiscal and financial, 3. 
 
 Fiscal aspects of early tariff, 188. 
 
 Fiscal subjects, study of increasing, 
 513; by National Tax Associa- 
 tion, 514; in New York, 514. 
 
 Fiscal systems, characteristics of, 
 15. 
 
 Fiscal tendencies, 155. 
 
 Floating debt, 399. 
 
 Florence, early studies in, 10. 
 
 Florida, part of public domain, 79. 
 
 Forces loans, 400. 
 
 Fordney emergency tariff, 198. 
 
 Foreign corporations, taxation of, 
 359. 
 
 Forests, public retention of, 52; in- 
 direct effects of, 82. 
 
 Fourteenth amendment, 257. 
 
 France, increase in expenditures in, 
 29; fees in, 126; development of 
 tax system, 142; tariff in, 200; 
 excise tax in, 219; tobacco mon- 
 opoly in, 221; business taxes in, 
 224; gave up property tax, 255; 
 income tax in, 296; inheritance 
 tax in, 333; debt and national 
 wealth, 411; fiscal plan in, 424; 
 method of financing Great War, 
 477; tax measures of Great War 
 in, 478; daily expenditures for 
 Great War in, 495; expansion of 
 note circulation in, 499. 
 
 Franchise, kinds of, 338, 
 
 Franchise to be, taxation of, 339. 
 
 Franking privilege, abuse of, 59. 
 
 Franklin, difficulty in borrowing, 
 402. 
 
 French writers, 10. 
 
 Funded debt, 399. 
 
 Funded income, 116, 281. 
 
 Funds, importance of administra- 
 tion of, 20. 
 
 Gadsden purchase, 79. 
 
 Gallatin, Secretary, and War of 
 1812, 462. 
 
 Gary, land values in, 369. 
 
 General property tax, regressive in 
 effect, 115; against corporations, 
 336. (See Property tax.) 
 
 George, Henry, and Progress and 
 Poverty, 365; social vision of, 365; 
 proposed to take rents, 368; can- 
 didate for mayor of New York 
 City, 377. 
 
 George, Lloyd, land taxes of, 385. 
 
 German writers, 12. 
 
 Germany, increase in expenditures, 
 29; tariffs in, 200; excise tax in, 
 220; gave up property tax, 255; 
 inheritance tax in, 333; debt and 
 national wealth, 411; fiscal plan 
 in, 423; preparatory measures for 
 Great War in, 479; use of loans 
 in Great War, 480; use of taxes 
 in Great War, 481 ; daily expendi- 
 ture for Great War in, 495; ex- 
 pansion of note circulation in, 
 499. 
 
 Gifts, 136; taxation of, 325. 
 
 Glass, Secretary, on appropriations, 
 432. 
 
 Good, Representative, and budget 
 bill, 433. 
 
 Gorman- Wilson tariff, 196. 
 
 Gottlieb, L. R., on war costs, 494; 
 497. 
 
 Government, activities of, 1; cal- 
 culable field of activities of, 15; 
 demands of, 74; may conduct 
 industry, 83; many fields of ac- 
 
INDEX 
 
 525 
 
 tivity, 87; exempt from taxes, 
 244; confidence in and war 
 finance, 459. 
 
 Graduation, under income tax, 284. 
 
 Graph, of regular degression, 112; 
 of irregular degression, 113, 114. 
 
 Gratuitous services, objections to, 
 75. 
 
 Great Britain, special assessment 
 in, 132; debt and national wealth, 
 411; daily expenditure for Great 
 War in, 495; expansion of note 
 circulation in, 499. (See Eng- 
 land.) 
 
 Great War, cost of, 54; use of taxes 
 by the United States in, 464; rev- 
 enue act of 1916, 464; of 1917, 
 464; of 1918, 467; corporation 
 taxes under, 468; United States 
 borrowed extensively during, 469; 
 problems did not end with, 472; 
 England financed through loans 
 and taxes, 475; France financed 
 by borrowing, 477; Central Pow- 
 ers used loans in, 479; interest- 
 ing comparisons from financing 
 of, 482; daily expenditure for, 
 495; expansion of money and 
 credit affected cost of, 498; cas- 
 ualties of, 502. (See War, and 
 Cost of war.) 
 
 Greece, expenditures of, 24; in- 
 heritance tax in, 333. 
 
 Greenbacks, effect on Civil War 
 costs, 490; effects on citizens, 
 490. 
 
 Gross earnings tax, advantages of, 
 345; favored by officials, 346; 
 objections to, 347. 
 
 Grundsatze der Finanzwissenschaft, 
 12. 
 
 H 
 
 Harding, President, on budget, 435. 
 
 Hearth tax, 139. 
 
 Highways, cause of expenditure, 37, 
 
 63. 
 
 History, and Public Finance, 5. 
 Hungary, income tax in, 296; 
 
 financing Great War in, 481; 
 expansion of note circulation in, 
 499. 
 
 Illinois, oaths and penalties in, 261 ; 
 license on automobiles, 228; in- 
 debtedness in, 409; centralized 
 fiscal machinery of, 438. 
 
 Importer, bears burden of customs 
 duty, 184. 
 
 Impost, early revenue, 95. 
 
 Impot unique, proposed by physio- 
 crats, 363. 
 
 Income, earned and unearned, 116; 
 difficulties in defining, 279; gross 
 and net, 280; capital and, 280; 
 funded and unfunded, 281; dif- 
 ficulties in ascertaining, 286; and 
 property, 286; single tax on, 364. 
 
 Income tax, early use in England, 
 141; in Prussia, 147; found in 
 states, 154; shifting of, 162; 
 mark of developed fiscal system, 
 278; methods of levy, 283; ex- 
 emptions under, 284; graduation, 
 284; method of determining, 286; 
 in England, 289; success in Eng- 
 land, 293; in Prussia, 293; in 
 foreign countries, 295; in the 
 United States, 296; of Civil War, 
 297; of 1894, 298; constitutional 
 amendment for, 299; adopted in 
 1913, 300; Act of 1916, 303; de- 
 fects in Federal, 304; in states, 
 306; Act of 1917, 465; Act of 
 1918, 467; in England during 
 Great War, 477; law as example 
 of complexity, 517. 
 
 Incorporated places, expenditures 
 of, 33, 51. 
 
 Incorporation fee, 338. 
 
 Increasing cost, shifting of tax on 
 goods produced under, 173. 
 
 Increment, unearned, not confined 
 to land, 368. 
 
 Indebtedness, difficulties in han- 
 dling, 248; limitations on, 268; 
 characteristic of modern fiscal 
 
526 
 
 OUTLINES OF PUBLIC FINANCE 
 
 systems, 387; economic and 
 political effects of, 393; extin- 
 guishing of, 397; forms of, 399; 
 study of in the United States, 
 407; of various countries, 409; 
 per capita burden, in different 
 countries, 410; municipal, 442. 
 (See Public debts.) 
 
 Independent treasury, effects of, 
 416. 
 
 India, income tax in, 296. 
 
 Indirect tax, 105; early in France, 
 142; modern in France, 143. 
 
 Indirect war costs, 501. 
 
 Individual, interest in values of 
 land and buildings, 376. 
 
 Individual expenditures, for educa- 
 tion, 63; for charity, 67. 
 
 Industry, condition favorable to 
 state management, 84; revenue 
 not important, 89; and revenue 
 duties, 178; and protective du- 
 ties, 180; and excise duties, 207, 
 220; government ownership of, 
 221; and method of financing 
 war, 460. 
 
 Information at source, 288. 
 
 Inheritance, not a natural right, 
 321. 
 
 Inheritance tax, early use in states, 
 154; not of recent origin, 309; 
 early discussion of, 311; advo- 
 cated at present, 312; applica- 
 tion of benefit theory, 315; con- 
 forms to modern fiscal concepts, 
 316; objections weak, 318; courts 
 have strengthened position of, 
 320; problems arise in formu- 
 lating laws, 322; conflicting jur- 
 isdictions create problems, 326; 
 stability desirable, 328; advan- 
 tages of, 328; use by Federal 
 government, 329; use by states, 
 331; use abroad, 333; Federal, 
 under law of 1916, 464; under 
 law of 1917, 466. 
 
 In re Finnen, 321. 
 
 Insane, expenditure for, 68. 
 
 Insurance, social, 67. 
 
 Insurance companies, taxation of, 
 357. 
 
 Interest in Public Finance, 16. 
 
 International complications from 
 public borrowing, 396. 
 
 Interest rate, importance of, 402. 
 
 Introduction to Public Finance, 15. 
 
 Investment, returns on, 25. 
 
 Ireland, inheritance tax in, 333. 
 
 Italy, study of fiscal problems in, 
 9; development of city-states, 10; 
 tariff in, 200; excise tax in, 220; 
 gave up property tax, 255; in- 
 come tax in, 296; inheritance tax 
 in, 333; debt and national in- 
 come, 412; financing Great War 
 in, 479; daily expenditure for 
 Great War in, 495; expansion of 
 note circulation in, 499. 
 
 Jackson, President, distribution of 
 
 public funds, 416. 
 Japan, income tax in, 296. 
 Judicial system, expenditure for, 70. 
 Justice, principles not followed, 118. 
 
 K 
 
 Knights of Columbus, and war 
 costs, 504. 
 
 Laissez faire, and fiscal interest, 18; 
 
 and increase of expenditures, 29; 
 
 losing importance, 3&; and state 
 
 industry, 87. 
 Land, assessment of in England, 
 
 140; shifting of tax on value of, 
 
 163; shifting of specific tax on, 
 
 164 
 Land values, not all unearned, 368; 
 
 society responsible for other than, 
 
 369. 
 
 Law, John, and public land, 78. 
 Laws, tax, need simplification, 517. 
 Leadership, importance of, 62. 
 Legislative expenditures, Federal, 
 
 58; state, 59. 
 
INDEX 
 
 527 
 
 Legislatures, limitations by state, 
 257. 
 
 Leroy-Beaulieu, writer, 12. 
 
 Les six Libres de la Republique, 11. 
 
 Levy, defined, 99; place of on prop- 
 erty, 246. 
 
 License taxes. (See Business taxes.) 
 
 Life, loss of in war, 501; loss of in 
 nineteenth-century wars, 502; 
 loss of in Great War, 502. 
 
 Limitation, on taxes, 267; on in- 
 debtedness, 268. 
 
 Loan policy, success of United 
 States's in Great War, 471. 
 
 Loans, and taxes in emergency 
 financiering, 460. 
 
 Local option, favored by single tax, 
 378; struggle for in Oregon, 380. 
 
 Local taxes, in England, 142. 
 
 Long-term obligations, 399. 
 
 Louisiana, business taxes in, 227; 
 inheritance tax in, 331. 
 
 Louisiana purchase, 78. 
 
 Lump sum tax, shifting of, 171. 
 
 M 
 
 McCormick-Good budget bill, 434. 
 
 McCormick, Senator, and budget 
 bill, 433. 
 
 McCullough vs. Maryland, 244. 
 
 McKinley tariff, 196. 
 
 Madison, President, and tariff, 191. 
 
 Manufacturers' associations, on 
 sales tax, 474. 
 
 Manufacturing companies, taxation 
 of, 358. 
 
 Market, effect of extended, on shift- 
 ing customs duties, 184. 
 
 Maryland, budget in, 436. 
 
 Massachusetts, income tax in, 307; 
 taxation of corporations in, 342. 
 
 Maximum-minimum tariff, 182. 
 
 Mediterranean route of commerce, 
 influence on fiscal studies, 10. 
 
 Merchants' associations, on sales 
 tax, 474, 
 
 Michigan, rejection of gross earn- 
 ings tax, 348; adopts ad valorem 
 method, 351, 
 
 Middle Ages, use of inheritance tax 
 in, 310. 
 
 Middle colonies, tax system in, 149. 
 
 Military training, effect on individ- 
 ual, 54. 
 
 Mill, J. S., on income tax, 101, 283; 
 and justice in taxation, 108; on 
 inheritance tax, 311; and rents, 
 364. 
 
 Mines, public retention of, 82. 
 
 Minnesota tax commission, favors 
 gross earnings tax, 346. 
 
 Mirabeau, leader of physiocrats, 
 363. 
 
 Missouri, and single tax, 381. 
 
 Model system of taxation, 517. 
 
 Money, periodic exaction of, 16; 
 effect of change in value, 36; 
 superficial aspect of, 447; ex- 
 pansion of and cost of Great War, 
 498. 
 
 Money market, necessity of in pub- 
 lic borrowing, 388. 
 
 Monopoly, shifting of tax on, 170. 
 
 Montesquieu, early writer, 11. 
 
 Mortgages, taxation of, 249, 265; 
 shifting of tax on, 249; recording 
 tax in New York, 265. 
 
 Municipal, accounting, meaning of, 
 440; budgets, use of, 441; fi- 
 nances, administration of, 439; 
 indebtedness, 442. 
 
 N 
 
 Naples, early studies in, 10. 
 
 National bank, assessment of shares, 
 247. 
 
 National conference of single tax 
 league, platform of, 366. 
 
 National income, proportion of ex- 
 penditure to, 44. 
 
 National Tax Association, 15, 230 n; 
 and study of fiscal problems, 514; 
 and model tax system, 517. 
 
 Natural right, inheritance not a, 
 321; as proposed by Henry 
 George, 367. 
 
 Net earnings, taxation of, 348; ob- 
 jections to tax on, 349; taxation 
 
528 
 
 OUTLINES OF PUBLIC FINANCE 
 
 of opposed by Connecticut com- 
 mission, 350. 
 
 Net returns, shifting of tax on, 171. 
 
 New England colonies, property tax 
 in, 232. 
 
 New York, 149, 150; opposed to 
 tariff, 189, 231, 249, 259; in- 
 come tax in, 307; inheritance tax 
 in, 331; annual franchise tax of, 
 341; taxation of public utilities, 
 345; special franchise tax of, 355; 
 tax upon transfer of securities, 
 361; and single tax, 382; indebt- 
 edness in, 408; tax conferences 
 in, 514; corporation tax example 
 of complexity, 517. 
 
 New York City, assessors in, 274; 
 relative value of land and build- 
 ings in, 376. 
 
 Nineteenth-century wars, loss of life 
 in, 502; duration of, 502. 
 
 Nitti, F. S., on expenditures, 30 n. 
 
 Nonreproducible goods, shifting of 
 tax on, 165. 
 
 Nonrevenue receipts, 91. 
 
 Northern colonies, tax system in, 
 148. 
 
 Norway, income tax in, 296. 
 
 Note circulation, expansion of dur- 
 ing Great War, 499. 
 
 Oaths, 238, 261; in Illinois, 261. 
 
 Ohio, tax inquisitor law of, 262; 
 power of tax commission, 275. 
 
 Ohio plan of limitation, 269. 
 
 Oleomargarine, excise tax on, 210. 
 
 Ontario, business taxes in, 227. 
 
 Oregon, single tax campaign in, 379; 
 state tax commission and con- 
 stitutional amendment, 381. 
 
 Oregon territory, part of public do- 
 main, 79. 
 
 Ottawa, and single tax, 385. 
 
 Panama Canal, borrowing justified 
 for, 392 t 
 
 Partnership of state, argument for 
 inheritance tax, 316. 
 
 Payment of back taxes, argument 
 for inheritance tax, 317. 
 
 Payne-Aldrich tariff, 197. 
 
 Peace, expenditures during, 488, 
 491. 
 
 Peel, Sir Robert, and income tax, 
 289. 
 
 Penalties, 137; under property tax, 
 261; in Illinois, 261; use of in- 
 heritance tax as, 318. 
 
 Pennsylvania, use of inheritance 
 tax, 331; and single tax, 382; 
 small indebtedness in, 408. 
 
 Pensions, 68; mothers', 67, 69; old 
 age in England, 69. 
 
 Personal element, importance of in 
 war finance, 459. 
 
 Personal property, defined, 235; 
 value of compared with real, 241, 
 242. 
 
 Pestilence, example of emergency, 
 445. 
 
 Petty, early writer, 12; classifica- 
 tion of expenditures, 23. 
 
 Philippines, income tax in, 296. 
 
 Physiocrats, fiscal contributions of, 
 11; proposal of single tax, 363. 
 
 Pittsburgh, and single tax, 382. 
 
 Plehn, C. C., writer, 15; on single 
 income tax, 364. 
 
 Police power, 38 n\ and fees, 125. 
 
 Political aspects of fees, 128. 
 
 Political campaigns, single tax in, 
 379. 
 
 Political restraint on revenue, 27. 
 
 Political Science and Public Fi- 
 nance, 5. 
 
 Poll taxes, in American states, 222; 
 objections to, 223. 
 
 Pollock vs. Farmers' Loan and 
 Trust Co., 299 n. 
 
 Poor rates, English, 95. 
 
 Portugal, inheritance tax in, 333. 
 
 Post office, example of government 
 enterprise, 84; in the United 
 States, 85; motives for conduct- 
 ing, 86. 
 
INDEX 
 
 529 
 
 Prsecarium, early revenue, 95. 
 
 Price, relation to shifting, 160; ef- 
 fects of increased, 451; and taxa- 
 tion, 455; effects of changes, 500. 
 
 Private expenditures, compared 
 with public, 25. 
 
 Produit net, tax on, 363. 
 
 Profits, tax on excess, 465; difficul- 
 ties with tax on, 468. 
 
 Progress and Poverty, 365. 
 
 Progress, affected by excise tax, 208. 
 
 Progressive Taxation in Theory and 
 Practice, 15. 
 
 Progressive taxes, study in Italy, 10; 
 discussed, 110; effect of flat rate, 
 115; under income tax, 285; ap- 
 plied to inheritances, 324. 
 
 Project for a Royal Tythe, 11. 
 
 Property, classification of, 235; and 
 ability, 235; personal not as- 
 sessed, 239; intangible, 240; 
 court interpretation of classifica- 
 tion, 263; status of classification, 
 264; principle of classification, 
 264; results of classification, 265; 
 classification of in Pennsylvania, 
 266; in Connecticut, 266; and 
 income, 286. 
 
 Property tax, early use in states, 
 154; early development, 230; in- 
 fluence of democratic ideals, 232; 
 in Southern and Western states, 
 233; escape of personal property, 
 239; evils of double taxation, 
 245; handling of indebtedness, 
 248; regressivity of, 251; de- 
 grades morals, 252; intrenched 
 in the United States, 254; un- 
 satisfactory, 276; and corpora- 
 tions, 336. (See General property 
 tax.) 
 
 Property tax reform, difficulties with 
 constitutions, 256; in real estate 
 assessment, 258; in personal 
 property assessment, 261; clas- 
 sification attempted, 263; limita- 
 tion on tax rate and borrowing, 
 267; separation of sources of 
 revenue, 269; centralization of 
 
 authority, 272; the state tax 
 commission, 274. 
 
 Proportional taxes, 110; effect of 
 flat rate, 115. 
 
 Protection, expenditure for, 52. 
 
 Protective aspect of early tariff, 190. 
 
 Protective duties, meaning, 180; 
 and revenue duties, 180; coun- 
 teracted by excise, 208. 
 
 Prussia, development of tax system, 
 145; early fiscal reforms, 146; 
 early consumption and income 
 taxes, 147; business taxes in, 
 225; income tax in, 293. 
 
 Public, hostile attitude of, to cor- 
 porations, 335; effect of single 
 tax on activities, 372; more en- 
 lightened needed, 515. 
 
 Public activity, change in, 506. 
 
 Public buildings, expenditures for, 
 60. 
 
 Public credit, universality of, 16; 
 growth of, 28, 39. 
 
 Public debts, compared with pri- 
 vate, 390; payment of, 390; pur- 
 pose of, 391; economic and polit- 
 ical effects of, 393; methods of 
 originating, 400; problem of ad- 
 ministering, 404. (See Indebt- 
 edness.) 
 
 Public expenditures, early classifi- 
 cation, 10; importance of, 18; 
 considered by early writers, 22; 
 of Greece and Rome, 24; under 
 feudalism, 24; compared with 
 private, 25; political restraints 
 on, 27; changes in, 27; increase 
 in, 28; causes of growth, 37; 
 supply less material wants, 39; 
 justification of, 40; economic ef- 
 fects, 41; comparative study dif- 
 ficult, 43; classification of, 46; 
 by census bureau, 47; according 
 to benefit, 49; for defectives, de- 
 linquents, and dependents, 66; 
 for individuals, 71. 
 
 Public Finance, definition of, 2; a 
 division of Economics, 4; relation 
 to Political Science and History, 
 
530 
 
 OUTLINES OF PUBLIC FINANCE 
 
 5; to Sociology and Ethics, 7; 
 method of study, 8; extent of 
 study, 9; interest in, 16; studied 
 under different heads, 17. 
 
 Public lands, arguments for dis- 
 posal, 77; for retention, 77; of 
 the United States, 78; method of 
 disposition, 79; success of policy, 
 80; policy of states, 81. 
 
 Public price, defined, 134; and rate, 
 134; reduction in, 135; public 
 interest and, 135. 
 
 Public revenues, early classifica- 
 tions, 76; classification of cen- 
 sus bureau, 90; growth in, 91; 
 compulsory nature, 94; histori- 
 cal development, 94; motives be- 
 neath, 95; factors in classifying, 
 120. 
 
 Public utilities, cause of expendi- 
 ture, 37; taxation of, 343; taxa- 
 tion of in New York, 345; regu- 
 lation and taxation of, 354. 
 
 Pueblo, single tax and, 382. 
 
 Pullman, land values in, 369. 
 
 Quasi single taxers, 366. 
 Quesnay, leader of physiocrats, 11, 
 363. 
 
 R 
 
 Rate, defined, 99; and public price, 
 134; applied to inheritance tax, 
 323. 
 
 Rau, K. H., early writer, 12; and 
 public lands, 77. 
 
 Real property, defined, 235; value of 
 compared with personal, 241, 242. 
 
 Reciprocity, treaty with Canada, 
 182; in French tariff, 182. 
 
 Red Cross, and war costs, 504. 
 
 Regressive taxes, 114; general prop- 
 erty tax regressive, 251. 
 
 Regulation of public utilities, 354. 
 
 Regulative activities, 38. 
 
 Republican party, and tariff, 196. 
 
 Repudiation of debts, early, 28; by 
 states, 390. 
 
 Reserve fund, failure of, 388. 
 
 Retaliatory tariff, 182; in McKin- 
 ley tariff, 196. 
 
 Revenue, political restraint on, 27; 
 cost of collection, 60; early in 
 England, 139; in France, 142; in 
 Prussia, 145; in American col- 
 onies, 147; separation of sources 
 of, 269; apportionment under 
 single tax, 374; secured quickly 
 from borrowing, 449; act of 1916, 
 464; act of 1917, 464; sources of 
 for Great War, 497; overlapping 
 of sources of, 509; separation of 
 sources of, 510. 
 
 Revenue duties, meaning, 178; and 
 industry, 178; and protective 
 duties, 180. 
 
 Revenue receipts, 90. 
 
 Revenue systems, development of, 
 138. 
 
 Revolutionary War, financing of, 
 149. 
 
 Rhode Island, 150; opposed to 
 tariff, 189; property tax in, 233. 
 
 Ricardo, on income tax, 100; on 
 inheritance tax, 311; on rents, 
 364. 
 
 Right, natural, inheritance not a, 
 321. 
 
 Rivers and harbors, committee on, 
 428. 
 
 Rome, expenditures of, 24. 
 
 Roosevelt, Theodore, favors in- 
 heritance tax, 313. 
 
 Ross, P. V., on inheritance taxes, 
 320. 
 
 Rural, burden of single tax in dis- 
 tricts, 375; values compared with 
 urban, 375. 
 
 Russia, increase in expenditure, 29; 
 income tax in, 296; inheritance 
 tax in, 333; financing Great War 
 in, 479; expansion of note circu- 
 lation in, 499. 
 
 S 
 
 Salary, instead of fee, 127. 
 
 Sales tax, advantages of, 473; ob- 
 
INDEX 
 
 531 
 
 jections to, 473; shifting and in- 
 cidence, 474. 
 
 Salvation Army, and war costs, 504. 
 
 Savings, inheritance tax on, 319. 
 
 Scotland, gave up property tax, 255. 
 
 Scranton, and single tax, 382. 
 
 Seattle, and single tax, 381. 
 
 Secretary of the Treasury, and ex- 
 cise tax, 213; and independent 
 treasury, 417; and book of esti- 
 mates, 429. 
 
 Secured debts tax, 266. 
 
 Securities, tax on transfer of, 361; 
 by Federal government, 362. 
 
 Seligman, E. R. A., 14, 167 n; on 
 property tax, 277; on English 
 income tax, 293; on war costs, 
 494, 495. 
 
 Separation of sources of revenues, 
 269; advantages of, 270; dangers 
 of, 271. 
 
 Serial bonds, use of in cities, 442. 
 
 Service, expense of, arguments for 
 inheritance tax, 315; value of, 
 argument for inheritance tax, 315. 
 
 Shifting, distinguished from eva- 
 sion, 157; direction of, 175. 
 
 Shifting and incidence, denned, 99; 
 relation to justice, 157; funda- 
 mentally a study of price, 159; 
 of poll tax, 161; of income tax, 
 162; of land taxes, 163; of tax 
 on nonreproducible goods, 165; 
 of tax on buildings, 166; of tax 
 on monopoly, 170; of tax on 
 competitively produced goods, 
 172; influenced by elasticity of 
 supply and demand, 174; of cus- 
 toms duties, 183; of excise duties, 
 204; of sales tax, 474. 
 
 Short-term obligations, 399. 
 
 Single Tax League, platform of, 366. 
 
 Single tax, proposal for not new, 
 363; on incomes, 364; proposed 
 by Henry George, 364; social 
 claims of, not proved, 370; un- 
 desirable features and difficulties 
 of, 371 ; effect of, on public activi- 
 ties, 372; administrative difficul- 
 
 ties of, 372; modifications of, 373; 
 burden in rural districts, 375; 
 propagation of, 377; campaign in 
 Oregon, 379; in other states, 381; 
 outside the United States, 383; 
 emphasized defects, 385. 
 
 Sinking fund, early use in England, 
 405; in the United States, 406; 
 in cities, 442. 
 
 Situs of property, as base for tax 
 levy, 246; as base for inheritance 
 tax, 327. 
 
 Situs of securities, as base for tax 
 levy, 246. 
 
 Smith, Adam, published Wealth of 
 Nations, 13; classified revenues, 
 76; on postal system, 85; places 
 taxes on shares of income, 104; 
 and faculty theory, 108; can- 
 vass of taxation, 101; on inherit- 
 ance tax, 311; on rents, 364. 
 
 Smuggling, problem of, 185. 
 
 Social, aspects of fees, 128; effects 
 of excise taxes, 207; claims of 
 single tax not proved, 370; ef- 
 fects of public borrowing, 395; 
 point of view has gained in promi- 
 nence, 510. 
 
 Social insurance, 67. 
 
 Sociology, and public finance, 7. 
 
 South Carolina, dispensary system 
 in, 221. 
 
 Southern colonies, tax system in, 149. 
 
 Southern states, property tax in, 233. 
 
 Spain, inheritance tax in, 333. 
 
 Special assessment, defined, 130; 
 and tax, 130; and fee, 130; and 
 special tax, 131; extent of use, 
 131; justice of, 132; in Great 
 Britain, 132. 
 
 Special franchise, in New York, 249; 
 taxation of, in New York, 355. 
 
 Special tax and special assessment, 
 131. 
 
 Specific, defined, 99; objection to, 
 186. 
 
 Specific tax, shifting of on land, 164. 
 
 Staatswirthschaft, 12. 
 
 State equalization board, 259. 
 
532 
 
 OUTLINES OF PUBLIC FINANCE 
 
 State, partnership of, argument for 
 inheritance tax, 316. 
 
 State tax commission, 230 rc; re- 
 ports on property tax, 253; ex- 
 ample of centralization, 275; ac- 
 tivities of, 275; auditing and ac- 
 counting, 275; corporation as- 
 sessments, 276. 
 
 State taxes, 154. 
 
 States, expenditures in European, 
 29; expenditures of, 32; for pro- 
 tection, 55; legislative expendi- 
 tures, 59; for education, 61; for 
 defectives, 67; public land policy, 
 81; revenues of, 93; corporation 
 taxes in, 155; use of income tax, 
 306; use of inheritance tax, 331; 
 indebtedness of, 407; use of bud- 
 get in, 435. 
 
 Steuer, early revenue, 95. 
 
 Stevens, W. S., favors net earnings 
 tax, 349. 
 
 Stoppage at source, 287. 
 
 Stuyvesant, Peter, 149, 231. 
 
 Sumptuary tax, excise duty as, 209. 
 
 Supplementary reading, general list, 
 21. 
 
 Supply, relation to shifting, 160; 
 effect of elastic on shifting, 175; 
 elastic and customs duties, 183. 
 
 Sweden, inheritance tax in, 333. 
 
 Switzerland, increase in expendi- 
 ture, 30; income tax in, 296; in- 
 heritance tax in, 333. 
 
 Tableau oeconomique, 11. 
 
 Taft, President, budget agitation 
 under, 432. 
 
 Tariff, compared with bounty, 69; 
 maximum-minmium, reciprocity, 
 retaliatory, to equalize costs, 
 compensating, 182; early at- 
 tempts to secure in United States, 
 188; of 1779, 190; of 1816, 191; 
 of 1824 and 1828, 192; compro- 
 mise, 193; Walker, 194; of 1857, 
 195; of Civil War, 195; McKin- 
 ley, 196; Gorman-Wilson, 196; 
 
 Dingley, 197; Payne-Aldrich, 
 197; Underwood-Simmons, 197; 
 Fordney emergency, 198; in Eng- 
 land, 199; in France, 200; in Italy 
 and Germany, 200. (See Protec- 
 tive duties and Revenue duties.) 
 
 Tax, definition of, 97; important 
 terms, 98; economic effects of, 
 100; attempts at classification, 
 103; justification and measure- 
 ment of, 106; social aspects of, 
 116; as regulatory measure, 117; 
 and special assessment, 130; lim- 
 itation of, 267; Ohio plan of 
 limitation, 269; upon banks, 356; 
 upon insurance companies, 357; 
 on manufacturing companies, 358. 
 (See kinds of taxes.) 
 
 Tax inquisitor law of Ohio, 262. 
 
 Tax laws, simplification needed, 517. 
 
 Tax limitation, by fixed rate, 267; 
 by limited rate, 268; by limiting 
 expenditures, 268. 
 
 Tax list, defined, 100. 
 
 Tax maps, 260. 
 
 Taxation, and prices, 455; objections 
 to in emergency financiering, 456. 
 
 Taxes and loans in emergency finan- 
 ciering, 460; statistics of, for 
 Great War, 497. 
 
 "Tenths," form of revenue, 140. 
 
 The Elements of Public Finance, 15. 
 
 The Income Tax, 15. 
 
 The Science of Finance, 14. 
 
 The Shifting and Incidence of Taxa- 
 tion, 15. 
 
 The Theory and Practice of Taxation, 
 14. 
 
 Traite de la Science des Finances, 12. 
 
 Transfer of securities, tax on, 361; 
 by Federal government, 362. 
 
 Treasury certificates, issued during 
 Great War, 470. 
 
 Treasury department, organization 
 of, 417; later modifications, 418; 
 integrity of, 419, 431. 
 
 Treatise of Taxes and Contributions, 
 12. 
 
 Turgot, leader of physiocrats, 1 1 , 363 . 
 
INDEX 
 
 533 
 
 U 
 
 Underwood, J. H., on inheritance 
 taxes, 318. 
 
 Underwood-Simmons tariff, 197. 
 
 Unearned decrement, 370. 
 
 Unearned increment, not confined 
 to land, 368. 
 
 Unemployed, problem of, 43. 
 
 Unfunded debt, 399. 
 
 Unfunded income, 116, 281. 
 
 Uniform tax clause, 258. 
 
 Unit of goods, shifting of tax on, 170. 
 
 United States, increase of expendi- 
 tures in, 30, 35; public lands of, 
 78; method of disposition, 79; 
 success of policy, 80; conduct of 
 postal system, 85; fees in, 126; 
 special assessment in, 131; excise 
 tax in, 215; indebtedness of, and 
 national wealth, 410; indebted- 
 ness of, and social income, 411; 
 budget in, 426; daily expenditure 
 for Great War in, 495; expansion 
 of note circulation in, 499. 
 
 Urban, values compared with rural, 
 375. 
 
 Valuation, statistics of property, 
 241; of public utilities, 344. 
 
 Value, relation between a tax on 
 and earnings, 352; social, not 
 confined to land, 368; all land, 
 not unearned, 368. 
 
 Value of service, argument for in- 
 heritance tax, 315. 
 
 Vancouver, single tax in, 384. 
 
 Vauban, early writer, 11. 
 
 Venice, borrowing in, 388. 
 
 Virginia, report of joint committee 
 on taxation, 351. 
 
 Voluntary loans, 400. 
 
 Von Justi, early writer, 12. 
 
 Wagner, writer, 12. 
 
 Walker tariff, 194. 
 
 War, cause of expenditure, 36, 54; 
 best example of emergency, 445; 
 Revolutionary, requisitions un- 
 der, 447; burden upon present 
 production, 447; burden not 
 shifted to future, 452; use of 
 taxes in financing, 454; impor- 
 tance of personal element in 
 financing, 459; money costs of, 
 484; returns from, 485. (See 
 Great War.) 
 
 War Chest, in Germany, 389; use 
 of in Great War, 480. 
 
 War of 1812, use of excise tax, 216; 
 method of financing, 462; cost 
 of, 487. 
 
 War profits, taxed in England, 477. 
 
 Warehouses, under Walker tariff, 
 194. 
 
 Washington, single tax campaign in, 
 381. 
 
 Ways and means, committee on, 
 established, 427. 
 
 Wealth of Nations, 13. 
 
 Webster, definition of income, 279. 
 
 WeUs, D. A., 14, 21; on property 
 tax, 240. 
 
 Western states, property tax in, 234. 
 
 Whigs, and tariff, 194. 
 
 White, Chief Justice, decision on in- 
 come tax, 301. 
 
 Wisconsin, income tax in, 306; re- 
 port on tax commission of, on in- 
 come tax, 307; rejection of gross 
 earning tax, 348; adopts ad va- 
 lorem tax, 351. 
 
 Woolen tariff, 193. 
 
 Woolens, compensating tariffs on, 
 183. 
 
 Woolworth, building, socially cre- 
 ated value in, 370; site, distribu- 
 tion of rental from, 375. 
 
 W Y 
 
 Wade, F. C., on single tax in Can- Young Men's Christian Association, 
 ada, 384. and war costs, 504. 
 
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