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 INTRODUCTION TO PUBLIC FINANCE
 
 THE MACMILLAN COMPANY 
 
 NEW YORK • BOSTON • CHICAGO • DALLAS 
 ATLANTA • SAN FRANCISCO 
 
 MACMILLAN & CO., Limited 
 
 LONDON • BOMBAY • CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN CO. OF CANADA, Ltd, 
 
 TORONTO
 
 INTRODUCTION 
 
 TO 
 
 PUBLIC FINANCE 
 
 BY 
 
 CARL C. PLEHN, Ph.D., LL.D. 
 
 FLOOD PROFESSOR OF FINANCE IN THE UNIVERSITY OF CALIFORNIA 
 
 " Je ti' impose rien ; je ne propose meme rien; j'' expose" 
 
 DUNOYER 
 
 FOURTH EDITION 
 
 THE MACMILLAN COMPANY 
 1 92 1 
 
 All rights reserved
 
 Copyright, 1896, 1909, 1920, 
 By the MACMILLAN COMPANY. 
 
 Set up and electrotyped. Published August, 1896. Reprinted 
 August, 1897. 
 
 Second edition, revised, May, 1900; July, 1902; August, 1904; 
 January, 1906. 
 
 Third edition, published September, 1909; January, December, 
 1911; April, I9T3; June, 1914; July, 1915; July, December, 
 1916. 
 
 Fourth edition, published September, 1920.
 
 r 
 
 I 
 
 I 
 
 
 ^ 
 
 
 PREFACE TO THE FIRST EDITION 
 
 This Introduction to Public Finance is intended to be an 
 ^ elementary text-book. It contains a simple outline of those 
 things which are necessary to prepare the student for inde- 
 pendent research ; a brief discussion of the leading principles 
 * . that are generally accepted ; a statement of unsettled principles 
 "^ with the grounds for controversy ; and sufficient references 
 to easily accessible works and sources to enable the student 
 to form some opinion for himself. The references that are 
 ^ given are not so much for the purpose of sustaining the author's 
 ^ statements, which any advanced student or teacher can easily 
 ^ trace to their sources, as to enable the beginner to add to his 
 information on points that are of necessity briefly treated here. 
 Both the American and the English systems of taxation are 
 badly in need of reform. Public opinion is gradually awakening 
 to this need. Financial questions are widely discussed. There 
 ^ can be no doubt that the most pressing reforms of the close of 
 ^ the nineteenth century are tax reforms. The rapid extension 
 of governmental functions — the invasion by the government 
 of fields of activity that lie near to the welfare of the people — 
 has given rise to great interest in the financial side of these 
 activities. It is hoped that this work may be helpful in the 
 accomplishment of these needed reforms. 
 
 The Introduction to Public Finance can be intelligently 
 studied by any person already familiar with the general prin- 
 ciples of Political Economy. Technical details and wearisome 
 tables of statistics have been avoided wherever possible. Abun- 
 dant references to statistical compilations are, however, given, 
 so that such matters can be readily looked up if wanted. The 
 countries whose financial systems ha\c l^ccn chiefly used to 
 
 V
 
 vi PREFACE TO THE FIRST EDITION 
 
 illustrate principles are England, Germany, France, and the 
 United States ; other countries have been drawn upon only 
 for particularly pertinent examples. A brief but complete 
 history of the financial practices of the four countries named 
 has been given. The countries most extensively studied are 
 England and the United States. Although the book has been 
 written from the point of view of an American, the author 
 ventures the hope that it may not prove* the less useful to 
 English students. 
 
 Carl C. Plehn. 
 Berkeley, Cal., 
 August, 1896.
 
 PREFACE TO THE THIRD EDITION 
 
 In its third edition, this book has been revised throughout, 
 partly rewritten, and considerably enlarged. The statistics 
 and other illustrative data have been brought down to date, 
 and discussions have been introduced of some of the more 
 important of the fiscal questions which have come into promi- 
 nence since the first edition was written. 
 
 By using the book with his classes in Public Finance at the 
 University of Cahfornia, the author discovered many points 
 in which he thought it might be improved. He has, also, 
 gratefully adopted many suggestions kindly offered by his 
 colleagues who have used the book in other colleges and uni- 
 versities. During the period that has elapsed since the pubh- 
 cation of the first edition, the author has had much experience 
 at first hand with the actual administration of public fiscal 
 afifairs. This experience was gained both in his home State, 
 Cahfornia, and in the Philippines. This intimate contact 
 with taxation in the doing and in the making has, on the one 
 hand, modified the author's views, and on the other hand 
 should have aided him in his endeavour to make the book more 
 useful to officers concerned with taxation and to legislators 
 and their advisers. 
 
 In addition to the general revision outlined above, the follow- 
 ing items may be specifically mentioned : the definitions and 
 explanations intended to aid the beginner have been sharpened 
 and clarified, and many new ones have been added ; more 
 space is given to French taxation ; the chapter dealing with 
 the American general property tax has been entirely rewritten 
 from a new point of view and very much enlarged ; the de- 
 scription of that " great engine of the revenue," the British 
 
 vii
 
 Vlli PREFACE TO THE THIRD EDITION 
 
 income tax, has been revised, primarily with a view to making 
 it more easily understood by American readers ; Henry George's 
 " single tax," although still disapproved, is much more sympa- 
 thetically treated ; and inasmuch as the first edition seems 
 to have found quite as many readers in England as in America, 
 the effort has been made in the selection of new material to 
 choose those things which may be of equal interest in both 
 countries. 
 
 Lucerne, Switzerland, 
 August, 1909.
 
 PREFACE TO THE FOURTH EDITION 
 
 The world moves. When I compare the contents of this 
 edition with those of the first edition which was printed in 1896, 
 I am astonished by the extent and number of the changes in 
 pubhc finance which have occurred in the twenty-five years 
 just passed. Although I have lived through them and had 
 a hand in their making still their magnitude surprises me. The 
 additions made to the book in three revisions record only the 
 more momentous changes in governmental finance. But even 
 so the record of new things done, and of new ways of doing 
 things, by government, is impressive indeed. There is ever 
 room for more improvement, but progress has been made. 
 
 The list of changes constitutes in itself a fine record of progress 
 and achievement. In the field of taxation the following pages 
 record as accomplished facts reforms which twenty-five years 
 ago were dreams. In the United States the income tax has 
 come into use, and although it is not yet fully fitted into its 
 place in the fiscal system it is coming to be better understood 
 and highly appreciated. The inheritance tax, which was so 
 unimportant in 1896 as to require only a few pages, is now well- 
 nigh full grown. The old general property tax, which in 1896 
 seemed so hopelessly antiquated as to be beyond reform, has 
 been remodelled, curtailed, and adapted to the conditions of 
 modern life. Its evils have been trimmed away and it will, 
 unless all promises deceive, again occupy an honourable place 
 in the esteem of the fiscal authorities. The improvements in 
 tax administration have been as remarkable as the changes in 
 the fiscal system itself. The business of taxation is attracting 
 fine men and as officers they are making taxation a science. 
 Aljovc all and as paving the way for the better taxes and better 
 
 ix
 
 X PREFACE TO THE FOURTH EDITION 
 
 administration of the old taxes there has come a clearer social 
 judgment on what constitutes justice in taxation. Official 
 commissions and voluntary associations of taxpayers and 
 officials are studying taxation and disseminating knowledge of 
 correct principles. A body of trained and experienced experts 
 in taxation now exists whose wisdom is being freely drawn upon 
 by legislators. 
 
 The burden of taxation is light only when the money raised 
 is well spent. Although the amount of taxes being raised to-day 
 is far larger than in 1896 the burden thereof, except for the 
 financial burden of the war, is less. Governments are doing 
 many new things, most of which are good, and are doing the old 
 things better. Educational facilities are better, more varied, 
 and although more costly, create in each succeeding generation 
 new sources for meeting the cost of the new methods. Prisons 
 have changed or are changing from punitive to curative in- 
 stitutions, and every criminal cured is an economic asset instead 
 of a burden. The same is true of institutions for the care of 
 defectives. The mothers' pension system has greatly increased 
 the chance of making good citizens of the half-orphans. Proper 
 provision for industrial accidents has spread the burden thereof 
 over the many who can carry it easily instead of allowing it to 
 fall with crushing weight on the few. Old age pensions and 
 public servants' pensions are being transformed from doles 
 into rights. We are protected from adulterated foods and to a 
 greater extent than before from epidemic diseases. The term 
 " public highway " has ceased to mean the abstract privilege 
 of passing over a streak of mud, and has a new and concrete 
 ( ! ) meaning. Public utilities are being made more and more 
 public servants. When the world goes to war it does so more 
 efficiently than ever before. In every direction the public 
 money is being more wisely spent and our impatience with the 
 waste of public money, which is greater, than ever, is in itself 
 proof of progress. 
 
 The book has been extensively revised throughout. Many 
 pages of dry theoretical discussion have been omitted to make 
 room for the presentation of the actual taxes whose operation
 
 PREFACE TO THE FOURTH EDITION Xl 
 
 it is hoped demonstrates the theory in a more simple fashion. 
 The discussion of tlie income tax, and of the inheritance tax, has 
 been completely rewritten and given very much more space, 
 as is becoming in view of their present importance. The 
 chapter on the shifting and incidence of taxation, a topic of 
 burning interest, has been entirely recast, simpHfied, and a new 
 and more practical point of view has been introduced. The 
 discussion of public expenditure has been recast to give room 
 first for a statement of the guiding principles and especially 
 for the introduction of the new objects of expenditure. The 
 exemplification of the principles of war f nance afforded by the 
 World War has been examined, and the main features of the war 
 finances of different countries recorded. The new taxes tried 
 and proposed, especially the increment value land taxes, the 
 excess profits taxes, and the capital tax, have been discussed. 
 Recent reforms accomplished and proposed have been con- 
 sidered. Facts and figures have been brought down to date. 
 
 Columbia University in the City of New York, 
 April, 1920.
 
 PAGE 
 
 TABLE OF CONTENTS 
 
 GENERA L CONSIDER A TIONS 
 
 Section i. The meaning of ''Public Finance." 
 
 Sec. 2. An old discipline. Adam Smith's four maxims on taxation. 
 
 Manu's maxim. 
 Sec. 3. The growing importance of public finance. 
 Sec. 4. Divisions of the subject. 
 Sec. 5. The classes of revenues and e.xpenditures. The evolutionary 
 
 tendency to supply all government costs by taxation . . i 
 
 PART I 
 PUBLIC EXPENDITURE 
 
 CHAPTER I 
 
 The Nature of the State and Its Functions 
 
 Section i . Political science sets no definite limits to the extension of 
 State functions. Sec. 2. Public finance finds a limit in the reve- 
 nue-yielding strength of the State. Sec. 3. Public expenditure 
 in early times. Sec. 4. Public expenditure in Greece and Rome. 
 Sec. 5. Feudal expenditure and the beginnings of modern. Sec. 6. 
 Classification of expenditures 11 
 
 CHAPTER II 
 
 The Growth of Public Expenditures 
 
 Section i. The growth of expenditure is rapid. Sec. 2. Government 
 
 business obeys the law of increasing cost 22 
 
 CHAPTER III 
 
 Expenditure Mainly for the Common Benefit 
 
 Section i. Expenditure for general administration. Sec. 2. Ex- 
 penditure for the legislative department. Sec. 3. Expenditure 
 for public buildings. Sec. 4. Expenditure for defence. Sec. 5. 
 Expenditure for means of transportation. Sec. 6. Expenditure 
 for education. Sec. 7. Assistance of private industry and 
 
 commerce 26 
 
 xiii
 
 PAGE 
 
 xi\- TABLE OF CONTENTS 
 
 CHAPTER IV 
 
 Expenditure Mainly for the Benefit of Individuals 
 
 Section i. Expenditure for charities, mothers' pensions, insurance 
 against old age, care of insane and criminal classes, hospitals. 
 Sec. 2. Pensions, civil and military. Sec. 3. Workmen's com- 
 pensation. Skc. 4. Bounties and "protection." Sec. 5. Ex- 
 penditure for the administration of justice. Sec. 6. "Better- 
 ment" of property. Skc. 7. Expenditure in public industries. 
 Sec. 8. Human welfare 4° 
 
 PART II 
 PUBLIC REVENUES 
 
 CHAPTER I 
 
 The Character and Classification of Public Revenues 
 
 Section I. Early forms of revenue. Sec. 2. The growth of constitu- 
 tionalism results in uniformity of the revenue systems of the 
 different countries. Sec. 3. Different States find the same justi- 
 fication of taxation. Sec. 4. Compulsion is universal. Sec. 5. 
 Classification of revenues, definitions of fees, taxes, and rates. 
 Secs. 6 and 7. Further considerations on classification . . 54 
 
 CHAPTER II 
 
 The Various Kinds of Taxes, Fees, and Rates; Definitions 
 
 Section i. The measure of taxation distinguished from the justifica- 
 tion; benefit theory and faculty theory. Sec. 2. Difficulties in 
 the classification of taxes. Sec. 3. Direct and indirect taxes. 
 Sec. 4. Taxes on persons, property, and income. Sec. 5. Other 
 classifications of taxes. Sec. 6. Classification of fees. Sec. 7. 
 Economic revenues. Sec. 8. Definitions of various terms used, 
 tax base, ad valorem and specific, rate, proportioned and ap- 
 portioned taxes, progression and degression, imports, customs, 
 excises, tolls, shifting and incidence, levy, assessment, tax list or 
 roll, also diagrams 64 
 
 CHAPTER in 
 
 The Tax System 
 
 Section I. All nations use many different taxes ; no single tax feasible, 
 the "single tax" of Henry George. Sec. 2. What, in the opinion 
 of nations, constitutes the ideal of correct or just taxation. The
 
 TABLE OF CONTEXTS XV 
 
 PAGE 
 
 benefit theory ; the legal theory in the United States. Sec. 3. The 
 faculty theory; what constitutes faculty. Sec. 4. Other 
 theories and the theor}' of progression ..... 04 
 
 CHAPTER IV 
 
 The Development of Taxation before the Industrial 
 
 Revolution 
 
 Section i. Feudal dues commuted, and voluntary contributions be- 
 come taxes. Sec. 2. Historj' of taxation in France. Sec. 3. His- 
 tory of Crown taxation in England. Sec. 4. History of local 
 taxation in England. Sec. 5. Colonial taxation in America . 99 
 
 CHAPTER V 
 
 The Development of Tax Systems from the Industrial Revo- 
 lution TO the World War 
 
 Section i. The effect of the industrial and political revolutions. 
 Sec. 2. General outline. Sec. 3. Development of taxation in 
 Prussia. Sec. 4. In France. Sec. 5. In England. Sec. 6. In 
 America. Sec. 7. The National Tax Association's model tax 
 system 114 
 
 CHAPTER VI 
 
 Excises 
 
 Section i. Comparison of excises and customs; and direct con- 
 sumption taxes. Sec. 2. Purposes, principles, and kinds of the 
 excises. Sec. 3. Method of assessment. Sec. 4. Typical excises. 
 Sec. 5. Proper field for excises 134 
 
 CHAPTER VII 
 
 Customs Duties 
 
 Sections i and 2. Customs duties defined. Secs. 3 and 4. The pur- 
 poses of customs duties, both fiscal and political. Protective 
 and revenue tariffs. Sec. 5. The protective principle widely ap- 
 plied. Sec. 6. The tax character of protective duties. Sec. 7. 
 Customs duties as a source of revenue, smuggling. Sec. 8. His- 
 tory of customs duties in England. Sec. 9. The German customs 
 union and the imperial tariffs. Sec. 10. History of the French 
 tariff. Sec. II. Tariff history of the United States. The Tariff 
 Commission 144
 
 XVI TABLE OF CONTENTS 
 
 CHAPTER VIII 
 Property Taxes 
 
 Part i. The General Property Tax. With Special Reference 
 to the United States 
 
 PAGE 
 
 Section i. The place of the general property tax in the revenue sys- 
 tem. Sec. 2. The types of the general property tax. The New 
 England type. The Southern tjq^e. The Pacific Coast type. 
 Lines of developments. Sec. 3. The property subject to this tax. 
 Date of assessment. Definitions of "real" and "personal" 
 property. Sec. 4. The property exempt from this tax. Sec. 5. 
 The forms and methods of assessment, and the valuation of the 
 property. Sec. 6. The taxation of mortgages, and of money and 
 credits other than mortgages. Sec. 7. The taxation of corpora- 
 tion franchises. Sec. 8. The objections urged against the general 
 property tax. Sec. 9. The scientific judgment on the general 
 property tax. Recent regeneration of the general property tax . 163 
 
 Part 2. Special Property Taxes 
 
 Sec. 10. The land tax. Sec. 11. Building tax. Sec. 12. The incre- 
 ment value land tax, especially in Great Britain. Sec. 13. Taxa- 
 tion of capital. Sec. 14. Post-war capital levies. Sec. 15. In- 
 heritance tax. The diff^erent kinds : probate, estate, and inherit- 
 ance taxes. The British death duties. Sec. 16. The arguments 
 for and against inheritance taxes. Sec. 17. Rates and classes. 
 Frequency and insurance. Sec. 18. Federal inheritance and 
 estate taxes. An illustration of rates 193 
 
 CHAPTER IX 
 
 Personal Taxes: The Poll Tax and the Income Tax 
 
 Section i. Poll taxes. Kinds of poll taxes. Sec. 2. The personal 
 income tax. Nature of income. Distinction between income 
 and property, or capital. Capital value increments not income. 
 Stock dividends. Annuities. Gross and net income. Sec. 3. 
 Place of income tax in the tax system. Sec. 4. Prussian income 
 tax, a highly personal form of income tax. Sec. 5. British prop- 
 erty and income tax, a partly non-personal form of income tax. 
 The schedules and the rates. The assessment and collection. 
 Sec. 6. The federal income taxes of the United States. The consti- 
 tutional problem and the sixteenth amendment. The Civil War 
 income tax. The income tax of 1894. The income taxes of 1913, 
 1916, and 1918. Defects in the law. Sec. 7. State income taxes 
 in the United States; Wisconsin, Massachusetts, and New York 220
 
 TABLE OF CONTENTS XVU 
 
 CHAPTER X 
 War Profits and Excess Profits Taxes 
 
 PAGE 
 
 Section i. A new tax. Sec. 2. Normal and abnormal profits. 
 Sec. 3. Historical matters. Sec. 4. The excess profits duty of 
 Great Britain. Sec. 5. The war and excess profits tax of the 
 United States. Sec. 6. Judgment on the excess profits tax. Il- 
 lustration of its working. Sec. 7. Effects of an excess profits tax 291 
 
 CHAPTER XI 
 
 The Incidence and Effects of Taxation 
 
 Section I. Definition of shifting, incidence, and effects. Sec. 2. Taxes 
 which it is intended shall be shifted and those not expected to be 
 shifted. Incidence of poll taxes. Sec. 3. Taxes on rent, interest, 
 and profits. Sec. 4. Incidence of a permanent tax on property. 
 Capitalisation and amortisation. Sec. 5. Incidence of American 
 general property tax. Sec. 6. Incidence of a personal income 
 tax. Sec. 7. Incidence of taxes on producers. A popular half- 
 truth about ease of shifting. Sec. 8. The incidence of taxes which 
 alter market conditions. Illustrations : a tax on candy, on milk, 
 on a street railway. Sec. 9. Incidence of a tax on gross sales . 310 
 
 CHAPTER XII 
 
 Fees and Industrial Earnings 
 
 Section i. Connection between fees and industrial earnings ; develop- 
 ment of fees into taxes. Sec. 2. Judicial and legal fees. Sec. 3. 
 Administrative fees. Sec. 4. Special assessments. Sec. 5. Postal 
 fees. Sec. 6. Revenues from public property. Sec. 7. Revenue 
 from public industries 328 
 
 PART III 
 
 PUBLIC INDEBTEDNESS 
 
 CHAPTER I 
 
 The Growth and Nature of Public Credit 
 
 Section I. Size and rapid growth of public debts. Secs. 2 and 3. The 
 nature of credit. Sec. 4. Wherein public credit differs from pri- 
 vate. Sec. 5. Economic effects of public borrowing. Sec. 6. 
 Foreign and domestic loans • 34°
 
 Xvm TABLE OF CONTENTS 
 
 APPENDIX TO CHAPTER I 
 
 PAGE 
 
 Public Debt and the World War, Tables . .351 
 
 CHAPTER II 
 
 Forms of Public Debts 
 
 Section i. Paper money, accounts, claims and warrants, treasury 
 and exchequer bills. Sec. 2. Floating and funded debts. Sec. 3. 
 The kinds of funded debts, bonds, stocks, rentes, annuities, lottery 
 loans. Sec. 4. Should bonds be taxable? Sec. 5. Special pro- 
 visions to enhance credit. Sec. 6. The rate of interest. Sec. 7. 
 Loans for productive enterprises 353 
 
 CHAPTER III 
 
 Negotiation, Payment of Interest, Conversion, and 
 Redemption of Debts 
 
 Section i. Two chief methods of negotiating public loans. Sec. 2. 
 Place of payment of interest, and other minor considerations. 
 Sec. 3. Conversion of the debt. Sec. 4. Debt payment and 
 the sinking fund in England. Sec. 5. Debt payment and the 
 sinking fund in America. Sec. 6. Summary .... 366 
 
 PART IV 
 
 FIN AN CI A L A DMINISTRA TION 
 
 CHAPTER I 
 
 The Budget; Administration of Expenditure; Control and 
 
 Audit 
 
 Section i. Importance of sound methods of administration. Sec. 2. 
 History of fiscal administration. Sec. 3. The budget in England, 
 and appropriations in the United States. Sec. 4. English con- 
 trol and audit. Sec. 5. Control and audit in the United States. 
 Sec. 6. The recent budget movement in the United States . . 376 
 
 CHAPTER II 
 
 Collection of the Revenues ; Custody of the Funds; and 
 THE Public Accounts 
 
 Section I. Early methods of collecting revenues. Sec. 2. Collection 
 of customs duties and excises, j^ Sec. 3. Assessment of direct
 
 TABLE OF CONTENTS Xlx 
 
 PAGE 
 
 taxes, "declaration," and equalisation. Sec. 4. Convenience of 
 the contributor must be consulted in the collection of taxes. 
 Sec. 5. Transfer of the public funds and custody of the public 
 moneys. Sec. 6. Public accounts in England and America. 
 Sec. 7. " Funds of account " 387 
 
 CHAPTER III 
 
 Financial Administration of War 
 
 Section i. The "extra-ordinary" expenses. Sec. 2. Increased rates 
 for old taxes. Sec. 3. New taxes. Sec. 4. The use of credit in 
 time of war. Sec. 5. Can war be financed by taxation without 
 loans? Inflation. Sec. 6. Proportion of taxes to loans in war 
 finances. Theories of different countries. Sec. 7. The basis of 
 credit in war times. Popular loans. Sec. 8. Aggregate war costs 
 1914-1919. Sec. 9. English war finance 1914-1919. Sec. 10. 
 French war finance 1914-1919. Sec. ii. German war finance 
 1914-1919. Sec. 12. United States war finance 1917-1919. 
 Sec. 13. Post-war finance. Sec. 14. United States war finance 
 in the Spanish war ......... 396 
 
 Brief Bibliography for Supplemental Reading , . . 435 
 Index 439
 
 INTRODUCTION TO PUBLIC 
 
 FINANCE 
 
 GENERAL CONSIDERATIONS 
 
 Section i. Finance and Public Finance Defined. — Public 
 finance deals with the raising and spending of government 
 funds. A government needs money in much the same way as 
 an individual does. But a government gets its money mostly 
 by taxation, which is a power an individual may not exercise ; 
 and a government spends money primarily for the good of 
 society — for the all of us — while an individual usually spends 
 on himself and on his near of kin. 
 
 Finance is a broad term covering all matters relating to 
 money and especially to monetary transactions. Thus we 
 have bank finance, corporation finance, trust finance, private 
 finance, individual finance, " high finance," and public or 
 government finance. The term financier calls to mind bankers, 
 syndicates, brokers, promoters, and other dealers in money 
 and in credit, as well as Chancellors of the Exchequer and 
 Secretaries of the Treasury. The common element is that they 
 all deal with the funds or means of payment. Any transaction 
 interpreted, measured, or recorded in money is a financial trans- 
 action. While the government may coin money and transact 
 a banking business, such activities are not customarily included 
 in Public Finance. That term has come, by accepted usage, 
 to be confined to a study of funds raised by governments to 
 meet the costs of government. 
 
 Sec. 2. Age of Public Finance. — ^ The science of public 
 finance, meaning therel)y the orderly study and arrangement 
 of the facts and principles belonging to this field of knowledge, 
 
 B I
 
 2 INTRODUCTION TO PUBLIC FINANCE 
 
 is old. The discipline as we now have it began with a group 
 of advisors (or with the teachings of such advisors) to the ruling 
 kings and princes of the various kingdoms, mostly in central 
 Europe, which were formed toward the end of the Middle Ages. 
 These writers were called the cameralists. The term camera 
 meant chamber or cabinet, and a cameralist, strictly speaking, 
 was one who was a member of the king's cabinet. Hence by 
 metonymy a cameraHst was one who dealt with, studied, and 
 wrote about the duties and business of the king's cabinet 
 officers, among which, naturally, matters financial were of the 
 first importance. The demand for cabinet ofiicers and the 
 presence of many persons who were ambitious to become such 
 afforded an opportunity for teachers of, and writers on, the 
 cameralistic science or sciences. Hence a considerable number 
 of such teachers arose, some of whom enjoyed high repute, and 
 deservedly. They have been regarded as the forerunners of 
 the poKtical economists, and so, in a sense, public finance, 
 which formed the greater part of their studies, is older than our 
 modern science of economics, with which it is now so closely 
 associated and so generally held to be a part. 
 
 In the days of the camerahsts taxation was not very fully 
 developed and much of the revenue which supported the rulers 
 and their governments was derived from the royal or princely 
 domains consisting of cultivated lands, rented to tenants or 
 peasants, or directly administered, of forests and of mines; 
 and from dues, rents, fees, and other charges not of the nature 
 of taxes. So the studies of the cameralists had to do with 
 many forms of revenue which have now disappeared or shrunk 
 in importance as public revenues. They, however, did not 
 neglect taxes, which were then steadily rising in importance. 
 
 Adam Smith on Public Finance. — Adam Smith embodied 
 in his Wealth of Nations (1776) a full discussion " of the Reve- 
 nue of the Sovereign or Commonwealth," covering first the 
 " Expences " and then the revenues, and as to the last devoted 
 by far the greater part of his attention to taxes. That he 
 could relegate the discussion of pubHc revenues other than 
 from taxes to a bare dozen of pages and take four times that
 
 GENERAL CONSIDEIL\TIONS 3 
 
 space for taxes shows the change that had taken place since 
 the days of the cameraUsts. Moreover, Adam Smith devoted 
 a long chapter to the Public Debts, thus recording the begin- 
 nings of an important, then new, phase of public finance. 
 Public debts came in with the rise of constitutional govern- 
 ment. In the days of the cameralists it was the ruler, not the 
 commonwealth, whose credit formed the basis of any public 
 borrowing. 
 
 Adam Smith's treatment of pubhc finance and his views on 
 taxation in particular influenced greatly the course of legislation 
 and the trend of thought on finance for many a decade after 
 the publication of his book, and is still potent. As a sample 
 of the character of his work, as well as because of their pre- 
 eminent significance, we may present his famous canons of 
 taxation here despite the fact that they logically belong in 
 another place. They are commonly called canons although 
 Smith called them maxims. The following is an abridgment 
 of the canons. The full text is to be found in The Wealth 
 of Nations, Book V, Chapter II, Part II. 
 
 Adam Smith's Four Maxims with Regard to Taxes in 
 
 General 
 
 Equality. — " I. The subjects of every state ought to con- 
 tribute towards the support 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." By " revenue " he means: rent, 
 profits, and wages, which he calls " the three different sources 
 of private revenue." 
 
 Certainty. — " II. The tax which each individual is bound 
 to pay ought to be certain, and not arbitrary. The time of 
 payment, the manner of payment, the quantity to be paid, 
 ought all to be clear and plain to the contributor, and to every 
 other person." 
 
 Convenience. — " III. Every tax ought to be levied at the 
 time or in the manner in which it is most hkely to be convenient 
 for the contributor to pay it."
 
 4 INTRODUCTION TO PUBLIC FINANCE 
 
 Economy. — ■ " IV. Every tax ought to be so contrived as 
 both to take out and to keep out of the pockets of the people 
 as httle as possible, over and above what it brings into the public 
 treasury of the state." 
 
 We also insert here, so that it may come early to the reader's 
 attention and remain ever in his mind as he proceeds, a still 
 greater maxim written three thousand years or more before 
 the days of Adam Smith, by Manu the Indian sage and law- 
 giver (between 1200 and 1500 B.C.). Manu, it should be 
 explained, held that taxes should not be levied on the capital 
 but on the income of the taxpayers, because otherwise taxation 
 would check the productive use of capital and lessen production. 
 
 Manu's Maxim 
 
 Progression. — "Of the unequal partition of taxes the 
 necessary consequence is a greater quantity of suffering than 
 the same amount of taxes would produce, if more equally 
 imposed, because the pain of the man who pays too much is 
 out of all proportion greater than the pleasure of the man who 
 pays too Httle. To make the burden of taxes equal, it should 
 be made to press with equal severity upon every individual. 
 This is not effected by a mere numerical proportion. The man 
 who is taxed to the amount of one-tenth, and still more, the 
 man who is taxed to the amount of one-fifth or one-half of an 
 income of 100 rupees per annum, is taxed far more severely 
 than the man who is taxed an equal proportion of an income 
 of 1000 rupees, and to a prodigious bigness more severely than 
 the man who is taxed an equal proportion of 10,000 rupees per 
 annum." ^ 
 
 Financial Studies Down to 1892. — Since the time of Adam 
 Smith writings on Public Finance have grown in volume. ^ In 
 Germany there were many systematic treatises covering the 
 whole field, public expenditures, public revenues of all kinds 
 including taxation, public debts, and financial administration 
 
 1 Burnell and Hopkins, Lectures on the Laws of Manu, p. 394. 
 
 2 An excellent brief account of this literature appears in Bullock, Selected Read- 
 ings in Economics, Chapter I.
 
 GENERAL CONSIDEIL\TIONS 5 
 
 including the budget. Rau, Wagner, Roscher, Cohn, and 
 Eheberg are among those who pubUshed systematic treatises. 
 Schonberg's Handbuch, a collection of important monographs, 
 has a volume entirely devoted to the discussion of financial 
 legislation. In France and England many writers have studied 
 taxation, notably : de Parieu, Paul Leroy BeauHeu, Leon Say, 
 Ricardo, M'Culloch, and other economists. But the first 
 systematic treatise on the whole field in Enghsh was Bastable's 
 Public Finance, first edition, 1892. 
 
 Sec. 3. Government Expansion. — Financial problems are 
 becoming ever more important, because the functions of govern- 
 ment have grown in importance and in number. Our indus- 
 trial, commercial, and social organisation has become more 
 and more complex, and one consequence thereof is that it 
 requires better and more government organisation to keep it 
 running smoothly. The more government there is the more 
 it costs. The more dense population becomes the more vital 
 and numerous are the activities of government. Traffic pohce 
 are not needed at country crossroads but in the great cities 
 they are indispensable. Government cost rises per capita from 
 year to year and generally speaking is highest where progress 
 is most marked. Whether we look with favor or with mis- 
 giving on the constant expansion of government activities the 
 fact remains that there is a constant expansion and conse- 
 quently ever greater financial problems. 
 
 Recent Literature. — • Possibly these facts explain the great 
 recent increase in the interest taken in pubhc finance which 
 finds a record in publications. In the United States we have 
 many writers, either of books or of essays, among whom 
 are H. C. Adams, T. S. Adams, Bullock, Daniels, Dewey, Haig, 
 Hollander, and Seligman, not to mention a multitude of others 
 whose interest in systematic public finance is great but possibly 
 secondary to some other interest. Notable, also, are the official 
 reports of tax commissioners and other financial public officers. 
 Of great importance are the pubhcations of voluntary associa- 
 tions of taxation students and taxing officials. The pub- 
 lished proceedings of the National Tax Association begun in
 
 6 INTRODUCTION TO PUBLIC FINANCE 
 
 1897 contain a large amount of interesting and valuable 
 material. 
 
 In England intensive study has been devoted to the theory 
 of taxation, and notable results have been achieved by mathe- 
 matical methods of analysis to which Marshall, Edgeworth, 
 and others have contributed. There are also EngHsh scholars 
 whose work is descriptive and analytical of existing taxes, like 
 Wilson and Goschen, while the monumental work by Stamp 
 on British Incomes and Property requires special mention. 
 
 It would take too much space to list the legal treatises on 
 taxation in any detail. But Cooley and Judson should be 
 named as perhaps the leading American jurists to discuss 
 taxation. 
 
 Sec. 4. Divisions of the Subject, Policy. — The subject 
 falls naturally into four parts : (i) public expenditures, (2) pub- 
 lic revenue, (3) public debts, (4) financial administration. 
 
 Writers on pubHc finance have hesitated to pass judgment on 
 questions of policy as to what should be done or left undone by 
 government. Such questions as the wisdom of embarking 
 upon a system of governmental old age pensions, the wisdom 
 of compulsory education, or of government operation of rail- 
 roads, are not purely financial questions. They are questions 
 largely for the statesman to determine and for students of 
 political science or government to discuss. Our attitude on 
 the question of prohibition of the sale of intoxicating liquors 
 cannot be determined solely by consideration of the taxes lost. 
 But once a policy has been determined upon and a new activity 
 sanctioned then the cost and the best way of meeting that cost 
 become questions of finance. In this sense Public Finance is 
 a science dependent on other sciences, on economics, and on the 
 science of government. 
 
 It is sometimes said that a government decides first what it 
 will spend and then raises the money. This is sometimes taken 
 to mean that a government regulates its income by its expen- 
 ditures, a plan which it would not, ordinarily, be wise for an 
 individual to attempt to follow. This statement can easily 
 be taken to mean too much. In war time the first thought is,
 
 GENERrVL CONSIDERATIONS 7 
 
 of course, what must be clone, and only afterward is the question 
 raised : What will it cost and how shall we raise the money ? 
 But in ordinary times the cost of any proposed new or expanded 
 activity is weighed against the advantages. The germ of 
 truth in the statement is that public revenues and taxes can be 
 determined somewhat at will and are not limited as individual 
 incomes often are by conditions beyond control. It is, within 
 limits, practically true that legislative bodies often decide first 
 what they would like to do and then consider whether the 
 taxpayers will be complacent with the added burden of taxes. 
 But the resistance of the taxpayer is potent to restrain in many 
 cases. 
 
 It is not always true that where the largest taxes, large, that 
 is, per capita or even in proportion to wealth, are levied the 
 burden of taxation is greatest. If the money is wisely spent 
 by the government the tax burden may be light, even though 
 the expenditures are large. But the burden of taxes misspent 
 by bad government is always heavy and as hard to bear as 
 would be tribute levied by a conquering enemy. Good order, 
 good schools, good roads, and many other results of good 
 government produce the sources from which taxes can be drawn. 
 
 Sec. 5. The Classification of Expenses and Revenues. — To 
 the matter of classification, in particular of public charges, 
 writers on public finance have directed much attention. A good 
 classification is helpful in seeing the relations of things. In the 
 present work the classification used is that suggested by Pro- 
 fessor Cohn for all public charges, and afterwards developed 
 in a somewhat different way by Professor Seligman.' The 
 charges made by the government upon individuals are regarded 
 as varying in character according as the special benefit conferred 
 upon the individual is made the exact or the partial measure of, 
 or is not allowed to affect at all, the burden imposed upon him. 
 
 ' Cohn, Finanswissenschajt, pp. 104-118, esp. pp. 117, 118. Sclip^man, Quarterly 
 Journal of F.conomics, May, i8g2 and i8g5. Essays in Taxation, Chap. IX. Hints 
 of the same classifications are found in Malchus and Hoffman. See, also, Tlehn, 
 Classification in Tulilic Finance, Pol. Sci. Quar., Marcii, 1897, and Nicholson, 
 Principles of Political Economy, Vol. II, Bk. VI, Chap. IX. Especially important 
 and illuminating is the "Appendix," beginning on page 146 in Bastable's 3d edition.
 
 8 INTRODUCTION TO PUBLIC FINANCE 
 
 The nature of this classification may be illustrated by reference 
 to the well-known customs of large athletic clubs. For member- 
 ship, and the usual privileges of the club, each member is assessed 
 the same sum, irrespective of the actual extent to which he uses 
 the club, and without reference to his ability to pay, that being 
 assumed, for this purpose, to be equal to that of every other 
 member, and certainly without reference to any known ability 
 to pay more. This fee is justified by the common benefit 
 conferred. If, however, the member makes use of the dining- 
 room, or asks for special privileges, such as the private use of 
 the club quarters, grounds, boats, appliances, etc., he pays an 
 additional sum, measured, generally speaking, by the special 
 benefit conferred upon him. Again, if the club is in debt, or 
 proposes to enlarge its facilities, not infrequently a subscription 
 paper is passed around and each member is urged to contribute, 
 not the same amount all others have subscribed, nor yet in 
 proportion to the use he makes of the club, but " as much as he 
 is able." And lastly, there are not infrequently cases where 
 poor but promising athletes have been admitted, in order that 
 the club may have the glory of their prowess, and have been 
 excused from dues. 
 
 Now there is an analogy between such a club and the State 
 in respect to the contributions demanded, the benefits conferred, 
 and the method of operation. Generally speaking, the State 
 endeavours, in collecting revenues, to impose an equal ^ burden 
 upon all for the support of those functions that are regarded 
 as conferring a common benefit, and a special burden for the 
 support of those activities which confer a special benefit, and 
 under certain circumstances to increase the burden imposed 
 upon the very wealthy, who are regarded as able to bear more ; 
 and lastly, to tax all for the support of the poor. Not that the 
 State always succeeds in its endeavour, nor that all States 
 recognise equally the desirability of the attempt ; for in pubHc 
 finance expediency necessarily plays a large part. But most 
 States have come to recognise more or less clearly these ideals, 
 and their policy can be conveniently summarised in this way. 
 
 1 What is meant by "equal" will be discussed later.
 
 GENEK^L CONSIDER.\TIONS 9 
 
 Common and Special Benefits. — The various activities of 
 the State can be easily classified, according to the degree of 
 common or special benefit they are supposed, by the lawmakers, 
 to confer upon the citizens, or taxpayers. The various groups 
 may blend or shade into one another at their margins, but 
 those activities belonging to the centre of each group are easily 
 recognisable and are fundamentally different in each. Thus, 
 it is universally admitted that the functions of the general 
 administrative and legislative departments are of such a char- 
 acter as to give a common benefit, for which, ideally, every one 
 should pay according to some scheme of supposed equality. 
 But at the other extreme there are many things done by the 
 State which confer so special a benefit as to justify a special 
 charge. For example, when the State carries a passenger or 
 a box of freight over its railroad, or carries a letter, or provides 
 the citizens with china or tobacco, it confers a special benefit. 
 Between these two extremes there are any number of grades, 
 according as the predominant thought is that of common or 
 special benefit, when both ideas are present. But there is one 
 more consideration that must be introduced. There are a 
 certain number of State activities which it is in the interest of 
 the whole to have performed, but which accrue to the special 
 benefit of certain classes, who on account of poverty are unable 
 to pay for that benefit; and if the State is to perform these 
 functions, it must call upon the other classes for assistance, 
 excusing the poorer. Theoretically, the support of the poor 
 and defective classes is an activity conferring a common benefit 
 upon all the other members of society, and hence they are called 
 upon to contribute accordingly. If we consider it the moral 
 duty of society as a whole to help the weak, then the relief of 
 the poor confers a common benefit. It is the same if we look 
 upon poor relief from a less altruistic point of view, and con- 
 sider that society is merely protecting its own interest, as, for 
 example, in isolating the feeble-minded, so that they shall not 
 propagate their weakness. Without going into details which 
 will receive attention later in the book, it is now clear that this 
 conce;)tion provides a feasible way of classifying puljlic acti\i'ties
 
 10 INTRODUCTION TO PUBLIC FINANCE 
 
 and public revenues. It is a classification, which will, we be- 
 lieve, help us to get at the economic features of expenditures and 
 reveal the justification of taxation. 
 
 It must not be understood that the assignment of any activity 
 to a particular group is permanent. Activities that were once 
 regarded as conferring special benefit — as, for example, a large 
 part of the administration of justice — come in time to be 
 regarded as of common benefit. Such changes sometimes 
 proceed with rapidity, and the stages are not passed through 
 synchronously by all States. There are, for example, many 
 cities which let private individuals provide the water supply. 
 Others provide it themselves, on precisely the same terms as 
 individuals would, while others provide it much as they do other 
 special privileges, regarded as conferring both special and 
 common benefits; and very probably the time is near when 
 some large cities will regard it quite as much a matter of common 
 benefit to provide each and every citizen with at least a certain 
 amount of water, paying the cost out of funds derived from the 
 general taxes, as they now regard it a matter of common benefit 
 to dispose of the sewage, a function which was once considered 
 the duty of each citizen, and is still so regarded in some cities. 
 But however mutable our classes may be, they are clearly dis- 
 cernible, and it is generally only by slow degrees that functions 
 move from one end to the other of the systematic grouping. 
 
 While there seem to be general tendencies, which transfer all 
 activities from the special benefit to the common benefit plan, 
 there are a few exceptional cases where the movement is the 
 other way. The support of religion is such an instance. Origi- 
 nally almost the sole object of State expenditure, this has now, 
 after passing through various ups and downs, come to be re- 
 garded as of such special benefit that it is being gradually 
 excluded from the sphere of the State, and left to private support.
 
 PART I 
 
 PUBLIC EXPENDITURE 
 
 CHAPTER I 
 THE NATURE OF THE STATE AND ITS FUNCTIONS 
 
 Section i. The State an Organism. — The State is the 
 centre of public finance. The State requires money and services 
 for the performance of its functions. The first question is, What 
 is the nature of the State, and what are its functions? To 
 answer this we shall have to borrow a little from political science. 
 The best authorities on political science seem to answer the 
 question, " What is the State? " with a more or less expanded 
 but not essentially modified restatement of Aristotle's famous 
 dictum : " It is manifest that the State is one of the things that 
 exist by nature, and that man is by nature a political animal." 
 The State is an organism into which the individual is born, and 
 through which alone he can hope to reach his highest develop- 
 ment. Upon its existence, and the perfection with which it 
 performs its functions, depends the degree of social organisation 
 possible. The State seems to be God-given to enable society 
 to organise on a grand scale for the accomplishment of practical 
 ends far beyond the reach of the individual, — ends upon which 
 the welfare of the individual depends.' 
 
 Individualism and Socialism Reconcilable. — The two oppos- 
 ing theories as to the proper sphere of the State, Individualism 
 and Socialism, stand for two grand truths. The one for the 
 truth that the individual, if he is to accomplish his manifest 
 destiny, must be allowed and assured room enough for the free 
 
 ^ Cf. Kidd, Social Evolution; for detailed analysis of the nature of important 
 modem States see Burgess, Political Science and Comparative Constitutional Law. 
 
 II
 
 12 INTRODUCTION TO PUBLIC FINANCE 
 
 exercise of his powers so as to develop them, and to expand. 
 Such individual development is necessary for the advance of 
 society. The second is that the State affords the individual 
 the surest means of obtaining the assistance of his fellows, so 
 necessary to his own complete manhood. The way of recon- 
 ciling these two theories is pointed out in the Christian doctrine 
 that true freedom consists in perfect obedience to the law. 
 Anything short of perfect obedience to the highest law is failure 
 to attain the highest freedom. 
 
 The constant intrusion of the State on fields of activity 
 previously given to the individual is a natural result of the con- 
 stant increase in the separation of employments, necessitating 
 more extensive organisation. As the individual becomes more 
 and more dependent for the completeness of his own life on his 
 fellows and their faithful performance of the duties assigned 
 to them, the organisation of the State becomes correspondingly 
 more perfect. As regards this increasing importance of or- 
 ganisation, the following will fairly summarise the practice of 
 advanced nations. It is impossible to approve on a priori 
 grounds of every intrusion of the State into fields hitherto set 
 aside for the individual. Only when such intrusion does not 
 lessen individual power, energy, ambition, and ability to ad- 
 vance, is it permitted. And only when it promises definitely 
 to increase the importance of the individual, in the long run, is it 
 desirable. The burden of proof is, therefore, in each concrete 
 case thrown upon the persons who would have the State ad- 
 vance into new fields. There is no absolute limit to, but only 
 a general presumption against, the assumption of new functions 
 by the State. 
 
 Sec. 2. The Limit of State Expansion. — If political science 
 cannot in the nature of things give us any definite, theoretical 
 limits to the expansion or the contraction of State functions, 
 can such limits be found in public finance? If the common 
 statement that " the State regulates its income by its expendi- 
 ture and not its expenditure by its income " is altogether true, 
 there can be no limit set by public finance to the possible ex- 
 pansion of State functions. But there are, as a matter of fact,
 
 THE NATURE OF THE STATE AND ITS FUNCTIONS 13 
 
 many important exceptions recognised.^ Those exceptions are : 
 (i) that statesmen in deciding as to the advisability of any 
 new expenditure necessarily consider the amount of burden it 
 will impose on the taxpayers. The expansion of municipal 
 activities in the last twenty-five years has been so rapid that 
 at present any further expansion is, in many instances, at least 
 temporarily checked by the difficulties in the way of meeting 
 the cost. (2) There are some instances where for political 
 reasons income has outrun what was regarded as wise expendi- 
 ture, and new ways of spending have had to be devised. This 
 is a decidedly more unfortunate state of affairs than the other, 
 for such forced expenditure seldom takes a wise direction. 
 Witness the wholesale plundering of the United States treasury 
 for pensions. (3) Expenditures may sometimes rise very 
 rapidly, and necessarily so, at a time when it would be extremely 
 unwise to attempt to increase the revenues. At such times the 
 practice of nations — a practice that has proven itself wise 
 — has been to let expenditure run beyond the income and borrow 
 the difference. 
 
 One of the prime requisites of a good system of public revenues 
 is that the sums taken from the people each year in the various 
 ways shall be as steady as possible. The reason for this will 
 be made clear under the general consideration of revenue. That 
 fact, however, forbids our determining the annual revenues 
 absolutely by the annual expenditures. The general practice 
 of nations is to increase expenditure, (a) when it is absolutely 
 necessary, {b) if not absolutely necessary, when it offers advan- 
 tages which more than compensate for the increased burden 
 on the revenues. The experience of nations has also shown, 
 that it is universally better to do the public business, if expenses 
 are increasing rapidly, on a deficit rather than on a surplus. 
 If expenses are for a considerable period quite uniform, the 
 usual policy is to keep the revenues, as nearly as possible, equal 
 to them, but not in excess of them, and when expenses can for 
 some reason be lessened, some of the revenues may be applied 
 to the amortisation of accumulated deficits. It would seem, 
 ■Cf. Bastable, p. 42; Wagner, I, sec. 11.
 
 14 INTRODUCTION TO PUBLIC FINANCE 
 
 then, that steadiness of revenue is treated as the more important 
 consideration. Herein hes a Hmit, but not an absolutely fixed 
 one, to the expansion of expenditure and of State functions. 
 
 To sum up : the general character of public expenditure, 
 especially as to whether imperative or not, as well as to its 
 particular direction, will depend primarily upon considerations 
 which belong to political science. Its amount will depend on 
 the revenue-yielding strength of the State, and upon the effect 
 which such expenditure will have thereon. The danger made 
 so much of by some writers ^ lest, revenues being obtainable by 
 compulsion, that compulsion be exercised for the benefit of 
 interested persons, who gain particularly by the increased 
 spending, is in a democracy replaced by the corresponding 
 danger lest too meagre supplies be granted by the voters who 
 must themselves pay the larger part of the revenues, and ad- 
 visable or even necessary lines of expenditure be omitted or 
 seriously curtailed. 
 
 Sec. 3. Public Expenditure in Early Times. — ■ Expendi- 
 ture, like every other feature of public finance, changed radically 
 in character and direction during the eighteenth century. 
 Therefore, before proceeding to analyse present expenditure, 
 we shall do well to take a brief survey of expenditure before 
 that century. In the early stages of State life the forms of prop- 
 erty were few, public life was identified with the family and with 
 religious life. There was little call for definite public expendi- 
 ture. The chief item was for religious observances, and for 
 these purposes only was there a distinct public treasury. Foun- 
 dations for the support of religious observances, as seen in Greece 
 and Rome, are extremely old. The temples have their own 
 groves, lands, mines, and flocks, receive contributions, and 
 collect payments for their services. Materials for the study 
 of this period are scant. Services of a public character are 
 performed by all citizens as a matter of course. In war they 
 are the warriors ; they furnish their own arms. Their reward 
 is in the success of their enterprise. By mutual effort, or by 
 the slave labour of conquered peoples, they build their fortress- 
 
 1 Roscher, sec. 109.
 
 THE NATURE OF THE STATE AND ITS FUNCTIONS 15 
 
 cities, ships, roads, and temples. The simplicity of economic 
 life and the absence of a money economy forbid the rise of any 
 proper S}-stem of public revenues. Taxes are levied on con- 
 quered peoples, but the free citizen is usually exempt. There 
 is practically no division of labour in State matters which 
 would call for a paid public service. Greece and Rome emerge 
 from these primitive forms with a more compUcated system of 
 expenditure, but with relatively little advance in revenues. 
 
 Sec. 4. Athenian Expenditure. — In Athens we find a 
 highly developed system of expenditures, almost communistic 
 in character, and greater than that of other nations of Greece 
 on account of the sources upon which the city treasury might 
 draw and the peculiar circumstances in which the city was 
 placed.^ The expenditure for public buildings and public 
 works was particularly large, as were the extravagances of 
 public festivals and sacrifices, of donations to the people, com- 
 pensations for attending the assemblies, and the like. Peculiar 
 to Athens, among all the nations of that era, was the assistance 
 rendered at the public expense to the poor and especially to 
 the children of those fallen in war. Regular expenditures are 
 said to have varied from 400 to 1000 talents, or from $410,400 
 to $1,026,000. Extraordinary expenses in time of war were 
 relatively small on account of the rendition of voluntary ser- 
 vices by the citizens. 
 
 Expenditure in Rome. — In Rome there was no distinct 
 public budget in the earlier days of the republic.^ The public 
 wealth was not distinct from the private wealth of the citizens. 
 With the increase of the provinces and the receipt of tribute 
 from them came regular methods of public expenditure. The 
 items directly borne by the State were the cost of the priest- 
 hood, of buildings and other structures and roads, of the army, 
 of the general administration, and of the distributions of food, 
 of grain for the city population, and donations of money, oil, 
 and wine. The army was first paid in 406 B.C. But for a 
 
 ' The outline in the text is necessarily very brief ; for a longer account see Boeckh, 
 The Public Economy of the Athenians. 
 
 *See Marquardt, ROmische Staalsverwallung, Bd. II.
 
 l6 INTRODUCTION TO PUBLIC FINANCE 
 
 long time afterward the remuneration amounted to little more 
 than the reimbursement of expenses. At first the Emperor was 
 supposed to live from his own private property, but as he had 
 control of all the public revenues, the distinction was difficult 
 to maintain. The later courts were extremely extravagant. 
 
 Greek, and especially Roman, expenditure had many fea- 
 tures similar to modern expenditure. In classic civilisation, 
 division of labour was sufficiently developed to render possible 
 the payment of those who devoted all their time and energy 
 to public affairs. But continuity of development is lacking. 
 From the fall of Rome to the rise of feudalism there is a rever- 
 sion to the earlier forms of public life. Public expenditure is 
 not separable from private. The citizen serves the State with- 
 out remuneration, and there are no public expenses proper. 
 
 Sec. 5. Feudal Expenditure. — It is the essence of feudalism 
 that all governmental functions are placed in the hands of 
 officials who are given the possession of lands which yield the 
 necessary revenues for the execution of those duties. At the 
 same time the relation between these rulers and the people is 
 such that services can be commanded for public purposes with- 
 out distinct remuneration. The undeveloped condition of com- 
 merce and industry necessitates that public contributions shall 
 be in products and in services. The chief duties of a public 
 character that are performed by these semi-public officials are 
 the organisation and leadership of military operations and the 
 crude administration of justice. Of the administrative func- 
 tions in our modern sense there are scarcely any. The public 
 funds are so entirely under the control of the prince that he 
 comes to regard them as his own. At the same time the various 
 subordinate lords, who were originally officers of the crown and 
 who received lands for the purpose of supporting them in their 
 offices, succeed in retaining possession of the lands and other 
 rights and privileges, although neglecting the duties for which 
 they were given. As the monarchical State emerges from 
 feudalism there is the same complete identification of the public 
 purse with the private purse of the monarch as there was of the 
 State with the person of the monarch. And this, too, although
 
 THE NATURE OF THE STATE AND ITS FUNXTIONS 17 
 
 a good share of the revenues are now derived from taxation. 
 Expenditure is for the gratification of the prince, and so far as 
 he sees that his interest is the same as that of his people he 
 spends for them. 
 
 Expenditures under Constitutional Government. — The ad- 
 vance of constitutional forms of government is everywhere 
 characterised by successful attempts on the part of the repre- 
 sentatives of the people, or of those who contribute to the 
 public purse, to get control of the finances. Constitutionalism 
 advances just as fast as it succeeds in these attempts. At 
 present the control of the purse is entirely in the hands of the 
 constitutional legislative bodies in almost all civilised countries, 
 and the domains of the prince, which were originally given him 
 by the people in order that he might be supported in proper 
 dignity in the performance of his public duties, and were then 
 diverted by him to his private enjoyment, have been regained 
 in many cases by those who gave them, and are in most States 
 once more public property. The expenditure for the support 
 of the crown now becomes one of the chief items on the civil 
 list. The final establishment of constitutional government has 
 introduced a new criterion for judging public expenditure. An 
 expenditure is no longer a justifiable one when it gratifies the 
 whim of the ruler of the governing body, but it must result in 
 some clear benefit to the people as a whole, or to the nation, or 
 in a benefit that is so regarded ; otherwise it will not continu- 
 ously meet with the popular approval which is now necessary 
 to sanction every governmental action. 
 
 Sec. 6. Necessary, Desirable, or Superfluous Expendi- 
 tures. — Many attempts have been made to classify public 
 expenditures, and often with good results. The most common 
 are those which follow, more or less closely, the usual economic 
 analysis of private expenditure, according as the wants satisfied 
 are necessary, desirable, or superfluous. The use of economic 
 terms in this way is to be commended, but as in economics, so 
 here, the vagueness and relativity of these terms are very un- 
 satisfactory. Different writers do not agree as to what are 
 necessaries, even for the same State. After all, the assignment
 
 l8 INTRODUCTION TO PUBLIC FINANCE 
 
 of any particular expenditure to one or the other of these cate- 
 gories is merely the expression of the author's individual judg- 
 ment on the expenditure in question.' Professor Bastable, 
 realising this difi&culty, proposes a classification based on the 
 order of historical rise of the different functions, or perhaps it 
 would more nearly reproduce his thought to say that he tries to 
 establish historically a sort of natural evolution or sequence of 
 public expenditures. Such a classification is useful, for the 
 purpose of historical treatment, but even there it presents many 
 difficulties. The difficulties arise from the fact that such a 
 process merely substitutes for the author's judgment, on which 
 the older classifications rest, the judgment of the leaders of 
 national policy at different times and in different places on the 
 same questions : namely, Are these expenses necessary or merely 
 expedient ? He certainly gains much by substituting the point 
 of view of past statesmen for that of any present person or 
 persons. But for purposes of exposition it will be a still greater 
 gain if we can eliminate the personal element entirely and make 
 a classification that does not depend upon the way in which 
 the desirabihty or undesirabiHty of. the different functions is 
 regarded. 
 
 Economic Classification of Civic Housekeeping. — Such an 
 analysis as we are in search of has been suggested by Professor 
 Cohn,2 which he has well called the " economic analysis of 
 ci^ac housekeeping." There are, according to this suggestion, 
 four groups. The first consists of those functions which confer 
 so definite a benefit upon the individual, and are so clearly 
 performed solely for the benefit of the individual, that he would 
 naturally be expected to meet the cost of them. The second 
 group consists of those functions which confer a common benefit 
 upon all members of the State, of such a character that it can- 
 not be parcelled out and each portion definitely assigned to the 
 respective members. This group embraces the prime functions 
 of the fundamental institutions of the State. These are the 
 two extremes. Between them are two more groups. The 
 third consists of those functions which confer a special benefit 
 » Cf. Bastable, p. 43. ^ Finanzmssenschaft, p. 117-
 
 THE NATURE OF THE STATE AND ITS FUNCTIONS 19 
 
 that might be separately assigned to particular persons, but in 
 which such assignment is wholly or partly waived, because 
 there is also sufficient common benefit to justify making such 
 functions a total or partial charge on the general ability. Fi- 
 nally, a fourth group, which consists of those functions that 
 confer a special benefit on certain individuals more or less 
 unable to assist in bearing the charges, and which are conse- 
 quently treated as though they conferred a common benefit 
 upon all the members of society. 
 
 Dropping, for the present, all consideration of the ways in 
 which the benefit is measured, which will be fully discussed 
 under the head of revenue, and rearranging the groups in the 
 order of their importance, we have the following four classes 
 of expenditures : 
 
 First, the largest and most important, those which confer a 
 common benefit on all citizens. 
 
 Second, those which confer a special benefit on certain classes 
 that is treated as a common benefit, because of the incapacity 
 of these classes. 
 
 Third, those which confer both a special benefit on certain 
 persons and a common benefit on all the others. 
 
 Fourth, those which confer only a special benefit on indi- 
 viduals. 
 
 Under the first of these come the general expenditures for 
 the support of the constitutional agencies of the government. 
 The support of the administrative and legislative departments, 
 in almost all their branches, including the diplomatic corps, and 
 everything necessary thereto, as public buildings, etc. Here, 
 too, belong the support of defence and the maintenance of in- 
 ternal security and quiet. Here belong, according to modern 
 practice, the maintenance of roads, although it was once treated 
 as belonging to class four, and passed through a transition stage 
 in class three. Under this class belong also the chief expenses 
 in connection with the maintenance of the money circulation, 
 although a part of this expenditure is in most countries to be 
 assigned to class three.^ The same is to be said of the expendi- 
 
 » The United States once charged a seigniorage of one-fifth per cent.
 
 20 INTRODUCTION TO PUBLIC FINANCE 
 
 ture for education. Here belong the administrative control 
 and assistance of private industry and commerce. 
 
 Under class two belongs the care of the poor and the defec- 
 tive. Also the support of the pensioned, unless the pensions 
 are such that they may be regarded as wages delayed in pay- 
 ment, in which case they belong to the first class. 
 
 Under class three come the administration of justice, the 
 provision for religion wherever the State has an established 
 church, and general administration of the postal service (some- 
 times, however, this is in class four), the administration of 
 special rights, like patent rights, copyrights, corporation privi- 
 leges, etc. ; also, the recording of titles, etc., the laying out and 
 grading of streets, building of sewers, etc. ; so, also, the water- 
 supply in many cities, although the provision for this is rapidly 
 undergoing a development that will eventually place it in class 
 one. 
 
 To class four belong almost all of the great industries carried 
 on by the State or by cities, the monopolies maintained by 
 them for the benefit of their treasuries, etc. 
 
 As will be seen from remarks made above in connection with 
 the assignment of certain of these services to the different 
 classes, there has been, and still continues, a certain process of 
 evolution which may be generally summed up as a tendency 
 for all these expenditures to move from class four to class one. 
 There are many instances where expenditures now regarded as 
 naturally and unchangeably belonging to class one were regarded 
 as belonging to class four. When a government assumes any 
 new industrial function, as, for example, supplying water to 
 the inhabitants of a city, that function is usually assigned at 
 first to class four and treated as though conferring a special 
 benefit only. But it frequently comes about that it is regarded 
 as a function conferring a common benefit at least in part, and 
 passes into class three. There are forces at work which seem 
 likely to place it finally in class one. In the case of highways 
 this transition has been completely made, and, except in the 
 case of city streets, which still belong to class three so far as 
 construction is concerned, but pass into class one as soon as
 
 THE NATURE OF THE STATE AND ITS FUNCTIONS 21 
 
 finished, highways are usually treated as conferring common 
 benefit only. 
 
 In the following chapters on expenditure the order indicated 
 above will be followed. The arrangement of the different 
 expenditures under class one will be somewhat according to 
 historical origin and importance.
 
 CHAPTER II 
 THE GROWTH OF PUBLIC EXPENDITURES 
 
 Section i. Rapidity of Growth. — Public expenditures 
 have grown very rapidly, especially since 1850. They are still 
 growing fast in all progressive countries. The growth is a 
 striking accompaniment of the intensification of popular gov- 
 ernment. The more democratic a government becomes, the 
 more do the people incline to spend upon government activ- 
 ities. 
 
 This growth shows up very large when stated in absolute 
 figures. But, of course, it should also be considered relatively. 
 That is, it should be stated in proportion to population and to 
 wealth. The increase in public expenditures is more rapid than 
 the increase in population. It is probably more rapid, also, 
 than the increase in wealth and in private incomes, although 
 this statement is difficult to prove statistically and possibly is 
 true only where governments are most active or, to use a com- 
 mon phrase, most progressive. 
 
 The statistics of public expenditure are now being published 
 by most governments in great detail, and on account of their 
 multiplicity cannot be introduced here. They are very diffi- 
 cult to interpret. One reason for this is that no altogether 
 satisfactory measure of the private income and private wealth 
 of the people of different nations has yet been devised. Wel- 
 fare, measured in the joy of living, as distinct from wealth, 
 measured in money, is so often the aim of public expenditures, 
 that it seems illogical to set up comparisons based solely on 
 private money incomes and public money expenditures. The 
 effect of good roads may be measured, in part, by the increased 
 value of the farms served ; but what is the money value of the 
 
 22
 
 THE GROWTH OF PUBLIC EXPENDITURES 23 
 
 training obtained in good schools, or of the peace of mind which 
 an old age pension system affords? 
 
 Wars which break out with ever greater violence each time 
 leave behind them great debts, with heavy interest charges to 
 be met each year. We think of these as extraordinary charges, 
 and when so conceived they seem to conceal any general trend 
 in the ordinary charges. 
 
 Another cause of confusion in the interpretation of the 
 statistics of the increase in public expenditures is found in the 
 changes in the purchasing power of money, in which all expen- 
 ditures are necessarily measured. Even if by the method of 
 index numbers we could arrive at an approximate basis of com- 
 parison between different years, we are still confronted by a 
 more serious difficulty. That is, there has been an enormous 
 change in the relative importance of the things which money 
 will buy and in the services governments require. How can 
 one find a basis of comparison to measure the difference be- 
 tween the primitive public housekeeping of, say, William of 
 Normandy and the complex organisation of government under 
 George V? Or between the days of Washington and those 
 of Wilson? 
 
 Public expenditures grow because, and as, pubHc activities 
 increase and multiply. This increase is both extensive and 
 intensive. Governments in every branch, central, interme- 
 diate and local, are constantly assuming new work or duties, 
 and are constantly performing the older functions, and in turn 
 the newer ones, also, on an ever larger scale. Public schools, 
 for example, were long ago added to government activities. 
 At first they included only the primary grades. Then there 
 were added grammar grades, high schools, normal schools, and 
 even universities. Instruction becomes more and more diver- 
 sified and intensified and even research is subsidised. The end 
 is not in sight. 
 
 Governments sometimes drop functions. The dropping or 
 curtailment of the government's interest in and contributions 
 to religion is the best illustration. This, however, is almost 
 the only important illustration to be found in recent ages.
 
 24 INTRODUCTION TO PUBLIC FINANCE 
 
 Most changes, like the abandonment of the town pump for a 
 new waterworks system, involve only the substitution of a 
 better service for a less complete one. 
 
 Extravagance. — When attention is directed merely to the 
 aggregate of public expenditures the rapid increase sometimes 
 causes alarm. Then charges of extravagance are made against 
 the party in power. But it takes only a moment's considera- 
 tion to realise that the real question is not as to the amount 
 spent, but as to the wisdom of the expenditures. It is quite 
 possible that to spend too little on public schools may be far 
 worse than spending too much. If, after due and careful con- 
 sideration, it has been decided that an elaborate system of 
 highways should be built, the consequent increase in expendi- 
 tures is not per se evidence of extravagance. If the highways 
 serve a real need and are well built and well kept, they may be a 
 source of many economies to the people and also to the govern- 
 ment. It was not the size of the expenditures of the French 
 court in the i8th century, but the non-pubhc, non-social char- 
 acter of them which contributed to the French Revolution. 
 
 Of general principles or controlling laws there are few to be 
 found in this field. The wisdom or folly of each individual 
 expense should always be the point at issue. In 1776 the people 
 of Pennsylvania wrote into their constitution the following piece 
 of profound wisdom : " the purpose for which any tax is to be 
 raised ought to appear clearly to the legislature to be of more ser- 
 vice to the community than the money would be if not collected." 
 
 Sec. 2. Government Business Obeys Law of Increasing 
 Cost. — Whether governments serve the pubHc better or 
 worse than private enterprise could or would, in activities in 
 which a choice is possible, is a question on which opinions 
 differ. Public finance has a clear teaching on one vital point. 
 It is distinctly in the evidence that, by and large, as now con- 
 ducted, government business obeys the law of diminishing 
 returns or increasing cost per person served. The larger the 
 population served, the greater is the per capita cost.^ It has 
 
 • Data on this point will be found in my little book on Government Finance in 
 the United States, esp p. 86.
 
 THE GROWTH OF PUBLIC EXPEXDITURES 25 
 
 sometimes been thought by careless observers that since large 
 scale production is generally cheaper per unit, other things 
 being equal, than is small scale production, so the cost of 
 government ought to become cheaper per capita as population 
 grows. But such is not the case in practice. Generally speak- 
 ing, great cities spend more per capita and impose heavier tax 
 burdens than do smaller ones. The highest government costs 
 are generally to be found where population is densest. The 
 fact seems to be that large, or dense, populations at once require, 
 and afford an opportunity for, larger government activities. 
 The post office is clearly an activity in which large scale opera- 
 tion should render the cost per unit less than when the business 
 is small. But the constant demand, the insistent demand 
 which will not down, for lower rates, more service, and new 
 kinds of ser\ace from the post office, eats up the savings which 
 large scale operations might have made possible. The resi- 
 dents of large cities might have made a saving per capita on 
 street lighting as the cities grew larger, had they been content 
 with the same grade of lighting. But instead they demanded 
 more light and now revel at night along " great white ways " 
 resplendent with ornate electrical electroliers. The activities 
 of the police departments of large cities are almost the only 
 ones which seem to be cheaper per capita as cities grow larger. 
 But there is at the same time a rapid growth in analogous 
 functions, so even this may be only an apparent advantage. 
 
 The facts of public expenditures seem to bear out President 
 Wilson, who said : " The people of the United States do not 
 wish to curtail the activities of their government, they wish, 
 rather, to enlarge them ; and with every enlargement, with the 
 mere growth indeed of the country itself, there must come, of 
 course, the inevitable increase in expenses."
 
 CHAPTER III 
 EXPENDITURE MAINLY FOR THE COMMON BENEFIT 
 
 Section i. Net Expenditure. — In this chapter we shall 
 consider expenditure of the first class ; that is, expenditure 
 treated by the government as so clearly for the good of all that 
 no special charge is made upon any of the individuals inciden- 
 tally benefited. From one point of view expenditure of the 
 second class, wholly for the benefit of certain persons, who are, 
 however, exempt from any special payments, the expense being 
 treated as involving only common benefit, is sufficiently like 
 that of class one to come under the heading of this chapter. 
 But it has been made a part of the next chapter in order not to 
 lengthen this one unduly. Both of these expenditures might 
 well be called net expenditures in distinction from those which, 
 unlike them, develop some accompanying revenues. 
 
 Administrative Expenditures. — The first item is that for 
 general administration. Administrative expenditure is for the 
 support of those officers of the government who have to do 
 with civil affairs. For convenience it is best to limit it to those 
 officers whose functions are absolutely indispensable to the 
 execution of the laws. The officers who will be included vary, 
 from country to country, with the frame of the government. 
 It has been customary for financial writers, following the lead 
 of the cameralists, to limit their discussion of this expenditure 
 to that for the crown and court. This is, in England, called 
 the civil list. The peculiar character of such expenditure in 
 monarchical countries makes it advisable to isolate it. But it 
 must be borne in mind that in republican countries there is no 
 corresponding expenditure. The salaries of the highest execu- 
 tive officials in republics are of the same character as those of 
 
 26
 
 EXPENDITURE :MAINLY FOR THE COMMON BENEFIT 27 
 
 the ministerial officials in monarchies. In England the civil 
 list provides for his Majest^^'s privy purse, household, charities, 
 etc., and for the annuities paid to members of the royal family. 
 In most monarchical countries these expenses were originally 
 met by the revenues from the crown estates. But the revenues 
 from the domains having been absorbed by the general treasury, 
 it became necessary to make provision for the civil list from 
 the general revenues. To the civil list should be added the 
 salaries and other expenses of the ministries, their clerks, sec- 
 retaries, etc. In federal governments the administrative de- 
 partments of the component parts or commonwealths, as well 
 as that of the central government, should be included. Finally, 
 there are the administrative departments of the local govern- 
 ments. It is very difficult to ascertain the number of such 
 officials and almost impossible to ascertain all such expenses. 
 In monarchical governments, and to a certain extent also in 
 republican governments, traditional sentiment demands that 
 the head of the government shall hold a social position of great 
 prominence and perform certain merely ornamental functions, 
 involving considerable expenditure. So that the expenditure 
 for the services of the highest officials is often larger than the 
 sums which would be necessary to obtain merely efficient ser- 
 vice. This lavish expenditure may be fully justified on political 
 grounds, but as it involves great waste, both directly and indi- 
 rectly by example, it cannot be justified on economic or fiscal 
 grounds.! It is a general fiscal principle, applicable as well to 
 this part of expenditure as to any other, that the expenditure 
 should not be larger than is necessary to secure the most effi- 
 cient service. The justification of this lavishness, therefore, 
 must be found, if anywhere, in the creation of some equal utility 
 recognised by political science. The exceptions made in prac- 
 tice to the general rule of economy do not extend beyond the 
 heads of the administrative departments. In the subordinate 
 positions the remuneration does not generally exceed and is 
 often below that which must be paid for similar services in pri- 
 vate life. Indeed, there is a certain saving, in that many of 
 
 1 Rau, Finanzwissenschafl, sec. 48.
 
 28 INTRODUCTION TO PUBLIC FINANCE 
 
 the positions, especially where the tenure of office is secure for 
 a relatively long period, can be filled at a lower cost than the 
 same services command elsewhere, on account of the honour 
 attaching to them. In those countries where the expenditure 
 for the higher positions is largest much is saved by the lower 
 pay attaching to subordinate positions. 
 
 Diplomatic and Consular Service. — In this connection 
 mention may be made of the diplomatic and consular service, 
 which, while partly conducive to the better performance of 
 other functions, as, for example, defence and the regulation of 
 commerce, is yet properly considered to be subordinate to the 
 executive departments. Here again the traditional opinion, 
 that the dignity of the nation can only be properly sustained 
 by a lavish expenditure on the part of the ambassador or min- 
 ister, imposes on the treasury burdens far greater than the 
 value of the services rendered, if measured by the ordinary 
 business standards. As the means of communication improve 
 and the general efficiency and reliability of the news agencies 
 of the public press grow, it becomes harder and harder to justify 
 this extravagance even on political grounds. The custom of 
 lavish expenditure for diplomatic services has not been carried 
 to such extremes by the United States as by other countries. 
 As these positions were formerly more or less of the nature of 
 political prizes, in that country, this has probably been to the 
 improvement of the service. In recent years the foreign rela- 
 tions of the United States have grown in importance. There 
 has been a distinct effort to increase commerce with South 
 America and to promote a better mutual understanding. Com- 
 mercial attaches are being added to the more important min- 
 istries. Young men can now look forward to the consular 
 service as a career and train for it. There has been a marked 
 corresponding increase in cost. Meanwhile Great Britain, 
 having always had an adequate service, has increased her 
 expenses but little. 
 
 The Cost of Collecting the Revenues. — To the adminis- 
 trative department belongs the expenditure for the collection 
 of the revenues. Although this is a part of the gross expendi-
 
 EXPENDITURE MAINLY FOR THE COMMON BENEFIT 29 
 
 tures only, it is properly included in the general accounts so as 
 to render control possible. 
 
 While the cost of collecting revenue will naturally vary very 
 much with circumstances, some generalisations are permissible. 
 The cost of collecting customs duties should be kept within 
 three per cent, and that of internal excise taxes within still 
 narrower limits. But if the total amount to be raised is rela- 
 tively small the cost is likely to be proportionately larger. In 
 like manner heavy direct taxes are proportionately less costly 
 to collect than are light ones. 
 
 Sec. 2. The Legislative Department. — The expenditure 
 involved in the payment of salaries to legislative officers, when 
 any such are paid, is not the largest part of the expenses caused 
 by the maintenance of such bodies. There are the clerks, aides, 
 pages, etc., in immediate attendance upon the bodies during 
 their session, the expenses of elections, which in this case swell 
 to considerable amounts, the costs of investigations, public 
 hearings, etc., necessary to put the legislature in possession of 
 the facts upon which to base their actions, and the expenses of 
 promulgating laws, publishing speeches, reports, etc., all of 
 which together form no inconsiderable burden on the finances 
 of every nation enjoying legislative government. These ex- 
 penses also extend from the federal government down to the 
 municipal governments. The desirableness or undesirableness 
 of paying legislative officers for their services is a matter for 
 political science to determine, and depends in large measure 
 upon the traditions of the different peoples. In England rela- 
 tively little is spent in this way in any of the legislative depart- 
 ments of the government from Parliament down to the parish. 
 But in that country there is a tradition of unpaid public service 
 that gives her much help in this direction. In the United 
 States the direct emoluments and other legitimate expenses of 
 the federal Congress, and the direct and indirect, more or less 
 illegal, raids by the commonwealth legislatures on the treas- 
 uries, as well as those made by the city councillors and alder- 
 men, are very large. 
 
 Some mention should also be made of the expenses involved
 
 30 INTRODUCTION TO PUBLIC FINANCE 
 
 in the support of local or semi-local legislative bodies. For the 
 United States, there are the State legislatures and the city 
 councils, and, for England, the local government board and the 
 county and municipal councils. Of these, only the common- 
 wealth legislatures are purely legislative in character. The 
 others perform functions which are better described as admin- 
 istrative. It is so difficult to obtain a correct estimate of the 
 particular expenses for the support of these subordinate bodies 
 as to be an unprofitable task. These bodies, too, are so inti- 
 mately concerned in the administration of the other functions 
 that we gain little by isolating the mere expenses of their main- 
 tenance. With the commonwealth legislatures, however, the 
 matter is different. These are purely legislative. In most 
 commonwealths the legislatures are paid per diem, and they are 
 prevented from running up too large bills by the limitation of 
 their term. The per diem remuneration and mileage are fixed 
 by law, and range from $5 to $io a day and from five cents to 
 ten cents per mile. A loophole for additional expense is left 
 by the necessity of allowing the legislature to appropriate money 
 for incidental expenses. Money is spent for the hire of personal 
 attendants on members, stenographers, clerks, etc., for tours of 
 inspection to various institutions, and the like. This abuse 
 became so flagrant in California that it was eventually pro- 
 hibited by a constitutional amendment limiting the expenses 
 of the legislature. Most of this expenditure contravenes the 
 rule of economy. England in the absence of the federal sys- 
 tem is spared this expense. 
 
 Expense of Judiciary. — A very considerable part of the ex- 
 pense of maintaining the judiciary is treated as a matter of 
 common benefit. These expenditures are sufficient to insure 
 the continued existence of the courts, whether they have any 
 litigation before them or not. But as some part, and often a 
 very considerable part, of the costs of actual litigation falls on 
 the litigants, and as the courts are, in most places, almost 
 continuously engaged in work of that kind, it seems more con- 
 sistent with our classification to treat this expenditure as one 
 partly for private benefit, under class three.
 
 EXPENDITURE MAINLY FOR THE COMMON BENEFIT 3 1 
 
 Sec. 3. Public Buildings. — The construction and main- 
 tenance of public buildings for the convenience of the executive 
 and legislative departments and for other purposes is one of the 
 most important although not one of the largest items of expen- 
 diture. The construction of such buildings is of course neces- 
 sary. That they should be imposing edifices, handsomely 
 decorated and equipped, is a matter of national and local pride. 
 That their construction should not be wasteful is self-evident. 
 •The extravagances and theft which have too often accompanied 
 the construction of such buildings in the United States are too 
 well known to need discussion. They are purely abuses and 
 need no further words of condemnation than they have always 
 received. The cost of construction may be regarded as a per- 
 manent investment, not yielding a money revenue, but im- 
 portant utilities. These expenditures are obviously subject to 
 great fluctuations from year to year. 
 
 The exact annual value of these utilities to the government 
 cannot be directly estimated in money. Indirectly it might be 
 estimated as the equivalent of the interest on the sums which 
 it would cost to replace them in the most economical manner, 
 less the annual cost of the repairs. As, in some cases, the 
 original expenditures were extravagant and wasteful, this 
 method of computation would result in a smaller sum than the 
 interest on the original cost. 
 
 Sec. 4. Cost of Defence. — A nation differs from individuals 
 in that no law can be imposed upon it by any external human 
 power. The enforcement of the rights and obligations of na- 
 tions in their intercourse with one another is left to the different 
 nations themselves. As long as international law offers no 
 peaceful means of redressing wrongs, war is the only resource. 
 "International law," says Woolsey, "assumes that there must 
 be * wars and fightings ' among the nations." This assump- 
 tion is universally correct. There are no signs, as yet, in spite 
 of the peace conferences at The Hague, and the proposal of a 
 League of Nations, that nations will cease to consider that war, 
 or at least the actual preparation therefor, as its sole preventive, 
 is an absolute necessity. The whole theory of the independence
 
 32 INTRODUCTION TO PUBLIC FINANCE 
 
 and equality of sovereign States, upon which international law 
 proceeds, throws the maintenance of national dignity, honour, 
 and recognised national rights upon the nations themselves. 
 The extent and character of preparation for war in each State 
 depends upon its history, national character, and geographical 
 situation. Thus, the warlike traditions, the mutual distrust, 
 and contiguity of France and Germany, impelled to extensive 
 preparation for war, and similar considerations affected other 
 nations of Europe. On the other hand, the traditions, national 
 character, and geographical position of the United States, until 
 after the war with Spain in 1898, led to a feeling of security, and 
 a preparation so insignificant, compared to European arma- 
 ments, as to call forth continual warnings and protests from 
 mihtary authorities. As a result of the acquisition of territory 
 in the Pacific, and in the Orient, there has been thrown upon the 
 United States the burden of maintaining the bulwark between 
 the white and the yellow races, on the western side of the terri- 
 tory occupied by the whites. The unavoidable expenses for this 
 purpose, while they have not yet reached the magnitude of those 
 of England and of Russia for the defence of the eastern side of 
 their outlying possessions, are already large and are growing 
 rapidly. The necessity and probable continuance of this burden 
 on the finances of nations being thus predetermined, the only task 
 for the student of finance is to ascertain how great a burden this 
 imposes on the treasuries and what possibility there is for some 
 return. An extended discussion of the actual expenses of war 
 itself is given at the end of this book. In this chapter we are 
 discussing only peace time expenditures of a mihtary character. 
 There has been much discussion of the relative merits and 
 economy of the different methods of army organisation. It is 
 pointed out that the German system of compulsory service of all 
 citizens without remuneration shows a much smaller cost, per 
 man, than the Enghsh and American system of paid enUstment. 
 But it is urged again that there are in Germany a larger number 
 of expenses involved in the army system than those of the 
 government, as the personal expenditures of the soldiers, the 
 cost of the country from the disturbance of production, the
 
 EXPENDITURE IMAINLY FOR THE COMINION BENEFIT 33 
 
 extra costs of enrolment, of free quarters during manoeuvres, 
 etc., which do not appear in the budget, but which should be 
 counted in before any fair comparison can be made. It would 
 seem that, in the end, the actual net expenditure for this purpose 
 could only be as much less, per man, as the standard of living of 
 the soldier is less in the one country than in the other. And on 
 this ground it might be urged that the German system, which 
 gives the soldier but little spending money to waste, and by very 
 strenuous measures inculcates thrift and almost penurious 
 economy, is on the whole the cheaper. How much again this 
 lessens the efficiency, per man, and necessitates a larger num- 
 ber of soldiers is hard to estimate. In England the volunteer 
 system, while adding somewhat to the cost, does not make as 
 heavy drains on the treasury as do the German reserves ; but as 
 the expenditure by the individual members of the volunteer 
 service is for a public purpose, it is a part of the cost of the sys- 
 tem, and a part that is very difficult to estimate. On the whole 
 no accurate comparison is possible. 
 
 The following figures are instructive : In the budget of 1894- 
 95 England appropriated for the army £18,000,000, for the 
 navy £18,700,000, together £36,700,000; for 1908-9, army 
 £29,459,000, navy £32,329,500, together £61,788,500; in the 
 last pre-war budget, army £28,885,000, navy £51,550,000, 
 together £80,435,000. The United States appropriated in 1895, 
 army $54,500,000, navy $31,700,000, total $86,200,000, but this 
 included $16,000,000 for new vessels; in 1906, army $117,900,- 
 000, navy $110,500,000, together $228,400,000; in 1914, army 
 $94,300,000, navy $140,700,000, together $243,000,000. In 
 most countries the preparation for war is a source of rapidly 
 growing expenditure. 
 
 Aside from maintaining the integrity and the dignity of the 
 State, which are, of course, the greatest conceivable public bene- 
 fits, the expenditures for the army and the navy yield little direct 
 economic return. The navy protects the citizens abroad and 
 contributes thus to the pursuit of commerce; while the army, 
 likewise, keeps open the channels of internal trade. In those 
 countries where the entire male population is passed through
 
 34 INTRODUCTION TO PUBLIC FINANCE 
 
 rigid military training, the military system supplements in a 
 very important manner the general educational system and 
 gives valuable mental and physical training. Countries with 
 a small standing army participate in this benefit to a much 
 smaller degree. The existence of a strong military spirit fosters 
 the virility of a people, and hence contributes to its manhood 
 and efficiency in every direction, while the absence of that spirit 
 betokens effeminateness and degeneracy. But these are benefits 
 that cannot be measured statistically, nor in money, and must 
 be left for the sociologists to discuss. 
 
 The Expense of War. — The expenses of actual war are not 
 a part of the regular budget of modern nations. They are 
 always treated as exceptional or extraordinary expenses. Be- 
 sides the sums actually expended by the public treasury there 
 are many indirect losses and expenses involved. According to 
 the estimates of Wilson ^ the cost of wars to England from 
 1688 to 1882 was over £1,258,680,000. The estimated cost 
 of the Boer War to England was over £182,000,000. The cost 
 to the United States of the Civil War is hard to estimate. The 
 debt incurred amounted to $1,845,900,000; $800,000,000 of 
 revenues were spent during the war ; commonwealths and cities 
 spent a part of their current revenues and rolled up debts, and 
 the pensions will probably amount to over $2,000,000,000; 
 $6,000,000,000 represents approximately the actual expenditure 
 by all the governmental agencies on the side of the North. 
 Data on the World War will be found in a chapter at the end 
 of this book. Every important war leaves behind it a great 
 burden of debt; and the debt charges, including interest and 
 repayment of principal, run on for years. It was estimated 
 that before the World War Great Britain had hquidated only 
 such part of her debt as was contracted prior to the revolution 
 of her American colonies. The United States, on the other 
 hand, has ever pursued a policy of speedy debt payment and 
 prior to the Great War was practically out of debt. Wars have 
 also been the occasion for granting of soldiers' pensions dis- 
 cussed in the next chapter. 
 
 * The National Budget, etc.
 
 EXPENDITURE MAINLY FOR THE COMMON BENEFIT 35 
 
 The general preparation for internal peace and security and 
 the prosecution or punishment of the disturbance of that se- 
 curity by individuals or small groups of persons is a very impor- 
 tant item of expense. Such security is generally maintained 
 by the police and the military. In the United States the chief 
 expense is borne by the cities. The states and counties have 
 their own police ofiScers for this purpose, as do also towns not 
 cities. 
 
 Sec. 5. Roads. — The building and maintenance of roads 
 is a source of expenditure which well illustrates the general 
 trend of development. Adam Smith regarded the maintenance 
 of roads as an activity conferring so special a benefit on the 
 individual user that he should bear the burden. Even Bastable 
 places them among the " industries of the State." ^ But the 
 universal tendency is to make the maintenance of roads a com- 
 mon burden because conferring a common benefit. The care 
 of the roads is generally a duty of the local governments, and 
 in the United States the first taxes laid in the colonies, and 
 afterwards in the new states, were for this purpose. The federal 
 government stopped spending much for roads and canals after 
 1840. 
 
 Quite recently, however, the states have again taken over 
 the care of roads to a large extent. Road building by separate 
 districts is apt to lack coordination. If the districts are small 
 uniformity of work is not attainable and even if they are fairly 
 large there may be a harmful lack of uniformity. For central 
 highways several hundred or several thousand miles in extent, 
 the plan of unsupervised district building is not practicable. 
 Generally there are expensive bridges or costly grades the cost 
 of which it seems proper to apportion over many districts. 
 
 One of the most marked advances in modern times is the 
 "good roads movement." From roads which were little more 
 than graded, to stone or macadam pavements, and finally to 
 highways of concrete with asphalt top is an enormous advance. 
 No public expenditure brings so immediate and so proportion- 
 ately large a return in social welfare. Together with the motor 
 
 » Pp. 193, 194.
 
 36 INTRODUCTION TO PUBLIC FINANCE 
 
 vehicle they bid fair to eliminate the distinction between city 
 and country. They facilitate not only the transportation, but 
 the actual production of food, and make both labour and capital 
 more mobile. 
 
 Navigation. — The maintenance of waterways, roadsteads, 
 harbours, rivers, canals, is also a public function. Canals, to 
 be sure, have passed, or are passing, through the same develop- 
 ment as roads, and in some respects harbours and rivers have 
 also done so. In the United States the dredging and improve- 
 ment of the facilities for navigation in rivers and harbours are 
 the only important items of " internal improvement " that have 
 been consistently held in the hands of the federal government. 
 The " rivers and harbours " appropriation was at one time 
 notorious on account of log-rolhng and possibly of graft. In 
 the same line is the maintenance of lighthouses, signal-stations, 
 the weather bureau, and life-saving stations. The last-named 
 is in some countries supported, in part, by private contributions. 
 
 Sec. 6. The Cost of Education. — No expenditure com- 
 mends itself more than that for education. It creates the 
 groundwork of all political institutions. No expenditure in the 
 opinion of Geffcken is more " reproductive " than that which 
 the State makes for the development of its future citizens. But 
 the expenditure of the various countries for this purpose cannot 
 very well be compared, because it is very difficult to obtain a 
 complete statement of all the outgo under this head. The 
 local governments generally have certain lower branches under 
 their control and pay a part or the whole of the expense of those. 
 In federal governments the remainder of the system is generally 
 under the control of the component parts. The United States 
 federal government has rendered assistance to the common- 
 wealth and local schools by grants of land of unknown, but very 
 large value, and by the collection and dissemination of infor- 
 mation through a bureau of education, and in various other 
 ways. In England the provision for education made by public 
 authorities is generally less than in most other countries, the 
 sole exception being the provision for technical education. 
 Until very recently this Hne of public activity has been regarded
 
 EXPENDITURE ^MAINLY FOR THE COMMON BENEFIT 37 
 
 by that country as one conferring a special benefit and to be 
 paid for in part by fees. But it is now pretty clearly the ac- 
 cepted poHcy of all modern nations to provide at least the pri- 
 mary education necessary for every citizen as a common benefit 
 and to make it compulsory and free to all the recipients. In 
 treatment, then, it is regarded as being as much a benefit to 
 the rich childless man to have the sons of his poorer neighbour 
 educated as that he should have the protection of the police 
 in the enjoyment of his property, and he is made to pay on that 
 principle. In regard to higher education as given in the second- 
 ary schools, and technical education, there is no such uniformity 
 of practice. Education in the rudimentary mechanical arts 
 is in fact becoming as important a need of society as elementary 
 education in the usual branches. As the pace of industry be- 
 comes more rapid and its organisation more perfect, the pos- 
 sibility of giving this sort of instruction by the old apprentice- 
 ship system vanishes. There is no place for the boy in the 
 modern factory. Private initiative cannot be depended upon 
 to supply the opportunity for this sort of education. The 
 State has to do so if it is done at all. In this respect many of 
 the English cities are far ahead of any American city.^ 
 
 Whether college and university education should be given 
 the recipients free of charge at the common cost is, in practice, 
 also an open question. Had not liberal private endowments 
 been made for this purpose, it is probable that the question 
 would long ago have been settled, and that this branch of edu- 
 cation would have been treated as the primary was. University 
 education, even though enjoyed by but a relatively small 
 number of the citizens, is quite as " reproductive " and as bene- 
 ficial to the State as a whole as even a widely diffused system 
 of primary schools. It is quite as important, if not more 
 important, to have- highly trained leaders of public action and 
 thought as it is to have a low degree of intelligence widely 
 disseminated. The university as a centre for research alone 
 is worth many times what it costs if properly conducted. In 
 proportion to the benefits which it confers on the State it is, 
 
 1 Shaw, Municipal Government in Great Britain.
 
 38 INTRODUCTION TO PUBLIC FINANCE 
 
 where run at the general cost, the least expensive part of the 
 whole system. The provision made by many of the western 
 commonwealths of the United States for the liberal support of 
 universities from the public funds has been without exception 
 the most beneficial and economical expenditure they have made. 
 In Germany, too, a large part of the expense is borne by the 
 State. Closely related to education is the maintenance of 
 museums, libraries, picture galleries, and scientific investiga- 
 tions. These comprise in most countries an important part of 
 the provision for education. 
 
 Sec. 7. Aid to Industry. — Indirectly all public expendi- 
 ture aids private industry and commerce. But there are many 
 forms of direct aid that are treated and regarded as conferring 
 a common benefit on all ahke although accruing to the good of 
 certain persons. Bounties are sometimes offered for certain 
 products. Enterprises of various kinds receive subventions or 
 partial and even complete exemption from taxation. The so- 
 called protective system involves an indirect expenditure of 
 the people's money in the same way. The expense of main- 
 taining the currency, of building and keeping up roads, canals, 
 harbours, and the like, is of the same character. So are many 
 public buildings, as exchanges, markets, slaughter-houses, 
 structures and grounds for public fairs and the like, and com- 
 missions and other organisations for collecting and disseminating 
 knowledge concerning horticulture, agriculture, and various 
 industries. The maintenance of a system of weights and 
 measures also belongs here. Besides all those mentioned and 
 some others which are generally treated as expenditures for the 
 common benefit, there are a great many things which the State 
 does for the benefit and assistance of industry and commerce 
 that are regarded as conferring special benefit and treated as 
 such. 
 
 The administrative control of private industry and commerce 
 has become a necessity on account of the growing power of 
 modern organisations of capital and the growing importance of 
 the " public " functions which many of these private enter- 
 prises perform. The necessity has been widely felt of con-
 
 EXPENDITURE MAINLY FOR THE COMMON BENEFIT 39 
 
 trolling industrial monopolies, and we have numerous com- 
 missions for the regulation of railroads and other public-service 
 industries. To this branch of expenditure belongs also the 
 cost of the control exercised over the production and sale of 
 foods for the protection of the public health. This is mainly 
 an expenditure of the local governments, although it occa- 
 sionally enters into that of central government, especially in the 
 case of imported foods. In the United States the federal 
 government has assumed this important function, and many 
 of the states are supplementing its work. The cost of the 
 enforcement of sanitary regulations of all sorts is another ex- 
 penditure of the same character.
 
 CHAPTER IV 
 
 EXPENDITURE MAINLY FOR THE BENEFIT OF INDIVIDUALS 
 
 Section i. Public Charities. — In this chapter we shall con- 
 sider the remaining three classes of expenditure. These are not 
 so very closely akin, but have one point of similarity ; namely, 
 that they are all regarded as to a greater or lesser extent for the 
 particular benefit of individuals. The first, however, is not so 
 treated by any nation, but is treated as though it were an expen- 
 diture for the benefit of all. The relief of indigence and the pro- 
 tection of society against the insane and the criminal, the care 
 of the feeble-minded and otherwise defective classes, and the 
 care of the sick are among the most costly and most discourag- 
 ing features of public expenditure. In the United States the 
 expenditure for pensions, charities, and gratuities amounts 
 each year to large sums. Generally, even after the State has 
 done all that it can be induced to do, there is still room for 
 private effort in the same direction. The expenditure by 
 private persons and societies for exactly the same purposes is 
 possibly larger than that of the government ; so that this is 
 one of the heaviest of all public expenditures. The relief of 
 poverty has generally received more attention in treatises on 
 economics than in works on public finance. But it belongs very 
 properly to the latter science as well. It is generally a local, 
 rather than a national, expenditure, but on account of its vast 
 size and economic importance has often received the attention 
 of the central authorities, and is in many cases, at least partly, 
 under their control. There is almost no expenditure that fails 
 so signally to accomplish anything like permanent results. As 
 frequently administered, poor relief has aggravated the very evils 
 it has been intended to reheve. The words of Malthus are still 
 
 40
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDI\TDUALS 41 
 
 true : " We have lavished enormous sums on the poor, which we 
 have every reason to beheve constantly tended to aggravate 
 their misery." ^ Yet the expenditure is necessary, indeed im- 
 perative, and will be so as long as the present sentiments on 
 the subject prevail, unless we can remove the causes. That this 
 may be done by the extension of educational facilities, espe- 
 cially technical schools, is a frequent contention. The system- 
 atic relief of poverty in such manner as to lessen its evil has 
 recently become the study of scholars and of able adminis- 
 trators, and some progress has been made. The student of 
 finance need not enter into the question of the causes nor of the 
 cure of poverty. Indigence there is, and the State has assumed 
 the duty of relieving it. The modern methods of relief are fast 
 coming to be as economical and efficient as the conditions under 
 which they are necessarily administered admit. Like war, this 
 is a form of expenditure that shows little tangible result that 
 can be measured in terms of money. 
 
 The general principle applied in the granting of continued 
 assistance to the poor is that the cause of poverty to be relieved 
 must be such that it cannot be removed by the individual 
 efforts of the candidates for assistance. In other cases, only 
 temporary assistance is rendered. Those who can help them- 
 selves are desired to do so. The four agencies which really 
 work together toward the same end are the civil, the ecclesiasti- 
 cal, the associated,^ and the individual. These should all work 
 harmoniously and should avoid dupHcation of work. The 
 assisted persons should, so far as possible, be put under condi- 
 tions which will enable them to help themselves to the limited 
 extent that they are able. The repression of vagrancy and the 
 punishment of wilful paupers, who are really able to support 
 themselves but unwilling to do so, is left to the courts. 
 
 Mothers' Pensions. — The care of orphaned children presents 
 special problems. Orphans neither of whose parents are living 
 and who have no relatives who can support them are cared for 
 either in public homes or similar institutions, or by being placed 
 
 * Essay, p. 438. 
 
 2 Associations or leagues of charitable organisations.
 
 42 INTRODUCTION TO PUBLIC FINANCE 
 
 under the care of families. In the first place this is always at the 
 public cost. In the second it is sometimes at pubUc cost, in 
 whole or in part. Half orphans whose fathers are living are 
 more generally left to the support of the fathers. The case 
 of widowed mothers with minor children is, however, con- 
 sidered as presenting special problems. The mother cannot 
 well care for the child or children if she goes out to work. It 
 seems harsh and probably is not well for the children if they are 
 separated from the mother and placed under public care. A 
 solution has been found in giving the mother sufficient money 
 from the pubHc funds to support herself and the children until 
 they grow up. 
 
 Insurance and Pensions. — Very different from the older sort 
 of poor relief is the institution of old-age pensions on the insur- 
 ance plan. Such institutions, for example, as the German, for 
 compulsory insurance, premiums being collected from every 
 worker, may be made self-supporting and in time promise to 
 relieve the State of a part of the burden of poor relief. Still 
 different in principle is the old-age pension system adopted in 
 England in 1908. Under this system it is provided that every 
 man or woman who has attained the age of seventy years, 
 and who has been a British subject and had his or her residence 
 in the United Kingdom for twenty years, and whose means do 
 not exceed £31 105. (or about $150) per annum, shall be entitled 
 to receive a pension from the public funds. The amount of 
 the pension, which is to vary with the private income of the 
 pensioner, ranges from one to five shilhngs per week. Funds 
 for the administration and for the payment of the pensions are 
 to be provided by Parliament. This system appears to a 
 foreign observer to amount to an extension of the relief to 
 some persons who would not otherwise receive it, and to a trans- 
 fer of a part of the expense from the local to the central govern- 
 ment. It also seems to take away some of the stigma that 
 attaches to the acceptance of poor relief under the old system. 
 In the years 1914, 1915, 1916, and 1917 nearly a million persons 
 satisfied the requirements and the cost was running about 
 £13,000,000 per annum. But the cost of poor relief was stabi-
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDUALS 43 
 
 lized at about £18,000,000 with a diminishing number of persons 
 receiving such rehef. 
 
 Insane and Criminal Classes. — Modern society supports the 
 insane and criminal classes at pubHc cost. In this way the 
 greatest possible saving is made. Indeed, the cost need not 
 be nearly as great as it is. To a large extent prisons can be 
 made self-supporting. It is perfectly feasible by a proper 
 division of the field between the different institutions to make 
 the prisons, insane asylums, and the hke entirely self-sustaining. 
 Hard labour is frequently a part of the criminal's sentence ; the 
 less violent insane can be made to work, and something can be 
 got, by proper supervision, from the feeble-minded and the 
 paupers. By an exchange of products between the different 
 institutions the necessary diversity can be obtained. There is 
 little excuse for the too common uselessness of the labour im- 
 posed; the tread-mill and oakum picking of our older prison 
 discipline ; the digging of unneeded ditches by the insane, etc. 
 Exchange of products, too, avoids the danger of conflicts with 
 the labour unions, which so often arise when a prison attempts 
 to make a product for sale in the open market. This expendi- 
 ture is very closely related to the one for the maintenance of 
 internal peace and security. The burden falls mainly upon the 
 finances of the central government, or, in a federal State, upon 
 those of the component commonwealths. The policy of isolat- 
 ing the defective classes, the insane and criminal, the deaf and 
 dumb, the feeble-minded, and the like, is an economy for society 
 as a whole, and if it can be made to prevent the propagation 
 of these weaknesses, is far-sighted. 
 
 Hospitals. — Hospitals for the sick are imperative needs in the 
 case of infectious diseases ; they are great blessings and very 
 desirable from the standpoint of expediency in all cases. The 
 opposition occasionally manifested by selfish private medical 
 practitioners to public hospitals is a sufficient proof of their 
 economy. Fortunately the modern attitude of the medical 
 profession is strongly for preventive measures and consequently 
 favours the erection and support of hospitals. Generally this 
 is a local expenditure. Certain branches of the government,
 
 44 INTRODUCTION TO PUBLIC FINANCE 
 
 like the military and the naval, have generally found it necessary, 
 on account of the large number of persons in their employ, to 
 make provision by hospitals for the care of their own sick. The 
 maintenance of quarantine stations for the isolation of persons 
 coming from infected countries or districts is a national affair. 
 Its cost may at times rise to a considerable amount. But 
 there is no question as to its necessity and economy. In the 
 United States there are arrangements for quarantine between 
 the different States, partly at the cost of the federal govern- 
 ment and partly at that of the commonwealths. Quarantine 
 against plant and animal diseases is similar in character, and 
 the expense is met in similar ways. 
 
 Sec. 2. Pensions. — Old-age pensions for officials whose 
 lives have been spent in the public service, or for soldiers whose 
 health has suffered, for the good of all, are but the proper 
 recognition of those services. They may be regarded as sums re- 
 served from the wages from year to year and paid over in this 
 form. In that case this expenditure should be placed under class 
 one. This is the case with most of the pensions in England, 
 and there they are generally correctly classed under the expendi- 
 ture for the departments to which the men pensioned belonged 
 before they retired. But when this expenditure becomes, 
 as it was in the past in too large measure in America, a means of 
 reward for political services rendered to candidates for public 
 office, it cannot be placed anywhere but in class two, being 
 then an expenditure for the benefit of certain persons considered 
 as though it were for the benefit of all. The rapid increase of 
 expenditure for this purpose in the United States, as well as 
 the curious features of that increase, show that it cannot all be 
 justified by any rule of economy. In this country only soldiers 
 are pensioned. Under general laws, which require only that 
 there shall be sufficient proof that the applicant is entitled to a 
 pension, all those who base their claims on inability to work or 
 excellent services are pensioned. But many others have been 
 pensioned by special acts of Congress. The abuse of the system 
 ceased about 1900, although the pensions granted before that 
 still continue. The amount of pensions increased after the
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDUALS 45 
 
 Civil War, rapidly but irregularly. The Spanish War brought 
 new pensioners into the ranks and the decline in pension costs 
 was checked. In 1918 the allowances were increased and the total 
 expended in that year reached $222,000,000, the largest sum 
 ever paid. 
 
 War Insurance. — To avoid the notorious evils of the old 
 pension system a new plan was adopted at the very entry of 
 the United States into the World War. That plan was based 
 on the principles of compensation insurance. In brief the 
 government undertook at its own risk and expense to insure the 
 soldiers against death or disabihty arising directly from or 
 during military service. In the event of death the widow is to 
 receive a fixed sum each month for the remainder of her life 
 or until remarriage, and if there are children fixed sums are 
 allowed to them until they reach the age of eighteen. In case 
 of total disability the soldier himself receives compensation, 
 larger amounts being allowed if he has a family. In the case 
 of partial disability compensation is proportioned to the reduc- 
 tion in earning capacity. The government undertakes to care 
 for and medically treat all disabled with a view to their restora- 
 tion to full earning capacity if possible. To be recognised as 
 compensable death or disability must occur while in service 
 or within one year after discharge or resignation. 
 
 In addition the government sold regular life insurance to the 
 soldiers. Since the government itself assumed all strictly 
 war risks and paid all administrative expenses this insurance 
 was at relatively low premium rates. 
 
 The Proper System of Retirement Pensions for Public Ser- 
 vants. — It seems necessary that public servants should have 
 means of support when they retire on account of old age or 
 disability. Since public salaries are rarely large enough to 
 admit of much saving some kind of retiring pensions seem 
 appropriate. Grave practical difficulties arise in inaugurating 
 such a system where there are a body of officers already in the 
 service for whom no provision has been made. It means a 
 sudden large increase in the cost of the pubhc service. Assum- 
 ing that this difficulty can be overcome the choice lies between
 
 46 INTRODUCTION TO PUBLIC FINANCE 
 
 a so-called free pension system, and one supported by annual 
 premiums collected from those who are in line for retirement. 
 Probably in the long run the two are much alike. For probably 
 even if a so-called free pension is established the salaries will 
 be lower by reason of the pension promised. Since under 
 either plan the ofiicer pays for his pension in annual instal- 
 ments or premiums, it is only just that he should have a definite 
 contract personal to him. It is not just, if he leaves that service 
 before reaching the age of retirement, that he thereby lose the 
 value at date of resignation of the accumulated premiums, 
 whether he has paid them in money or by accepting a lower sal- 
 ary. But that in turn requires that the government shall keep 
 proper reserves, just as an insurance company which sells annuity 
 policies would have to do. Conducted in this way, once the 
 initial costs are met, a pension system is self-sustaining and 
 means only a relatively small regular annual outlay. The 
 initial cost may be regarded as restitution of moneys of which 
 the public servants have been unjustly deprived in the past. 
 But one danger must be held in mind. Pensions on this plan 
 are in essence annuity insurance. The premiums or reserves 
 have to be calculated on the basis of the ordinary mortality 
 tables. But these involve the assumption that the number 
 insured shall be large enough to make the law of averages a safe 
 guide. A small city with only a few hundred school teachers 
 and other officers cannot very well assume that the law of 
 averages will be lived up to by its pensioners. The plan re- 
 quires at least a hundred thousand in the group of pensioners, 
 and that means that it can be conducted only by a govern- 
 mental unit of large size. Provisions similar to those which 
 are here indicated for retirement pensions may be used to cover 
 disability as well, and both may be cared for in one general 
 system. 
 
 Sec. 3. Workmen's Compensation. — Another and a dif- 
 ferent application of the insurance principle is the establish- 
 ment of so-called workmen's compensation. We cannot 
 properly discuss the whole problem, but shall discuss the gov- 
 ernment's part only. Industry exposes workmen to accidents
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDU.\LS 47 
 
 which may result in loss of life or in disability. If this burden 
 is left on the individual who suffers the accident or on his family, 
 it is often a crushing one. It has been found that neither the 
 workmen nor the employers can safely be trusted to guard 
 against this hazard by private insurance. Government must 
 step in and compel the provision by insurance of compensation 
 in case of industrial accidents. In the most successful systems 
 the government fixes the rates of compensation. It may estab- 
 lish its own compensation bureau or quasi insurance company 
 to carry the risk, collecting annual premiums to cover the losses. 
 It may content itself with fixing compensation rates and adjudg- 
 ing the amounts due in each case and compel the employer to 
 pay the compensation. This would practically force the em- 
 ployer to insure with some commercial company. Sometimes 
 the government does both, and by setting up its own insurance 
 bureau regulates by competition the conduct of this business 
 by the commercial companies. When properly conducted such 
 a competitive government bureau is more effective in regulating 
 the rates of insurance than direct regulation or prescription of 
 rates would be. Joined with compensation there is usually 
 found the enforced use of safety appliances and other methods 
 of preventing accidents. This whole movement is one of the 
 greatest advances of recent years. 
 
 Sec. 4. Bounties and Protection. — Under this class be- 
 longs also that expenditure which is made for the development 
 of industry by bounties and the protection of home industries 
 against foreign competition. The latter expenditure differs 
 from the former only in that the sums spent do not pass through 
 the hands of the officers of the treasury. The recipients of this 
 assistance collect it directly from the contributors in the shape 
 of higher prices for their wares than would otherwise prevail. 
 With the economic side of this expenditure, and the possibility 
 or impossibility of adding permanently to the wealth of a na- 
 tion by this process, public finance has nothing to do. But as 
 many important nations practise this form of expenditure, we 
 cannot avoid at least a statement of its character. The rev- 
 enues derived by the government from taxes on the commod-
 
 48 INTRODUCTION TO PUBLIC FINANCE 
 
 ities actually imported will be considered in Part II. But so 
 far as any actual "protection" is afforded the home producer, 
 it is an item of expenditure. In effect it is practically the same 
 as if a subsidy or bounty were paid to the producers out of 
 taxes collected from the consumers of the goods in question. 
 This expenditure is made not so much in the hope of increasing 
 the total wealth of the nation directly as in the hope of obtain- 
 ing a greater diversity of products, so that in the end the effect 
 will be to increase the wealth, mdirectly, by allowing for a 
 greater division of labour, and consequently for more steady 
 and efficient production. This policy has nowhere been begun 
 as a permanent one, but one of its results is the growth of power- 
 ful vested interests which make for permanence. Thus boun- 
 ties are paid directly from the treasury, or protection is afforded 
 to industries which it is hoped will eventually be self-supporting, 
 but which are not so at the time. At different times circum- 
 stances have caused this policy to be supported by different 
 arguments. Practically all the most important arguments have 
 been used at different times in the United States, where pro- 
 tection has prevailed with scarcely a break from 1816 to 1909. 
 The oldest of those arguments is known as the " infant indus- 
 tries argument." It is urged that new, weak industries cannot 
 hope to hve if subject to the competition of older foreign indus- 
 tries. At the same time it is maintained that in case of war it 
 would be practically necessary for a country to be able to supply 
 all its own needs. This grows directly into the argument of 
 List, which is in the main to the effect that a nation's pros- 
 perity, in general, depends not so much upon the mass of wealth 
 produced as upon the greatest possible diversity of its indus- 
 tries, so as to develop aU possible phases of its national produc- 
 tion. Just as the human body is healthier when all the muscles 
 are uniformly developed than when a few are abnormally 
 strong, so, it is argued, a nation is more truly prosperous when 
 all its productive forces are moderately active than when its 
 entire force is expended in a few lines. Later comes the patri- 
 otic or " home market " argument, which urges that the home 
 producer has a claim on the custom of the home consumer.
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDUALS 49 
 
 Finally this argument has been developed in the United States 
 into the famous '' pauper labour " argument, and it is main- 
 tained that the home producer has been enabled to pay his 
 workmen higher wages than the same classes of workmen re- 
 ceive in foreign countries, on account of protection, and that to 
 remove that protection would be to reduce the home workmen 
 to the standard of life of the foreigners. This latter argument 
 is largely an appeal to class interests for votes and is not wholly 
 tenable. The infant industries argument, it is generally ad- 
 mitted, is incontestable. The strongest argument in favour of 
 the continuance of this subsidising of industries has been devel- 
 oped from that of List. This may be restated somewhat as 
 follows : if the productive energy of a nation has but a few 
 outlets, as in exploiting natural advantages, there is a great 
 danger that the nation's economic life may become stagnant. 
 If, however, production be diversified, even by an artificial 
 process, it is much easier to keep the current of productive 
 energy in motion, allowing it to be turned in whatever direction 
 new advantages may open up. 
 
 In England, which has for many years been regarded as the 
 " classical home of free trade," there has recently been a revival 
 of sentiment in favour of protection. But this movement has 
 not resulted in establishing a protective system in that country. 
 The reasons for the revival of protectionist sentiment are the 
 difficulty of furthering trade relations with countries practising 
 protection and whose home markets are supplied by protected 
 manufactures, and the desire for closer trade relations with the 
 colonies. 
 
 While it may be admitted that there is great force in the 
 arguments in its favour, it must be remembered that protection 
 is very heavy expenditure, not less heavy because it is hard to 
 estimate its amount. There is a practical limit set by the 
 wealth of the people to the possible amount of expenditure in 
 this direction. If this process places too heavy a burden on 
 the nation's annual wealth increment, the burden will not be 
 borne, and the end defeated. Again, if the "protected" infant 
 industries finally outgrow the need of subsidies, and fix prices by
 
 50 INTRODUCTION TO PUBLIC FINANCE 
 
 competition, the drain upon the resources of the country ceases. 
 If they do not, the subsidising process may continue so long as 
 the general mass of the wealth is not thereby too seriously cur- 
 tailed. A nation may be able to pay for diversification of 
 industries, just as it may be able to pay for schools, for parks, 
 for museums, for libraries, etc. But the limit of such expendi- 
 ture is set by what the nation can afford. This Hmit is too 
 frequently overlooked ; it is too often forgotten that all protec- 
 tion is public expenditure. No " protection " is afforded unless 
 the price is raised. The difference between the price that would 
 have prevailed and the price that does prevail is the amount 
 the nation spends for this purpose. This is not offset by any 
 direct gain in wealth, and can only be justified by the desira- 
 bility of having a diversity of industries. 
 
 Sec. 5. Expenditure for the Administration of Justice. — 
 We now come to those expenditures that are treated as confer- 
 ring a benefit divided between the particular individual who 
 pays for what he gets, and the people as a whole who pay in the 
 general taxes for the general or common benefit. The first and 
 oldest of these is the expenditure for the courts. The adjudica- 
 tion of disputes between different persons was one of the earliest 
 functions of government. The payment of the costs was 
 originally thrown upon the suitors. But modern governments 
 conceive that it is in the common interest to have justice uni- 
 versally administered. Upon the general and accurate admin- 
 istration of justice depends in great measure the prosperity of 
 business. But either as a preventive of too frequent litigations 
 or on account of the special benefit supposed to accrue to the 
 suitor, the costs are divided, and one part paid by the people, 
 the other — a minor part — ^by the suitor. In criminal cases the 
 whole cost practically falls on the State ; in civil cases the 
 attempt is generally made to assess the cost upon the party at 
 fault. A large part of the local administration of justice in 
 England is rendered without emolument by the Justices of the 
 Peace. Besides the mere deciding of disputes and of criminal 
 cases, the judicial departments perform other legal functions 
 of importance, as, for example, the probating of wills, the dis-
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDUALS 51 
 
 posing of property of intestates, etc. Somewhat similar legal 
 functions are performed for the special benefit of the individual 
 citizens by the administrative branches of the government, as 
 registration and legalising of deeds, mortgages, marriages, and 
 other contracts, the granting and registration of copyrights, 
 trade-marks, patent rights, corporation rights, etc. 
 
 In the United States the courts have developed a number of 
 quasi-legislative and administrative functions of great impor- 
 tance. As the interpreters of the federal and commonwealth 
 constitutions, they have had to meet new conditions, and indi- 
 cate the bearing of the constitutions thereon. They have often 
 been called upon to interpret the meaning of constitutional 
 customs that have grown up outside of the written documents, 
 and have in this way given those customs a certain degree of 
 legal prominence. They were formerly in some of the common- 
 wealths (following an old English custom) allowed to determine 
 the local tax levy or apportionment. Quite recently, by the use 
 of injunctions, they have exercised a sort of administrative 
 control over industry, especially as affects the relations of em- 
 ployers and employees in industrial monopolies of public 
 importance, as, for example, common carriers. In the control 
 of municipal corporations, both by punishing illegal acts and 
 compelling due compliance with discretionary duties, they have 
 largely performed the functions exercised by the administrative 
 departments in Europe.' In all this work they are considered 
 as acting for the common benefit. 
 
 Sec. 6. Betterment of Property, etc. — Other functions 
 that are similarly treated need but to be enumerated. Among 
 them are the laying out and grading of streets, building of 
 sewers for the benefit of all the citizens, and the special " better- 
 ment " of the property of abutting landowners. The division 
 made here is generally that the first cost is assessed to the 
 specially benefited persons, the subsequent costs, maintenance, 
 etc., to the people generally. The supply of water is similarly 
 treated in many cities. One of the best examples of this sort of 
 expenditure is that of the post-otfice, as managed in the United 
 ' See Goodnow, Municipal Home Rule.
 
 52 INTRODUCTION TO PUBLIC FINANCE 
 
 States. This service is almost entirely treated as conferring 
 a special benejfit on the users. A part of the cost of the dis- 
 tribution of newspapers within the county in which they are 
 published is treated as a public benefit. In some countries the 
 post-office is so managed as to yield a surplus, in which case it 
 passes into class four. 
 
 Sec. 7. State Industry. — Expenditures of class four are 
 part of the gross expenditure only. When a State spends 
 money in wages and in the purchase of a plant and raw materials 
 for the production of porcelain and the like, it expects to get 
 it all back again from the sale of the commodities. The same 
 is true of a city maintaining a gas plant, of a State railroad, etc. 
 Originally, the State made use of public lands, forests, mines, 
 etc., as a source of income, but now there are a great many 
 industries and enterprises which the State conducts more for 
 a public purpose than for the gain to the public treasury. A 
 city does not operate its street railways primarily as a source of 
 income, but to guarantee the citizen good and cheap service. 
 Hence the gross expenditure for this purpose is a very important 
 item. It is growing to be more and more so as time goes on. 
 
 Some of the more important industries that the State carries 
 on are for the purpose of supplying itself with certain commodi- 
 ties, as arms, ammunition, war-ships, and the like. Such in- 
 dustries are carried on from the highest branches of the govern- 
 ment down to the lowest. We find, for example, many Ameri- 
 can towns supplying a part of the support of the inmates of their 
 public institutions by cultivating the lands of the poor-farms. 
 
 Some of the most striking instances of such industrial ex- 
 penditure are connected with communication and transport, 
 and with those industries the management of which, on ac- 
 count of the tendency to monopoly, is frequently put into 
 public hands. Examples of this are numerous among those 
 already mentioned. Many industries have been at different 
 times and places so managed as to cost more than they brought 
 in. That is, they have resulted in a net deficit, not a net profit. 
 They thus pass into class three. 
 
 A rather significant list of enterprises has in modern times
 
 EXPENDITURE MAINLY FOR BENEFIT OF INDIVIDUALS 53 
 
 been entered upon by the State, which might be, but are not, 
 managed so as to yield a revenue that offsets their cost. These 
 are museums, libraries, parks, baths, and the Hke. They belong 
 under class one. 
 
 Sec. 8. Expenditures Directly for Human "Welfare. — Since 
 about 1900 there has been a movement, growing in strength, to 
 bend the activities of government more to the care of human 
 beings directly than to the mere improvement of their environ- 
 ment or economic well-being. A common criticism of govern- 
 ment expenditure has been expressed as " spending more money 
 to secure good litters of pigs than to promote the welfare of 
 human beings." The resultant legislation has given to govern- 
 ment some new activities. Among them may be mentioned: 
 increased provision for health and sanitation ; pure food and 
 drug laws including, especially, pure milk, and better enforce- 
 ment of such laws ; supervision and care of the physical well- 
 being of school children ; safety appliance requirements in fac- 
 tories and workshops ; increased provision for recreation, sport, 
 and exercise ; community medical service, which as yet is only 
 an expansion of the older hospital service, although it promises 
 to become different and more important as various forms of 
 social insurance increase. All of these activities trench upon 
 the freedom of the individual in ways that sometimes become 
 irksome. The safe middle course between the meddlesomeness 
 of the infatuated reformer, and the genuine helpfulness of a 
 true public service has yet to be found. The most hopeful 
 feature of this new departure is the discovery that the pubHc 
 will make use of new knowledge and of new facilities freely 
 without compulsion.
 
 PART II 
 
 PUBLIC REVENUES 
 CHAPTER I 
 
 THE CHARACTER AND CLASSIFICATION OF PUBLIC 
 
 REVENUES 
 
 Section i. The State Requires Services and Commodities. 
 — German writers on public finance generally begin the dis- 
 cussion of revenues with the statement that the State requires 
 services and commodities. The services are furnished by the 
 citizens ; in primitive communities freely, by all, in virtue of 
 membership in the State, later by particular ones who are paid 
 for them. The commodities or wealth required may be pro- 
 duced by the State or taken from the citizens. In the ancient 
 primitive community, services are rendered by the citizens 
 as their proper contribution to the State. The commodities 
 needed are for the most part furnished by the individuals with- 
 out any recognition of a transfer of ownership to the State. 
 The division of labour necessary for the successful adminis- 
 tration of more complex aft'airs of the modern State demands 
 a separation of the persons permanently in the service of the 
 State from the other classes. These must then be supported 
 from somewhere, and in classical times this is accomplished by 
 giving the State, or what is the same thing in classic thought, 
 its special officers, the income from certain sources, as mines or 
 productive enterprises, and taxes upon tributary peoples, or 
 certain inferior classes of citizens. Out of these funds the 
 public officers were supported, and those in the service of the 
 State who were paid for their services were maintained. 
 
 Again, in the Middle Ages, feudalism furnished a mode of 
 support for public officers by giving them a certain control over 
 
 54
 
 THE CLASSIFICATION OF PUBLIC REVENUES 55 
 
 land and its occupants. This was a means which, without the 
 use of money, provided services and commodities for the pubhc 
 needs. 1 But later as money became more plentiful, and in 
 ordinary transactions payments in kind and in services were 
 commuted into payments in money, the government in turn 
 commuted services due into money payments. At the same 
 time, lands originally conveyed to public officers in considera- 
 tion of their public services, and to enable them to perform those 
 services, passed absolutely into their control and were treated, 
 in part at least, as their private property, and the services and 
 commodities they yielded became the private income of those 
 individuals and their families. But although the revenues 
 from the domains, retained in this same way by those families 
 which became the sovereigns, were still applied to public ex- 
 penses, they soon became insufficient, as the State's functions 
 grew, and other resources were sought. In the mad scramble 
 for public revenues, old rights to dues and services were tena- 
 ciously retained by rulers or their officers. Especially were the 
 claims to military and similar general services held. These 
 claims, too, were finally commuted into money payments, 
 which became compulsory just as the services from which they 
 were derived had been compulsory. 
 
 Voluntary Payments. — The names used for the first rev- 
 enues, which differed from the receipts from domains and the 
 customary services, show very distinctly the voluntary char- 
 acter of the payments. They are called beggings, requests, 
 gifts {beden, petitiones, benevolences, dona), or from the point of 
 view of the assistance given, aids {aide, steuer)? With the 
 gradual growth of the needs, for which these demands were 
 made, into permanent needs, with the further centrahsation 
 and concentration of the public functions, with the neglect of 
 public duties by the feudal lords, and by the quasi-public 
 officers quartered on the land, and with the consequent perform- 
 ance of these duties by the government, the demands upon the 
 people became permanent and compulsory. 
 
 ' Maine, Early Law and Custom, p. 148. 
 * Seligman, Essays, pp. 6-7.
 
 56 INTRODUCTION TO PUBLIC FINANCE 
 
 Sec. 2. Effect of Constitutionalism. — Since the emergence 
 of the monarchical State from feudaHsm, the trend of public 
 finance has been directed by the growth of constitutionalism, — 
 or the representation of the people in the government. As the 
 whole advance of this movement turned upon the success of 
 the people in obtaining the control of the purse, it is evident 
 that the resulting changes in the financial system must have 
 been very important. The long history through which the dif- 
 ferent revenues have passed, the necessity of constant com- 
 promise between the different interested parties, and the various 
 changes made necessary by the growth in the economic life of 
 the world, all these have left modern States with a most con- 
 fused jumble of revenues. Yet with all the irregularities and 
 anomalies that can be found in the revenues of any modern 
 State, there is still in every case a more or less clearly traceable 
 systematic development. This growth of system is clearly due 
 to the work of the representatives, in whose hands the develop- 
 ment of constitutional government finally placed the control 
 of the collection and spending of the public money. As these 
 representatives realised the need of revenues, they naturally 
 sought for some principles of right and justice to guide them in 
 the choice of sources. The result has been a partial uniformity 
 in the systems of the different countries. 
 
 It should not, however, be imagined that this uniformity is 
 very great, nor that the systems of the different countries are 
 alike in details. But somewhat the same fundamental ideas 
 seem to underlie all. There are also great differences. Thus 
 one country chooses to obtain the larger part of its revenues 
 from a tax not used at all in another. Historical practices and 
 differences in the frame of government necessitate modifica- 
 tions, even of the same principle. That bugbear of the student 
 of public finance, practical expediency, which has ruined many 
 a fine theory, works in the most astonishing ways to prevent the 
 execution of approved principles. 
 
 Sec. 3. The Justification of Taxation. — The uniformity 
 above noted came about as a natural result of the general 
 search by the agents of constitutional government for some
 
 THE CLASSIFICATION OF PUBLIC REVENUES 57 
 
 good reason why, in each case, the particular person contribut- 
 ing should be called upon to do so. As the representatives of 
 the people, they naturally had to satisfy, in some way, the 
 reasonable desire of the people for some clearly defined method 
 of apportionment. As it is generally hard enough to convince 
 men of the need of contributing anything, the plea put forth 
 must be a strong one. If we confine our attention, for the 
 purposes of illustration, to taxes alone, which are the hardest 
 of all revenues to justify, we can see more clearly how the 
 necessity of thus showing good reasons led to uniformity. It 
 is exddent that if the representatives had, for instance, informed 
 their constituents that " taxes are one-sided transfers of eco- 
 nomic goods or services," ^ they would have had considerable 
 difficulty in getting consent to any taxes. But when they 
 announced, " taxes are paid in return for the benefits conferred 
 upon you by the government," it was easier to collect them. 
 When they proceeded to assess taxes on the basis of a more or 
 less definite attempt to measure the benefit conferred, or where, 
 in the nature of things, an actual measurement was impossible 
 on some other basis of supposed equality, they clearly had a 
 very good case to present to their constituents. It requires 
 but the slightest knowledge of the history of constitutional 
 legislative bodies to prove conclusively that such was the 
 process of reasoning. And this fully accounts for the simi- 
 larity of the systems of various countries. 
 
 Whenever it was perfectly clear that a certain function con- 
 ferred a special benefit on an individual citizen, the charge was 
 made on him, and those persons not so clearly benefited were 
 wholly or partially exempt. Thus we have the practice of taking 
 tolls from persons using the roads, of collecting fees from the 
 suitors at court, or making a sale of some privilege or com- 
 modity to the citizens for a price, as in the case of granting 
 a monopoly, or the sale of manufactured wares, or of lumber, or 
 ore from the domains. But many of the more important 
 functions do not result so clearly in a special benefit to the 
 individual, and recourse is had to some other mode of justi- 
 • Part of the definition of taxes by Professor Ely, pp. 6, 7.
 
 58 INTRODUCTION TO PUBLIC FINANCE 
 
 fication. At first, naturally, the older ideas are developed. 
 The services traditionally due from the citizen to the State, of 
 which that of military service is the most prominent example, 
 are recalled and appealed to. It is claimed that money should 
 be given in commutation of these services. Then the ground 
 is shifted again and again, and many apparently different 
 reasons are advanced. But in all these changes one thing is 
 clear, — • the shifting of argument is made in order to enable 
 the use of some new measure of the amount of taxation, and at 
 basis the justification remains practically the same. The citi- 
 zen is asked to pay, because he shares in the benefits common 
 to him and his fellows. But this common benefit does not 
 suggest any particular measure. 
 
 Sec. 4. Compulsion a Universal Feature. — Another point 
 of similarity between different nations must be studied histori- 
 cally ; that is the feature of compulsion. This feature is old and 
 universal. It is, perhaps, older than any one of the nations 
 and began in that feudal system from which they emerged. 
 The citizen had to be compelled to render his service to the 
 State, whenever the special benefit to him was not clear. That 
 feature the most advanced constitutional governments have 
 retained. There have, to be sure, been instances where States, 
 and especially cities, have had recourse to voluntary contribu- 
 tions to meet the expenses giving a special benefit. But these 
 soon passed into compulsory contributions. A fine example of 
 the development of a voluntary contribution into a tax is found 
 in the English poor-rate. In the twenty-seventh year of the 
 reign of Henry VIII, 1536, collections were made for the impo- 
 tent poor (voluntary). In the first Edward VI, 1547, bishops 
 were authorised to prosecute all who refused to contribute for 
 this purpose (compulsion enters). In the fifth Elizabeth, 1563, 
 the justices of the peace were made judges of what constituted a 
 reasonable contribution (compulsion as to the amount). And 
 from the fourteenth Elizabeth, 1572, regular compulsory con- 
 tributions were levied, and so they have continued. 
 
 Sec. 5. Classification of Revenues. — ■ We have already 
 classified expenditures according to the character of the benefit
 
 THE CLASSIFICATION OF PUBLIC REVENUES 59 
 
 conferred.^ Now the almost uniform practice is to collect com- 
 pulsory revenues from all the citizens for those expenditures 
 that confer a common benefit, or one that is so treated ; then to 
 collect special compulsory revenues for a part of the cost from 
 those persons regarded as specially benefited by expenditures 
 of class three ; while the revenues for meeting the fourth class of 
 expenditures are raised by the sale of the commodities or services. 
 
 Professor Seligman finds that there are three distinct classes 
 of revenues, each resting on a different justification.- The first 
 of these three we shall call taxes. This is a slightly narrowed 
 use of the term. In the broadest sense an exercise of the taxing 
 power of the State occurs whenever a compulsory contribution 
 of wealth is taken from a person, private or corporate, under 
 the authority of the public powers. But such a broad definition 
 of taxes would include, also, the charges for expenditures of the 
 third class levied to pay the cost or part of the cost of a special 
 service. As these are certainly different from those charges 
 levied to meet the expenditures conferring a common benefit, it 
 is necessary to adopt the narrower definition. 
 
 Taxes Defined. — In this sense, then, taxes are general com- 
 pulsory contributions of wealth levied upon persons, natural or 
 corporate, to defray the expenses incurred in conferring a com- 
 mon benefit upon the residents of the State. A tax is justified, 
 but not necessarily measured, by the common benefit conferred. 
 
 Fees Defined. — When a distinct attempt is made to levy 
 the charge only where a traceable or assumed special benefit is 
 conferred, and to make it cover the cost, or a part of the cost 
 thereof, the compulsory payment is a fee. In the broadest 
 sense fees are taxes, but they are not taxes in the narrower sense 
 defined above. They compose a large and important class by 
 
 1 See Part I, Chap. I, sec. 6. 
 
 2 See Selipman, "Classification of Revenues," in the Qiiarlerly Journal of Eco- 
 nomics, April, i8g,3, and April, 1895; Essays, Chap. IX. In my opinion Professor 
 Seligman has not improved his classification Ijy the refinements introduced in the 
 second article. Nor is the necessity for distinguishing between fees and special 
 assessments clear. Special assessments are a kind of fee, even within the terms of 
 the professor's definition of fees. Nothing is gained by raising classes logically 
 secondary in character to first place. It is hoped that the simple general outlines of 
 Professor .Seligman's classification, as given in the text, may find general acceptance.
 
 6o INTRODUCTION TO PUBLIC FINANCE 
 
 themselves. A fee has a different justification from a tax. A fee 
 never exceeds the cost of the special service rendered. A charge 
 for a special benefit that exceeds the cost is best regarded as 
 consisting of two parts : one a fee, the other a special tax. A 
 fee may be defined as a compulsory contribution of wealth 
 made by a person, natural or corporate, under the authority of 
 the public powers to defray a part or all of the expenses involved 
 in some action of the government, which, while creating a 
 common benefit, also confers a special benefit, or one that is 
 arbitrarily so regarded. 
 
 Rates Defined. — The third category of revenues has been 
 called "contractual" revenues, or, by the United States Census 
 Bureau, " commercial " revenues. They are more specifically 
 designated by Professor Seligman as " prices." But there are 
 good reasons for preferring the term " rates " as the general 
 designation of the class. They are the charges made when the 
 government performs some service, or supplies some commodity, 
 in substantially the same manner as that service would be per- 
 formed, or the commodity supplied and sold, by private enter- 
 prise. Thus we speak of railway rates, water rates, rates for 
 gas or electrical current, telegraph and telephone rates, etc. 
 At the same time we speak of the " price " of Gobelin tapestry, 
 or of Sevres ware. While common usage is not altogether 
 consistent, the charges made by a monopoly are more often 
 called rates than prices. The government generally estabhshes 
 a monopoly whenever it takes over any industry and refuses 
 to allow its citizens to compete with it. Industries in which 
 it allows competition are rather unusual and exceptional. 
 Hence the term " rate " seems preferable to " price," and will 
 be adopted in this work.^ 
 
 If the State has a monopoly, it may act as a private person 
 would and take " all the traffic will bear," or it may forego a 
 part of the possible gain, and the payment becomes or ap- 
 
 * The term "rate" was not used in this sense in the first edition of this book, nor 
 has it yet received general recognition in theoretical works. But it is not infre- 
 quently so used in official documents. It should not be confused with the English 
 designation of local taxes which are, in that country, generally spoken of as par ex- 
 cellence, "the rates."
 
 THE CLASSIFICATION OF PUBLIC REVENUES 6l 
 
 preaches a fee. If the State has no monopoly, it must, per- 
 force, act as an individual would, subject to competition. Every 
 civilised country has these three categories of revenues, and 
 combinations thereof, and no more than these. Every civilised 
 country recognises the same justification for each contribution. 
 Every government appeals to the same motives to induce the 
 payment of each class. In the case of the first two classes the 
 motive is compulsion, in the last the government withdraws 
 and allows the interest of the individual to bring him forward 
 and induce him to make the contribution. This class has been 
 called voluntary. If this term meant merely the absence of 
 compulsion, — the spontaneity, as it were, of the contribution, 
 — it would be satisfactory. But generally there is the danger 
 of confusion arising from the implication in the term that the 
 contribution is without return, of the nature of a gift. Hence, 
 in order to show the character of the payment, Professor SeHg- 
 man has called it " contractual." There are serious objections 
 to this term also, although it is of such a character as to admit 
 of a technical application very easily. But in lieu of a better 
 and for sake of uniformity we will adopt it. There is less 
 objection to the term " commercial " revenues, used by the 
 United States Census Bureau. But up to the present time 
 the term has not been commonly adopted. 
 
 Sec. 6. Compulsory Revenues are Derivative ; Contractual 
 are Not. — Thus far, for sake of simplicity, and not to depart 
 from the usage of other writers, we have considered the revenues 
 as practically identical with the money flowing into the treasury. 
 Services rendered without pay do not belong to our subject. 
 But still it is not quite accurate to identify the public revenues 
 with the money that flows into the treasury. Money is here, 
 as in private households, but the representative of wealth. 
 When the government compels its subjects to pay contributions 
 of classes one and two, taxes and fees, it does so in order to ob- 
 tain control of wealth which it takes from the people to consume 
 for a public purpose. But in the case of contractual revenues 
 the matter is quite different. Here the government simply 
 sells, for money, wealth : material things, privileges, or ser-
 
 62 INTRODUCTION TO PUBLIC FINANCE 
 
 vices which it has brought into existence. The transaction is a 
 simple sale. This is partly true of some fees. The money that 
 flows into the treasury simply takes the place of actual wealth 
 already created or being created by the government. The 
 important thing to note is that rates result in little or no increase 
 in the amount of wealth in the hands of the government, unKke 
 the other cases, but represent a mere change in the form of the 
 wealth already owned. It is not wealth taken from the people 
 to be consumed by the government ; but wealth created by the 
 government is turned mto money so that it may be more con- 
 veniently used. Nothing is taken from the people, for they 
 receive back the equivalent of their money in wealth, over 
 which they then have control as owners. In the case of com- 
 pulsory revenues the matter is different because they receive 
 back nothing tangible, but simply enjoy the common or special 
 benefits of good government. These benefits are of the same 
 character exactly as the benefits which accrue to the individual 
 when he consumes his own wealth. They are " reproductive," 
 if at all, in the same sense that the consumption of bread by the 
 worker is reproductive. That is no sense at all. Just as the 
 aim of all production in the economic world is consumption or 
 the satisfaction of wants, so the end and aim of the compulsory 
 collection of revenues is consumption by the State. Some- 
 times, to be sure, the government turns these funds into per- 
 manent forms of wealth which are slowly consumed ; as, for 
 example, roads. Sometimes, too, the government adds to the 
 effective power of the wealth before consuming it, or uses it to 
 produce new wealth ; but yet, so far as the individual is con- 
 cerned, he has parted with his property in a way which leaves 
 him benefited, to be sure, but in exactly the same position as 
 when he spends the same amount for some gratification. Quite 
 the contrary is his position when he buys a piece of china made 
 by the government, for then he has the equivalent of his money. 
 The government, too, is no richer than before, but has its 
 wealth in a form which better suits it.^ Frequently the govern- 
 ment uses the wealth created directly without first turning it 
 1 Cf. Stein, Finanzwissenschajl, II, 138.
 
 THE CLASSIFICATION OF PUBLIC REVENUES 63 
 
 into money. This wealth is as much a part of the revenues as 
 any that is sold. 
 
 We may now change our terminology slightly, and say that 
 there are three sources of public revenues : the first is collected 
 from all the citizens by compulsion, on the ground that certain 
 expenditures are necessary and confer a common benefit upon 
 all ; these are taxes. The second is collected by compulsion 
 from certain persons on the ground that they are specially bene- 
 fited by some expenditures ; these are fees. And lastly, the 
 State creates wealth for itself. The wealth thus created consti- 
 tutes a part of the revenue of the government belonging to the 
 third class. This, whether sold or not, is contractual revenue or 
 commercial revenue, and is received in the form of rates. 
 
 Sec. 7. Gifts, Fines, and Penalties. — One or two minor 
 matters have to be noticed and our classification is complete. 
 Sometimes States receive gifts, generally for some special pur- 
 pose. These are now rare and unimportant. The special 
 purpose is usually more or less outside the general functions of 
 the State. Sometimes the State receives property by reversion, 
 or takes property which has no apparent owner. This, too, is 
 an insignificant category. The State may exercise the right of 
 eminent domain and take property for some purpose. Gen- 
 erally speaking, it restores an equal amount of some other kind 
 of wealth, so this transaction results in no net revenue. The 
 State is the recipient of not insignificant sums from fines and 
 penalties inflicted under the penal power. These are compul- 
 sory contributions levied with an intent to injure, and differ 
 materially from the other categories. Their nature is clear, 
 and they will receive no further attention. All the receipts of 
 the State come under one or the other of these categories.
 
 CHAPTER II 
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES; ALSO 
 
 DEFINITIONS 
 
 Section i. The Measure of Taxation. — Considerable con- 
 fusion in the discussions of the different modes of taxation is 
 due to the failure to distinguish clearly between the justifica- 
 tion of taxation in general {i.e. why there should be any taxes 
 at all) and the measure of taxation {i.e. what should be the basis 
 upon which to decide how much each citizen should pay). 
 The universally accepted justification of taxation is the common 
 benefit conferred upon the individuals by the action of the 
 government. But the common benefit is, strictly speaking, 
 equal,^ while the taxed citizens are unequal in wealth and 
 ability to pay taxes. Therefore recourse has to be had to some 
 other measure of taxation. It lay nearest, in the search for 
 such a measure, to overlook the distinction between the measure 
 and the justification and to assume that there was a difi'erence 
 in the benefit enjoyed by the different citizens. 
 
 The Benefit Theory. — ■ Thus one theory assumes that pro- 
 tection to Hfe, liberty, and property is the chief benefit conferred, 
 and that this benefit, or at all events its cost, varies as the 
 property varies, generally in exactly the same proportion. 
 This theory has been called the benefit theory of taxation, 
 
 * "The protection of the subject in the free enjoyment of his life, his liberty, and 
 his property, except as they might be declared by the judgement of his peers or the 
 law of the land to be forfeited, was guaranteed by the twenty-ninth chapter of 
 Magna Charta, 'which alone,' says Sir William Blackstone, 'would have merited 
 the title that it bears of the Great Charter.' " Cooley, Constitutional Limitations, 5th 
 edition, p. 430. "Equality of rights, privileges, and capacities unquestionably 
 should be the aim of the law; . . ." "The State, it is to be presumed, has no 
 favours to bestow, and designs to inflict no arbitrary deprivation of rights." Ibid., 
 pp. 486 and 487. 
 
 64
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 65 
 
 because it attempts to estimate by the benefit conferred the 
 amount of tax each individual should pay. 
 
 The Faculty Theory. — The difiiculties involved in measur- 
 ing benefit, with suflicient accuracy to serve as a basis for taxa- 
 tion, led another school of thinkers to abandon that entirely. 
 These writers feel that each citizen is necessarily a part of the 
 organism of the State, one of the nourishing cells, as it were. 
 And, as in all organisms of nature each organ or each cell con- 
 tributes to the fife of the whole, in accordance with its powers 
 or strength, so each citizen should contribute as he is able. They 
 claim that it is easier to measure ability than it is to measure 
 benefit. This theory is called the faculty theory, the term 
 " faculty " having been found in this sense in early tax laws. 
 Generally speaking, this ability is supposed to be indicated in 
 some way by wealth or by income. But the advocates of 
 faculty as a measure of taxation encounter a serious difficulty in 
 attempting to ascertain whether faculty is proportional to wealth 
 or income or increases more rapidly as these increase in amount. 
 A negative side of the same idea is presented when it is claimed 
 that the tax should impose an equal sacrifice upon every citizen. 
 In determining what constitutes equal sacrifice, we encounter 
 the same difficulty as in determining how to measure ability.^ 
 
 Sec. 2. Difficulties of Classification. — It will be noticed 
 that the basis from which each of these measures starts is 
 individual wealth. The first argues that benefit is indicated 
 by wealth, the second that faculty is so indicated. If wealth 
 is the basis, then the classification of taxes might be made to 
 depend on that of wealth. Such a method, although tried, has 
 been found impracticable, because the processes of shifting 
 render it impossible to ascertain the final incidence with suffi- 
 cient accuracy for classification. It has also been suggested 
 that we might use the different specific means employed by na- 
 tions to measure benefit or faculty. But here again we meet 
 with difficulties that are almost insuperable; for in that case 
 
 1 See Chap. Ill for further discussion of this jKiint. A full and instructive dis- 
 cussion of these theories is to be found in Seligman's Progressive Taxation in Theory 
 and Practice. See also, Professor Edgeworth's three articles on the "Pure Theory 
 of Taxation," Economic Journal, Vol. VII.
 
 66 INTRODUCTION TO PUBLIC FINANCE 
 
 the classification will depend on the theory adopted as to the 
 correct measures. If we adopt the benefit theory, our classi- 
 fication will depend on the different indices of benefit chosen. 
 If we adopt the faculty theory, then our classification will be 
 according to the indices of faculty. But we are not at liberty 
 to adopt one or the other of these theories exclusively, because 
 no nations have done so in practice, and their taxes are some 
 of them based on the one theory, or at least best explained 
 thereby, and some on the other, while many combine both or 
 may be interpreted in either way. At the same time many 
 taxes that could not be justified on either basis are retained by 
 the nations on grounds of general expediency, because they 
 yield considerable revenue, or because they have been long in 
 use. If, therefore, we adopt a classification presupposing either 
 theory, we shall find many taxes that do not conform to it. 
 Inasmuch as no consistent plan for the measurement of taxation 
 has been adopted by any country, no uniform method of classi- 
 fication upon " natural " grounds can be found. 
 
 These difficulties are inherent in the matter that we are 
 attempting to classify. The librarian generally desires to 
 arrange his books according to the subjects treated. But 
 encyclopaedias could not be so arranged without tearing the 
 books to pieces. We might theoretically dissect each tax, and 
 assign its parts to the different categories according to the real 
 nature of each part. But we gain little by this painful process. 
 In this case classification will not help us to ascertain the real 
 nature of the things studied. 
 
 These difficulties have not always been regarded as insu- 
 perable, and many brave attempts have been made to overcome 
 them, but with so little uniformity as to mark the failure. 
 There are almost as many classifications as writers.^ The least 
 satisfactory of all are those that attempt to find some natural 
 arrangement. Those which have the most apparent success 
 accept the official names used by the treasury departments of 
 the different nations, and give them merely such limitation as 
 is necessary to use them scientifically. 
 
 • See Nicholson, Principles of Political Economy, Vol. Ill, p. 291 £F.
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 67 
 
 Sec. 3. Direct and Indirect Taxes. — Perhaps the most 
 common distinction is that made between direct and indirect 
 taxes. This distinction first obtained theoretical importance 
 in the writings of the Physiocrats. By direct taxes they meant 
 any of those taxes which were levied immediately upon the 
 " produit net." ^ There alone, they argued, could be the fund 
 out of which taxes could be paid. To levy taxes anywhere else 
 was indirect, because the burden would be shifted from one to 
 another until it rested there. The assignment of any particu- 
 lar tax to one or the other of these categories was with them a 
 mark of approval or condemnation. With the recognition that 
 other economic processes besides those which added to the 
 material property of the world created wealth, this peculiar 
 theory of taxation drifted into abeyance. The same terms, 
 however, have been widely used by officials and writers and 
 have such prevalence that a recognition of them cannot be 
 avoided. 
 
 Rau and Wagner have made the most elaborate attempts to 
 define the modern usage." In this they were only partly suc- 
 cessful, because of irregularities in official usage. But despite 
 these irregularities the terms are valuable. Wagner's distinc- 
 tion is practically as follows. There are two ways in which 
 direct and indirect taxes differ, (i) In the case of direct taxes, 
 the taxpayer is also the tax-bearer, at least in the expectation 
 of the lawgiver ; any shifting of the burden to another is not 
 expected, not desired, and sometimes, even, forbidden, or sub- 
 ject to penalty. Indirect taxes are, vice versa, those in which 
 the taxpayer is not permanently the tax-bearer, or is not in- 
 tended to be ; but a shifting of the burden to another is expected 
 and desired, and may even be prescribed.^ 
 
 But the element of shifting is not the only one that is essential 
 to the idea. The second characteristic is what may be called 
 the technical, administrative conception of direct and indirect 
 taxes. It is based on the method of procedure. (2) Direct 
 
 ' Cf. Higgs, The Physiocrats. 
 
 ■ Cf. Bullock, " Dir(( t and Indirect Taxes," Political Science Quarterly, Vol. XIII. 
 'Wagner, Finanzwissenschafl, II, 1st ed., p. 269; 2d cd., sees. 97-100. Schon- 
 berg's Handbuch, 3d ed.. Ill, p. 171.
 
 68 INTRODUCTION TO PUBLIC FINANCE 
 
 taxes are such as are laid regularly according to some fixed 
 fact (or one so treated, and at least somewhat fixed), some- 
 thing regularly recurrent, and hence previously ascertainable, 
 
 — a fact as of personality, of rank, of property, of earning, etc., 
 
 — and are, consequently, assessed according to some list or roll 
 (cadastre). Indirect taxes, on the other hand, are such as are 
 laid according to some changing, temporary, more or less acci- 
 dental fact which is, consequently, not previously ascertain- 
 able, — something the result of processes, events, transactions, 
 
 — and are laid and collected according to tariffs.^ 
 
 These two methods of distinction follow quite closely the 
 usages of theoretical writers and of ofiicial bureaux. There 
 are important exceptions in some countries. Thus in France 
 the customs duties are not officially classed as indirect taxes, 
 but form a class by themselves akin to direct taxes. In the 
 United States at the time of the Civil War the income tax was 
 viewed by the courts as an indirect tax, or at least not as a 
 direct tax in the sense of the Constitution.^ This decision, 
 however, was reversed in 1895, by a bare majority of the same 
 court, which decided that a somewhat similar income tax was a 
 direct tax in the meaning of the Constitution. This decision 
 was in accord with the distinction made above. 
 
 The principal direct taxes are : the land taxes, building taxes, 
 property taxes, poll taxes, class taxes, income taxes, industry 
 taxes ; the indirect taxes are : the custom duties (with the ex- 
 ception of the French), internal excise taxes, transaction taxes, 
 most fees and licenses. The inheritance taxes, or death duties, 
 as they are called in England, are not easy to classify. In the 
 first sense they are direct taxes, and in the second they are in- 
 direct. This is, perhaps, the only important tax that cannot 
 be easily classified. The inheritance tax wherever it exists is 
 used because it is expedient and without much cost yields a 
 large return. It is levied at a time when the persons paying it 
 
 1 Wagner, Finansmssenschaft, II, 2d ed., p. 239. 
 
 2 Springer v. United States, 102 U. S. 508. See article, "The Direct Tax of 1861," 
 Quarterly Journal of Economics, July, 1889; Seligman, "The Income Tax," Forum, 
 189s ; Bullock, "The Origin and Effect of the Direct Tax Clause," Political Science 
 Quarterly, XV, p. 470 S.
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 69 
 
 are not in position to demand a strong justification. It is 
 sometimes justified on the ground that it compensates for pre- 
 viously unpaid taxes. If this justification holds, then the in- 
 heritance tax must be classed as a direct tax. 
 
 Sec. 4. Taxes on Persons, Property, or Income. — A few 
 other terms which are often used as the names of different 
 groups of taxes and help, in a way, to classify them must be 
 mentioned in this connection. We sometimes speak of taxes 
 as being separable into (i) those on persons, (2) those on prop- 
 erty, (3) those on income. These terms do not indicate the 
 final source from which the tax is paid, but the basis upon which 
 it is levied. 
 
 1. In the case of personal taxes the different persons who 
 are to pay the tax are listed and assessed either (i) individually, 
 as in the case of per capita taxes, or (2) as representatives of a 
 group, as in the family or hearth taxes, or (3) according to some 
 characteristic, as rank in hfe, office, employment, age, income, 
 property, etc., supposed to be indicative of the benefit they 
 receive from the government or their ability to pay. A com- 
 plete system of such taxes might be built up, and it is possible 
 to suppose that all the requirements of justice could be met 
 thereby. 
 
 2. Taxes on property are those taxes which take the property 
 owned by a person as the index either of the benefit received or 
 of the ability to pay. These taxes may be considered as pur- 
 suing property wherever it is to be found with little or no re- 
 gard for the personality of the owner. They are not, of course, 
 in any but the most exceptional instances, paid out of property. 
 But no particular regard is had to the real source of payment. 
 They may be levied upon any and every kind of property. 
 They are sometimes called real taxes from res, things. But this 
 usage has no established sanction in English ; in that language 
 real taxes are taxes upon real estate. 
 
 3. Taxes on income in the broadest sense are all those taxes 
 which make wealth in the process of acquisition the basis of 
 assessment. These are of two principal kinds : (i) those which 
 are levied upon the annual increment of wealth as such, irre-
 
 70 INTRODUCTION TO PUBLIC FINANCE 
 
 spective of the person who is the recipient thereof. That is, 
 they treat the various items of wealth increment as the basis 
 of taxation without regard to the grouping of these increments 
 into a whole in the income of any particular person, and con- 
 sider the person paying the tax only in so far as he is an income 
 producer through his own activities. This is the character of 
 the British income tax. (2) Those which demand of each 
 person, or seek to obtain concerning each person, a summary 
 of the total income he receives. This latter tax is sometimes 
 so treated as to make it difficult to distinguish it from a personal 
 tax, for the different persons are listed and classed according 
 to amount of income they receive. 
 
 By a peculiar and entirely unwarranted use of common 
 English terms in a strange and foreign sense, property, income, 
 and the like have been called the tax objects, and the corre- 
 sponding taxes objective taxes, meaning that they are taxes on 
 things in distinction from taxes on persons. On the other 
 hand, the persons are called the tax subjects, and personal 
 taxes called subjective. This usage, although it has the sanc- 
 tion of a great authority, in Bastable, has fortunately not been 
 favourably received. Seligman, in a re\dew of Bastable's book, 
 pointed out that by the object of a tax we usually mean the 
 purpose of the tax, and the tax subjects may be things as well 
 as persons subjected to the tax.i 
 
 Sec. 5. Taxes on Rent, Interest, Profits, and Wages, etc. — 
 Following the lead of Adam Smith, various attempts have been 
 made to classify taxes according as they fall upon one or the 
 other of the different shares in distribution, — ■ rent, interest, 
 profits, and wages. But, as Bastable has well shown, the 
 sources from which the different taxes are paid are generally a 
 combination of several of these. The wealth or income of very 
 few persons consists of simply one of these shares. The at- 
 tempts to carry out such classifications consistently have failed. 
 Bastable's attempted compromise by calling such taxes as can 
 be traced directly to one or the other shares in distribution 
 primary, and all others secondary, brings us to practically the 
 
 1 Political Science Quarterly, VII, p. 717.
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 7 1 
 
 same results that were gained by Wagner in the discussion of 
 direct and indirect taxes. His primary taxes are those called 
 direct taxes above, his secondary are the indirect. 
 
 One other important set of distinctions must receive our at- 
 tention, because it has the sanction of two prominent authori- 
 ties. Wagner suggested and Cohn accepted the classification 
 into taxes paid out of wealth at the time of its acquisition 
 {Erwerb), or while in possession (Besitz), or upon its consump- 
 tion (Verbrauch). This distinction, according to the stage in 
 which the tax finds the wealth from which it is paid, is often 
 useful in showing the effects of certain taxes. 
 
 Another very valuable distinction is that made by the term 
 " taxes on revenue." Taxes on revenue are those that fall or 
 are assessed on the revenue or income yielded by different 
 kinds of property. These are a species of taxes on acquisition. 
 
 The three sets of terms which we have used in this work are : 
 (i) direct and indirect taxes ; (2) personal, property, and income 
 taxes ; (3) taxes paid on wealth at acquisition, in possession, 
 and at the time of consumption. 
 
 Sec. 6. Classification of Fees. — We now come to the im- 
 portant task of classifying fees. The essential consideration 
 to be held in mind about these payments is that they cover a 
 part of the total cost of certain governmental activities, which 
 are performed for the benefit of all, but yet confer a real or as- 
 sumed special benefit on the individual. When the payment 
 covers the whole or a little more than the whole cost, it is a rate. 
 Since fees are levied upon the receivers of certain benefits from 
 the government, it follows that the only classification for fees 
 is that which shows what activities of the government convey 
 the benefit. We can thus classify according to the different 
 departments of the government, for the services of which fees 
 are collected. 
 
 I. Judicial and Legal Fees. — The most numerous are the 
 judicial and legal fees, the character of which has already been 
 made clear from the discussion of the nature of these expendi- 
 tures.' Examples of these are the regular court costs and fees, 
 
 1 See Part I, Chap. Ill, sec. 4.
 
 72 INTRODUCTION TO PUBLIC FINANCE 
 
 probate fees, the charges for recording deeds, mortgages, con- 
 tracts, marriages, etc. 
 
 2. Administrative Fees. — Next come the administrative 
 fees for the special services of that department. They are : 
 police fees, charged for the special benefits accruing or supposed 
 to accrue to the individuals from the exercise of the poHce power 
 of the State ; the fees for education, when charged ; a large num- 
 ber of industrial and commercial fees for services rendered 
 individuals in their industrial and commercial undertakings. 
 The industrial fees include license charges for permission to 
 carry on certain businesses (care must be taken not to confuse 
 these with police fees, nor with business taxes assessed on the 
 same plan). Commercial fees include road and canal tolls, 
 harbour dues, and a number of similar charges. 
 
 Special Assessments. — A very important class of adminis- 
 trative fees are those known as special assessments, or in Eng- 
 land as " betterment " taxes, usually levied for local improve- 
 ments affecting property, as streets, sewers, etc. Sehgman has 
 defined these as follows : " A special assessment is a compul- 
 sory contribution paid once and for all to defray the cost of a 
 specific improvement to property undertaken in the pubHc 
 interest, and levied by the government in proportion to the 
 special benefits accruing to the property owner." He regards 
 them as of so much importance as to make them a class of rev- 
 enues coordinate with taxes and fees. Strictly speaking, they 
 are fees. 
 
 Sec. 7. The Nature of Public Rates. — The revenues de- 
 rived from the rates charged for the services rendered by the 
 industrial activities of the State, or from the production and 
 sale of commodities, so long as these enterprises are conducted 
 for profit, are of the same general character as the earnings of 
 the people. Early writers on public finance devote a great 
 deal of attention to the income of the State from the public 
 domain, forests, and mines, which were at one time of great 
 relative importance. These have shrunk in importance, in 
 modern times, but in their place have come the earnings of the 
 so-called " public service " enterprises, like the railroads and
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 73 
 
 the street railways, telegraph and telephone service, water 
 works, and others of a similar character. As stated in another 
 connection, these enterprises are usually monopolies. Even 
 when they are not of such a character that they would be 
 monopohes even under private control, the government makes 
 them monopolies by refusing to allow any private enterprise to 
 compete. The French tobacco monopoly affords in part an 
 example of this. Industrial enterprises conducted by a gov- 
 ernment for profit, under competitive conditions, are rare. 
 The general analysis of these earnings, whether monopolistic 
 or competitive, can be found in any good treatise on Economics 
 and need not be repeated here. 
 
 Public rates, however, differ in some respects from the charges 
 made by similar private enterprises. The differences can be 
 most readily shown by an illustration. Let us suppose that a 
 certain city is supplied with water by two private companies, 
 both of which have the right to lay pipes wherever they wish. 
 They will then supply water, supposing that they actually com- 
 pete, at rates determined mainly by the costs, which are those 
 of management, interest on the " plant," the cost of water, and 
 of the supplies and the general running expenses. The average 
 rates will be considerably higher than need be by virtue of the 
 dupHcation of the plant, etc. Suppose, however, before any 
 material duplication is reached the companies unite, forming 
 one company which has the monopoly. The charges will now 
 be regulated by " what the traffic will bear," and provided the 
 supply is ample will tend to conform to those rates which will 
 yield the largest net returns. The principles by which mo- 
 nopoly rates are regulated are well known to students of eco- 
 nomics. The charges in this case cannot be greater than the 
 cost to the citizens of operating their own wells, nor even so 
 high as to induce the citizens to economise materially in their 
 use of water. But suppose that the townspeople are not con- 
 tent with the rates or with the service. They attempt regula- 
 tion and fail. They may determine to buy out the plant. 
 Once the city owns the plant it may run it in one of four ways, 
 (i) It may run it as the company did, to make the highest
 
 74 INTRODUCTION TO PUBLIC FINANCE 
 
 possible profits, charging all or nearly all the traffic will bear. 
 The surplus over costs goes into the treasury and helps to de- 
 fray the other expenses of government. The rules determining 
 what the traffic will bear are rules of pure economics. There is 
 absolutely no difference between this public business and a 
 private business. The method of " charging what the traffic 
 will bear " is the method in economic life of determining the 
 value of commodities so sold. It takes the place in the sale of 
 monopoly goods of the " free dickerings of the market " by 
 which price of other goods is determined. ^ The private company 
 had to pay expenses, so does the city; the private company 
 enjoyed a surplus or made an " unearned increment," so does 
 the city ; the private company spent this surplus to the satis- 
 faction of the wants of its stockholders ; the city spends the 
 surplus for the benefit or for the satisfaction of the general wants 
 of the citizens, who may be regarded as its stockholders. Even 
 if it foregoes taking quite all the surplus, the principle is the 
 same. A private company sometimes does that in deference 
 to public opinion. (2) The city may decide not to make money, 
 but to charge only what the service costs and make the service 
 as good as possible. It then foregoes taking the full price of 
 the wealth that it has produced and allows each consumer to 
 enjoy the surplus. Then the payment by the citizen is a fee. 
 
 (3) It may charge a fee much smaller than the cost, or a fee 
 for all water consumed over a certain amount, but provide a 
 certain amount of water for each citizen at the common cost. 
 
 (4) It may distribute the water free of charge and pay for it 
 out of the common fund derived from taxation. Now the sums 
 received in the last three cases only are fiscal in character. 
 
 In this connection it is important to note that there is a 
 strong tendency for a government to abandon the economic, or 
 profit making, method of managing such enterprises and to pass 
 to some one of the fiscal methods. That is, the government's 
 method of conducting a public service does not usually con- 
 
 1 See Sidgwick, Bk. II, Chap. X; Andrews, rnstilntes of Economics, p. 122; 
 Marshall, Ec. of Ind., pp. 180 ff. ; Senior, pp. 103-114; Sumner, Essays, p. 46; 
 Hadley, R. R. Trans., p. 100; Seligman, Railway Tariffs, etc., pp. 8 ff.
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 75 
 
 tinue to follow that of private management. Thus, for example, 
 it would be natural, and perhaps proper, for a private water 
 company to keep a " large capital account " and to carry a 
 heavy interest or dividend charge against the earnings. But 
 when a government has paid off in whole or in part the debt 
 contracted when it acquired the plant, it is not uncommon to 
 drop the interest charge and to reduce the rates in proportion 
 to the reduced costs. The reason for making such an enterprise 
 a government function is the recognition of some public interest 
 or benefit, and, for the same reason, the fiscal method of admin- 
 istration is the more appropriate. Some writers have even 
 gone so far as to suggest this as a sort of test as to whether any 
 given enterprise should be taken over as a government function. 
 They say, in substance, that if the people are not willing to see 
 the enterprise in question conducted on fiscal principles, they 
 should not make it a government function, for it will probably 
 pass on into one of the three fiscal methods of management 
 above outlined and may in time reach the last. 
 
 As Cohn has so well pointed out, it is a very different problem 
 that we have to deal with when the management of some 
 industry is made merely the form or means for collecting a tax 
 from certain classes of persons. The French tobacco monopoly, 
 for example, is not in any sense to be looked upon as an industry 
 undertaken in the common interest, or even in the interest of a 
 particular class. It is the aim of the French government to 
 tax the users of tobacco. This aim is attained by other gov- 
 ernments through different processes. The form of a monopoly 
 has been found to be remarkably easy, expedient, and successful 
 as a method of indirect taxation. 
 
 Sec. 8. Definitions: The "Base." — This section will be 
 devoted to the definition of terms used in connection with 
 revenues. The base of a tax is the thing, characteristic, or 
 phenomenon by the possession of which the amount that each 
 taxpayer shall contribute is to be measured, or it is that upon 
 which the tax is " levied." The base is not always, although 
 it may be, the source from which the tax is paid. Thus a tax 
 based on property is generally paid out of the income, or rev-
 
 76 INTRODUCTION TO PUBLIC FINANCE 
 
 enue, which flows, sometimes from the property, sometimes 
 from other sources, while a tax on income would be, normally, 
 paid from the same income that constitutes the base. The 
 direct taxes are almost always called by the name of the base ; 
 indirect taxes are seldom so named. The base is often expressed 
 in units of value ; as, for example, $ioo worth of property. It 
 may, however, be expressed in terms of some other units of 
 measurement, as yards, tons, acres, barrels ; or again by mere 
 count, as, one poll, one ox, etc. 
 
 " Ad Valorem " and " Specific " Taxes. — When the base is 
 expressed in terms of value, the tax is sometimes called an 
 " ad valorem " tax. When the base is expressed in terms of 
 some unit of measurement other than value, the tax is some- 
 times called " specific." But neither of these terms is applied 
 to certain kinds of taxes, such as poll taxes, income taxes, or 
 inheritance taxes. Sometimes the unit of the base is complex 
 and arbitrary. For example, in Vermont, the base of the 
 general property tax is each dollar in the " Grand List." But 
 only one per cent of the true value of the property of each 
 taxpayer is " set in the Hst," while his poll is also " set in the 
 list," at an arbitrary valuation of $ioo. This complexity of 
 the base arose, originally, from the custom of fixing an arbi- 
 trary uniform value for each piece of property, as so much per 
 acre of land, so much per head of cattle, so much per horse, 
 irrespective of actual value. Other cases of such complex 
 bases usually have some similar historical origin. 
 
 The " Rate." — The rate is the amount of tax that falls upon 
 each unit of the base. The rate, whether for specific or ad 
 valorem taxes, may be proportional or disproportional. It is 
 proportional when it is always in the same proportion to the 
 base, whether the amount held by a taxpayer or subject to the 
 tax be large or small. 
 
 The important thing to observe in connection with propor- 
 tional tax rates is the way in which the rate is arrived at. It 
 often occurs that a government desires to raise a definite amount 
 of money by a given tax, but the aggregate of the base is not 
 known at the time this amount is fixed. It may, therefore,
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 77 
 
 direct that when the aggregate of the base is ascertained, the 
 amount to be raised shall be divided by the aggregate of the 
 base and the quotient, or the rate thus obtained shall be applied 
 in turn to the amount of the base held by each taxpayer, thus 
 determining his taxes. Or again, and this is perhaps more 
 important, a central government may apportion among its 
 local divisions the total amount to be raised, assigning a lump 
 sum to each, and the local government of each division may 
 apportion its share among its taxpayers in the manner above 
 described. In the latter case the " rate," so far as individual 
 taxpayers are concerned, will vary from one local division to 
 another. When either method is followed, the rate, or even the 
 tax itself, is often called " apportioned." This distinction is 
 especially important in the United States, where most of the 
 state taxes are apportioned in this manner. In many instances, 
 however, the government fixes the rate in advance, and is con- 
 tent to accept the revenues, be they large or small, which the 
 rate so fixed will yield. It is true, however, that even in these 
 cases there is a rough sort of apportionment made before the 
 rate is fixed, otherwise the revenue might be too large or too 
 small. Fixed proportionate rates are sometimes laid down by 
 some superior authority to hmit the extravagance of lower 
 governmental bodies. 
 
 Disproportionate rates are rates which in themselves vary as 
 the amount of the base held by different taxpayers varies. 
 These rates may be progressive or regressive. 
 
 Progressive rates are the most important general class of 
 disproportionate rates. This term is applied when the rate is 
 proportionately higher for a taxpayer who is taxable for a large 
 amount of the base than for one who is taxable for a smaller 
 amount. That is, the fraction taken is ever larger, the larger 
 the amount of the base possessed by the individual taxpayer. 
 
 Progressive rates may be regular or irregular according as 
 they increase by some fixed mathematical rule or increase in 
 some more or less arbitrary manner. There are very few regu- 
 lar progressive tax rates in actual practice. Arithmetical or 
 geometrical progression would give regular progression and so
 
 78 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
 would many other mathematical formulas, notably, some of 
 those of calculus. Of course, many forms of regular progres- 
 sion would, if continued long enough, reach a rate equal to one 
 hundred per cent of the base. As this results in practical con- 
 fiscation, such an extreme is seldom provided by law. Usu- 
 ally, after a certain relatively Wgh point is reached, the pro- 
 gression is more or less arbitrarily stopped and a proportional 
 rate is substituted. Were the progression to be continued 
 until it resulted in confiscation the motive would not be a 
 fiscal one, for such a policy would diminish the revenue by 
 ultimately cutting down the aggregate of the base. In fact, 
 as we shall see later, the motive for a progressive rate is always 
 something other than the purely fiscal one. 
 
 One of the most common, and certainly one of the most 
 important, forms of progression is that called " degressive." 
 In this case the rate (as distinct from the tax) increases but by 
 an ever decreasing increment. In perfectly regular degression 
 the rate would be so arranged that it would constantly approach 
 but never quite reach a given proportional rate as a limit. It 
 would be cumbersome to accomplish this result by varying the 
 nominal rate. But practically the same end can be reached by 
 the simple expedient of deducting from each of the ascending 
 amounts of the base a fixed amount, that is, technically untaxed, 
 and appljdng to the remainder, in each case, a nominally pro- 
 portioned rate. 
 
 Diagram A illustrates a theoretical form of regular degressive 
 taxation, which may be regarded as an ideal. The diagram is 
 
 DIAGRAM A 
 
 A Typical Form of Regular Degression 
 
 r 
 
 
 
 
 
 
 , 
 
 
 
 
 . 
 
 
 
 
 
 
 
 P3 
 
 Pi 
 
 
 
 
 
 ^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ( 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 C rrix ?"2 ^'^S "'4 ''^5 ^6 ^^7 ^8 '^^9 ^10 ^' U ^'^12 ^^^3 ^^li 
 
 2/ = r-^
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 79 
 
 drawn on the assumption that a constant amount " C " is 
 deducted from each and every amount of the base, be the base 
 large or small, and that the remainder is subject to a propor- 
 tional tax of " R," which thus becomes the limit, which the 
 rate constantly approaches but never reaches. 
 
 In actual practice such regularity as is assumed in the chart 
 is seldom found. The regularity may be broken by changing 
 the amount of the deduction allowed at different stages, or by 
 cutting it off altogether. 
 
 Diagram B represents the beginning of the schedule of rates 
 of the British income tax, as it was under the law of 1898, when 
 
 DIAGRAM B 
 
 British Income Tax, Form of 1898. Rate, 8d. per £. Slightly 
 Irregular Degression, Ending in Proportion 
 
 
 
 c 
 
 4 
 
 
 
 
 
 
 _J 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ,^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1) 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 £ 100 200 300 400 500 GOO 700 bOO 900 1000 1100 1200 loOO 1400 
 
 the rate was fixed at eight pence per pound. The deductions 
 allowed were £i6o up to an income of £400 ; then £150 up to an 
 income of £500; then £120 to £600; £70 to £700; after which 
 no deduction is allowed. As will be readily seen this carries 
 fairly regular degression up to £700, after which the rate is 
 proportional. 
 
 Progressive tax rates are often graduated ; that is, the rate 
 increases by grades or stages of the amounts of the base, and is 
 either proportional or fixed within each grade. From this 
 practice it is very common to speak of all progressive taxes as 
 " graduated taxes." It is probably safe to say that the term 
 " graduated " is more widely used in this connection, and 
 perhaps better understood than the term " progressive." 
 
 Diagram C represents a somewhat complex form of the gradu- 
 ated tax. But it is a form which with modifications as to details
 
 8o 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
 and rates is very frequently found and is found in connection 
 with many important taxes. The diagram shows the first ten 
 grades of the long series of grades in the Prussian income tax, 
 as it was in 1891. It is a form that is intended, broadly speak- 
 ing, to result in a series of rates that impose a generally degres- 
 sive tax. But on account of the fixed rate within each grade, 
 and of the change in rates from grade to grade by round numbers 
 only, the resulting schedule is regressive within each grade, and 
 occasionally regressive from grade to grade. If the rates were 
 proportional within each grade, the chart would show a series 
 of horizontal steps. 
 
 DIAGRAM C 
 
 First Ten Grades of the Prussian Income Tax, 1891. 
 Degression, Regression in Each Grade 
 
 Gr.\dual 
 
 
 
 
 
 
 
 
 
 p^ 
 
 ^r 
 
 -^ 
 
 ^ 
 
 J^ 
 
 ^ 
 
 
 
 
 
 
 p 
 
 ,_^ 
 
 ■J 
 
 
 
 
 
 
 
 
 
 
 
 P^ J^" 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 MARKS ' 000 »00 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 
 
 Many other forms of progressive rates have been devised. 
 They are found in a great many different kinds of taxes, but 
 are most common in income and inheritance taxes. The theory 
 of progressive taxation is discussed in another connection. 
 
 The rate is regressive when it is the reverse of the progressive, 
 that is, when it is higher for the taxpayer who has a small 
 amount of the base than for one who has a large amount. This 
 is usually regarded as an unjust mode of taxation, and when it 
 occurs, it is usually an accidental or unintentional result. 
 Sometimes it is brought about by the evasion or partial evasion 
 of taxation by those who should be the heavier taxpayers. It 
 is occasionally adopted intentionally, as when it is desired to 
 exterminate small saloons and drinking places by a higher 
 license tax than is imposed on the larger ones. It is safe to say 
 that whenever regressive rates are found, they are either acci- 
 dental or their purpose is distinctly non-fiscal. The regressive
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 8l 
 
 rates are in practice never very regular in form, even less so 
 than the progressive rates, but theoretically they can be quite 
 as regular in form as the latter. 
 
 It should be noted that graduated taxes are usually regres- 
 sive within each grade ; that is, the tax is a larger proportion 
 of the base for a taxpayer who is just over the lower limit than 
 for one who is at or near the upper limit of the grade. Strictly 
 speaking, every so-called proportional tax is graduated and con- 
 sequently regressive within each grade. This is because the 
 recognised unit of the base, be it a pound, a dollar, a penny, or 
 a cent, constitutes a grade and necessarily takes the same rate 
 throughout. But when the unit of the base is small, this 
 graduation and regression is of so little importance that it is 
 ignored. 
 
 Other Definitions. — Impost is a general term for any tax, 
 but there is a tendency to make it synonymous with indirect 
 taxes. 
 
 Customs duties are indirect taxes levied on the goods imported 
 into or exported from certain territories. 
 
 Excises are indirect taxes levied on goods produced or con- 
 sumed within certain territorial Hmits. 
 
 Toll was originally a general term for many taxes, but it has 
 come to have a special meaning, and applies only to the charges 
 for passage over roads, bridges, canals, etc. 
 
 A tax is said to be shifted when the taxpayer reimburses 
 himself from some one else. The final incidence of the tax is 
 the falling of the burden upon some person who does not shift it. 
 
 Two terms of great importance in connection with taxation 
 are " levy " and " assessment." 
 
 The term " levy " covers all the legal processes of imposing 
 a tax and making its payment compulsory. It is an act of the 
 supreme authority of government. " Whatever else it may be," 
 says Mr. John Fiskc,' " the government is the power that 
 taxes." Conversely no tax can be imposed except by govern- 
 mental authority. In England and the United States the 
 power to levy taxes is a jealously guarded prerogative of the 
 
 1 Civil Government in the United States, p. 7.
 
 82 INTRODUCTION TO PUBLIC FINANCE 
 
 legislative department. Two of the commonest provisions of 
 the constitutions of the commonwealths of the United States 
 are in effect: (i) that " the power of taxation shall never be 
 surrendered or suspended by any grant or contract to which 
 the State shall be a party." (2) " No tax shall be levied except 
 in pursuance of law." Only in countries having a system of 
 administrative law is there a seeming departure from this 
 principle. 
 
 After the legislative or the equivalent authority has levied a 
 tax, the next step is the " assessment." This term covers the 
 acts and proceedings of the administrative ofBcers in determining 
 the amount of taxes each taxpayer is to pay. By metonymy 
 it is often restricted, in common usage, to the most important 
 process involved. Thus in the United States in connection 
 with the administration of the general property tax, the term 
 " assessment " is often used as though it were synonymous 
 with the " valuation" of the property. 
 
 While legally and logically the levy of a tax involves fixing 
 the rate, and while theoretically this part of the levy can no 
 more be delegated by the legislative authority to any one else 
 than can any other part of the levy, nevertheless, a seeming 
 delegation of this power often occurs. Thus some executive 
 department may be instructed to ascertain that rate which will 
 yield a certain sum of money, and this rate, although unknown 
 at the time the law is enacted, is declared therein to be the 
 legal rate. This is only a seeming evasion of the fundamental 
 principle ; for the executive department on which this duty 
 is imposed has no discretionary powers and merely makes a 
 mathematical computation, the result of which it has no power 
 to alter. Unquestionably illegal is the not uncommon practice 
 of such executive boards of rounding out the rate to some whole 
 number, or to some convenient fraction, so as to simplify the 
 extensions on the tax bills. But this is such a trivial matter 
 that the courts do not regard the tax levy as invalidated by such 
 a proceeding. 
 
 The tax list or roll, which is also known by many other 
 names, contains the record of the assessment. It is a legal
 
 THE VARIOUS KINDS OF TAXES, FEES, AND RATES 83 
 
 document of the first importance. It is in force and effect 
 a warrant, compelling payment, and the basis of all legal tax 
 proceedings. In many cases, notably on the continent of 
 Europe, these Usts are, for certain taxes, elaborate, permanent 
 or partly permanent records, which may serve various legal 
 purposes as well as the fiscal, as for example the record of titles, 
 and are called " cadastres." When the same tax is used by 
 several different departments of government, as, for example, 
 by the cities, counties, pro\dnces, or other divisions of local 
 governments and also by the State or central government, the 
 initial tax fist or the original may be retained and filed in each 
 local office or tax bureau, and a duplicate thereof sent up to the 
 higher department or division of government. When a number 
 of these duplicates are brought together, the combined list is 
 designated by some distinguishing name, such as the " grand 
 dupHcate," the " grand list," or some other similar term. 
 
 " Rate," when used alone without the prefix " tax," is a term 
 appHed in England to many local taxes, as the " poor rates," 
 or simply " the rates," and in that country often carries the 
 distinction between local taxes and general taxes. In America 
 local taxes for the maintenance of the water systems are not 
 infrequently called " water rates," but the term does not carry 
 the same meaning as in England.
 
 CHAPTER III 
 THE TAX SYSTEM 
 
 Section i. Taxes are Combined into a System. — No 
 
 nation has ever found it feasible to adopt any single tax as the 
 sole source of its income. No nation at all advanced in civilisa- 
 tion has attempted to conduct its government entirely from 
 the earnings of its domains or industries. Every civilised 
 nation of to-day combines the three sorts of revenues, those 
 produced by its own activities and those obtained from taxation 
 and from fees. And furthermore, no nation attempts to exist 
 with only one of each of these kinds of revenues. These dif- 
 ferent forms are combined into a " system " or general scheme, 
 which conforms more or less closely to the general ideal of 
 justice which may have been adopted by the nation. To 
 judge of the justice or expediency of any tax it should be studied 
 in its place in the " system." We have already seen the two 
 main theories as to the proper measure of taxation : the one, 
 that taxation should be measured by benefit ; the other, that it 
 should be measured by faculty. A perfect system would so 
 combine the different forms that the total burden imposed 
 would be in accord with the ideal adopted. 
 
 The Dream of a Single Tax. — There is a constant tendency 
 toward the simplification of tax systems, although most modern 
 systems are still extremely complicated. It is the dream of 
 financial theorists, and has been ever since the science began, 
 and it is the aim of many would-be reformers, to find a single 
 tax that will furnish all the necessary funds for the support of 
 the government. The physiocratic impot unique on the produit 
 net is well known, as is also the justification therefor. It is 
 also well known wherein this fails. Modern proposals generally 
 
 84
 
 THE TAX SYSTEM 85 
 
 involve something more than mere tax reform. The socialistic 
 demand for a single, exclusive income tax with a progressive 
 rate is advanced with a hope of effecting a redistribution of the 
 wealth of the world. Henry George's well-known scheme for 
 a single tax on land has a similar ulterior purpose. His object 
 is to free industry from trammels which he supposes are due 
 to the appropriation of land values by private individuals. In 
 form his proposition is not very unlike that of the Physiocrats. 
 He is an extreme individualist, but he aims, hke the socialists, 
 at a new distribution of property. Of these two modern schemes 
 for a single tax the first is perfectly feasible from the fiscal point 
 of view. Such a tax could probably be administered and could 
 be made to yield ample revenue. It fails, however, to answer 
 the simplest requirements of justice. For example, it would 
 not, unless our whole scheme of economic Hfe were first altered, 
 seem just that the man whose property was benefited by the 
 grading and metalling of a street should be entirely free from 
 a special charge for the special benefit. The scheme is inexpe- 
 dient for three reasons : (i) it presupposes for its successful 
 administration a method of distribution of wealth very dif- 
 ferent from that which the world now has ; (2) it demands a 
 perfection in the technique of administration as yet absolutely 
 unattainable ; (3) it would need, in order to be fairly adminis- 
 tered, more honesty than men have yet shown in their dealings 
 with the government. None of these reasons militate in the 
 least against the incorporation of an income tax in the tax sys- 
 tem, beside other taxes. They apply only to its use as the sole 
 source of revenue. 
 
 Mr. Louis F. Post, official lecturer for the Single-tax League, 
 gives the following explanation of the second most prominent 
 form of a single tax. 
 
 " The practical form in which Henry George puts the idea 
 of appropriating economic rent to the common use is ' To abolish 
 all taxation save that upon land values.^ This is now generally 
 known as ' the single tax.' Under its operation all classes of 
 workers, whether manufacturers, merchants, bankers, profes- 
 sional men , clerks, mechanics, farmers, farm-hands, or other work-
 
 86 INTRODUCTION TO PUBLIC FINANCE 
 
 ing classes, would, as such, be wholly exempt. It is only as 
 men who own land that they would be taxed, the tax of each 
 being in proportion, not to the area, but to the value of his land. 
 And no one would be compelled to pay a higher tax than others 
 if his land were improved or used while theirs was not, nor if 
 his were better improved or better used than theirs. The 
 value of its improvements would not be considered in estimat- 
 ing the value of a holding ; site value alone would govern. If 
 the site rose in the market, the tax would proportionately in- 
 crease; if that fell, the tax would proportionately diminish." ^ 
 A full discussion of the economic and social effects of Henry 
 George's single tax would carry us far beyond the scope of this 
 book. The argument for the single tax, as a mode of taxation 
 alone, is far from complete by itself. In so far as it can be 
 stated separately it has been well given by Fillebrown.^ His 
 statement is as follows: " a. The site value of land is a social 
 product, b. A land tax cannot be ' shifted.' c. The selHng 
 value of the land is an untaxed value." From a he would 
 have us draw the conclusion that the ground rent should belong 
 to the community as a whole. This, of course, involves the 
 economic argument for the single tax. From b he would have 
 us infer that the only person affected would be the landlord, 
 and from c that " if all taxes are ultimately taken from rent, 
 it follows that in the course of two or three generations taxation 
 may cease entirely from being a burden upon any one." ^ In 
 the first edition of this book there was a discussion of the prob- 
 able sufficiency of the revenues which could be obtained from 
 this source, and figures were presented from which the author 
 was inclined to draw the conclusion that the entire ground rent 
 would in most communities be less than the revenues now being 
 spent by the government. Those figures have been questioned, 
 and it is difficult, if not impossible, to get any that both sides 
 to the controversy would be willing to accept. But it appears 
 to the author on more mature consideration that the point is 
 
 1 "The Single Tax," p. i. Henry George, Progress and Poverty, Bk. VIII, 
 Chap. II. 
 
 ^ A. B. C. of Taxation, p. 155. ' Op. cit., p. 163.
 
 THE TAX SYSTEM 87 
 
 not quite pertinent. Because, if it were admitted on the one 
 hand that all taxes other than those on land values were unjust, 
 then it would become the duty of the government to keep its 
 expenditures within the revenues available. But on the other 
 hand some of the ablest among the modern disciples of Henry 
 George do not lay full stress on the word " single." "It is a 
 question of applying land values to the common use as far as 
 they will go, or as much of them as may be needed, as the case 
 may prove to be." ^ 
 
 Aside from any question as to the probable sufficiency or 
 insufficiency of the revenues, the single tax presents a great 
 many practical administrative difficulties for the solution of 
 which no detailed suggestions have been offered. Thus we 
 cannot easily foresee how, under the changed conditions, the 
 assessment would be made, or how the actual ground rent 
 would be ascertained. It is especially difficult to see how the 
 revenues would be apportioned among the various divisions of 
 government, or what would be the assignment of governmental 
 functions to different divisions of government under the new 
 regime. All these difficulties make governments hesitate to 
 plunge into so comprehensive a change, the outcome of which 
 it is so difficult to foresee. 
 
 If on economic grounds, or on the ground of general public 
 pohcy, we deny that any such fundamental changes in the 
 modern system of land ownership, possession, or enjoyment 
 are desirable, or that the " private appropriation of ground 
 rent " is in any way a wrong, or the cause of any social or 
 economic evils, then the case against the single tax is clear. 
 It would be fundamentally unjust because it lays an unduly 
 heavy burden on certain classes and allows others to go free 
 or at least to enjoy a very considerable abatement in their 
 contributions to the common ends of society. 
 
 Increment Value Land Taxes. — An apparent application 
 of the single-tax idea is found in the recent extension of a 
 system of special taxes on the increment of land values, espe- 
 
 1 Louis F. Post, The Single Tax, p. 86. Quoted approvingly by Fillebrown, op. 
 cit., p. 154.
 
 88 INTRODUCTION TO PUBLIC FINANCE 
 
 daily in large cities in Germany. As these cities have grown 
 rapidly in population there has come a corresponding increase 
 in land values. In many cases the existing tax systems have 
 been insufficient to reach this added tax-paying capacity in a 
 manner that seemed adequate under the new conditions, and 
 consequently new special methods of reaching it have been 
 devised. The special taxes are usually based on the so-called 
 " unearned " increment in value and not on any increase due to 
 actual outlay or improvements made by the owner. They are 
 usually levied at the time of a transfer, when the actual incre- 
 ment of value appears. The rates, while often sharply pro- 
 gressive according to the percentage of unearned increment 
 over cost, are not so heavy as to take the entire increment. 
 They accrue, as a rule, to the benefit of the cities only. These 
 taxes are therefore unlike the " single tax " in that they do 
 not in any event take the whole of the ground-rent, whether 
 as an annual payment or in capitalised form. 
 
 Every tax tends to repress the development of the particular 
 phenomenon on which it rests. A single tax of any kind will 
 tend to defeat its own ends by repressing the existence of the 
 phenomenon which gives the signal for its assessment. For 
 example, in Mexico land is not taxed, but if the farmer kills 
 a cow, or sells a crop, he is taxed. Naturally this discourages 
 any extension of the uses of land that involve this disagreeable 
 consequence. The experience of nations which has led them to 
 diversify the forms of their taxation is, therefore, supported 
 by theoretical considerations. The tax system of the United 
 States is still, and the tax systems of all European nations have 
 been, until recently, and are yet in great measure, mere acci- 
 dental jumbles of different historical taxes, which are retained 
 simply for the revenue that they yield and not because of any 
 belief in their justice. It is not often that nations are rich 
 enough to enjoy what Professor Cohn has well called the 
 '' luxury of reform for reform's sake." Their reforms have 
 been most often undertaken for the sake of increased reve- 
 nues. 
 
 To be sure, the rough edges have been somewhat worn away
 
 THE TAX SYSTEM 89 
 
 by the friction of economic forces, and the process of tax shift- 
 ing has in some instances removed some of the worst injustices. 
 But examined from the standpoint of some ideal system, the 
 tax systems of many modern nations fail woefully. It matters 
 little which ideal be the one held up by which to test them ; 
 whether it be that of the benefit theory, or that of the faculty 
 theory, the failure is the same. 
 
 Sec. 2. Theories of Justice in Taxation. — What in the 
 opinion of nations constitutes the idea of correct or just taxa- 
 tion ? The answer to this question is to be sought in the theories 
 of taxation that have found favour, and are generally contained 
 in the writings of economists and financiers. The Physiocratic 
 answer was, we have seen, inadequate. The benefit theory 
 would say that each citizen should pay according to the benefit 
 he receives. What is the benefit and how is it measured ? The 
 common benefits are, clearly, the peaceful enjoyment of life, 
 liberty, and property. The protection the State affords to 
 life and liberty is theoretically equal for all ; that to property 
 might be considered to vary as the amount of property varies.^ 
 A uniform tax on each poll for the first two benefits, and a pro- 
 portional tax on property, would seem to answer the require- 
 ments of this theory with sufficient accuracy. But the relatively 
 small returns from the poll taxes and the great expense and fric- 
 tion of collecting them soon led to their partial abandonment. 
 Property then remained the chief basis under this theory. The 
 value of property seemed clearly to depend on its revenue- 
 yielding power. It is a matter of comparative indifference 
 which is taken. Hence the idea embodied in the famous dictum 
 of Adam Smith : " The subjects of every State ought to con- 
 tribute toward the support of the government, as nearly as 
 possible, ... in j)roportion to the revenues which they 
 respectively enjoy under the protection of the State." - But 
 here again as the industrial population separated from the soil 
 
 * The benefit theory has been illogically developed into a defence of progressive 
 taxation. See Seligman, Progressive Taxation, 2d ed., p. 181 fl. I have not included 
 this illogical side in the discussion. 
 
 2 Bk. V, Chap. II, Part II. On the various interpretations of this passage, see 
 Seligman, op. cit., p. 150.
 
 90 INTRODUCTION TO PUBLIC FINANCE 
 
 and a large body of citizens arose, who had no land and little 
 personal property, and who could ill afford to part with any 
 of their earnings, humanity and expediency urged the exemp- 
 tion of the minimum of subsistence. It cost too much and 
 caused too much bitterness to collect taxes from those having 
 only the bare necessities. Then came Ricardo's suggestion, 
 " The power of paying taxes is in proportion to the net, and 
 not in proportion to the gross revenue." The items that were 
 to be deducted were the costs of production, among which 
 were then counted the bread and meat for the labourers, which 
 were regarded very much as so much fuel shovelled into the 
 furnace of a human machine. Hence it was argued that it 
 would be too burdensome to production to tax what was neces- 
 sary to maintain the productive power of the workers. A certain 
 amount of income, therefore, should be exempt ; for if taxed, 
 the tax would certainly be shifted. Fortunately, according 
 to the prevalent theory of wages, the amount to be exempted 
 would remain fixed, or nearly so, advancing, if at all, very 
 slowly. So that all incomes over a fixed amount were to be 
 taxed proportionally, since the benefit to such individuals as 
 possessed incomes above the chosen minimum was supposed 
 to be in exact proportion to the amount in excess of the mini- 
 mum. Stated broadly, this theory was as follows : All taxes 
 must be proportioned to benefit. Certain classes only are 
 benefited, namely, those having income over a certain amount ; 
 that is, over the minimum of subsistence. They should be 
 taxed on the amount above that minimum of subsistence. It 
 would seem, then, that the money spejit in protection of the 
 workers who lived on the minimum of subsistence was to be 
 treated as if of benefit to the other classes. This puts the 
 worker in much the same category with the pauper for whom the 
 State, from reasons of humanity, decides that it is worth while 
 to care. With a clearer perception of the character of pro- 
 duction and a realisation of the fact that the worker was a man, 
 the satisfaction of whose wants, even if they did not exceed the 
 minimum of subsistence, was yet as important as the satisfac- 
 tion of the higher wants of other classes, came a realisation
 
 THE TAX SYSTEM 9I 
 
 of the inadequacy of this theory. It is now quite generally 
 abandoned, except as the legal theory in America. 
 
 Perhaps the best statement of tlie United States legal theory 
 of what constitutes the just measure of taxation is given by 
 Judge Cooley.^ " If it were practicable to do so, the taxes 
 levied by the government ought to be apportioned among the 
 people according to the benefit which each receives from the 
 protection the government affords him ; but this is manifestly 
 impossible. The value of life, liberty, and of the social and 
 family rights and privileges cannot be measured by any pecuni- 
 ary standard ; and by the general consent of civilised nations, 
 income or the sources of income are almost universally made the 
 basis upon which the ordinary taxes are estimated. This is 
 upon the assumption, never wholly true in point of fact, but 
 sufficiently near the truth for the practical operations of govern- 
 ment, that the benefit received from the government bears some 
 proportion to the property held, or the revenue enjoyed under 
 its protection ; and though this can never be arrived at with 
 accuracy, through the operation of any general rule, and would 
 not be wholly just if it could be, experience has given us no 
 better standard, and it is applied in a great variety of forms, 
 and with more or less approximation to justice and equality. 
 But, as before stated, other considerations are always admissible; 
 what is aimed at is, not taxes strictly just, but such taxes as will 
 best subserve the general welfare of political society." 
 
 Benefit as a measure of taxation is therefore according to the 
 admission of one of its strongest advocates inadequate. Only 
 in special instances can benefit be directly measured. There, 
 of course, it has been and will remain the basis of taxation, at 
 least until the State shall decide that the special benefit has been 
 merged in the common benefit. 
 
 Sec. 3. The Faculty Theory. — But the faculty theory, while 
 offering some difficulties, is on the whole more satisfactory. 
 The faculty theory is well illustrated by the history of the 
 English poor law, to which reference has already been made. 
 At first the attempt was made to supply the wants of the poor 
 
 1 Taxation, p. 24.
 
 92 INTRODUCTION TO PUBLIC FINANCE 
 
 by voluntary contributions. But it soon became apparent that 
 all were not contributing " as God had prospered them." The 
 idea that the support of the poor was a benefit to the other 
 classes, except, perhaps, so far as almsgiving was supposed to 
 insure a man's salvation, did not appeal to the legislators. 
 They anxiously avoided making the contribution compulsory 
 because it would be hard to justify such a policy by pointing 
 to any benefit. But they felt that fairness demanded that each 
 should contribute according to his ability. Indeed, this was 
 their understanding of the Divine command upon which they 
 were consciously acting. The justices of peace were, without 
 any very definite instructions as to the mode of procedure, 
 authorised to see that each person contributed fairly according 
 to his abihty.^ 
 
 What then constitutes ability? The original idea seems to 
 have been that the possession of property constituted ability. 
 But the value of property depends upon its power to yield the 
 owner a revenue. If we consider landed property only, we find 
 historically the greatest uncertainty as to whether men should 
 be assessed according to some estimate of the salable value or 
 according to its annual yield. This uncertainty arose from the 
 conditions of the times. The salable value of landed property 
 was, of course, determined by the annual produce or revenue- 
 yielding power. In the middle ages land was not salable 
 property ; hence, it was the custom to value it for purposes of 
 taxation according to the annual produce, or the annual rental 
 value, which was determined by the produce. The history 
 of taxation in the American colonies is very instructive as to 
 the method of determining what constitutes faculty or ability 
 to pay. Here for the first time in history, or at least since the 
 fall of Rome, was a country that enjoyed almost absolute free 
 trade in land. When the Connecticut proprietors bought 
 in fee simple lands in Vermont, which they had never seen, 
 to be sold again on cash terms to settlers, whom they had never 
 seen, often for prices which the same lands would not bring 
 to-day, they were doing what was not possible in any European 
 1 Ashley, Economic History, II, p. 360.
 
 THE TAX SYSTEM 93 
 
 country at the time and what is only partly possible in most 
 of them to-day, i.e. selling land as one sells wheat or any other 
 commodity. The New England colonists, therefore, had the 
 choice of two methods of assessing property in land : they 
 could follow the older method to which they were accustomed 
 at home, which assessed the rental value of the property, or they 
 could take some method suggested by the fact that lands were 
 really sold, in fee simple, for a price. In general they chose 
 the latter, although there are numerous traces of the old method 
 both in the tax laws and in other regulations that are of a 
 similar character. It is unfortunate that none of the investi- 
 gations into the history of this period have been specially 
 directed toward this point. Vermont furnishes one of the best 
 examples of the principles underlying the colonial idea of taxa- 
 tion. There the conditions were very simple. Taxation 1 was 
 intended to cover all male inhabitants. Every male between 
 16 and 60 years of age, with a few definite exceptions, was 
 " rated " at £6 on his person. That is, everybody was con- 
 sidered to be able to contribute something, whether he had 
 property or not. Then the different items of property were 
 " set in the list " over against the name of the owner at fixed 
 rates. For example, each acre of improved land, 105. ; an ox 
 or steer four years old, £4 ; three years old, £3 ; two years old, 
 £2 ; one year old, £1 ; a horse three years old or over, £3 ; all 
 " horse kind " two years old, £2. Money on hand, or due, was 
 listed at £6 in the £100. Then all persons were listed " for 
 their faculty," according to occupation and earnings : attor- 
 neys at from £50 upwards, as the value of their practice in- 
 creased ; all tradesmen, traders, and artificers " proportion- 
 ally to their gains and returns." Other items of property were 
 entered in the list in a similar way at fixed rates. The sum total 
 of all the difi"erent items over against the name of each person 
 was supposed to represent his total ability or faculty. The 
 notable thing about all this is that only revenue-yielding prop- 
 erty was listed. It was not a property tax purely, nor an in- 
 come tax. But the thing which it sought to ascertain was how 
 1 Wood, History 0/ Taxation in Vermont. Columbia College Studies, IV, 3.
 
 94 INTRODUCTION TO PUBLIC FINANCE 
 
 much ability or faculty each person had. All property that was 
 regarded as indicative of faculty was listed, and many other 
 things that were also indicative of faculty were included. Later, 
 however, Vermont adopted a form more nearly in accord with 
 the idea that property alone indicates faculty. 
 
 There are, then, two ways of ascertaining faculty. In the 
 one the base is primarily the property irrespective of the 
 revenue the property yields. In the other it is income from 
 property or from other sources. There are also two ways 
 of completing the measurement : We may assume that faculty 
 is proportional to [property or income ; that is, that it 
 increases in exactly the same ratio as property and in- 
 come increase. Or we may assume that it increases more 
 rapidly than either property or income. The choice of base 
 and the choice of rate have given rise to long and weary dis- 
 cussions and hair-sphtting distinctions. In regard to the first, 
 it is sufficient to say that at present the most widely accepted 
 view is that, from the standpoint of abstract justice, income 
 forms a better starting-point for the determination of faculty 
 than property. But we cannot avoid entering the discussion 
 as to whether faculty is in proportion to income or increases 
 more rapidly. The widespread advance of democracy, and 
 of sympathy for those in the lower walks of life, led to the 
 desire to justify if possible the exemption of smaller incomes, 
 especially the minimum of subsistence, and this desire found 
 means of fulfilment in the newer theories of value, the con- 
 ception of marginal utility, and the discussion as to the relative 
 urgency of different wants. If we classify certain wants as 
 absolute necessities, then the conclusion is near that the possessor 
 of the minimum of subsistence has no ability to pay taxes. The 
 possessor of a great deal more than the minimum of subsistence 
 can in proportion bear more taxes than one who has only 
 enough to obtain a few comforts in addition to the necessities. 
 That is, the test of justice is found in equality of sacrifice, and 
 we impose a greater sacrifice if we take away from the labouring 
 man with $1500 a year 10 per cent of his incomie than we impose 
 on the capitaHst with $15,000 annual income by taxing him
 
 THE TAX SYSTEM 95 
 
 in the same proportion. Moreover, if we look upon faculty 
 as identical with general economic power, then it is clear that, 
 as the control of wealth increases, the ease of further increase 
 is greater. Thus it is easier relatively for the millionaire to 
 double his fortune than it is for the daily-wage earner to rise 
 to independence. 
 
 Only slightly different in form is the so-called " leave-them- 
 as-you-find-them " theory of justice in taxation. That is, 
 that taxes should be so imposed that when all have paid them, 
 each will be left in the same position, relative to his fellows, 
 as he was before the payment. ^ 
 
 Sec. 4. The Compensatory and Socialistic Theories. — 
 There are two other theories, which, independent of the idea 
 of sacrifice or of increased economic power, attempt to justify 
 a higher rate of taxation for higher incomes than for lower. 
 These two theories adopt the hypothesis that the common 
 benefit is equal, and demand that the inequalities in wealth 
 should be removed in order to make it easily possible to tax 
 according to this equal benefit. There are, first, those who 
 argue that the inequalities in wealth are due in large measure 
 to the action of the State, and hence the State is justified in 
 abandoning the idea of equality of taxation and in taxing 
 those who have much wealth more heavily than others, for 
 they have gained from the State's own action. This has been 
 called the compensatory theory. Others, again, starting from 
 the same hypothesis, urge that taxation cannot be equal, be- 
 cause evil economic forces have changed the abilities of the 
 taxpayers and that it is the duty of the State to offset these 
 forces by readjusting wealth through taxation. This has been 
 called the socialistic theory. Neither of these theories can 
 justly be called scientific; they both cut loose entirely from 
 existing conditions. 
 
 After a careful study of all the modern theories of justice in 
 taxation we are forced to the conclusion that none of them is 
 superior in any way to the noble maxim or canon of Manu 
 
 ' The student will do well to read carefully the three essays by Edgeworth on 
 the "Pure Theory (jf Taxation" in tlic 1807 volume of the Economic Journal.
 
 96 INTRODUCTION TO PUBLIC FINANCE 
 
 quoted at the very beginning of this book in the unnumbered 
 chapter entitled " General Considerations." 
 
 The Practical Application of Progression. — These theories 
 all demand that the rich should be taxed proportionately more 
 heavily than the poor. This principle is not always successfully 
 applied, but there is no country which does not attempt to apply 
 it. How is the attempt made? There are several ways. 
 First, heavier taxes are imposed on luxuries than on necessities. 
 There are heavier taxes on silk shirts and stockings than on 
 cotton ones, heavier taxes on broadcloth than on blue jeans, 
 heavier taxes on fine flavored cigars than on common plug 
 tobacco. Second, a series of taxes cumulate on the rich many of 
 which do not apply to the poor. The poor man pays his lighter 
 indirect taxes as above, a poll tax, and, may be, a small prop- 
 erty or income tax. The rich man pays the same or heavier 
 indirect taxes and poll taxes and proportional property taxes 
 and then a whole series of other taxes such as heavier (propor- 
 tionately) property and income taxes, together with business 
 taxes, inheritance taxes, capital taxes, and often still others. 
 Third, a differentiation is made within each tax by levying 
 heavier or progressive rates on the rich. Thus incomes of small 
 amounts may be entirely exempt, incomes of moderate amounts 
 may be taxed only a few per cent while large incomes may be 
 taxed many more per cent. 
 
 In working out progression, under the third method, two 
 important questions arise. One is : In what kinds of taxes 
 may a progressive tax rate be used ? The other is : How high 
 can the progression be carried? 
 
 Progression Logically Applies to Direct Personal Taxes Only. 
 — The answer to the first one is : progressive tax rates may be 
 logically applied only to a direct personal tax so framed as to 
 be based on some clear index of ability to pay. That pro- 
 gressive rates are wholly out of place in customs duties and 
 excises is so obvious that a mere statement that it is so suffices. 
 Whether the import be champagne or coal, the rate per case or 
 per ton is the same for a shipload as for one case or one ton. 
 But progressive rates are in place for income taxes, inheritance
 
 THE TAX SYSTEM 97 
 
 taxes, and for property taxes when in the last case the base is a 
 man's aggregate estate. But if the property tax is one on 
 things ownable, regardless of the owner, progression is out of 
 place. Ordinarily there is little difficulty in deciding whether 
 progression is appHcable, but sometimes the decision becomes 
 difficult. A poll tax is ordinarily not progressive, despite the 
 fact that it is personal. But sometimes the assumption has been 
 made that some polls or heads are different from others. Then 
 the rate may be made progressive and a Duke's or Earl's head 
 may be taxed more heavily than a peasant's. On the other 
 hand, while a tax on the shares of the heirs or legatees of prop- 
 erty left by a decedent may properly be progressive, it is 
 wholly illogical to impose progressive rates on the entire estate 
 left by him. For that means that the privilege of inheriting 
 $500, say from a million-dollar estate, is worth more than that 
 of inheriting the same amount from a $1000 estate. Although 
 the principle is clear, legislators, having, perhaps, some diffi- 
 culty in grasping progression at all, often attempt ridiculous 
 appHcations. They are sometimes prone to try to apply it to 
 any new direct tax, whether personal or not. Thus it was 
 appUed to the excess profits tax in the United States with the 
 most astonishing lack of sense. 
 
 How High May Progression Go ? — The second question, 
 how high may the rates rise? has never been answered by a 
 definite rule. McCulloch very correctly said when we abandon 
 proportion " we are at sea without rudder or compass." Pro- 
 fessor Seligman, after surveying all the theories and practices 
 in the matter of progressive rates, said : " If, therefore, we sum 
 up the whole discussion, we see that while progressive taxation 
 is to a certain extent defensible as an ideal, and as the expression 
 of the theoretical demand for the shaping of taxes to the test 
 of individual faculty, it is a matter of considerable difficulty to 
 decide how far or in what manner the principle ought to be 
 actually carried out in practice." ^ 
 
 The theory of marginal utility, which holds that each unit 
 of a large supply or stock of goods available gives less satis- 
 
 ' Progressive Taxation, 2d cd., p. 302 fl.
 
 q8 introduction to public finance 
 
 faction than each unit in a small one, gives us no measure of 
 how much less the satisfaction is. It does, however, teach 
 that, in general, after the somewhat uncertain point of satiety 
 is passed, each added unit in the surplus has no more utility 
 than any other unit in the surplus. This gives us a scientific 
 explanation of the common practice, adopted under the dic- 
 tates of common sense, of stopping progression and reverting 
 to proportion after some assumed high level is reached. 
 
 If we are under necessity of saying where, in a given income 
 tax, for example, progression shall stop and proportion set in, 
 we are forced to decide by considerations quite outside of the 
 field of pain inflicted and of strength available. The real deci- 
 sion will have to be made on the basis of general social welfare. 
 A tax at rates so very progressive as to approach confiscation 
 quite rapidly, may be justified as a war tax, but if we desire to 
 stimulate industry and promote thrift it is essential, lest the 
 accumulation of capital cease, to avoid any approach to con- 
 fiscation. War income taxes with maximum rates above fifty 
 per cent for large incomes are not uncommon, but in peace 
 times a rate over ten per cent is held to be dangerously high. 
 Practical administrators of the tax laws regard twenty-five per 
 cent as the highest advisable rate for the inheritance tax, and 
 while it would be hard if not impossible to state the grounds 
 for this conclusion, the unanimity shown argues that it would 
 be wise to be guided by it. 
 
 It would seem, then, that, in general, faculty is the ideal base of 
 taxation ; that faculty can be measured either by property or by 
 income, but best by the latter ; that faculty increases somewhat 
 progressively and is affected by the consideration of relative 
 conditions, as the kind of property, the source of the income, 
 or the burdens already resting upon the individual or property. 
 All these considerations have to be applied in determining 
 whether the tax system of any country compHes with the rules 
 of justice. They do not apply with the same strictness to the 
 separate taxes. ^ 
 
 1 The recognition of the principle of progression in the recent reforms of taxation 
 is very marked. See Seiigman, Essays, 305 £E.
 
 CHAPTER IV 
 
 THE DEVELOPMENT OF TAXATION BEFORE THE 
 INDUSTRIAL REVOLUTION 
 
 Section i. Taxes Not Found under Feudalism. — Feu- 
 dalism placed a large number of economic receipts directly in 
 the hands of the rulers. These receipts were generally suffi- 
 cient for the discharge of the customary public activities. It 
 is a mistake, therefore, to search for taxes proper in the period 
 of the supremacy of feudalism ; that is, from the capitulary of 
 Charles the Bald, 877, to the end of the thirteenth century. 
 Taxes begin to emerge with the transformation of feudal rights 
 and dues, the commutation of obligatory military services, and 
 the Hke into payments in kind or in money. Greek and Roman 
 forms of taxation had even less influence on modern systems 
 of taxation than Greek and Roman forms of expenditure on 
 modern spending. For the study of Roman law and the tradi- 
 tions of the glory of the Roman Empire determined many 
 State activities that involved the spending of public wealth. 
 But new methods of obtaining the funds were devised. Infor- 
 mation concerning the taxes of the period from the fall of Rome 
 to the capitulary of Charles the Bald is rather meagre and too 
 vague to be of much value. 
 
 Early Taxes. — The first taxes to emerge from the darkness 
 of this period are a number of fee-like contributions of the 
 nature of commuted feudal services, or directly connected with 
 feudal rights, certain market dues and customs duties, tolls 
 for protection to travellers, for the use of roads, bridges, and 
 ferries, and two forms of property taxes, land taxes and family 
 taxes. The land taxes of this period are just emerging from the 
 character of rent payments and acquire only by degrees the char- 
 
 99
 
 lOO INTRODUCTION TO PUBLIC FINANCE 
 
 acteristics of pure taxes. Even in the case of land left to the 
 original possessors after conquest, the payments demanded are 
 more of the character of rents than of taxes. But the combina- 
 tion of these charges with hearth or family taxes leads to the 
 formation of various mixed property and personal taxes. The 
 fact that land is practically the only kind of revenue-yielding 
 property and that no considerable earnings are made without 
 the use of land, makes this tax sufficiently universal for the de- 
 mands of justice. 
 
 Direct taxes are in this period, as in classical times, never 
 paid by the freeman. They are regarded as derogatory and as 
 the badge of a servile position. The freeman could give his 
 services to the State, he could risk his hfe for it, but he would 
 regard it as a deadly insult if he were asked to pay taxes. In- 
 directly, of course, he was taxed, as, for example, when he 
 bought merchandise, for permission to sell which the trader 
 was taxed. 
 
 As soon, however, as industry began to develop, as soon as 
 the crafts sprang up in the cities which clustered around the 
 market-places, and classes which had lived in part from indus- 
 trial pursuits found it possible to obtain so wide a market that 
 they could live entirely from their industry, then, there arose 
 such a differentiation of the sources of wealth that the old 
 forms of taxation were insufficient. Taxation had, therefore, 
 to be extended to meet the new forms of wealth. The first 
 methods of taxing these were dictated solely by expediency 
 and the desire of obtaining as large revenues as possible, rather 
 than by any definite ideas of justice, and were mainly indirect 
 in character and partly an extension of the older market dues, 
 excises, customs, and tolls, together with new taxes of the same 
 kind. 
 
 Of old Roman taxes none can be strictly said to have sur- 
 vived the conquest. Some lasted throughout the Merovingian 
 period in a greatly changed form. Finally they were merged 
 into various feudal payments, and took on the nature of rents. 
 A few relatively insignificant market dues and fees constitute 
 the only taxes which regularly formed a part of the revenues
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION lOI 
 
 of the State or of the State's officers, the feudal lords. The 
 regular feudal burdens, while economic in character and not 
 fiscal, really fill the place of the later direct taxes. In propor- 
 tion to the prosperity of the people they were certainly as heavy 
 as any modern systems of taxes. The rapid disintegration of 
 the German Empire into smaller territorial lordships after the 
 sixteenth and seventeenth centuries rendered the question of 
 imperial taxation at once less pressing and more compHcated. 
 On some eleven different occasions, according to Wagner, be- 
 tween 1427 and 1550, the Empire, as such, stood in need of 
 extra revenues, for purposes so clearly of common benefit as to 
 justify a demand for common contributions. Such an instance 
 is that of the Hussite and Turkish wars. The tax used was 
 the " common penny." This direct imperial tax was a mixture 
 of poll and personal taxes with income and property taxes. 
 We find very similar taxes in France and England. It fell upon 
 all imperial subjects whether holding from the crown or not, 
 provided they held property. The rate was an irregular regres- 
 sive one, being smaller for all above a certain amount of prop- 
 erty. It was very badly administered and not universally 
 collected.' 
 
 In the German principaHties that were formed out of the Ger- 
 man Empire the first direct taxes were the bedes. These were 
 extra payments, similar in form to the existing feudal contri- 
 butions. They were made by those already paying such dues 
 and were measured in somewhat similar ways. The basis was 
 generally landed property. The first bedes were more or less 
 voluntary, private contributions for the support of the Vogt, 
 count, or lord for some recognised public purpose. By con- 
 tracts entered into between the contributors and the lords, 
 they became compulsory and formed part of the regular income 
 of the lords, who then in extraordinary cases of need would again 
 come forward with the demand for extra or " necessity " bedes. 
 This was frequently done in times of war. Hence, these bedes 
 were often called " army bedes." Some of these in turn became 
 customary or fixed. With the rise of the idea of public life and 
 
 ' Cf. Wagner, Schonberg's Handbuck, 3d ed., Ill, 184.
 
 I02 INTRODUCTION TO PUBLIC FINANCE 
 
 public needs, the bedes easily became compulsory public con- 
 tributions, and were regarded as distinct from the feudal dues, 
 which by virtue of longer standing and the absence of a recog- 
 nised public purpose were treated as the private revenues of 
 the prince. A pecuharity of the earlier assessments of the hedes 
 was the method of apportionment to, or assumption by, the 
 different orders or cities of a certain lump sum, which was then 
 distributed by their own rulers among the different members, 
 according to some measure agreed upon. Prelates, clergy, and 
 knights were exempt from the ordinary hedes. They sometimes 
 rendered similar contributions, hedging themselves in with all 
 sorts of reserves and precautions, to prevent the payments 
 becoming regular. These were called " donative monies." 
 
 It was in the cities that retained a large degree of pohtical 
 independence that the highest development of the fiscal system 
 was to be found in the middle ages. This is owing to the fact 
 that they were in advance of the rest of the country in their 
 economic development. Long before the principalities were 
 able to abandon payments in kind and services, the cities were 
 collecting taxes in money, making some use of public credit 
 and developing regular fiscal offices. " The art of taxation," 
 says Wagner,^ " the use of public credit, and the practical 
 organisation of the financial administration in the cities had 
 been an important part of public institutions for centuries be- 
 fore the territorial State had even recognised the need of such." 
 This field has, however, not yet received the attention of his- 
 torical investigators sufficiently to allow us to draw conclusions 
 as to the generally prevailing forms.- 
 
 Sec. 2. Early French Taxes. — In France the early growth of 
 a strong central power led to an intensification and sharp dif- 
 ferentiation of the royal feudal dues from the other feudal 
 charges, which gives them something the character of taxes. But 
 inasmuch as the French State was peculiarly a proprietary State, 
 and the territory was rather a part of the private property of the 
 king than public property in the modern sense, these early charges 
 
 ' Schonberg's Handbuch, 3d ed., Ill, 185. 
 
 * See Schonberg's Investigations into the City of Basel.
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION 103 
 
 are not taxes proper, but rents, or, to use the more general term, 
 feudal dues. But the rapid growth of the central power, and 
 the high development of public needs in the kingdom, neces- 
 sitated more revenues. These needs were at first met by the 
 collection of indirect consumption and trade taxes. The ten- 
 dency toward the development of indirect taxes grew apace 
 after the seventeenth century. The mercantile theory, which 
 was supreme for most of the time after Colbert, prompted a 
 high development of custom duties, and these ran parallel with 
 internal consumption taxes. In the eighteenth century there 
 were three, or possibly four, important taxes which had grown 
 up in various ways out of the feudal dues. These were the 
 " taille " ^ (tallage), the " vingtlemes " (twentieths), the " capi- 
 tation " (poll), and possibly the " dtnies " (tithes).^ 
 
 The taille is of feudal origin. Originally it was arbitrarily 
 assessed with extreme rigour upon the serfs by the lords, and 
 occasionally upon the great vassals by the king with the assent 
 of the peers. It became a permanent charge when royal power 
 was firmly estabhshed on the ruins of feudalism. Charles VIII 
 made it permanent at the same time with the establishment of 
 the royal army. The taille was both real and personal. On 
 the one side it was based on the revenue from landed property ; 
 on the other, it was based on the faculty of the taxpayer, meas- 
 ured by the revenues from his landed property, and active 
 rents, as well as the products of his own industry. This tax, 
 suppressed in 1790, yielded 44,737,800 livres the year before. 
 Necker obtained 91,000,000 livres from it. Nobles and clergy 
 were exempt. 
 
 The vingtiemes consisted of one or more twentieth parts of 
 
 > The term "taille'' in English, tallage, also spelled talliage, tailaf,c, and taillage, is 
 from a root meaning "to cut." It is explained as derived from the general method 
 of keeping accounts by means of notched sticks. A taille was any sum of which 
 account was kept, then the amount scored up (tallied) against any person. Slender 
 sticks with notches called "tally-sticks" were used by the English exchequer for 
 accounts, until abolished by the statute of 23 Geo. Ill, c. 82. Similarly, the Ger- 
 man Kerbe, tally sticks. Other roots meaning "to cut" are common in the names 
 of various taxes ; viz. incisio, incisura, else, later accise, adcisio, Eng. excise ; in 
 these Latin roots the thought is, that a part of the taxed article is cut out for the 
 government. 
 
 * See Vignes, Ed., Traid des Impdts en France, 1872, p. 10.
 
 I04 INTRODUCTION TO PUBLIC FINANCE 
 
 the revenues from either landed or movable property. This 
 tax had a varied history. At first it was used with the taille, 
 but when that tax was made permanent under Charles VIII, 
 the vingtieme disappeared. It was revived in 1710 by Louis 
 XIV as a war tax. It remained as the occasional resource of 
 the treasury up to the Revolution. Only the clergy were 
 exempt. It produced 46,000,000 livres (under Necker, 55,- 
 000,000). 
 
 The capitation, or system of poll taxes, was the variable tax 
 of the ancient monarchy. It dates from 1695. It was first 
 regarded as a temporary expedient, but was continued to the 
 Revolution. It was assessed according to a tariff of twenty- 
 two classes. But the base was frequently changed. The 
 clergy were exempt, the nobles were taxed on the basis of their 
 presumptive ability, and those who paid the taille were taxed 
 according to the amount of that tax they paid. In 1786 it 
 yielded 41,500,000 livres.^ 
 
 The dtme, or tithe, was an assessment paid in kind from the 
 fruits of the soil for the benefit of the clergy. The tax was not 
 always the tenth, but varied from one-seventh to one thirty- 
 second. The ecclesiastical purpose of this payment has led 
 some to refuse to call it a tax in the strict sense. Since the 
 Church exercised a power that differed little from that of the 
 State and the burden was a regular one maintained for a public 
 purpose, it should probably be called a tax. 
 
 The corvees were more strictly taxes than the dimes. These 
 were personal services applied to the construction of the roads 
 and other public works. They were regarded as feudal dues. 
 They were of two kinds : the first were levied on property and 
 rendered by the proprietor for his lands, and the second were 
 levied on persons and rendered by all, irrespective of land- 
 holding. The nobles and the aliens were not subject to the 
 personal corvees. The clergy could commute them into money 
 payments or have them rendered at their own cost. The land 
 corvees were due from all hereditary proprietors irrespective of 
 rank, but they were not bound to furnish them in person. Louis 
 
 'For further details see Farieu, Traitc des Impols, 1, p. 144 fi.
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION 105 
 
 XVI suppressed the corvees in 1776, but they were reestablished. 
 They disappeared in 1793. 
 
 The most important indirect consumption taxes were leased 
 for 166,000,000 livres, and those collected by the government 
 were 51,500,000 livres. These together nearly equalled the 
 revenue from direct taxes. The indirect taxes of the ancient 
 monarchy were : first, the aides, which consisted of taxes on 
 drinks, on articles of gold and silver, on iron, oil, skins, starch, 
 bills, paper, etc., and the octrois, levied at the city gates on all 
 sorts of goods when brought into the towns ; second, the gahelle, 
 or salt tax, which was so arranged as to amount practically to a 
 direct tax. For the people were obliged to buy each year from 
 the management of the monopoly an amount of salt deter- 
 mined in each case by the size of the family. There was a 
 similar " salt conscription " in Germany. Thirdly, there was 
 the tax on tobacco. 
 
 Sec. 3. Early English Taxes. — In England ^ we find in 
 Anglo-Saxon times three principal taxes : (i) The ship-geld, or 
 ship money, a tax imposed on those shires and towns along the 
 sea-coast which were unable at time of need to furnish ships 
 for defence, when invasion was threatened. It was levied 
 intermittently and was used exclusively for naval purposes. 
 The attempt of Charles I, in 1637, to impose this tax on all of 
 England and for purposes other than the na\y, was one of the 
 contributing causes of the civil war. (2) The tribute-like 
 " Danegeld " was levied after 991 at so much a hide (piece of 
 land) and paid to the Danes to prevent them from raiding the 
 coasts. After the cessation of the original cause, it was col- 
 lected by the kings as private revenue. (3) The " fumage," 
 or " tax of smoke farthings," was a tax on every hearth. This 
 seems to have been a traditional form of tax with the Saxons. 
 It was in effect a family tax, as the hearth stood for the 
 family. 
 
 In Norman times, the feudal character of the government 
 was such that it obtained revenues from the demesne, from 
 feudal dues, and from the royal prerogatives so great that no 
 
 ' See Dowell, Tlislory of Taxation and Taxes in England.
 
 lo6 INTRODUCTION TO PUBLIC FINANCE 
 
 real taxes exist. The Danegeld was levied by the Conqueror 
 as an annual tax, but disappeared after 1163. 
 
 With the reign of Henry II came a more ordered and regular 
 system of taxation. This began with the well-known com- 
 mutation of the military obHgations of tenants. It was due 
 to the continental position of the Angevin kings. The dis- 
 tance at which war was waged and the length of service de- 
 manded rendered the military obligations particularly burden- 
 some, and tenants were anxious to commute them. An army 
 of mercenaries, too, suited the king better, as easier to control 
 than the feudal army. Hence arose the commutation of the 
 duty to foreign service into a money payment of two marks, 
 £1 65. 8d., on each fee of £20, known as the " scutage," or 
 shield-money. Henry II collected three such scutages, and 
 this tax did not fall into disuse until after 1322. It was 
 practically a land tax, levied each time for a special pur- 
 pose. 
 
 The " tallage " in England was the tax that was collected 
 from the tenants on the royal demesne on occasions of unusual 
 expense. Those who paid the hidage or Danegeld were gen- 
 erally exempt. Cities and towns not exempt in this way paid the 
 auxilium or aid. The tenants were liable for these taxes up 
 to one-tenth of their goods. In the city of London the tallage 
 was treated as a " benevolence." It was superseded after 
 Edward III by the general taxes on movables. 
 
 The taxes on movables began with the " Saladin tithe " in 
 1 188.' It was one-tenth of rent and movables paid by all 
 except crusaders. Out of this insignificant beginning grew a 
 system of taxes on movables which finally included all the taxes 
 so far mentioned. Richard I levied a tax on all ploughed land 
 in 1 194, known as the " carucage," from the area upon which 
 it was levied ; namely, the amount of land that could be covered 
 
 1 The tithe, or tenth, as the rate of taxation appears in many taxes in Christian 
 countries. It is especially common in Catholic countries. The idea of taking a 
 tenth has its origin in Mosaic law : "And concerning the tithe of the herd, or of the 
 flock, even of whatsoever passeth under the rod, the tenth shaO be holy unto the 
 Lord." Lev. 28 : 32. A half a tithe and other convenient fractions give rise to the 
 rates, which otherwise appear irregular.
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION 107 
 
 by one plough (caruca) in a season. After 1224, this was 
 merged in the tax on movables. 
 
 The tax on rents and movables, which began, as just stated, 
 with the Saladin tithe, was continued from ii8g to 1334. This 
 was a grant of one-thirteenth in 1207, one-fifteenth in 1225, 
 one-fortieth in 1232, one- thirtieth in 1237, one-fifteenth in 1275. 
 Up to 1283, the method of obtaining the grant was by separate 
 negotiations with each section of the country. But after that 
 date, general grants were made by Parhament and other taxes 
 were discontinued. 
 
 Besides these direct taxes, the crown had the privilege of 
 taking " customary " tolls upon merchandise imported or ex- 
 ported. Hence our modern term, " customs duties." These 
 tolls were of the character of licenses and protection money. 
 Their early history is obscure. Before the Magna Charta they 
 had become so fixed and regular as to call forth the well-known 
 clause of that historical document : '' Let all merchants have 
 safety and security to go out of England, to come into England, 
 and to remain in and go about through England, as well by 
 land as by water, for the purpose of buying and selhng, without 
 the payment of any evil or unjust tolls, on the payment of the 
 ancient and just customs " (sine omnibus malis toltis, per anti- 
 quas et rectas consuetudines). In 1275 these " ancient cus- 
 toms," slightly raised, were granted Edward I by Parliament. 
 The chief duties were on wine imported and wool exported and 
 a poundage on all other goods imported or exported. 
 
 From 1334 to 1453 there are a number of changes to note. 
 The fifteenths and tenths were apportioned among the com- 
 munities, cities, and boroughs, the townships and the demesne 
 tenants, in 1334, and the assessment then made remained the 
 basis of taxation. The tax thus became a fixed charge. It 
 varied in rate from one-half a ^^ fifteenth " and " tenth" to two- 
 fifteenths and tenths, as the need for revenues changed. Some- 
 times no such grant was made. In 1377 Parliament granted 
 to the king a tax of " four pence, to be taken from the goods of 
 each person in the kingdom, men and women, over the age of 
 fourteen years, except only real beggars." This was known as
 
 I08 INTRODUCTION TO PUBLIC FINANCE 
 
 the " tallage of groats." Subsequently a classified poll tax was 
 employed, in which an attempt was made, by the arrangement 
 of the payers into classes and a gradation of the rates, to get a 
 larger return by taking advantage of the greater wealth of 
 certain classes. The rates were : for the Duke of Lancaster, 
 who was the highest subject, £6 13^. 4J. ; earls £4, barons £2, 
 and so on down to the lowest ; every one, except beggars, was 
 to pay at least a groat or 4c?. In 1379 this yielded £25,000, 
 which was only slightly more than the previous tallage of 
 groats. The clergy were included in both these taxes. After 
 the peasant revolt, which was occasioned partly by the op- 
 pressive methods used in collecting these taxes, return was 
 made to the fifteenths and tenths. From 1382 the landowners 
 take the whole burden of the old " fifteenth and tenth." In 
 1435 t^^^ was supplemented by a graduated tax on income 
 from lands, rents, and annuities, and ofiices of freehold. In 
 the reign of Edward III the customs yielded large returns. 
 They consisted as before of tunnage on wine, customs on wool 
 and leather, and poundage on all other merchandise. The 
 popularity of Edward IV enabled him to add to his other 
 sources of revenue the " benevolences,'' demands on the rich for 
 special contributions. These " benevolences " were not always 
 cheerfully paid. It was more often " as though," says More, 
 " the name of benevolence had signified that every man should 
 pay not what he himself of his good will list to grant, but what 
 the King of his good will list to take." Throughout the history 
 of taxation in England the grant of monopolies of new indus- 
 tries was made a source of income to the government. The 
 multiplication of these under Elizabeth did not yield much 
 revenue, although it gave rise to much discontent. 
 
 There is little in the varied application of these taxes that is 
 important as showing the line of development until the seven- 
 teenth century. At that time they proved unequal to the task 
 of meeting the growing needs of the treasury. The chief aux- 
 ihary lay in the extension of the indirect consumption taxes. 
 The year 1692 (revision, 1697) saw the establishment of a 
 permanent land tax. This grew out of the apportionment of
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION 109 
 
 the " fifteenths and tenths." It became a fixed charge on 
 land, a real burden, not having, as time went on, any definite 
 relation to the income from land. In 1798 Pitt made this 
 redeemable by the payment of a lump sum down, after which 
 no annual tax would be collected. This privilege has been 
 taken advantage of to the extent of removing half the charge 
 from the lands. In its operation the land tax became rather 
 a rent than a tax. 
 
 The Income Tax. — The wars of the period of the French 
 Revolution and the consequent need of revenue introduced the 
 general income tax (1798, 1802, 1803, 1806). This tax was no 
 departure in principle from the older taxes, although a departure 
 in method. It has been well characterised as a combination of 
 several taxes into a system which has for its aim the proportional 
 taxation of all incomes, with the exemption of a certain fixed 
 simi (degressive). The form which it took in 1803 is the best 
 to study. Two separate acts were passed, the one taxing all 
 incomes from holdings of real estate, rents, and public salaries 
 at the source ; that is, so far as possible the tax was deducted 
 before the revenues passed into the hands of the recipient. 
 The second taxed industrial earnings and interest on capital on 
 the basis of a declaration by the taxpayer. The tax began 
 with an income of £60 (later £50), and this amount could be 
 deducted from all incomes below £150; after that the full rate 
 was paid. Each person was required to declare his whole in- 
 come and could claim reimbursement for any tax stopped at 
 the source if he could show that his total income was below the 
 minimum. This tax, set aside in 1816, was restored in 1842, 
 as a substitute for the indirect taxes, removed in consequence 
 of the demand for commercial freedom. The rate is changed 
 from time to time as the needs of the government change. 
 
 Sec. 4. The English Local Rates. — Local taxation in Eng- 
 land has been partly independent of royal taxation. England 
 has not followed the continental plan of collecting revenues for 
 local purposes in the form of additions to the national taxes. 
 While the weight of national taxation fell upon customs duties, 
 excises, and certain direct taxes, measured roughly by income,
 
 no INTRODUCTION TO PUBLIC FINANCE 
 
 local taxation was based exclusively upon revenues from real 
 estate. The prototype of all local taxation was the poor rate. 
 Previous to the reign of Elizabeth local activities were of such a 
 character that they could be discharged from feudal dues. In 
 the manorial villages and the boroughs with semi-feudal guild, 
 and close corporation governments, which owned landed prop- 
 erty, feudal incomes paid the few public expenses. But the 
 removal of the monasteries, hospitals, and other charitable 
 foundations, threw upon public charity a number of well-devel- 
 oped paupers ; and the rapidly changing character of industry 
 and of economic life constantly gave rise to the problem of what 
 to do with the unemployed, who at times became very numerous." 
 The result was the famous poor law of 1601. The principle of 
 the tax for the support of the poor had been of slow growth. 
 In the reign of Henry VIII the giving of alms was prohibited, 
 and collections for the impotent poor of the parish were re- 
 quired to be made in each church. In 1547 the Bishops were 
 authorised to prosecute all persons who refused to contribute 
 for this purpose, or should dissuade others from contributing. 
 In the fifth year of Elizabeth the justices of peace were made 
 judges of what constituted a reasonable contribution for this 
 purpose. After 1572 regular compulsory contributions were 
 levied. Out of a purely voluntary contribution, then, there 
 emerged in two-thirds of a century a compulsory tax. The 
 basis of this tax was the annual rental value of real property. 
 The tax was collected not from the owner but from the occupier. 
 Most of the other taxes for local purposes which have developed 
 in England since then are of the same general character. They 
 are too numerous to mention here. Besides the direct taxes, 
 there were a few indirect ones, market dues, road tolls, coal and 
 wine duties. 
 
 Sec. 5. Early American Taxes. — ■ In the American colonies 
 we meet with entirely new conditions. Public needs were 
 simple and few, and were mostly local in character. Customs 
 duties were for the most part controlled by the mother country 
 in the interests of her gener^ colonial policy. So the colonists 
 were driven to other forms of taxation. Practically free trade
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION ill 
 
 in land existed. Land at a known selling value early formed 
 a large part of the property of each citizen, and differed in no 
 essential particular from his other property. There were in 
 some colonies, to be sure, charges of a feudal nature known as 
 quit rents, which were a recognition of the king's interest in 
 the land. These never became of fiscal importance, and never 
 developed into taxes. Nor do they seem to have ever seriously 
 modified the essentially free character of landowning, since 
 they were so irregularly and meagrely collected. They were 
 " acknowledgments His Majesty receives of the People's Tenure 
 and Subjection." ^ At times they developed into an apparent 
 tax on certain lands. They seldom formed a part of the rev- 
 enues of the colonial treasuries, being generally payable to the 
 king.2 
 
 Just as there were three different forms of government among 
 the colonies, so there were in the beginning three different ten- 
 dencies in taxation.'' New England began with a tax on prop- 
 erty and faculty. The General Court of Massachusetts laid 
 down in 1634 the following principle: " In all rates and public 
 charges the towns shall have respect to levy every man accord- 
 ing to his estate, and with consideration all other his abilities 
 whatsoever, and not according to the number of his persons."* 
 Later, however, poll taxes were used, and the general property 
 tax was extended to cover property in the process of acquisition, 
 or the earnings of labour. In all the New England colonies 
 the resulting system was practically as follows: Each person 
 was to contribute as he was able. Ability was measured, first, 
 by property, real and personal ; secondly, by the person himself; 
 thirdly, in the case of wage-earners, merchants, and others, by 
 earnings. With a few notable exceptions, as in the case of law- 
 yers, the third measure of ability gradually fell into disuse. 
 It has been repeatedly pointed out ^ that the New England 
 
 • Spottiswood Letters, quoted by Ripley, Financial History of Virginia. 
 
 2 See Wood, History of Taxation in Vermont, p. 13. Also Schwab, History of the 
 New York Property Tax. 
 
 ^ Cf. SeliKman, Essays, p. 19 ff. 
 
 * Massachusetts Records, quoted liy Douglas, Financial History of Massachusetts, 
 p. 18. 
 
 <- Walker, "The Bases of Taxation," Political Science Quarterly, Vol. ITT.
 
 112 INTRODUCTION TO PUBLIC FINANCE 
 
 people had the habit of saving. All earnings were soon turned 
 into property. So that the demands of justice were fully met 
 by the general property tax and the poll tax. In addition to 
 these direct taxes, there were a number of indirect taxes, " im- 
 posts," some collected in the form of licenses, and many as 
 excises. 
 
 In the Southern colonies, of which Virginia will serve as a 
 model, the first taxes were the poll taxes. " Personal respon- 
 sibility," says Ripley, " was thus the basis of taxation at first, 
 but as the burden of taxation became heavier this liability was 
 partly transferred to real estate." ^ This transfer of the burden 
 to real estate began with the practice of making the personal 
 tax a lien upon the property of absentees, or of persons dying 
 before the payment of the tax. The general property tax in a 
 form like that in use in New England did not exist in Virginia 
 before the Revolution. The grossness of the poll tax was 
 modified by some reference to the different kinds of property 
 owned. In consequence of the failure to develop a good 
 system of direct taxes Virginia resorted to indirect taxes, ex- 
 port duties on tobacco and hides, import duties on liquors 
 and slaves, and some general tunnage duties forming the main 
 features. 
 
 The third or central system is fairly represented by New 
 York. There, under the West India Company, 1621-1664, 
 taxation first took the form of moderate indirect taxes on goods 
 imported and exported and imposts on the consumption of 
 beer, wine, and spirits. It was after the passage of the colony 
 into the hands of the English that attempts were made to 
 develop the property tax. The actual existence of this tax 
 begins with the formation of the Assembly after 1683.^ 
 
 In all parts of the United States after the Revolutionary 
 War the main reliance for local revenue was the general prop- 
 erty tax. The commonwealths, as such, had little need for 
 revenues until after 1840. In the formation of the Union indi- 
 
 ^ Financial History of Virginia, p. 21. 
 
 2 See Schwab, Die Entivickelung der Vermogensteuer im Staate New York, Jena, 
 i8go. Also Schwab, History of the New York Property Tax, Pub. of the Amer. Econ. 
 Assn., V, 5.
 
 TAXATION BEFORE THE INDUSTRIAL REVOLUTION 113 
 
 rect taxes were made the prerogative of the federal government, 
 so that the commonwealths had to resort to other means. The 
 character of direct taxation in the United States since the for- 
 mation of the Union will be treated in the next chapter. The 
 differences in the forms of taxation in the different parts are due 
 both to political and economic differences.
 
 CHAPTER V 
 
 THE DEVELOPMENT OF TAX SYSTEMS FROM THE 
 INDUSTRIAL REVOLUTION TO THE WORLD WAR 
 
 Section i. Changes in Taxation Due to the Industrial 
 Revolution. — The trend of the development of taxation was 
 abruptly changed by the industrial revolution at the close of 
 the last century. On the one hand, the development of con- 
 stitutionaHsm, vesting, as it did, the control of the purse in the 
 people, and especially in the taxpayers, had the inevitable 
 effect of changing the ideas underlying the tax systems. New 
 ideas as to the justification of taxation developed, and with 
 them a tendency to seek new measures of taxation. On the 
 other hand, the rapid increase in wealth, the growth of new 
 forms of wealth, such as invested capital, the birth of new kinds 
 of property, and of ways of holding property, as the many kinds 
 of credits, and the rapid change in the distribution of wealth 
 among the different classes in the community, — ^all of these and 
 other similar causes led to the constant extension of taxation 
 to the new forms. Old taxes which were well suited to certain 
 simpler conditions of society become under new conditions 
 unjust, and give rise to dissatisfaction, to many attempted and 
 some accompHshed reforms. These reforms in turn prove no 
 more satisfactory in the long run, for the conditions they were 
 intended to meet change again. 
 
 Just as the attention of economists was chiefly directed to the 
 study of productive agencies during the first three-quarters 
 of the century, so the general tendency of the same period in 
 finance may be broadly characterised as an attempt to com- 
 pel the different agencies of production to contribute to the 
 
 114
 
 THE DEVELOPMENT OF TAX SYSTEMS 115 
 
 support of the government. It is claimed that economists have, 
 during recent years, turned their attention more to the con- 
 sideration of questions of distribution, and it is certainly true 
 that the most recent tax reforms have been in the direction of 
 securing a better division of the burden among the sharers of 
 the new wealth rather than among the producers thereof. Sub- 
 ordinate to this tendency are various proposals and attempts 
 to alter the distribution of wealth by the use of the taxing 
 power. 
 
 The demands upon the revenues increased vastly during and 
 immediately after the period of war which followed the French 
 Revolution. Large debts had been accumulated ; great armies 
 and navies claimed support even in times of peace. New 
 functions were being thrust upon the governments. Moreover, 
 the new economic era demanded the payment of all charges 
 upon the State in money and necessitated the collection of 
 revenues in money. The old feudal receipts and services be- 
 came more and more inadequate ; new industrial receipts were, 
 in general, not calculated to be much larger than the sums 
 necessary to support the service or institution which furnished 
 them. Consequently, taxation on an ever increasing scale be- 
 comes the basis of all State finances. Taxation is no longer 
 regarded as a temporary expedient to meet passing and ex- 
 traordinary needs. It is admittedly a necessary and permanent 
 policy. 
 
 The doctrine of pohtical equality when generally accepted 
 leads to a demand for universality and equality of taxation. 
 The difficulties that arise are no longer as to the justification 
 of taxation in general, but as to the justice of certain forms 
 and measures of taxation. The main question is, what is 
 equality, and what the best method of attaining it. The 
 methods and direction of reform were necessarily prescribed by 
 the constitutions of the various countries and differ much from 
 land to land. Different economic and social conditions have 
 also an inevitable effect. Among the constitutional features 
 that determine the direction of taxation the following may be 
 mentioned. First, federal governments have generally been
 
 Il6 INTRODUCTION TO PUBLIC FINANCE 
 
 excluded from the field of direct taxation. The central govern- 
 ments of the German Empire, Switzerland, and the United 
 States depended for revenues from taxation on customs duties 
 and internal excises. The sense of personal loyalty to the cen- 
 tral government is inferior to that to the commonwealth govern- 
 ments so far as wiUingness to contribute directly to its support 
 is concerned. Those who pay a direct tax wish to see the money 
 expended near at hand and under their own eyes. The partial 
 concealment or at least lack of prominence of the indirect con- 
 tribution permits of its collection without calling the attention 
 of the contributors forcibly to the fact that they are taxed by 
 a new authority. Just that advantage of partial concealment 
 in this tax which appealed so strongly to the monarchies, before 
 the birth of political consciousness on the part of the people, 
 appeals to the federal governments. At the same time the 
 practical necessity of uniform rates over the whole country, 
 which arises from the fact that these taxes disturb the economic 
 balance of industry and commerce, and the greater ease of 
 administration with a larger territory and a single boundary, 
 make it advisable to put all of them in the hands of the central 
 organ. It was the latter considerations in regard to custom 
 duties that led to the establishment of the Zollverein and even- 
 tually of the German Empire.^ 
 
 On the other hand, the different States of which the federal 
 governments are composed have shown themselves inclined to 
 restrict their taxation to the direct taxes, leaving all but a 
 few of the indirect ones to the central governments. 
 
 But this separation of the assessment of direct and indirect 
 taxes between different authorities has been productive of great 
 difficulties. For it is impossible to assess any tax justly and 
 equally without reference to the other burdens already imposed 
 on the contributors. It would seem that the demands of justice 
 which dictate that the whole system of taxation should work 
 toward a definite and single purpose, will necessitate either the 
 
 1 See Bowring's Report on the Prussian Commercial Union, Parliamentary 
 Documents, 1840, Vol. XXI, pp. I717. Reprinted in Rand, Economic History, p. 
 170. Also Legoyt's La France ei I Elranger, Vol. I, pp. 250-255 ; ibid.
 
 THE DEVELOPMENT OF TAX SYSTEMS I17 
 
 coordination of these forms or the placing of both of them in the 
 hands of the same authorities. The proper coordination of all 
 taxes is hard to accomplish when the taxing power is in differ- 
 ent hands. This is one of the hardest problems of American 
 taxation. 
 
 The development of direct taxation will now be traced in 
 detail by reference to some of the more important countries. 
 Indirect taxes cannot properly be said to have undergone any 
 process of development. Many changes have, indeed, been 
 made, dictated by different economic theories and purposes. 
 But it has been simply a flux backward and forward. Sometimes 
 ulterior aims, as protection, have been abandoned and strict 
 fiscal principles allowed sway. In those cases we find a simpli- 
 fication and a decrease in the number of articles taxed. But 
 no general principles have been developed. 
 
 Sec. 2. Reforms of Taxation in Different Countries. — 
 Probably the most thorough attempts to reform taxation in 
 accord with clearly recognized principles of theoretical justice 
 have been in Prussia. That country has taken advantage from 
 time to time of the advice of men of science. It has been 
 doubly, happy (i) in having a goodly number of unpartisan 
 financial scientists to draw upon ; (2) in being able to draw 
 upon them for advice, either by counting their pupils among 
 its fiscal officers or placing the scientists themselves on its tax 
 boards 'and commissions. It has been able to make changes 
 with a broad conservatism that looked toward the gradual 
 realisation of accepted ideals. With characteristic visionary 
 eagerness, France has several times started out to obtain at a 
 single bound some new ideal, but has each time fallen upon 
 forms and methods but little better than those in vogue before. 
 In England, special difficulties and objections have been met 
 with little reference to any general plan. The result has been 
 a steady approach to a better state of affairs, with only an occa- 
 sional intensification of existing evils, due to the attempt to 
 cure symptoms rather than to seek the underlying causes of the 
 trouble. In the United States there have been spasmodic and 
 ill-directed attempts at the removal of a few clearly recognised
 
 Il8 INTRODUCTION TO PUBLIC FINANCE 
 
 abuses; and without any consistent attempt to change the 
 system, the result has been a decided modification. The 
 general failure of the property tax to reach personal property 
 gave rise at first to vigorous efforts to extend and sharpen the 
 methods of assessment. These attempts failing, other methods 
 of reaching the mass of personal property were devised, which 
 have resulted in a partial change of system wherever they have 
 been successful. 
 
 Sec. 3. Tax Reforms in Prussia. — The most instructive 
 country to study is Prussia. The line between the old and the 
 new may be drawn at the reforms of Stein and Hardenburg in 
 the forms of land tenure. These reforms may be regarded as 
 having been accompHshed in 1811. Briefly stated, their result 
 was to abolish personal serfdom, dissolve the feudal partner- 
 ship between tenants and proprietors, and estabHsh free trade 
 in land.^ Although these reforms had to do mainly with land, 
 and although the accompanying edict of 1810 promised speedy 
 reform of the land tax on the basis of a new survey, or cadastre, 
 nothing material was accomplished in the reorganisation of 
 this tax until 1861. In that year the land tax was rearranged 
 for the entire kingdom on the basis of a new and rapidly executed 
 survey. Some twenty different provincial land taxes, with up- 
 wards of one hundred minor variations, which had existed 
 before that time, were merged into an apportioned tax upon 
 the net product of each piece of land as given in the cadastre. 
 This tax recently yielded about 40,000,000 M. annually. 
 
 The reforms which preceded this were those of the indirect 
 consumption taxes, out of which finally emerged the personal 
 class tax. The edict of 1810, which was referred to above 
 as promising a reform of the land tax, seriously attempted to 
 remove inequalities by destroying many feudal exemptions and 
 privileges, and removing local differences. A general scheme 
 of consumption taxes on necessaries, of which the excise on 
 meal is a type, was planned for city and country ahke. It was, 
 
 ^Seeley's Life and Times of Stein, Vol. I, pp. 178-207. Morier, "The Agrarian 
 Legislation of Prussia during the Present Century," in Probyn [Editor], Systems oj 
 Land Tenure in Various Countries, pp. 306-316. See Selections in Rand.
 
 THE DEVELOPMENT OF TAX SYSTEMS 119 
 
 however, immediately found that the meal tax was hard to 
 collect in rural parts. As early as i8ii, therefore, a poll tax 
 of one-half thaler from every person over twelve years of age 
 was substituted for the meal tax in all places except the larger 
 towns. In 1820 this tax, still applying to the same places, 
 developed into a classified poll tax ; i.e. all persons were grouped 
 according to rank, profession, and general prosperity, into a 
 few classes, which were then taxed per capita at different rates 
 for each class. Somewhat modified the next year, so as to make 
 twelve classes, in groups of three each, and with rates which 
 ranged from one-half thaler to 144 thalers, and covering all 
 persons over fourteen years old, this tax endured thirty years. 
 As before, this tax did not extend to the large cities, where 
 the excise on meal and meat was regarded as placing the same 
 burden on the people. Such a remarkably clear perception of 
 the fact that indirect taxes are practically the equivalent of 
 direct taxes in the individual burden they impose is not often 
 met with in fiscal history. 
 
 The Income Tax. — In 1851, this tax was changed in order 
 to make room for the introduction of an income tax on all 
 persons having an income of over 1000 thalers. Those per- 
 sons whose incomes were below this amount were taxed in the 
 large cities by the meal and meat tax ; in the country and in 
 small towns, by a class tax, like the old one, with rates rang- 
 ing from one-half thaler to 24 thalers, according to the supposed 
 income. Persons living in large cities who paid the income tax 
 were allowed to deduct 20 thalers from their income as com- 
 pensation for the meal and meat tax they were supposed to 
 have paid. Later reforms removed these gate excises except 
 for local purposes. As the income tax forms a special topic 
 in a later chapter, we will not at present follow the details of 
 its development and reform. It is sufficient to say that it was a 
 progressive tax on the income of every person.' 
 
 When the land tax was reformed in 1861, the building tax was 
 separated from it, having been until that time a part of it ; 
 and all old taxes of a similar sort were merged in the new one. 
 
 » See Chap. IX.
 
 I20 INTRODUCTION TO PUBLIC FINANCE 
 
 This tax is assessed in the cities according to the rental of the 
 buildings, and in the country according to the size of the lands 
 connected with the houses, and other characteristics. 
 
 One of the reforms that were made after the peace of Tilsit 
 to strengthen the weakened economic resources of the country- 
 was the establishment of general industrial freedom. Naturally, 
 such a change would have been regarded as a failure from the 
 standpoint of the statesmen of the times, if it could not be made 
 to yield a revenue to the treasury ; so the new industries were 
 burdened with a new tax. This tax, which was very weak, and 
 which, wisely, perhaps, failed to meet all the new forms of 
 industry which came into existence, was subjected to a thorough- 
 going reform in 1891. But it was at that time transferred to 
 the local governments. Capital invested and some of the 
 permanent features of each business form the basis of this tax. 
 
 The Prussian system, as it existed before the great reforms of 
 1893, may now be seen as a whole. It consisted of two parts: 
 (i) There was a group of three complementary taxes upon the 
 produce of property and capital, — the land tax, the building 
 tax, and the industry tax ; (2) there was a system of personal 
 taxes culminating in an income tax. The former group, true 
 to the economic tenets of the first three-quarters of the century, 
 taxed the productive agencies. The latter, although it origi- 
 nated as a consumption tax, aimed at taxing the shares in dis- 
 tribution. Thus the older consumption taxes, which were 
 originally assessed without any very clear idea of what the 
 justification was, but were used because productive of large 
 revenues, yielded to new taxes supposed to be more fairly in 
 accord with the modern system of distribution. 
 
 The Great Reforms of 1893. — We are now in position to see 
 the significance of the great reforms of 1893 (all of which went 
 into effect in 1895), made under the leadership of Finanzminister 
 Dr. Miquel. These reforms place Prussia far in advance of all 
 other countries in the theoretical perfection of her tax system.' 
 The income tax, which has long been correctly regarded as the 
 
 ' See Seligman, Essays, pp. 330-339. References to larger and more detailed 
 statements are given there.
 
 THE develop:ment of tax systems 
 
 121 
 
 foundation of the Prussian tax system, was subjected to a 
 thorough reform in 1891.' It was strongly urged at that time 
 that income from property represented a far higher faculty, 
 per unit, than income from labour and personal exertion, and, 
 therefore, that a perfect system should contain two kinds of 
 progression : one that taxed larger incomes more heavily than 
 smaller ones ; another that taxed incomes from property more 
 heavily in proportion than incomes from labour. It was felt 
 that the existing produce taxes (Ertragsteuern) , the land, build- 
 ing, and industry taxes, failed to accomplish this end. Hence 
 one of the reforms of 1893 was the surrender of these taxes 
 to the communes, and the initiation of a general property tax 
 as supplementary to the income tax. This tax, which can be 
 properly understood only when its supplementary character 
 is held in mind, is arranged as follows : 
 
 The tax is one-half per mill on the lower limit of the class 
 within which the property falls. The classes go by stages 
 of 2000 M. from 6000 M. to 40,000 M., of 4000 M. up to 60,000 
 M., of 10,000 M. up to 200,000 M., and above that of 20,000 M. 
 each. 
 
 Thus. 
 
 From 
 
 Property 
 
 
 Tax 
 
 Up 
 
 to 
 
 6,000 
 
 M. . 
 
 exempt 
 
 6,000 
 
 
 8,000 
 
 U 
 
 . 3M. 
 
 8,000 
 
 
 10,000 
 
 ti 
 
 4 " 
 
 10,000 
 
 
 12,000 
 
 iC 
 
 • 5 " 
 
 20,000 
 
 
 22,000 
 
 n 
 
 10 " 
 
 40,000 
 
 
 44,000 
 
 il 
 
 20 " 
 
 60,000 
 
 
 70,000 
 
 (t 
 
 . 30 " etc 
 
 Above 200,000 M. the stages are 20,000 M. each, and the 
 tax increases 10 M. in each stage. 
 
 This tax being supplementary to the income tax accomplishes 
 the result of imposing a differential rate on funded income as 
 against unfunded income. 
 
 The abandonment by the State of the three old taxes on land, 
 buildings, and industry rendered the reform of local taxation 
 
 1 See Chap. IX.
 
 122 INTRODUCTION TO PUBLIC FINANCE 
 
 possible. As has already been said, the proper coordination 
 of all tax burdens is one of the chief problems of modern tax 
 reform. With the exception of the beer taxes, and the meat 
 and meal taxes still used by some of the cities, local taxation in 
 Prussia is mainly direct. Most of it, until 1895, took the form 
 of percentages additional to the rates of the royal taxes. In 
 some cities there were important special local taxes, like the 
 house rent tax in Berlin. Prussia, also, grants subsidies from 
 the royal treasury to the local bodies for special purposes. 
 But the symmetry of the national system was somewhat de- 
 stroyed by these additional rates. Such additions to the in- 
 come tax were especially intolerable. Real estate is, more- 
 over, a particularly good basis for local assessment. It cannot 
 evade the tax, and it is the recipient of particular benefits from 
 good local government. The same is true of businesses of a 
 local character, although it is not safe to let the rate vary from 
 place to place. Hence these three taxes were handed over to 
 the local bodies. At the same time the attempt was made to 
 regulate all other sources of local revenues. 
 
 The Prussian system as it now stands comes nearest to the 
 realisation of the taxation of faculty of any in the world. The 
 chief difficulties that have arisen are those of assessment. The 
 progressive rate gives rise to a special incentive to the conceal- 
 ment of larger incomes, and not even the general excellence 
 of Prussia's administration has been preventive of under-assess- 
 ment.^ 
 
 Sec. 4. Development in France. — In France indirect taxa- 
 tion has probably found a higher development than anywhere 
 else. Indirect taxes yielded in 1908 over 2,000,000,000 francs, 
 against 560,000,000 francs from direct taxes. Some of the 
 main taxes are on the consumption of wine, spirits, beer, sugar, 
 salt, tobacco, etc. ; there are also the octrois or gate duties col- 
 lected by some of the cities as a means of contributing their 
 share of some of the direct taxes to the general treasury. There 
 are also the taxes on acts and transfers, which will be treated 
 
 1 See the revelations of the Bochum investigations, quoted by Wagner in Schanz 
 Finanzarchiv, XVIII year, Vol. II, pp. 107, 108.
 
 THE DEVELOPMENT OF TAX SYSTEMS 1 23 
 
 under fees, since they assume a private benefit, and the customs 
 duties. Not peculiar to France, but receiving a high develop- 
 ment there, is the mode of collecting a tax on consumption by a 
 monopoly of the manufacture of tobacco in the hands of the 
 government. The imperative necessity under which France la- 
 boured all through the XlXth century of continually increasing 
 her revenues, and the danger of making the burden unbearable 
 if thrown upon the existing direct taxes, as well as the desire on 
 the part of the legislators of concealing so far as possible the 
 actual burden, lest an impatient constituency rebel, accounts 
 well for the relatively high development of indirect taxation. 
 The preference for indirect taxes as the main reliance of the 
 pubhc revenues argues, however, a low stage of political ethics. 
 The more highly developed the consciousness of citizenship and 
 membership in the State, the easier it is to make direct taxation 
 effective. 
 
 Direct taxation in France dates in its present form from the 
 Revolution. All the taxes of the ancient monarchy were abol- 
 ished at that time and a fixed scheme of taxes on revenue-yield- 
 ing property substituted. This system of direct taxes has 
 four chief members: (i) the tax on real estate, known as the 
 " impot fonder^'; (2) the apportioned tax on polls and rents 
 of dwellings, " cote personnelle et mobilierc "; (3) the tax on doors 
 and windows, " impot sur les partes et fenetres "; (4) the tax on 
 business, " impot des patentes^ ^ Supplementary to these 
 taxes are a number of taxes classed as " assimilated to the 
 direct taxes." These, so far as they flow into the central treas- 
 ury, are : (i) the mining dues, or the royalties from the mining 
 rights, " redevances des mines "; (2) the fees for the certifica- 
 tion ("verification ") of weights and measures; (3) the tax on 
 property held in mortmain, that is, property held in perpetuity 
 by the communes, hospitals, churches, seminaries, charitable 
 
 * " Palentes" is translated by Leroy Bcaulieu by "licenses," Science des Finances, 
 Vol. I, p. 39^. There is no exact English etjuivalent. The "license" in this case 
 is little more than evidence of the payment of the tax. The term "patent" does 
 not seem to imply, as the term "license" does, the granting of a special privilege. 
 The term "license" is, however, not infrequently used in iMiglish to indicate a tax 
 on business.
 
 124 INTRODUCTION TO PUBLIC FINANCE 
 
 institutions, and the like, " taxes des Mens de la main morte "; 
 (4) the taxes on horses and carriages, " impot sur- les chevaux et 
 les voitiires "; (5) a number of miscellaneous fees and charges 
 of which the charges for the inspection of pharmacists, grocers, 
 druggists, and herbists are examples. 
 
 The real estate tax, the poll and rents of dweUings tax, and 
 the door and window tax are, in most part, apportioned taxes. 
 The real estate tax, " impot fancier, " was, down to 1890, a com- 
 bined tax on agrarian lands and on land with buildings. It 
 was apportioned on the basis of a very elaborate survey and 
 valuation completed in 1850 and carefully kept up to date. 
 These taxes, like the other apportioned taxes, were apportioned 
 in successive steps, first to the departements, then to the arron- 
 dissements, and then to the communes, by the several legislative 
 bodies, and finally divided among the individuals in each of the 
 communes by a " conseil de repartition." In 1890 the tax on 
 dwellings, that is, the tax on land with buildings on it {propriete 
 bdtie), was separated from the agrarian land tax and the amount 
 levied on the land was somewhat reduced. In 1897 further 
 relief was granted to small landed properties. In 1908 the 
 impot fancier yielded 200,000,000 francs. The land tax is still 
 an apportioned tax, but that on dwellings, or on propriete bdtie, 
 is now proportioned, and the uniform rate is about 3.2 per cent. 
 
 The tax on polls and rents of dwellings is peculiar to France, 
 the same combination not being found in the tax systems of 
 other countries, although the elements thereof are not uncom- 
 mon. This tax, the pcrsonnel-mobilier , as it is called, is two 
 taxes in one, a tax on polls and a tax bearing the somewhat 
 misleading designation " mobilier." This latter tax was orig- 
 inally designed to cover personal property, hence its name, 
 and thus to supplement the impot fancier. The personal or poll 
 tax element of this tax is due from every citizen of France and 
 from every resident enjoying civil rights, except paupers, married 
 women living with their husbands, and children, whether of age 
 or not, Hving with their parents or guardians, and not enjoy- 
 ing an independent income. It is the same in rate for all the 
 inhabitants of a given locality and the rate is fixed at three
 
 THE DE\ELOPj\IENT OF TAX SYSTEMS 1 25 
 
 days' wages. The rate at which the wages shall be assessed is 
 determined each year by the general council of each departe- 
 ment. It may, however, not be fixed at less than one-half 
 franc, nor at more than one franc and a half. Thus the 
 minimum tax is one franc and a half and the maximum 
 four francs and a half. The other element of this tax, the 
 mobilier, is assessed according to the rental value of inhabited 
 houses. It is in this part of this two-headed tax that the appor- 
 tionment is worked out. The poll tax falls short of raising the 
 commune's share of the combined taxes, and the balance of the 
 quota is assessed upon the rentals of dwellings (loyer de habita- 
 tion). Some of the large cities, Paris, Lyons, Marseilles, and a 
 few others, raise a part or even the whole of their quota by means 
 of duties on goods brought into the cities, i.e. octrois, and do not 
 levy on rentals. 
 
 The door and window tax is an apportioned tax rated accord- 
 ing to the number of windows and doors in the houses. It was 
 intended to supplement the personal and dwelling tax, but it is 
 really an addition to the real estate tax. It is paid by the owner 
 and he is allowed to shift it if he can to the tenant. 
 
 The business tax is an old one. Established in 1791, re- 
 modelled in 1844, it is now enforced under a law that was adopted 
 in 1880. Unlike the other direct taxes it is regarded, not as an 
 apportioned, but as a proportioned or rated tax. The " impot 
 des patentes " is imposed on every person, native or alien, who 
 carries on any trade or profession in France, except agriculture 
 and a few others that are especially exempted. The aim is to 
 tax the profits of industry or of a profession, as nearly as may be 
 proportionately. The methods of determining the rates for the 
 different occupations or industries are extremely complex, so 
 much so that only the most general outline can be attempted 
 here. The objects of this complex system of rates are to avoid 
 on the one hand any inquisitorial prying into the affairs of the 
 individual taxpayers, and on the other hand to shun the danger 
 of receiving false declarations as to the amount of the profits. 
 This is done by seizing upon certain concrete, external signs, 
 or natural and obvious characteristics, as evidence of the size
 
 126 INTRODUCTION TO PUBLIC FINANCE 
 
 of the profits. In general the rates fall into two parts. The 
 first is called the fixed duty {taxe determinee). This is the same 
 for each occupation of the same sort, and is largely independent 
 of any of those conditions which make one occupation more 
 profitable than another of the same kind. The second is the 
 proportional rate, based on certain characteristics that are 
 assumed to indicate that a given industry is more or, as the case 
 may be, less profitable than another of the same kind. The 
 fixed duty, however, is not the same in all towns, for it is assumed, 
 for example, that a druggist in a large town makes larger profits 
 than one in a small place. For the fixed duty occupations are 
 grouped in three classes and fall under schedules A, B, and C 
 of the law. Class A includes the general run of merchants 
 and artisans. Merchants are again divided into three classes, 
 according as they sell entirely at wholesale, partly at whole- 
 sale and partly at retail, or entirely at retail. In this class 
 the fixed rate is based on two considerations, (i) the nature 
 of the business and (2) the size (population) of the place 
 in which the business is conducted. Thus occupations are 
 divided into eight general classes according to their nature, 
 and for each of these there are nine ratings according to 
 the size of the place in which they are located. Class 
 B contains a number of businesses in connection with which 
 it seems necessary to consider the size of the enterprise as 
 well as the size of the place and the nature of the business. 
 So a third set of characteristics is introduced supposed to show 
 the size of the enterprise. In this class are bankers, depart- 
 ment stores, water works, hack and omnibus companies. Class 
 C includes the smaller industrial pursuits, handicrafts, and the 
 like. In this class the size of the place is not taken into con- 
 sideration, but some concrete index of the size of the estab- 
 lishment is taken in connection with the nature of the business. 
 Such indices are the number of appliances, or machines used, the 
 number of workmen employed, and the like. The proportional 
 part of the rate is based mainly on the rental of the place of 
 business and the rental of the home the proprietor occupies. 
 It varies for each of the main classes and also within the classes
 
 THE DEVELOPMENT OF TAX SYSTEMS 1 27 
 
 These rates are for class A from two to five per cent of the 
 rental, for those in class B ten per cent, in class C from one and 
 two-thirds to ten per cent. The " liberal " professions, such as 
 thoseoflaw}^ers, doctors, and the like, pay only the proportional 
 rates. 
 
 During the Great War France found her tax system too in- 
 elastic. An income tax was introduced in 1916. 
 
 Sec. 5. English Tax Reforms. — The English system of 
 taxation can be very briefly treated here, because the principal 
 component parts will be discussed in detail in later chapters. 
 What is necessary here is to give an outline of the system as a 
 whole. The greatest change in the British scheme of taxation 
 within this period was the ehmination of the protective prin- 
 ciple from the customs duties, — and indirectly from the excises 
 also, — brought about in the period from 1840-1850, by the 
 abolition of the corn laws and the agitation leading thereto. 
 The consequent simplification of both the import duties and the 
 excises rendered it possible to manage them purely as a source 
 of revenue with a view to obtaining relatively larger sums. 
 The customs duties, the entire tariff of which, 1912, contained 
 only 40 rates, and the somewhat more numerous excises and 
 stamp duties, paid one-half the total annual revenue. The 
 property and income tax, which was restored in 1842 and has 
 since been the variable or elastic element in the system, will 
 also receive special attention in another chapter. Inasmuch 
 as this famous property and income tax is a system, in itself, 
 of five taxes which are calculated to fall upon the chief sources 
 of wealth, it compUes, in a way, with the requirements of uni- 
 versality. Its rate is degressive, so that it attempts to comply 
 with the requirements of justice. It may be looked upon as 
 the complete system of direct taxation. Outside of the system 
 there are two remnants of older taxes which are anomalies and 
 destroy, somewhat, the logic of the system. This lack of any 
 logical reason for retaining them does not necessarily form any 
 good reason for abolishing them. They give rise to no serious 
 complaint, they are old and have been in the main capitalised, 
 so that they form no real burden at present. They are the land
 
 128 INTRODUCTION TO PUBLIC FINANCE 
 
 tax of the eighteenth century, which is now a redeemable rent 
 charge, and the house duty. This latter developed out of the 
 hearth tax of 1662. In 1688 it had been replaced by a window 
 tax. In 1778 a tax on the annual rental was added to the win- 
 dow tax, and finally after 1851 this tax on the rental value was 
 left to stand alone. 
 
 There is still another tax which supplements the property and 
 income tax, and that is the inheritance tax. The most recent 
 changes in these inheritance taxes, — " death duties," — which 
 have existed in England since 1694, will receive attention under 
 another heading. The important thing to note in this con- 
 nection is that these taxes have introduced the principle of 
 progression very extensively into the tax system of England. 
 
 The English system as it now stands consists (i) of the 
 customs and excise duties ; (2) of the so-called property and in- 
 come tax, a degressive tax upon five kinds of income ; (3) two 
 older taxes, the land tax and the house tax ; (4) a graduated 
 inheritance tax; and (5) a number of stamp taxes on deeds, 
 receipts, and so forth. ^ 
 
 The different authorities that have had the power to levy 
 local rates in England are very numerous. The whole system 
 is very complex. The different rates, each going by the name 
 of the authority that levies it, or the purpose for which it is 
 collected, are mostly upon the same base ; namely, the annual 
 rental of the various tenements. They are generally levied 
 upon occupiers. In the case of tenements of less than £10 
 annual value, the difficulty of collecting from the occupier is so 
 great that the plan of making the landlord advance the tax has 
 been adopted. He then shifts it to the occupier. The recent 
 reforms of county and municipal government in England have 
 resulted in a simplification of local rates. 
 
 Sec. 6. American Tax Chaos. — Like the English, the 
 American system can be but briefly treated here, since many 
 of the taxes will receive our attention in subsequent chapters. 
 The principal federal taxes have been customs duties and excises. 
 
 1 Williams' The King's Revenue contains a fine outline of the revenue system of 
 England. It is one of the best books of its kind ever compiled.
 
 THE DE\'ELOPMENT OF T.\X SYSTEMS 129 
 
 The states, or commonwealths, have confined themselves rather 
 closely to direct taxes, as have also the minor civil divisions. 
 Down to 1840, commonwealth taxation was very meagre. 
 ]\Iany of the states attempted to get along without recourse 
 to taxation at all, depending for revenues upon the sale of lands, 
 fees, and other sources. 
 
 The evolution of taxation in this country during the XlXth 
 century resulted in little advance. Indeed it had been to make 
 confusion thrice confounded. Not only was difficulty found 
 in adjusting the spheres of the different taxing authorities, but 
 no sound principle, indeed scarcely any principle at all, had been 
 followed. Before the Revolutionary War the general property 
 tax, whose origin we have already seen, answered the require- 
 ments of justice and equality fairly well. As has been frequently 
 remarked, the American people were a saving race. As fast 
 as they created wealth they turned it into property. The forms 
 of property were, even when not immovable, tangible and 
 unconcealable. Real estate formed the mass of it. Movable 
 property consisted of furniture, farm utensils, and cattle. There 
 were few stocks or bonds, or other forms of credit in which to 
 invest wealth. Among such a people a tax levied on property 
 that was easily ascertainable answered all the requirements. 
 
 But as intangible personal property increased, as oppor- 
 tunities for investment multiplied, it became impossible to 
 make the property tax " general." It became a tax on real 
 estate except for the few conscientious persons who declared 
 their personal property. Until about 1900 the commonwealth 
 legislatures made but half-hearted attempts to sharpen the 
 procedure of assessment. Since that date a number of the 
 states have introduced a plan of central control of the local 
 assessors by a strong central commission. Wherever adopted 
 this has resulted in marked improvement in the direction of 
 greater equality. Prompted at first by a wave of popular 
 excitement, which took the form of a feeling of bitterness toward 
 certain classes of capitalists, the legislatures have, from time to 
 time, attempted to reach personality by taxing the corporations 
 in which the untaxed funds were invested. The resulting cor-
 
 130 INTRODUCTION TO PUBLIC FINANCE 
 
 poration taxes worked some improvement. They supplement 
 the general property tax very effectively. Within the past 
 twenty years a number of states have been remodelling their 
 tax systems, by selecting certain sources of revenue for the 
 use of the state or central governments only, leaving the gen- 
 eral property tax to the minor civil divisions. One general 
 result of this movement has been the taking over of the taxa- 
 tion of corporations by the state, with corresponding increase 
 in efficiency of administration. Sometimes the legislatures 
 have attempted to tax mortgages, as if they were a part of the 
 property on which they rest. As mortgages have to be recorded 
 in order to be legal, it is possible to get at the full value. In 
 some commonwealths, then, the mortgagee is taxed on his in- 
 terest in the property and the owner is exempt to that extent. 
 In California, where this plan has been most extensively tried, the 
 result has not been at all what was desired. The only effect 
 has been to raise the rate of interest on mortgages by the amount 
 of the tax plus from one-fourth to one per cent. That is, the 
 mortgagees have succeeded in shifting the burden of the tax 
 to the real owners with a handsome addition for their trouble. 
 Such a shifting is always possible when any one form of capital 
 is taxed, leaving other forms untaxed, either because they are 
 exempt or because they escape the tax. A recent development 
 in some states has been the exemption of mortgages from taxa- 
 tion as property under the general property tax and the sub- 
 stitution of a tax at a low rate, known as a recording tax. But 
 in general and in most of the commonwealths the American 
 system remains what it has been since 1840, — a regressive tax 
 on real estate, supplemented in part by corporation taxes in 
 some commonwealths, and by an ever increasing number of 
 inheritance taxes. It is a system condemned by every scien- 
 tific writer and impartial statesman, but retained as the only 
 source of revenue. 
 
 The difficulties which have prevented persistent attempts 
 at reform remain, and it is hard to see how they can be overcome. 
 No one commonwealth can afford to pursue personal property 
 with so much vigour as to actually impose a tax on all of it.
 
 THE DEVELOPMENT OF TAX SYSTEMS 131 
 
 Only concerted action could accomplish this. Capital is suffi- 
 ciently mobile to move easily from commonwealth to common- 
 wealth, and if compelled to bear its fair share of the burden in 
 one and not in another, it will surely migrate. Legislators are 
 extremely desirous of attracting capital and very wary of repel- 
 ling it. The owners of capital cannot be taxed personally. 
 They change their residence from city to suburb and even to 
 unfrequented rural parts on the slightest increase of local taxa- 
 tion and move from commonwealth to commonwealth with 
 equal facility. Residence, too, is a matter of intention, and it 
 is easy if personal taxes are proposed to plead residence in 
 another commonwealth. Concerted action being practically 
 impossible, the tax-dodger is safe. 
 
 But while the present system is very bad, it has been tolerated 
 in the past, and arouses less discontent at present than might 
 be expected because it falls mainly on the receivers of economic 
 rent. The value of land in many parts of the United States 
 has increased very rapidly and is still increasing steadily ; so 
 that in those parts, while the taxed owner feels the burden 
 severely, he consoles himself with the thought that he is largely 
 or wholly reimbursed by the increased price which he hopes to 
 get for his land. The general practice, too, of assessing real 
 estate at a fraction of its value, even though so universal as to 
 work no actual lessening of the burden in any individual case, 
 tends to stifle murmurs of discontent. For the owner secretly 
 congratulates himself on not having to pay on all of it, — an 
 illogical basis for self-congratulation, to be sure, but still not 
 infrequently effective. The same person, too, is not infre- 
 quently the owner of taxable personal property which he con- 
 ceals, and he is less uneasy about the tax on real estate so long 
 as he is able to save the other. 
 
 Another reason for the absence of a concerted movement of 
 real estate owners to lessen the ])urden arises from the fact that 
 the real estate tax is a real burden on the property, and shifts 
 itself by the process of capitalisation. For the new purchaser 
 gets his property at a lower j)rice than he would have to pay if 
 the tax had not been imposed. The frequency and ease with
 
 132 INTRODUCTION TO PUBLIC FINANCE 
 
 which real estate changes hands gives constant occasion for this 
 capitaHsation of the tax. Every real tax, when not a part of 
 a well-organised system which taxes every kind of property or 
 all receivers of wealth, can be shifted in this way. It becomes 
 a rent charge on the property to which it is thus attached. A 
 dim perception of this, and a possible realisation of the fact 
 that a reform of the tax system might transform this tax into an 
 actual burden again, may lie at the bottom of the indifference 
 with which the average landowner views proposed reforms. 
 
 All of this selfish indifference is, of course, mistaken. It 
 defeats its own ends. The burden of taxation is light only when 
 properly adjusted to all the shoulders. The serious effects of an 
 unjust, unequal, and ill-arranged system of taxes upon the 
 economic forces of the country have been treated elsewhere. 
 The property tax forms the subject of a special chapter. 
 
 We have spoken merely by courtesy of an American system. 
 As a matter of fact there is none that is worthy of the name. 
 Federal authorities tax with no reference to commonwealths 
 and municipalities ; commonwealths and municipalities, with- 
 out reference to federal action. Municipal taxes are, however, 
 generally adjusted to the existing commonwealth taxes, but 
 only in such a way as not to make the resulting burden appear 
 too large. Their efforts in this direction have only served to 
 intensify the existing inequalities. 
 
 Sec. 7. The National Tax Association's Model Tax System. 
 — A movement in the direction both of a better system or 
 coordination of different taxes within each state and of better 
 relations between the taxes of different states has resulted from 
 the preparation by the National Tax Association of a plan for 
 " A Model System of State and Local Taxation." ^ This re- 
 port has been justly characterized by Professor T. S. Adams as 
 " one of the wisest and most helpful statements ever published 
 concerning the proper structure of the tax system of the Ameri- 
 can State." The report proposes : 
 
 (i) A personal income tax. " Every person having taxable 
 
 1 Proceedings of the Twelfth Annual Conference on Taxation, Chicago, June 17— 
 19, 1 91 9, pp. 426-470.
 
 THE DEVELOPMENT OF TAX SYSTEMS 133 
 
 ability should pay a direct tax to the government under which 
 he is domiciled." " The tax should be levied upon persons in 
 respect of their entire net incomes, and should be collected only 
 from persons and at places where they are domiciled. It 
 should not be collected from business concerns, either incorpo- 
 rated or unincorporated, since such action would defeat the very 
 purpose of the tax." Non-residents earning income in or 
 receiving income from sources in a state should not be taxed. 
 
 (2) There should be " a tax upon tangible property, levied 
 exclusively at the place where such property is located " and 
 " intangible property of all descriptions be exempt from taxa- 
 tion as property." The tax-paying ability represented by such 
 property can be reached in other ways. 
 
 (3) That the methods of taxation applied to public service 
 corporations be improved so as to impose an equitable burden 
 upon such companies, but no one method was recommended. 
 
 (4) A business tax " levied upon the net income derived 
 from business carried on within the state levying the tax." 
 
 (5) Improved administration involving (a) assessment dis- 
 tricts large enough to justify the employment of a permanent 
 full time official ; (b) a term of office long enough to develop 
 efficiency, at least four years ; (c) power of removal of assessors 
 by the state tax commission ; (d) a permanent central state tax 
 commission, with broad powers over the entire tax system, 
 state and local. 
 
 The plan is sufficiently broad and flexible to be adapted to 
 the needs and conditions of any state.
 
 CHAPTER VI 
 
 EXCISES ' 
 
 Section i. Comparison of Excises and Customs. — Gen- 
 erally speaking, indirect taxes are older than direct taxes. They 
 are suitable to a more primitive organisation of society. Hence, 
 it will not be amiss to treat them before we analyse the direct 
 taxes. By far the larger part of the indirect taxes are on con- 
 sumption (Aufwandsteuern) . Most of the taxes on consumption 
 fall under one or the other of two heads : they are either excises 
 or customs duties. In the United States the excises are called 
 internal revenue taxes. Excises may be defined as all those 
 taxes levied within a country on commodities destined for 
 consumption. Customs duties fall on commodities as they 
 enter or leave the country. In their effect on the economic 
 condition of the country and on the tax-bearer they are prac- 
 tically the same. In both cases the persons who first advance 
 the taxes are generally supposed to reimburse themselves from 
 the persons to whom the wares are sold. In both cases, although 
 less often in the case of excises, it may be true that only a part 
 of the funds taken from the tax-bearer flows into the treasury. 
 For both of them enable producers who escape, or whom it is not 
 intended to tax (as the home producer in the case of a tax on 
 imported commodities), to collect on each piece of goods sold a 
 bounty or a tax in the form of a price higher than he could 
 otherwise obtain, the amount of which goes into his own pocket. 
 Sometimes this subsidising of certain producers is intentional, 
 sometimes only accidental. In any case the ultimate effects 
 
 ' The discussion here is confined to normal, or peace times, conditions, in order 
 to give the reader a view of the more permanent principles. War taxation, treated 
 elsewhere, is distinctly abnormal. 
 
 134
 
 EXCISES 135 
 
 which will result from such an interference with the ordinary 
 currents of trade cannot be fully traced. It is comparatively 
 seldom that excises have been intentionally used to change the 
 movement of economic life. But customs duties have regularly 
 been used for that purpose. Excises have, to be sure, been 
 used to influence social life, to lessen the consumption of certain 
 commodities the use of which is regarded as injurious to the 
 individual or dangerous to society, but the object, in that case, 
 is social, not economic. 
 
 Direct Consumption Taxes. — There used to be a large num- 
 ber of the so-called direct consumption taxes. A few of these 
 still survive. They are direct in the first sense of that term, 
 but not in the second. These direct taxes on consumption are 
 either remnants of the older taxes on movables, or arose from 
 the attempt to frown on the use of luxuries. They differ from 
 excises in that they are levied directly on the consumer and not 
 on the person or persons who supply him with the commodities. 
 They are to-day few in number and of little fiscal importance. 
 The chief instances in modern times and the most universal are 
 the dog taxes. There are, in England, similar taxes on guns, 
 carriages, armorial bearings, and men servants. In the United 
 States watches, clocks, and firearms have been made contribu- 
 tory in this way. Plate, houses, clocks, hair powder, and a 
 great many other articles have been taxed. It is regarded as 
 just and proper to make articles of luxury the subjects of taxa- 
 tion because their use is supposed to be evidence of ability to 
 pay. The tendency now is to leave the administration of 
 direct consumption taxes to the local bodies. They are some- 
 times combined with police regulative laws and are assessed 
 as a means of enforcing those ordinances. This is the case 
 with the dog tax in America. 
 
 Sec. 2. Some Excises Have the Same Purpose as Sump- 
 tuary Laws. — It is the excise tax in all its forms that has 
 displaced the direct consumption taxes. The distinguishing 
 feature of this tax is that some resident seller of an article, 
 whether produced in the country or abroad, or the manufac- 
 turer of such an article, advances the tax either during the
 
 136 INTRODUCTION TO PUBLIC FINANCE 
 
 process of its production or at some time before it reaches the 
 consumer. The main purpose of the excise is to obtain revenue, 
 but the ideas underlying the sumptuary laws, and the desire 
 to use taxation as a means of social and moral reform, have 
 dictated some of these taxes or at least the selection of the 
 commodities to be taxed. The fact that the consumption of 
 certain articles like spirituous liquors, tobacco, and playing 
 cards is condemned in itself, and that such articles are regarded 
 as unnecessary luxuries, has led governments to disregard, or, 
 indeed, to favour, the repressive tendency of the tax upon the 
 use of them. It is felt that in case the tax should lessen the con- 
 sumption, the gain to the community in moral and social well- 
 being would more than offset the loss to the treasury in revenue. 
 Moreover the consumption of such articles is not, it has been 
 found, liable to serious diminution on account of the tax, unless, 
 as in the case of the French tax on tobacco, it is very high. 
 
 A System of Excise Taxes. — ■ In the seventeenth century 
 there was a marked tendency to multiply excise taxes. So 
 strong did this tendency become that not a few able writers 
 advocated a general excise as the most just form of tax.^ Many 
 of the recent suggestions for the reform of taxation in France 
 are in the same direction. This tendency can be easily ex- 
 plained by the rapid multiplication of taxable commodities. 
 It was urged that the ease with which such taxes were shifted 
 insured in the end perfect justice. It was also often urged that 
 consumption is more or less voluntary, and any one who finds 
 the tax too heavy can avoid it or lessen it by curtailing his 
 consumption of the taxed article. Thus if the taxed articles 
 are not important necessities, the contributor has a certain 
 control over his share of the tax and can suit it to his means. 
 If the tax is on a luxury, he has presumably absolute control 
 over his contribution. But modern investigations into the 
 character of distribution and consumption would seem to indi- 
 cate that these views are erroneous. There is no doubt that 
 consumption is a very poor criterion of taxpaying ability. 
 What a man spends is no indication of his tax faculty. There 
 
 1 Cf . Cohn, p. 336 ; Seligman, Shifting and Incidence, p. 1 2 ff.
 
 EXCISES 
 
 137 
 
 are, also, some important administrative difficulties. The 
 yield of these taxes is beyond the control of the fiscal officers. 
 If more revenues are needed, it is not always possible to obtain 
 them by raising the rates, since a rise in the rate may, in fact, 
 lessen the revenues by lessening the demand for the articles. 
 Therefore, they are not variable at the pleasure of the treasury. 
 It follows, further, that a system of excises alone would be ex- 
 tremely inelastic. But as parts of a system, the elasticity of 
 which is provided for by other elements, they have proved very 
 valuable on account of the relative ease of collection, and the 
 large returns which they can be made to yield. In England, 
 Russia, and France the returns of the excises and customs duties 
 were one-half or more of the national revenues. In Germany 
 the constitution conferred upon the imperial legislature the power 
 to regulate the customs and excises upon domestic productions 
 of salt, tobacco, spirituous liquors, beer, sugar, and syrup. ^ 
 The commonwealths of the Empire did not levy excises on the 
 articles above mentioned except Bavaria, Wiirttemberg, and 
 Baden. The Empire could not tax any other articles. In the 
 United States the federal government derived nearly half 
 its revenues from excises and an almost equal amount from 
 customs. 
 
 Principles of Excise Taxation. — The following principles 
 have been developed as governing the returns obtainable from 
 excises: (i) Articles which are regarded as necessaries, and 
 which naturally have or can have a wide consumption, are very 
 suitable under this tax for obtaining large revenues. In this 
 case the operation of the tax is like that of a poll tax. The old 
 French gahellc, a tax on salt, is an example. The effect of these 
 taxes, if high, is possibly to curtail consumption and possibly 
 to cause a substitution of other similar articles not taxed. 
 Possibly, too, they may curtail the consumption of other articles 
 by lessening the money available for their purchase. But even 
 with a low rate, these taxes are extremely productive of revenue, 
 on account of the large number of contributors. The objec- 
 tion to burdening necessaries and rendering the existence of the 
 
 ' Burgess, Political Science, II, p. 174.
 
 138 INTRODUCTION TO PUBLIC FINANCE 
 
 poor harder, leads, however, sooner or later, to their abolition 
 or to a reduction in their rates. These, like the poll taxes, 
 recognise to too small an extent differences in ability. They 
 are, however, good sources of revenue in cases of extreme need. 
 (2) Luxuries and comforts may be taxed heavily. This applies 
 especially to luxuries the use of which has become a fixed habit 
 with large masses of people. The general principle is to select 
 those luxuries of the widest consumption as the objects of the 
 heaviest taxes. Thus alcoholic liquors and tobacco are univer- 
 sally taxed in this way. In the United States they formed al- 
 most the sole objects. In times of special need it is customary to 
 press the semi-luxuries or comforts into service. Here again, the 
 choice is made of articles of widest consumption ; such as coffee, 
 sugar, silks, chocolate, etc. In most modern excise systems, 
 the heaviest burden falls upon luxuries. In England, where the 
 receipts from excises were nearly one-fourth of the total revenues, 
 the chief burden fell upon spirits (1908, £22,830,000) and beer 
 (1908, £13,550,000). In France, aside from the octroi, the 
 chief excises are on beer, wine, spirits, and tobacco, then on 
 sugar, salt, and playing cards. In Germany, apart from the 
 city gate taxes, they fall upon alcoholic drinks, tobacco, and 
 sugar. Modern excises are, then, mainly taxes on alcoholic 
 drinks and tobacco with the addition of a few other duties upon 
 playing cards, etc., and in cases of great need, upon a few 
 articles of large consumption. 
 
 Sec. 3. Methods of Assessment. — By far the most inter- 
 esting features of the excises are the methods of assessment and 
 collection. These are practically of three kinds, which may 
 be variously combined: (i) A tax on the producer or seller so 
 levied that the failure to pay it deprives the person of the right 
 to sell, and renders him liable to penalty. That is, a so-called 
 license ^ is sold. (2) An impost on each unit of the article. 
 This demands the registration of the dealers therein ; and some- 
 times they are required to give bonds as surety for the payment 
 
 1 For the distinction between a license and a permit see the United States Census 
 Bureau definitions, Wealth, Debt and Taxation, 1907, Classification of Revenues. 
 A license to conduct some business illegal in itself differs from a license required 
 merely to compel the payment of a tax.
 
 EXCISES 139 
 
 1 
 
 of the tax. Wherever it is possible, this impost is collected by 
 means of the sale of stamps purchased of the government to be 
 affixed to each package, hogshead, etc., or by means of brands, 
 or other marks affixed by officials who thus receipt for the pay- 
 ment. The stamp or brand serves as evidence that the tax has 
 been paid. Goods not bearing these would, if taxable, become 
 contraband and liable to seizure. (3) By the retention of the 
 monopoly of manufacture and sale by the government. 
 
 England and America use a combination of (i) and (2). 
 Thus in England every barrel of beer is taxed ys. gd. (1908) 
 and every dealer and brewer pays a license besides.^ 
 
 * The following applies to 1908 : 
 
 Beer Duty, Excise 
 
 .£ 5. d. 
 Beer of specific gravity of 1055 degrees, per 36 gal 079 
 
 Annual Licenses 
 
 Brewers of beer for sale 100 
 
 Other brewers : 
 
 Brewing solely for their own domestic use, exempt from beer duty, if the 
 annual value of the house occupied does not exceed £8 . (exempt) 
 
 Same, if annual value of house exceeds £8, but does not exceed £10 040 
 
 Same, if annual value £10 to £15 . o g o 
 
 Same, but Uable also to beer duty, over £15 040 
 
 Same, or for consumption by farm labourers, if annual value of house 
 
 does not exceed £10, exempt from beer duty 040 
 
 Same as last, if over £10, liable also to the beer duty 041 
 
 Beer dealers 360 
 
 Beer dealers, additional to retail, off the premises 150 
 
 Beer retailers, on the premises 3 10 o 
 
 Beer retailers "on," occasional (license per day) 010 
 
 Beer retailers, grocers, "off," Scotland, to £10 2 10 o 
 
 Beer retailers, grocers, "off," Scotland, £10 and upward 440 
 
 Beer retailers, grocers, "off," England 150 
 
 With varying and additional licenses for combination of sale of beer with 
 wine, spirits, etc. 
 Spirits are taxed in a similar way and so are the dealers therein. In the case of 
 tobacco the import duty forms the tax on the commodity, and the manufacturer 
 pays a license graded according to the size of his business. 
 Tobacco manufacturers : 
 
 £ J. d. 
 
 Under 20,000 lb S 5 o 
 
 20,000 to 40,000 " 10 10 o 
 
 40,000 " 60,000 " 15150 
 
 60,000 " 80,000 " 2100 
 
 80,000 " 100,000 " 26 5 o 
 
 100,000 31 10 o
 
 I40 INTRODUCTION TO PUBLIC FINANCE 
 
 In the United States all internal revenue taxes are payable 
 by stamps. These stamps are pasted upon the packages con- 
 taining the taxed commodities in such a way as to be necessarily 
 broken when the package is opened. Or else they are pasted 
 up or exposed in the places of business. The table below illus- 
 trates the whole system. 
 
 Schedule of articles and occupations subject to tax under the internal 
 revenue laws of the United States in force August 28, 1894, as amended to 
 1908. 
 
 Special Taxes 
 
 Rate of Tax 
 
 Rectifiers of less than 500 bbl. a year $100.00 
 
 Rectifiers of 500 bbl. a year, or more 200.00 
 
 Retail liquor dealers 25.00 
 
 Wholesale liquor dealers 100.00 
 
 Retail dealers in malt liquors 20.00 
 
 Wholesale dealers in malt liquors 50.00 
 
 Manufacturers of stills 50.00 
 
 And for stills or worms, manufactured, each 20.00 
 
 Brewers, annual manufacture less than 500 bbl 50.00 
 
 Brewers, annual manufacture 500 bbl., or more 100.00 
 
 Manufacturers of oleomargarine 600.00 
 
 Retail dealers in oleomargarine 48.00 
 
 Wholesale dealers in oleomargarine 480.00 
 
 Distilled Spirits, Etc. 
 
 Distilled spirits per gallon $1.10 
 
 Wines, liquors, or compounds known or denominated as wines, and made 
 in imitation of sparkling wine or champagne, but not made from 
 grapes grown in the United States, and liquors, not made from 
 grapes, currants, rhubarb, or berries grown in the United States, but 
 produced by being rectified or mixed with distilled spirits, or by 
 the infusion of any matter in spirits to be sold as wine, or as a sub- 
 stitute for wine, in bottles containing not more than one pint, per 
 bottle or package 10 
 
 Same, in bottles containing more than one pint, and not more than 
 one quart, per bottle or package 20 
 
 And at the same rate for any larger quantity of such merchandise, 
 however put up, or whatever may be the package. 
 
 Stamps for distilled spirits intended for export, for expense 10 
 
 Tobacco and Snuff 
 
 Tobacco and snuff, however prepared, manufactured, and sold, or 
 removed for consumption or sale, per pound 12 cents, or with dis- 
 count of 20 per cent $ -OQ^o net
 
 EXCISES 141 
 
 Qgars and Cigarettes 
 
 Cigars of all descriptions made of tobacco or any substitute therefor, 
 and weighing more than 3 lb. per thousand, per thousand . . . $3.00 
 
 The same, weighing not over 3 lb. per thousand, per thousand ... .54 
 
 Cigarettes, weighing not more than 3 lb. per thousand and of a whole- 
 sale value or price of more than $2 per thousand, 36 cents per pound, 
 or per thousand 1.08 
 
 The same of a wholesale value or price of not more than $2 per thousand, 
 18 cents per pound, or per thousand 54 
 
 Cigarettes, weighing more than 3 lb. per thousand, per thousand . . 3.60 
 
 Fermented Liquors 
 
 Fermented liquors, per barrel, containing not more than 31 gal. . . $1.06 
 More than i bbl. and not more than i hogshead, 63 gal., in one pack- 
 age 3.20 
 
 Oleomargarine 
 
 Domestic, per pound . $ .02 
 
 Imported, per pound 15 
 
 Opium 
 Prepared smoking opium, per pound $10.00 
 
 Playing Cards 
 Playing cards, per pack, containing not more than 54 cards .... $ .02 
 
 Sec. 4. Types of Excises. — We may now look at a few 
 typical excises. The taxation of salt by means of an excise, 
 collected in the form of a tax on producers, a tax on sellers, the 
 sale of a monopoly to a private company, or state manufacture, 
 is one of the oldest forms of taxation. On account of the na- 
 ture of the commodity, a necessity for which there is no sub- 
 stitute, and of which poor and rich consume about the same 
 amount, this tax acts practically as a poll tax. With the 
 modern tendency to abolish or at least to lower poll taxes, as 
 unequal and unjust, the salt tax has been largely abolished, or 
 its rates have been so lowered as to practically nullify the re- 
 turns. France in 1908 received about 10,000,000 francs from 
 the salt excises. The English salt tax yielded at the time of 
 its abolition only £380,000. The United States war excise 
 upon salt yielded only $300,000 (1899).
 
 142 INTRODUCTION TO PUBLIC FINANCE 
 
 The best, but not by any means the sole, example of the to- 
 bacco monopoly is in France. This interesting tax scheme be- 
 gan in 1674 under Colbert, It continued with slight interrup- 
 tions for over a century as one of the most productive parts of 
 the revenue system. It was leased to a ferine generate, who 
 paid the government, at the time of Necker, 32,000,000 francs 
 annually. At the time of the Revolution the monopoly was 
 abolished, and an attempt was made to introduce a series of 
 taxes on tobacco. But the monopoly was restored in 18 10 by 
 Napoleon I, and has continued ever since. Under the present 
 law the culture of the plant is forbidden outside of certain 
 localities. Each year the estimated amount required by the de- 
 partment is apportioned among the different applicants within 
 the district where it is permitted to raise tobacco. Several 
 thorough official inspections of the fields and crops are made 
 and even the number of plants and leaves is counted to insure 
 obedience with the regulation which demands the delivery of 
 the whole crop to the government. Tobacco raised for export 
 is similarly watched to see that none of it escapes into the 
 channels of the French trade. The price for each quality is 
 determined by a commission of officials and experts. A part, 
 about one-half, of the supply is imported. The manufacture 
 is carried on in public factories, which employ about 20,000 
 workmen. The sale is in the hands of some 40,000 petty 
 officials, who receive a percentage of their sales and whose 
 appointment is a part of the party spoils system. The revenues 
 obtained in this way are enormous : 
 
 1815 40,000,000 francs. 
 
 1869 197,000,000 " 
 
 1872 218,700,000 " 
 
 1876 262,300,000 " 
 
 1880 284,000,000 " 
 
 1885 300,000,000 " 
 
 1890 373,000,000 " 
 
 1895 381,000,000 " 
 
 1900 415,000,000 " 
 
 1904 447,000,000 " 
 
 1908 with matches 516,000,000 "
 
 EXCISES 143 
 
 The prices charged for tobacco are high compared with the 
 prices prevalent in other countries, so high that the consumption 
 is apparently checked thereby, it being per capita less than one- 
 half that of Germany. Austria and Italy have very similar 
 state tobacco monopolies. France added a monopoly on 
 matches in 1890. 
 
 Sec. 5. The Proper Field for Excises. — On account of the 
 large returns obtainable from an excise on luxuries, and in view 
 of the fact that any repressive effect of such excises is not felt 
 to be harmful, but is often desired, it is probable that these 
 taxes will be long retained. They are applicable to any luxury 
 the consumption of which is large and of which the production 
 is sufficiently simple or concentrated to allow of supervision. 
 But in general, excises as taxes on expenditure or consumption 
 are unfair. What a man spends is no indication of his ability 
 to pay taxes, and what a man spends on a certain limited list 
 of commodities is less so. When these taxes are made a sub- 
 ordinate part of a system and due allowance is made in the other 
 taxes for the existing burdens, there is less objection to them.
 
 CHAPTER VII 
 CUSTOMS DUTIES 
 
 Section i. Customs Duties Defined. — Customs duties are 
 taxes levied upon commodities when they cross the national 
 boundary line, or are admitted within a customs territory, 
 consisting of a combination of countries or of definitely limited 
 parts of countries. Unless a city or town forms an independent 
 sovereignty, taxes levied on goods entering a city are not called 
 customs duties, but octrois or imposts, and partake of the nature 
 of excises. Duties upon goods passing from province to prov- 
 ince in the same country are likewise not customs duties ; 
 neither are tolls or transit duties charged upon goods passing 
 through the country. Such charges are fees for the ostensible 
 or real service of the government in keeping up roads and 
 bridges, maintaining peace, and allowing transit.^ Customs 
 duties are indirect consumption taxes of practically the same 
 character as excises. Their treatment in a separate chapter 
 is not on account of any actual difference in nature but because 
 of their historical and fiscal importance. 
 
 Sec. 2. Old Customs Duties Covered Both Imports and 
 Exports. — The old forms of customs duties were on exports 
 and imports alike. They arose by analogy from the transit 
 tolls which were customary in the Middle Ages. Once in use 
 their fiscal importance was recognised, and it was easy from 
 the standpoint of feudal politics to justify their continuance. 
 Feudalism regarded every act of the vassal as the concern of 
 the lord. If any vassal, or later any subject, found a new 
 means of gain, feudalism imposed on him the duty of con- 
 
 ' Cf. Bastable, p. 552, for contrary view. Bastable does not recognise fees as a 
 separate class. Hence his identification of transit duties witli customs duties. 
 
 144
 
 CUSTOMS DUTIES 145 
 
 tributing a part thereof to the lord or the king. If a subject 
 sold a commodity to a foreigner it seemed to the men of the 
 Middle Ages that the king's interests were affected, and it seemed 
 right that his permission should be paid for. The export duty 
 is often a sort of compromise accepted for the removal of the 
 prohibition of exportation. With the decay of the older, cruder, 
 mercantile ideas and the advent of a period when national 
 wealth came clearly to depend upon the size of national trade 
 more than on its direction, export duties fell away. It is inter- 
 esting to note in this connection that England has been using, 
 even in very recent years, an export duty on coal, originally 
 for the protection of her deposits from depletion. In 1901 this 
 duty was restored in order to obtain revenues for war purposes. 
 The yield in 1905 reached £2,500,000. The duty was repealed 
 in 1906. Turkey and India are now the only countries where 
 export duties form an important item of revenue. India is the 
 only country in which the export duties exceed the import 
 duties.' In Turkey the duty is i per cent of all exported com- 
 modities. Switzerland, Austria, Russia, and Italy have a few 
 export duties upon products peculiar to their soil, the burden 
 of which is supposed to fall upon the foreigner. France did 
 away with them in 1881, Germany in 1873. 
 
 Import duties are still very numerous. As a branch of the 
 taxes on consumption, their yield is very large. The German 
 customs duties yielded nearly one-half of the imperial net receipts. 
 Until recently about half of the United States federal income was 
 from this source ; now it is sHghtly less in proportion. The 
 English customs duties yield about 23 per cent (1908) of the 
 gross receipts, the French 15 per cent, and the Itahan the 
 same. 
 
 Sec. 3. The Purposes of Customs Duties. — ^ Although the 
 fiscal interests are great, yet in every important country except 
 England the receipts from this source are not regarded as of any 
 greater importance than the effects upon the industries of the 
 
 ' Export duties are still levied in tlic i'hilippincs and are regarded as necessary for 
 the taxation of the industries of the islands. They fall on sugar, hemp, and tobacco 
 principally.
 
 146 INTRODUCTION TO PUBLIC FINANCE 
 
 country. There are then two sides from which these taxes 
 must be studied : (i) from the side of the revenue-yielding 
 capacity; (2) from the side of the "protection" afforded the 
 industries of the country which levies them. While it would be 
 undesirable to introduce a full discussion of the far-reaching 
 economic effects of protective duties upon industries and com- 
 merce in a treatise on finance, yet a brief statement of these 
 effects and of the main reasons which have led great nations to 
 adopt these taxes is essential to an understanding of their nature. 
 It is as essential to know how and why protective duties are 
 intended to alter the existing economic conditions, as it is to 
 know how and why the income tax, for example, is supposed 
 to leave them unaltered. 
 
 Sec. 4. Protective Tariff Defined. — What is the distinction 
 between a protective tariff and a tariff for revenue ? It may be 
 briefly stated as follows : a protective tariff is a scale of duties 
 so arranged as to prevent importation, wholly or in part, and to 
 raise the price of commodities from abroad, the production of 
 which within the country it is intended to encourage. The 
 scale of duties is, therefore, arranged with a view to the sup- 
 posed needs of the industries which it is intended to develop. 
 A tariff for revenue, on the other hand, aims to avoid any effect 
 upon industries within the country, and the duties are laid ac- 
 cording to principles similar to those of the excise upon articles 
 of large consumption and great tax-bearing capacity. The 
 term " a tariff for revenue o«/y," so current in the United States, 
 is the expression of an unattainable hope. A moment's consid- 
 eration of the law of international exchange,^ namely, that the 
 interchange of commodities between distant places is deter- 
 mined by differences in their possible cost of production in the 
 same place, and not by their absolute cost of production in the 
 separated interchanging places, will reveal the fact that even a 
 very small duty upon a single commodity affects the demand 
 of the country from which that commodity comes for other 
 things, and indirectly affects every commodity manufactured 
 in the country laying the tax. The same is true of an excise. 
 1 See Mill, Prm., Bk. Ill, Chap. XVII.
 
 CUSTOMS DUTIES 147 
 
 In fact, any consumption tax has far-reaching effects. Strictly- 
 speaking, there can be no such thing as a tariff for revenue only. 
 What is meant by that phrase is that the tariff shall be so 
 arranged as to yield the needed revenue with the least possible 
 effect on the trade and industry of the country. 
 
 It must be noticed that every tariff, even though it contains 
 many protective features, also necessarily contains many duties 
 which are mainly for revenue. Thus in the United States, 
 even with high protective duties, the main revenues were ob- 
 tained from the taxes upon a few commodities. The receipts 
 in 1888, for example, were: from duties on sugar and the like, 
 $52,000,000; from wool and woollens, $37,000,000; from iron 
 and steel, $21,000,000; these three together being more than 
 half the entire receipts from customs duties. 
 
 Sec. 5. Protection as a National Policy. — The protective 
 principle is widely applied in every important existing tariff of 
 customs outside of England, Holland, Norway, Belgium, Swit- 
 zerland, and Denmark. This policy is clearly the outcome of 
 national selfishness. The attempt to direct industry into cer- 
 tain lines by artificial means cannot find support in any system 
 of political economy that regards the largest possible world's 
 product as the proper aim.i The object is rather the greatest 
 possible diversity of home products. In so far as this purpose is 
 attained, it is by the process of shutting out competition and 
 allowing the home producer to collect from home consumers 
 a certain amount of support, greater or less, according to the 
 supposed needs of the producer in question. In so far, then, 
 the actual protection afforded is an item of public expenditure. 
 Revenues collected by means of higher prices authorised by law 
 are spent in developing the industry protected. It is in every 
 respect the same as if a subsidy were paid to the manufacturer 
 
 ' See the article by Professor FolwcU on "Protective Tariffs as a Question of 
 National Economy," in The National Revenues, a collection of papers by American 
 economists, edited by Albert Shaw, Chicago, 1S88. Contrary to the popular opinion 
 as to the views of economists, none of the writers who have contributerl to this 
 symposium finds it possible to attack protection on n priori grounds. On the free- 
 trade side see Report of the Proceedings of the International Free-trade Congress, 
 London, August, 1908. Cobden Club, Caxton House, Westminster, S. S., London, 
 1908.
 
 148 INTRODUCTION TO PUBLIC FINANCE 
 
 or other producer, except that the money goes directly to him 
 without first passing through the treasury. 1 
 
 Sec. 6. A High Protective Tariff Yields Little Revenue. — 
 We turn now to a treatment of the fiscal character of protec- 
 tive duties : (i) In the first place, it is clear that the more " pro- 
 tection " the duty gives, the less will be the revenues afforded 
 to the government, and the greater the possible revenues to the 
 subsidised producer. Absolute protection means the exclusion 
 of the foreign commodity and no revenue to the government. 
 The subsidy that the producer can obtain is determined 
 by the conditions of production ; it varies from nothing to 
 the whole amount of the tax according as the cost of pro- 
 duction varies above what the cost of the imported commodity 
 would be without the duty. (2) Above a certain point high 
 duties tend to diminish the revenues to the government, and 
 increase the subsidy to the producer, by diminishing the amount 
 of the commodity imported. The point beyond which the total 
 revenues diminish is ascertainable by a principle similar to 
 that of charging what the traffic will bear. In practice that 
 point can be ascertained by gradually increasing the duty until 
 it is found that the importation begins to diminish, and stopping 
 the increase of the duty when it is found that the added duty 
 checks more of the importation than the increased duty com- 
 pensates for. A tariff of customs duties arranged throughout 
 on this principle would be a revenue tariff, and if universal, 
 would yield enormous sums. It would, also, contain many 
 protective features. The burden of such a tax would be in- 
 sufferable. No such general tariff has ever been enforced. 
 (3) Protection is given only when the price is raised. The 
 subsidy paid to the producer is paid by the consumers within 
 the country. This part of the tax is never shifted to foreigners 
 and generally remains on the consumer. (4) But that part 
 of the tax which flows into the treasury of the government is 
 not always, although generally, paid by the consumer, whether 
 protection is afforded thereby or not. There are a few rare 
 instances in which the tax that forms a part of the government's 
 
 1 See above on expenditure for protection of industry.
 
 CUSTOMS DUTIES 149 
 
 revenue is shifted either to the foreigner, i.e. the producer, or 
 the speculator, i.e. the importer. These instructive instances 
 may be summed up as follows : The consumer escapes that 
 part of the tax which flows into the treasury on purchases of 
 commodities actually imported : (a) When the amount of 
 the commodity produced in the country laying the tax is suffi- 
 cient in quality to entirely supply the home market and to fix 
 the price very close to the cost of production, while the foreigner 
 has at the same time so large a supply that he must enter that 
 market to dispose of it. In this case, if any revenue at all 
 accrues to the government, it is clear that it is paid by the 
 foreigner, who is burdened by the whole tax and may lose more, 
 — more, that is, if his entrance into the market still further de- 
 presses the price. The home producer gets no subsidy. A 
 commonly cited example of this is the case of rye in Germany 
 in good years when the outside crop is also good, {b) When a 
 new tax is laid on goods produced b}' the aid of a large fixed 
 plant for a limited market which would be lost if the price were 
 raised. As long as the producer is unable to change the nature 
 of the^ plant, he must pay the tax. An example was found in 
 the iron products from the Rhine districts prepared for the 
 trade as " Sheffield " cutlery. England could in this case 
 tax the foreigner until such time as he could change the char- 
 acter of his product, (c) In the case of commodities that are 
 used only as the substitutes for something else because cheaper, 
 and which would not, if the price rose higher than that of the 
 commodity for which they are used, be consumed at all. In 
 this case the foreigner pays a part or the whole of the tax when 
 the alternate commodity is cheap. For example, rye in Ger- 
 many when wheat is cheap, especially if at the same time the 
 crop of rye is short, {d) In the case of commodities a large 
 part of whose total consumption is produced in the country, 
 but not enough to absolutely fix the price, which is still above 
 the cost of production. The foreigner in that case may pay 
 part of the tax, since his arrival depresses the price, {e) The 
 speculator regularly pays the tax in those frequently recurring 
 instances when the commodilv is massed in warehouses on the
 
 150 INTRODUCTION TO PUBLIC FINANCE 
 
 border ready for importation on a rise in the price and on being 
 imported, at the order of various speculators, in large masses 
 depresses prices again. It is a pretty well-established fact, 
 from the investigations of Cohn and Kandtorowicz, that the 
 speculators on the Exchange as a whole lose more than the)'' 
 gain. This loss is in part the consumer's gain through the relief 
 from taxation.^ 
 
 Sec. 7. Specific and Ad Valorem Duties. • — Customs duties 
 regarded merely as a source of revenue depend upon the same 
 principles exactly as those which underlie excises used for that 
 purpose. The greater revenue is obtained with the least 
 expense from a few simple duties upon important commodities. 
 
 Technically, customs duties are of two kinds, according as 
 they are levied upon goods in bulk irrespective of their value, or 
 the contrary. This technical distinction is of great importance 
 in determining the incidence of these taxes. Duties levied 
 according to the value of the imported commodities are known 
 as ad valorem; those according to weight, bulk, or other unit of 
 measurement are known as specific. The latter usually fall 
 most heavily upon the coarser or cheaper grades of commodities. 
 Such a tariff is, therefore, regressive and contrary to the spirit 
 of many consumption tax systems, which usually tax luxuries 
 more heavily than other commodities. But the great saving in 
 expense, and the great ease of collecting and administering 
 specific duties, go a long way in recommending them. Ad 
 valorem duties demand more machinery of administration, as, 
 for example, the certification of the consul in the place where the 
 goods come from to the correctness of the invoice, a corps of 
 appraisers, and a careful examination or inspection of all in- 
 coming goods. Little of this is necessary in the case of specific 
 duties. Specific duties are now retained mainly for simple 
 commodities of uniform value per unit, or for rough groups of 
 articles, whose value is easily ascertained. 
 
 * See the masterly treatment of the whole of this intricate subject by Lexis, 
 "Handel," in Schmibcrg's Handhuch, 2d ed., Vol. Ill, XXI, sec. 77; also Conrad, 
 in his Jahrbuch, XXXVII; Cohn, " Zeitgeschiif te und DiSerenzgeschiifte," in 
 Hildebrand's Jahrbuch, Yll, p. 388; brought down to date in i8go by Kandtoro- 
 wicz.
 
 CUSTOMS DUTIES 
 
 151 
 
 Smuggling. — The watching of the frontier and the preven- 
 tion of smuggUng is one of the primary difficulties that have 
 to be overcome in the administration of customs duties. Goods 
 of high value and easily portable are not very well adapted to 
 pay such duties, unless they can be obtained only from distant 
 countries and are thus easy of identification. Whenever there 
 is a heavy excise on any commodity there is generally a corre- 
 spondingly heavy customs dut}^ as well. Sometimes the im- 
 ported commodity pays both the dut}- and the excise or a part 
 of the excise. 
 
 The political or protective element in customs duties has been 
 gradually retreating in importance, and the fiscal has corre- 
 spondingly advanced. Stein ^ makes this the sole law in the 
 history of customs duties. It would be best characterized as an 
 advance of the fiscal interest, leaving the political or protective 
 interests the same as before. The pressing wants of nations, 
 and the fact that federal governments have been well-nigh con- 
 fined to these taxes, have necessitated this advance. 
 
 Sec. 8. History of Customs Duties in England. — We may 
 now look at some examples of customs duties. Those of Eng- 
 land are particularly instructive.^ The term " consuetudines,'^ 
 or customs, applied to the duties levied upon imported and ex- 
 ported commodities even before the Magna Charta, bespeaks 
 their antiquity. In the time of the Norman kings, however, 
 trade was insignificant and the duties not very productive. 
 The original duty on wine was one cask from every cargo of 
 between ten and twenty casks, two from twenty or more. What 
 the original duty on wool was is not known. Finally the sys- 
 tem settled down to a 5 per cent tax on all imports and exports. 
 Down to 1700 these duties were entirely for revenue purposes 
 and had no intentional protective features. At one time their 
 yield was nearly £i,5oo,cx)0. The eighteenth century saw a 
 changed policy. Special protective and prohibitive duties 
 were established. This was the policy of the entire century, 
 except during the "long peace" of Walpole, 1722-1739. By 
 
 ' Vol. ir. Part II, p. 377. 
 
 ^ See Hall, History of the Customs Revenue, and Dowell, History of Taxations
 
 152 INTRODUCTION TO PUBLIC FINANCE 
 
 1759 the general charges were 25 per cent, while many com- 
 modities, like tea, coffee, sugar, wines, and spirits, paid even 
 more. The expenses of the wars which marked the turn of 
 the century led to a general increase of charges on revenue- 
 yielding commodities. Yet with all the many increases in the 
 tax charges there was not a corresponding increase in revenues. 
 In some cases the high duties of the war period exceeded the 
 limit of what the goods would bear. For example, sugar paid 
 duties ranging from 205. to 395. per hundredweight during the 
 first fifteen years of the nineteenth century. But the annual 
 income was least when the duties were highest. Consumption 
 fell off half a million hundredweight under the higher price. It 
 must be noted that this result was obtained in the case of a com- 
 modity not produced in the country itself. Salt, also, bore a 
 heavy duty in this period to the lessening of the consumption. 
 Tea, coffee, tobacco, wine, and other foreign products were 
 also subject to revenue duties so high as to be close to, if not be- 
 yond, the limit of greatest productivity. 
 
 Interesting and instructive is the experience of England with 
 protective duties. Export duties on raw material, or the pro- 
 hibition of the exportation thereof, as in the case of wool, was 
 originally one of the most prominent features of the English 
 system. From the middle of the seventeenth century down to 
 1825 the exportation of home-grown wool was forbidden. Until 
 1802, however, the importation of wool was free. Then the 
 import duty rose rapidly from 55. 3J. per hundredweight, in 
 1802, to 565. per hundredweight in 1819. To encourage the 
 production of raw silk, heavy duties were placed upon that com- 
 modity in 1765, and not lessened until 1825. Linen manufac- 
 ture was encouraged by bounties. 
 
 The chief battles over the customs duties in England were 
 waged around the " corn-law." ^ Two things among others 
 of minor importance seem to have contributed mainly to the 
 establishment of protective duties on bread-stuffs.^ The 
 
 ^The American student must bear in mind that in England "corn" means 
 wheat, or, in general, bread-stuffs. 
 
 2 See McCuUoch, Taxation, p. 206 ; Wilson, National Budget, p. 62 ff. ; Levy, 
 History of British Cot/merce, 2d ed., Part II, Chap. 7 ; Rand, p. 207 ff.
 
 CUSTOMS DUTIES 1 53 
 
 first was the existence of heav}'^ public burdens upon land, and 
 the desire to compensate land owners and land users therefor. 
 The other was the desire to make England as independent as 
 possible of all foreign nations for her food supply, and to keep 
 even the poorer lands in cultivation. According to the advo- 
 cates of this policy, protection was needed to enable the pro- 
 prietors and tenants to buy manufactured products. It was 
 the political power of the proprietors that enabled the policy 
 to be maintained. The various tariffs that prevailed may be 
 conveniently summarised as intended generally to maintain 
 a chosen price, which it was assumed would enable the producer 
 to live, and would not place too heavy a burden on the con- 
 sumer. Hence the frequent recourse to a sliding scale by which 
 a higher duty was imposed as the price fell. The best example 
 is the scale adopted by Sir Robert Peel (5 and 6 Vict. c. 14), by 
 which the duty was to be 205. per quarter when the price was 
 50^. and 515., and decreased is. per quarter for every rise of 
 15. in price ; so that the duty would only be is. per quarter 
 when the price rose to jos. and over. The idea was, clearly, to 
 maintain, if possible, a price of at least 705. A similar purpose 
 underlay the earlier prohibition of importation, until the price 
 rose above 805. per quarter. 
 
 Popular agitation, headed by the Anti-Corn Law League, was 
 based upon the hope of cheaper food supplies. It was sup- 
 ported by the rapidly growing manufacturing interests in the 
 expectation that cheaper food would result in a fall in wages. 
 After years of effort it brought about the repeal of the corn laws 
 in 1846. The sympathy aroused by the Irish famine of the 
 same year contributed to this end. Just before the repeal of 
 the corn laws Peel had, in 1842, simplified the whole tariff by 
 eliminating many of the protective features, especially by re- 
 moving duties on raw material and freeing a number of small 
 articles. As a substitute source of revenue the income tax 
 was restored. Gladstone, in i860, completed the removal of 
 protective features. Since that time it has been true, in the 
 words of Bastable, that " the English customs system is remark- 
 able for its vigorous adherence to the principle of purely financial
 
 154 INTRODUCTION TO PUBLIC FINANCE 
 
 duties. All traces of a political aim in the imposition of customs 
 duties have now disappeared." The corn duty was, however, 
 restored as a revenue measure at the time of the Boer War. 
 It lasted but a short time, namely, from April 15, 1902, to July 
 I, 1903, and during that time yielded £2,448,000.^ 
 
 During the fiscal year 1 907-1 908 the customs yielded 
 £32,500,000 as follows : tobacco, £13,739,000 ; tea, £5,807,000 ; 
 coffee, £184,000; cocoa, etc., £287,000; chicory, £47,000; 
 currants, raisins, and other dried fruits, £456,000; sugar, 
 £6,708,000; beer, £23,000; spirits, £4,133,000; wine, £1,177,- 
 000. The Great War brought many changes in English customs 
 duties. They may not be permanent. Mention of them will 
 be found in the chapter on War Finance. 
 
 Sec. 9. The German Customs Union. — The difi&culty of 
 administering customs duties in the small and scattered areas 
 of the different States of Germany led to the formation of the 
 German customs union (Zollverein) in 1833. This union, which 
 at first embraced a population of 25,000,000 and a territory of 
 80,600 square miles, grew in size and in permanence with the 
 renewal, from time to time, of the treaties which bound to- 
 gether the States composing it, and with the entrance of new 
 States, so that in 1854 it embraced 98,000 square miles and 
 35,000,000 inhabitants. It was the core of the recent German 
 Empire. At the beginning the moderate, mainly revenue, 
 duties of Prussia were adopted. In the tariff of 1865 the rates 
 were lowered and many removed. Duties on grain and on 
 almost all raw materials were removed, and the duties on manu- 
 factured goods reduced. The free-trade tendency which accom- 
 plished this change lasted until long after the formation of the 
 Empire, indeed down to 1877. 
 
 The constitution of the Empire conferred upon the imperial 
 legislature the exclusive power to regulate customs. It might 
 levy taxes to any amount upon all articles exported or im- 
 ported, for revenue purposes or for protection or for both. But 
 the imperial legislature could not tax anything else. Further 
 
 1 The so-called "registration" duty, 1869-1870, yielded £1,000,000 during the 
 entire period of its existence.
 
 CUSTOMS DUTIES 1 55 
 
 revenues, if needed, could be raised in the form of an appor- 
 tioned requisition upon the commonwealths of the Empire. 
 The growing need of the Empire for revenues was accompanied 
 by a wave of protectionist sentiment, so that the increased duties 
 were more and more protective in character. It is true, however, 
 that the revenue features were increased at the same time. 
 
 Particularly interesting was the duty on grain, introduced in 
 1879, and raised several times afterward. The rate became 
 5 M. per 100 kilograms for wheat and rye, 4 M. for oats, 
 2 J M. for barley. These duties were in some measure pro- 
 tective in ordinary seasons. It was frequently found that a 
 part of the revenue which flowed into the treasury from this 
 source, especially in extraordinary years, was paid by others 
 than the consumer.^ Generally, however, the consumers paid 
 the home producers a goodly sum in the shape of higher prices. 
 The operation of these grain duties has been materially modified 
 in recent years by the conclusion of commercial treaties with 
 some of the grain-producing countries. The main revenues 
 from customs duties in the Empire came from coffee, tobacco, 
 wine, and grain. 
 
 Sec. 10. History of the French Tariff. — France has a highly 
 developed system of customs duties. By the edict of 1664 Col- 
 bert attempted to reduce to a single uniform scheme all the 
 confused and multifarious customs charges that had come down 
 from feudal times and were in the hands of many different 
 authorities. The tariff thus established was protective in 
 character and was dictated mainly by the mercantile doctrine. 
 But many provincial duties were left, and as time went on con- 
 fusion increased. The Revolution swept all the old taxes away, 
 and in 1791 the system which is the basis of the present one was 
 estabUshed. 
 
 The development since then has been gradual. Prohibi- 
 tions of imports and exports, so numerous in the tariffs of the 
 ancient monarchy, have now all been removed. Since 1863 the 
 only exceptions to this statement are books that infringe the 
 copyright law and munitions of war. To insure the proper 
 * See example cited above ; also Cohn, p. 565 ff.
 
 IS6 INTRODUCTION TO PUBLIC FINANCE 
 
 registration, for statistical research, of all traffic, there used 
 to be an import charge on all goods of 15 centimes per 100 
 francs' worth or 50 centimes per 100 kilograms, and an export 
 charge of 25 centimes per 100 kilograms. These have been 
 removed.^ 
 
 During the period subsequent to the Revolution, and down to 
 1814, war measures left no opportunity to test the tariff of 1791. 
 The Restoration established a highly protective system at the 
 instigation of the Chambers. The Second Republic continued 
 the same policy. Napoleon III, finding himself unable to 
 persuade the deputies to change the tariff, removed many of 
 the prohibitive duties by treaties. The first of these treaties, 
 with England in i860, fixed the maximum ad valorem duty on 
 English goods at 30 per cent for the first four years and 25 per 
 cent after that. Other treaties followed, extending similar 
 privileges to other countries. In the spirit of these treaties the 
 tariff itself underwent many amendments, raw products were 
 admitted free, duties on foods were removed or lowered, and the 
 duties protecting the stronger manufactures were lowered. 
 By 1873, that is, after the struggle with Germany was over, 
 and after the revenue system had been rearranged to meet 
 the tremendous burden which was the consequence of the war, 
 France had two distinct tariffs. First, the general tariff built 
 upon the law of 1791 amended many times. Second, a conven- 
 tional tariff based upon treaties. Since these treaties generally 
 contained the clause granting each nation the same privileges 
 as the most favoured, this tariff was more uniform than the 
 method of construction would lead one to expect. In 1881 the 
 general tariff was pretty thoroughly revised so as to approach 
 the treaty tariff. Manufactures were slightly protected. With 
 this as a starting-point new treaties were made. 
 
 One of the most remarkable reforms that any tariff has ever 
 undergone was accomplished in 1892. This was the passage of 
 two tariffs in a single law. There was first a general tariff 
 or maximum which was to be levied on goods from all countries 
 
 'On the whole subject see Levasseur, "Recent Commercial Policy of France," 
 Journal oj Political Economy, Vol i, No. i, December, i8g2.
 
 CUSTOMS DUTIES 157 
 
 not obtaining special privileges by treaties. Second, a minimum 
 tarifif marking the lower limit to which the concessions might go. 
 The latter was to be applied to the native products of those 
 countries which grant French products reciprocal privileges. 
 Both of these tariffs were protective. There are over 700 items 
 in the maximum tariff, but the number on which concessions 
 could be made was considerably less. 
 
 Sec. II. The United States. — The tariff history of the 
 United States has been written many times. ^ Its effects have 
 been explained in many different ways. Not one of the many 
 histories is clearer and more impartial than the short state- 
 ment by Professors Seligman and R. Mayo Smith, printed (in 
 English) in the publications of the Verein fiir Socialpolilik, 
 1892 (Vol. XLIX, Part i). Nothing but the barest outlines 
 can be attempted here. 
 
 The colonial policy of England prohibited the exportation 
 of the more important commodities, the " enumerated " articles, 
 to any country but England. Importation was to take place 
 only from British ships. As was seen in the chapter on protec- 
 tive expenditure, bounties were paid to encourage agricultural 
 products. The only import duty in the colonies was that im- 
 posed in 1773 on rum, molasses, and sugar from other than 
 British colonies. 
 
 After the War of Independence there was a movement to 
 protect the new industries which had sprung up. As Congress 
 did not, until the adoption of the new constitution in 1789, 
 have the power to collect duties, the commonwealths tried to 
 afford the desired protection. There is naught but confusion 
 in these efforts, all of which, however, came to an end when the 
 commonwealths were forbidden to levy customs duties. 
 
 The tariff was the sole source of tax revenue which the new 
 federal government had. It was, consequently, largely utilised 
 from the first. Down to the close of the War of 181 2 the 
 tariffs were, in effect, if not in intention, revenue and not pro- 
 tective tariffs. The rates were generally low, except on purely 
 
 ' Sumner, History of Protection in the United States; Taussig, TariJJ History of the 
 United States.
 
 158 INTRODUCTION TO PUBLIC FINANCE 
 
 revenue articles like sugar, tea, coffee, and wine. The Orders 
 in Council, the Berlin and Milan decrees, on the east side of the 
 Atlantic, and the Embargo and Non-Intercourse acts, on the 
 west side, followed by the War of 181 2, gave absolute protection 
 to American industries and seriously lessened the growth of the 
 customs revenue of the government for a period of seven years. 
 It is not surprising, therefore, to find the new industries which 
 had been forced into existence during that time calHng loudly 
 for protection after the peace. A strong protectionist senti- 
 ment arose which initiated a policy that had scarcely more than a 
 temporary setback from 1 816 to 1895. That pohcy was to com- 
 bine high protective duties with important revenue duties. 
 The main arguments advanced for and against the policy of 
 protection have been stated under Expenditure. The industries 
 protected were the textiles, cotton and wool, and iron. Among 
 the revenue duties may be named those on tea, coffee, and wine, 
 and perhaps those on sugar and tobacco. The first period of 
 the protective policy passed the highwater mark in 1828. 
 
 The only important setback which the policy sustained before 
 the recent tariffs was in the so-called free-trade period from 1846 
 to i860. The act of 1846 was heralded as a tariff for revenue 
 only, but it was still highly protective. The duties on the 
 classified commodities ranged from 5 per cent to 100 per cent; 
 the last on spirits. Some purely revenue duties were removed 
 entirely, as, for example, the duty on tea and coffee. The 
 protective textile industries retained their duties for the most 
 part ; woollens 20 to 30 per cent, cottons the same, iron 30 per 
 cent. All the duties were made ad valorem, a change which 
 involved an increase in the cost of administration. A more 
 substantial reduction was made in 1857. 
 
 The crisis of 1857 resulted in a serious decline in the revenues, 
 and just before the Civil War broke out, Congress passed the 
 so-called Morrill tariff, March 2, 1861. This tariff increased 
 the protective duties, especially on iron and woollens. From the 
 technical side this act made two changes of note. First, specific 
 duties were again restored ; second, the system of so-called 
 compensating duties was initiated. This second feature, which
 
 CUSTOMS DUTIES 159 
 
 afterwards received a very broad application, can best be made 
 clear by an illustration. The Morrill tariff increased the duty 
 on raw wool. To compensate the manufacturers for this, a 
 specific duty, supposed to represent the duty on raw materials, 
 was placed on manufactures of wool, together with an ad valorem 
 duty for protection. 
 
 Immediately after the passage of the Morrill act the war 
 broke out. Under the pressure of the need for revenues Con- 
 gress passed a long series of acts increasing the duties on purely 
 revenue articles, putting duties upon articles hitherto free, and 
 raising as compensation the protective duties. The idea of 
 giving compensatory duties was extended to cover the burden 
 of internal taxes also. Thus the manufacturers were, in 1864, 
 given special compensatory duties to offset the heavy internal 
 taxes. This remarkable protectionist measure, embodied in 
 the act of 1864, was rushed through Congress with only one 
 day's discussion in each house. It represents the highest limit 
 ever reached. Nearly 1500 articles were enumxcrated ; the 
 average rate was close to 50 per cent. It shows the effect of 
 three different forces: there was (i) the desire to increase the 
 revenues, (2) the feeling that the manufacturer had a good claim 
 for compensation for the high taxes in general, (3) the mad 
 scramble to gain all that could be gained from this class of legis- 
 lation. 
 
 This act afterward received a number of amendments to meet 
 the changes made in the other parts of the revenue system, but 
 the character of the tariff was not materially changed until 
 1883. One of the most interesting changes, technically, was 
 the fixing, in 1866, of the method of ascertaining the value upon 
 which the duty was laid. It was provided that the value should 
 be determined by adding to the value, at the place of shipment, 
 the cost of transportation, packing, commission, warehousing, 
 and other charges which fell upon the goods before their arrival. 
 
 The protection policy thus extended gave strength to vested 
 interests which thereafter supported that policy. The only 
 changes of note down to 1894 arc the attempted reforms of 
 1870, 1873, and 1883, and the McKinley tariff of 1890, which
 
 l6o INTRODUCTION TO PUBLIC FINANCE 
 
 reduced the income by removing the duties on purely revenue 
 articles and on very strong, self-sustaining industries, but in- 
 creased the protective features. 
 
 In 1894 came a change that at first appeared to be very im- 
 portant. The McKinley bill of 1890 had become practically 
 the platform of the Republican party, and the Democratic party 
 went into power pledged to the reduction of protection. They 
 proceeded slowly to the fulfilment of these pledges. The famous 
 Wilson bill was reported December 19, 1893, and became a law 
 August 27, 1894, without the approval of the Democratic Presi- 
 dent. It failed of his approval because of the objectionable 
 features introduced in the Senate. Two things prevented the 
 change from being sweeping. The first was the power of the 
 vested interests in the protected industries. Every sort of 
 pressure, short of illegal, was brought to bear in favor of the 
 existing system. The second was the patent danger of too 
 sudden a decrease. Sweeping reform would ruin industries 
 and create a depression. 
 
 The reduced tariff was not destined to remain long in force. 
 Within three years, that is, in 1897, there was a deficit in the 
 treasury, which gave an excuse for new tariff legislation. By 
 this time the protectionists had rallied and were again in power. 
 Congress was called together in special session and passed the 
 so-called Dingley tariff, as a strict party measure. This tariff 
 restored most of the protective features that had been removed in 
 1894. Protection was again granted to wool as a raw material, 
 and compensatory duties were placed on manufactures of wool. 
 In some respects the wool and woollen schedule was made 
 higher than ever before. Hides, which had been on the free 
 list ever since 1872, were given a protective duty of 15 per cent 
 ad valorem, while, to quiet the protests of the shoemakers, 
 manufacturers of leather received a compensatory duty that 
 fully made up for the increased cost of the raw material. On 
 cotton goods, however, the duties were slightly reduced, al- 
 though not all along the line. Silk and linen received a rather 
 substantial advance. The iron schedule was not materially 
 changed from the condition in which it was left by the McKinley
 
 CUSTOMS DUTIES l6l 
 
 bill. The greatest struggle was waged around the sugar tarifif. 
 The duty placed on raw sugar in the Wilson bill was retained 
 and slightly increased, while the refiners received a differential 
 that afforded them very handsome protection. On the whole 
 the Dingley tariff raised the protective wall higher than ever. 
 
 Ha\dng reached this stage, the protective system rested 
 for twelve years. During this time there developed, very 
 slowly, a sentiment for tariff reform. The protectionists yielded 
 a little to this sentiment, and won the privilege of having the 
 tariff " revised by its friends." In April, 1909, Congress was 
 again assembled in special session to " provide revenues to meet 
 a deficit " and to consider a bill known as the Payne biU, which 
 had been prepared by a committee of Republicans with a view 
 to propitiating the sentiment in favour of tariff reduction. Of 
 this bill the committee said : " While it makes a number of 
 reductions in the rates on industries that can admittedly stand 
 alone, it raises the rates on certain industries, that in the opinion 
 of the committee need more protection." This bill was heavily 
 amended in the Senate, where the protectionists were strongly 
 intrenched. It was again amended under pressure from the 
 Republican President, who interpreted the election promises of 
 his party as favouring a revision downward. When the Presi- 
 dent signed the bill, August 5, 1909, he summarised it as follows : 
 
 " This is not a perfect tariff bill, nor a complete compHance 
 with the promises made, strictly interpreted, but fulfilment, 
 free from criticism in respect to a subject-matter involving many 
 schedules and thousands of articles could not be expected. It 
 suffices to say that except with regard to whiskey, liquors, and 
 wines, and in regard to silks and to some high classes of cottons, 
 all of which may be treated as luxuries and proper subjects 
 of a revenue tariff, there have been very few increases in rates. 
 There have been a great number of real decreases in rates and 
 they constitute a sufficient amount to justify the statement 
 that this bill is a substantial downward revision and a reduction 
 of excessive rates." One of the interesting features of the bill 
 is the provision of two tariffs in one, which is popularly supposed 
 to be a partial adoption of the idea of the French maximum and
 
 1 62 INTRODUCTION TO PUBLIC FINANCE 
 
 minimum tariff above referred to. But there is a fundamental 
 difference, for if the French system is properly described as a 
 " maximum-minimum tariff," that proposed for the United 
 States is a " minimum-maximum tariff." That is, the French 
 system applies the maximum as a norm, from which deductions 
 may be made for favours received. But the American system 
 applies the minimum as a norm, to which additions may be 
 made by way of reprisal in the case of those countries whose 
 tariff policy does not please the United States. In other words, 
 the French system is one of reciprocity, the proposed American 
 system one of retaliation. Possibly no other position can be 
 adopted by the United States. She has steadfastly maintained 
 that the " most favoured nation " clause in her commercial 
 treaties cannot be construed as applying to the tariff, and many 
 of the duties in the tariffs of European nations are directed 
 specifically against the trade of the United States by way of 
 retaliation for her own high duties. The bill is not generally 
 regarded as a final settlement of the tariff question. It con- 
 tains a provision for the appointment of expert agents to assist 
 the President in administering the maximum-minimum clause 
 and many hope that this will lead to the collection of informa- 
 tion which will render a systematic and unprejudiced revision 
 possible. 
 
 There was a downward revision of the tariff in 1913, but 
 since then the tariff question has been slumbering. The only 
 life to be noted is the creation of a supposedly permanent 
 Tariff Commission to study tariff effects continuously with the 
 purpose of providing Congress with information whenever 
 needed. The reports of this commission, which are learned 
 and carefully prepared, have not yet been the basis of any par- 
 ticularly important action. From 1914 on the tariff question 
 has been completely overshadowed by other greater issues. It 
 is probable that the necessary post-war reorganization of the 
 tax system will bring many changes in the tariff.
 
 CHAPTER VIII 
 
 PROPERTY TAXES 
 
 Part i. The General Property Tax, with Special Reference to 
 
 United States 
 
 Section i . The American General Property Tax. — The 
 general property tax may be defined as a tax in which the base 
 is the entire amount of the property, real and personal, owned 
 by the taxpayer. This tax is old and is a favourite tax for 
 local purposes. The general property tax can be studied to 
 the best advantage in the United States, where it is used more 
 extensively, perhaps, than in any other country, and where it 
 is the main source of revenue for very important parts of the 
 government. It is also used in Switzerland as the main source 
 of revenue for some of the component parts of the federal State. 
 In Prussia, Holland, and some other countries it is used to 
 supplement other taxes, but when so used, it takes on a different 
 character. The federal government in the United States does 
 not levy any tax on property in general. If under the con- 
 stitutional provision, which requires that direct taxes shall be 
 apportioned among the states in proportion to population, the 
 federal government should levy a tax, that tax would presum- 
 ably be apportioned among the people by most of the states in 
 accord with their own laws, and collected as their own state 
 taxes are collected. 
 
 We need to see first the relation in which this tax stands to 
 the other taxes in the system of state and local taxation. 
 
 The individual states, the cities, and the other local divisions 
 of government in the United States derive their revenues from a 
 considerable number of sources. They each use some or all of 
 
 163
 
 l64 INTRODUCTION TO PUBLIC FINANCE 
 
 the following taxes: (i) the general property tax; (2) the poll 
 tax, payable either in money or in services, or in both ; (3) taxes 
 on selected kinds of business ; (4) taxes on certain ways of con- 
 ducting business, as the corporate form ; (5) inheritance taxes, 
 and (6), in a few instances, income taxes. They also use license 
 taxes or fees for permits which are distinguished from taxes 
 proper by the fact that regulation rather than revenue is the 
 more important consideration. They also receive other fees of 
 many sorts, mostly small, for special services to individuals, 
 recording of documents, and the like. Streets, sewers, and 
 other similar pubhc improvements are mostly constructed from 
 the proceeds of special assessments on the property immedi- 
 ately benefited. The cities, especially, not all, but many of 
 them, and to a very small extent the states also, receive rev- 
 enue from water works, gas and electric works, street railways, 
 canals, and other public service enterprises and to a very small 
 extent from industrial and commercial enterprises. A few of 
 the states receive revenue from the sale or use of public lands. 
 There are in addition a number of fines and penalties for vari- 
 ous infractions of law. 
 
 Among all of these sources of revenue the general property 
 tax stands preeminent. It is the structural iron which holds 
 the building together. It is the largest single source of revenue 
 and is universally regarded as preeminently the tax for all 
 purposes. There is no state in the Union in which this tax does 
 not exist at least as a tax for local purposes, although there are 
 six states in which it is not used to supply revenue for the state 
 or central government. Without a single important exception, 
 it is used in every city, in every town or its counterpart in local 
 government, in every district, be it a road district, school dis- 
 trict, drainage or irrigation district, or a district organised for 
 some other purpose. The few exceptions are insignificant, and 
 are in each case due to conditions clearly peculiar. 
 
 The general property tax of the United States was, in its 
 original conception, a direct personal tax for local purposes. 
 It was a tax on persons, natural or corporate, in proportion to 
 all their property. The only exemptions were originally per-
 
 PROPERTY TAXES 165 
 
 sons, usually corporate, like municipal corporations, schools, 
 colleges, and churches which were regarded as performing some 
 pubHc or quasi-public functions. Sometimes natural persons, 
 Hke ministers of the gospel, paupers, invalids, or veterans of 
 war, were exempt from pious, religious, charitable, or patriotic 
 motives. The present statutes still show marked traces of the 
 personal character of this tax as originally conceived. As an 
 illustration of the older conception we may cite Vermont, where 
 every person was " rated " or " listed " for his poll, his property, 
 and all his " faculties." In all the older laws the " person " 
 came first, and his estate was the attribute by which the amount 
 of his tax was measured. 
 
 It was a local tax intended primaril}' for the apportionment of 
 neighbourhood charges among neighbours. The functions of 
 government were at first exercised mainly by the local divisions. 
 Even as late as 1840, when the functions and activities of the 
 state or central governments had reached the first stage in their 
 development, this tax was used to a very limited extent only, 
 for supplying revenue for other than strictly local purposes. 
 By slow degrees the larger unit of government, the common- 
 wealth, began to draw upon this source by way of rates addi- 
 tional to the local taxes. Strangely enough, these added rates 
 rarely, if ever, took the form of a surtax so common, for example, 
 in Spanish taxation, nor did the surtax conception enter Ameri- 
 can financial thought anywhere until after 1890. Yet the effect 
 of these additional tax rates is distinctly the same as that of 
 the surtax. 
 
 By degrees, also, the strictly personal conception of the tax 
 has been modified, and it has steadily become more and more 
 of an objective tax, or a tax on things ownable regardless of the 
 owner. This change has come about first through customs 
 operating with the force of law, and is not even now so apparent 
 in the statutes as it is in the actual administration. With 
 several notable exceptions, of which New York is a conspicuous 
 example, the personal declaration of the taxpayer may still be 
 required and is more or less regularly exacted. But even where 
 this form is still retained, property, even real estate, may be
 
 1 66 INTRODUCTION TO PUBLIC FINANCE 
 
 taxed in the name of " unknown owners." As commonly 
 conceived by legislator, administrator, and taxpayer alike, the 
 general property tax, as it stands to-day, is a tax on all property, 
 irrespective of ownership, within the territory of the taxing 
 authority, except such as may be expressly exempted on account 
 of its use for a public or quasi-public purpose or out of consid- 
 eration for what is regarded as a desirable public policy. As 
 an illustration of this, we may quote the phrase most widely 
 used as the introductory sentence of the revenue laws of the 
 various states : " All property, real and personal, within this 
 state, not specially exempt, shall be taxed in proportion to its 
 value." Yet traces of the older conception of a personal tax 
 remain, often inconsistent and illogical, and giving rise to con- 
 fusion of thought and practice. 
 
 Sec. 2. Types of the Property Tax. — Although this ven- 
 erable tax, which dates from soon after the establishment of 
 the various colonies on the continent of America, has been 
 developed in each of the several states from a common origin 
 as to principles and ideas and by very similar social, political, 
 and economic forces, yet there are variations from state to 
 state, and from one part of the country to another, which are 
 by no means insignificant. Some of them are, in fact, so im- 
 portant that a failure to recognise them leads to a serious con- 
 fusion of thought. It is this divergence, in one state or another, 
 from the general type which makes it so difficult to explain 
 briefly the nature of American tax problems. These differ- 
 ences concern in some degree the kinds and classes of property 
 subject to the tax. But they concern in far greater measure 
 the forms and methods of administration, and as it is on the 
 administrative side that the greatest evils have been apparent, 
 these may be considered as the more important. 
 
 Although, as just suggested, the constitutional provisions, 
 the statutes, the ordinances, and the equally potent controlling 
 practices, customs, and traditions vary from state to state, and 
 although no two of them are exactly alike, it would nevertheless 
 be an exaggeration to say that there are fifty-one different 
 varieties of the general property tax in the United States.
 
 PROPERTY TAXES 1 67 
 
 Such a statement would lay too much emphasis on minor details. 
 There are, however, several more or less distinct types. Some 
 of the differentiating characteristics of these types are the 
 result of the dififerences in the framework of the government,^ 
 others arise from differences in the social and industrial devel- 
 opment. 
 
 In attempting to describe these types in a brief space we 
 inevitably incur all the dangers of any broad generalisation. 
 It should be understood that in many cases the types inter- 
 blend ; also, that for clearness' sake we shall select examples 
 of the extreme forms of each type.^ 
 
 The New England Type. — Among the oldest types is that 
 which we may call the New England. This extends wherever 
 the New England township form of local government extends, 
 and even where the township system is modified by a super- 
 imposed county system. That is, in all the territory north of 
 the Ohio River and of its line extended as far westward as the 
 Rocky Mountains. It is that type of the general property tax 
 which is the historical outgrowth of the well-known and famous 
 " township " system of local government. It differs from the 
 other types not so much by reason of any difference in the under- 
 lying conception of who and what is taxable, as it does in its 
 administrative features. In general, the administrative or tax 
 district is small, very small. In the " West " it is a township, 
 six miles square ; in older settled states it may be even smaller, 
 it may be a city ward. Sometimes this district contains only 
 a few hundred inhabitants, rarely over five thousand, and the 
 number of taxpayers is, of course, very much less, perhaps a 
 fifth or an eighth of the population. Consequently there may 
 be considerable common knowledge of each other's affairs 
 among the taxpayers, at least outside the cities, and the assessors 
 may be assumed to have some knowledge of the property which 
 
 • Any reader not familiar with the various forms of local government in the 
 United States will find enlightenment in Fiske, Civil Govcrnmenl in the United States; 
 Bryce, American Cotnmonweallh ; and Hinsdale, American Government. 
 
 ^ The reader who wishes to delve into the muilittuiinous details and variations 
 is referred to the present writer's contribution to the Census Volume on Wealth, 
 Debt, and Taxation. Special Report, 12th Census, 1907.
 
 1 68 INTRODUCTION TO PUBLIC FINANCE 
 
 they are to assess and of the value thereof. The assessors, 
 for there are often several in one township, are elected for 
 short terms, one year or two years, and in some cases perform 
 their oificial functions without interrupting their ordinary 
 vocations. Their work can usually be performed in a few weeks. 
 In short, the administration is democratic, springing from the 
 taxpayers themselves and ever under their control. 
 
 There are many variations of this type. There are some in 
 which there is no central control at all, or so Httle that it has no 
 influence, and others in which the administration is quite highly 
 centralised. Between these two extremes are many degrees. 
 We have space for only two examples, one at each extreme, 
 Rhode Island and Indiana. Rhode Island's old system prior 
 to 1910 will serve to illustrate a highly decentralised system. 
 Rhode Island, as has often been pointed out, is, as a state, 
 a sort of federation of small towns, each retaining a de- 
 gree of autonomy and independence greater than such units 
 enjoy anywhere else in the country. Here the state had 
 very few functions to perform, and the " county " was a 
 mere grouping of towns into court districts, a geographical 
 rather than a political conception. The tax for state and 
 county purposes, the county expenses being met from the state 
 levy, was less than 10 per cent of the total amount raised by 
 means of the general property tax. Consequently there was 
 no fiscal reason, or at least not a strong one, for central super- 
 vision. The state levy was until very recently apportioned 
 roughly among the towns at long and irregular intervals, of 
 about sixteen years each, by a sort of contractual agreement 
 between the towns made through their representatives in the 
 legislature and taking the form of law. The administration of 
 the tax was, therefore, almost purely a matter of local concern, 
 although provided for by a general statute. Each of the 
 towns, many of which contain less than two thousand inhabit- 
 ants, elects each year in town meeting not less than three 
 nor more than seven assessors, also a tax collector. The asses- 
 sors were all-powerful, their action nearly final. There was no 
 provision for review or for equalisation between individuals.
 
 PROPERTY TAXES 169 
 
 The only recourse an aggrieved taxpayer had was to take the 
 matter into the courts. Not even the date when the assess- 
 ment was to be made and to which it appHed was fixed for the 
 state at large, each town selecting these to suit itself. Such 
 is the extreme of the democratic or New England type of the 
 general property tax. 
 
 Equalisation. — In most of the other states having the same 
 general type of this tax there are local boards of review, usu- 
 ally consisting of the local council, " trustees," with power to 
 revise the assessments made by the assessor. In still others, 
 owing primarily to the greater importance of the central or 
 state functions, and the consequently larger proportional 
 amount of state taxes to be apportioned, there is more central 
 control. The cruder form of this central control is a state board 
 of equalisation with limited power to review the work of the 
 local assessors. Such boards do not, as a rule, change indi- 
 vidual assessments, but by making a nominal valuation for each 
 township or tax district as a whole determine the amount which 
 each town shall pay to the state. But that amount is appor- 
 tioned among the individual taxpayers on the basis of the orig- 
 inal assessment. Such boards as these are virtually appor- 
 tioning boards only. A fine example of this is afforded by 
 Michigan, where an apportionment of state taxes is made only 
 once in five years, and each town adds to its tax rate enough 
 to raise its quota of the state tax. There is thus no general 
 state tax rate. 
 
 Central Tax Commission. — From this crude form of cen- 
 tralisation, which scarcely affects the local or decentralised 
 character of the tax administration, we pass, from state to state, 
 through varying degrees of centralisation until we come to those 
 like Indiana. That state has the old general property tax 
 almost pure and undefilcd in principle and theory, and yet 
 has a very powerful central controlling board. The original 
 assessment is still made by a multitude of local assessors elected 
 and acting in the small townships. But these assessors are 
 supervised and directed by county assessors, one for each 
 county, who are assisted by other officers and act as the agents
 
 lyo INTRODUCTION TO PUBLIC FINANCE 
 
 or representatives of the central or state board. By confer- 
 ences, instruction, and sharp supervision, backed by the right 
 to discharge assessors, the central board exercises a very effec- 
 tive control reaching down into each township. 
 
 There are two controlling reasons for this development of 
 central supervision. The first is that the proportionate amount 
 of state and county taxes to be apportioned is greater. Thus 
 in Rhode Island, as we have seen, the state tax, which includes 
 county taxes, is less than ten per cent of the total tax, while 
 in Indiana the state and county taxes amount to nearly half 
 of the total taxes on property. Clearly, then, any inequalities 
 in the valuations between the different towns become at once of 
 great importance. If, for example, a given town that has prop- 
 erty which at the average rate of valuation for the state would 
 be assessed at $200,000 and would usually pay, say, $2000 in 
 town taxes and $2000 in state taxes, should make its valuation 
 only $100,000 it would pay in town taxes still $2000, but would 
 pay in state taxes only $1000, throwing $1000 unjustly on other 
 towns. The other controlling reason for greater centralisation 
 is the existence of railroads and other great public service cor- 
 porations whose property lies in many townships. The local 
 assessor may know all about the value of farm lands in his little 
 town, and how much a cow or a hog is worth, but he cannot 
 possibly know how much six miles of railway, track, part, per- 
 haps, of a great transcontinental railway system, are worth. 
 Such properties can only be valued as part of a whole. Hence, 
 the application of the so-called " unit rule " necessitates a state 
 board. This reason for the centralisation of the administration 
 of the general property tax exists, also, in states not having 
 the New England type of this tax, but it is far more potent in 
 states where that type exists because of the extreme smallness 
 of the assessment district. 
 
 The Southern Type. — A second type of the general property 
 tax is found in the Southern states, and may, for that reason, 
 be called the Southern type. In general, it is found in the 
 territory south of the Ohio River and as far west as Louisiana. 
 It is almost everywhere accompanied by an extensive system
 
 PROPERTY TAXES 171 
 
 of business license taxes which fill in certain gaps in the general 
 property tax, and hence modify the classes of property to be 
 included. On its administrative side it has been determined 
 by the county system of local government which exists in those 
 states where it is in force. The county being a very much larger 
 unit of local government than the township, both in population 
 and territorial area, its government is necessarily more repre- 
 sentative and the type of property tax developed is less demo- 
 cratic. The county performs all the functions of local govern- 
 ment, outside of the cities which are usually separately incor- 
 porated. The county revenues collected from the property 
 tax are in most cases equalled or exceeded by those collected 
 for the state, a condition almost the reverse of that in New 
 England. From the beginning the state or central government 
 loomed larger and had more functions to perform in the South 
 than in the North. Ignoring, for purposes of brevity, the 
 differences between individual states, we may venture to gen- 
 eralise as follows : Under the general supervision of the county 
 court, which has administrative as well as purely judicial func- 
 tions, the assessor or a small board of assessors makes the 
 valuation of property. As this officer cannot, in the nature of 
 things, know many of the taxpayers whose property he is to 
 value, nor much about values in portions of the county remote 
 from his home, his duties are far more difficult than those of the 
 town assessors in the North and very different in character. 
 Personal declaration by the taxpayer is required, at least by 
 law, and, in general, more respect is assumed to be paid to the 
 values declared by him. Penalties for failure to make a dec- 
 laration are more severe and more often enforced. The dili- 
 gence of the assessor is stimulated by commissions, it being 
 customary to compensate him by a percentage of the taxes levied. 
 Nevertheless considerable property escapes and it is not uncom- 
 mon to find so-called " back tax commissions " or other officers 
 authorised to assess property not placed on the rolls by the 
 assessors. These commissions are more nearly a part of the 
 regular machinery of government and quite unlike the guerilla 
 or private " inquisitors " of Ohio, to which, as an anomaly,
 
 172 INTRODUCTION TO PUBLIC FINANCE 
 
 much attention has been devoted.^ There is also a more pro- 
 nounced tendency in these states to use the general machinery 
 of government for the levy and collection of this tax, and not 
 to create a special and entirely separate set of officers. Thus 
 the sheriff or the treasurer is often ex-officio tax collector. 
 State supervisory boards are usually composed of ex-officio 
 officers of the state, such as the governor, the auditor, and the 
 treasurer, or the attorney-general, and property of a general 
 character like the railroads is assessed by them. Everywhere 
 else in the country the rate is always determined by appor- 
 tionment, but in many Southern states a proportional (per- 
 centage) rate is fixed by statute and changed only at com- 
 paratively long intervals. 
 
 The Pacific Coast Type. — The third and last type is the 
 Pacific coast type. This prevails in the states on and west of 
 the Rocky Mountains, and in a modified form in Texas. Al- 
 though, like the other types, it takes on various forms, yet it is 
 rather more uniform than the other two, and this in spite of 
 the tendency of the people of this part of the country to experi- 
 ment with weird, fantastic, and evanescent theories. This 
 type resembles the Southern type more than the New England 
 type. In fact, the state of Missouri was one of the acknowl- 
 edged sources from which this type was drawn. It differs 
 from the Southern type more in spirit and traditions than in 
 outward form. The county is here an administrative district 
 of the state government. But the county has less autonomy 
 than in the South, most of its activities being directed by general 
 statutes under the supervision of state officers or bureaus. 
 In New England and in the South authority flows to a certain 
 extent from the local units to the state, in the far West it flows 
 only from the state down to the local units. The state's share 
 of the general property tax is usually about one-third of the 
 whole, including what the state raises for the purpose of equal- 
 ising the expense of maintaining the school system, which is 
 paid over to the counties for expending, but under general laws. 
 The assessment is made by a county assessor elected for a long 
 
 1 Carver, Tax Inquisitors in Ohio.
 
 PROPERTY TAXES 1 73 
 
 term, usually of four years. He is assisted, usually, by many 
 deputies and may assign them districts. Personal declarations 
 by the taxpayers are required by law, but very irregularly en- 
 forced. The county administrative board acts as a board of 
 review or " equalisation " as between individuals. There is 
 always, in this type, a state board of equalisation whose func- 
 tions, however, differ from those exercised by boards of a 
 similar name in the states of the East and of the Middle West. 
 As has been stated above, those Eastern boards usually make 
 a nominal valuation for the purpose of apportioning the state 
 taxes, and the " state tax rate " resulting may differ in every 
 town, because each town in assuming its allotted quota of state 
 taxes again apportions it on the basis of its own valuations. 
 That is, in the New England t}^e the valuations placed against 
 individual properties are not changed by state board action. 
 In the Western type, if the state board of equalisation decides 
 that it is necessary to raise the valuation in a given county, 
 say, 10 per cent, that 10 per cent is added to each individual 
 assessment on the rolls, and the state rate is the same for every 
 county and every taxpayer. The county " rate " might, conse- 
 quently, be reduced by such action. Property of a general 
 character like railroads is assessed by a central or state board, 
 usually by the state board of equalisation. 
 
 The Three Types Nowhere Pure. — In thus marking out and 
 attempting to describe briefly the three main types of the 
 general property tax on its administrative side in the United 
 States the writer is fully aware that he is treading on new 
 ground. He is also keenly conscious that his broad generalisa- 
 tions are dangerous. It may well be that he should have made 
 a fourth group of states like Michigan, Minnesota, Wisconsin, 
 and Ohio, which present many peculiarities. It may be pos- 
 sible that the differences noted are not the most distinctive 
 that might have been selected. His purpose was, however, to 
 point out that there is not " a " general property tax in the 
 United States, but fifty-one different property taxes, which 
 fall into three or four general groups. Since it is the admin- 
 istrative side of this tax which breaks down and, as we have seen,
 
 174 INTRODUCTION TO PUBLIC FINANCE 
 
 since there are many different types of this tax, it follows that 
 there is no universal remedy for the existing evils. 
 
 Sec. 3. The Property Subject to This Tax. — Passing now 
 from the administrative features, let us turn to the content, the 
 property subject to the tax. The statutes quite generally 
 define the locus of the taxable property, the time at which its 
 value and amount shall be taken, and the kinds and character 
 of the property to be included. There has been no particular 
 difficulty so far as real estate is concerned with the place con- 
 cept, it is real estate within the town, or the county, or the 
 state that is taxable irrespective of the residence of the owner. 
 But when it comes to personal property, especially to intangible 
 personal property, there has been and still is much trouble, and 
 no clear principle of interstate comity has yet emerged. The 
 original theory was, as we have seen, that this tax was a per- 
 sonal tax, and that theory very naturally adopted the legal 
 theory that personal property takes the situs of its owner. 
 But, in general, the practice now is to tax personal property 
 where found, if found at all, and the residence of the owner has 
 little significance. A notable example of the uncertainty of 
 ideas on this subject was afforded when, a few years ago, the 
 state of Vermont expressly exempted all personal property out- 
 side the state belonging to residents. Although it was generally 
 assumed that this was done from the alleged unworthy motive 
 of tempting rich New Yorkers to take up a nominal residence 
 in Vermont and thus evade taxation in New York, whose laws 
 make the situs of personalty follow the owner, yet this action 
 merely legalised what has become a very general practice. 
 
 The difficulty of determining the situs of personal property 
 is the reason why the attempt to tax stocks and bonds to the 
 owner has been practically abandoned, and in its place it has 
 become customary to tax the property represented by such se- 
 curities to the corporations, and to ignore the stockholder. 
 
 Many anomalies have arisen from this conffict of the theory 
 that the property tax is a personal tax with the fact and practice 
 that it has become a real tax. A very pretty illustration of this 
 is afforded in the case of national banks. It will be recalled
 
 PROPERTY TAXES I 75 
 
 that the national banks were established at the time of the 
 Civil War to aid in the sale of the federal bonds, and that to 
 induce the national banks to hold these bonds, those banks were 
 allowed to issue notes secured by the bonds. These national 
 bank-notes came into competition with notes issued by banks 
 chartered by the states. To drive the state bank-notes out of 
 the way and to thus make room for the national bank-notes, 
 Congress imposed a tax of 10 per cent on all bank-notes except 
 those of national banks. It had long before been decided by 
 the courts that the states could not tax a federal bank except 
 by express grant of Congress. It was feared that the states, if 
 allowed to tax national banks at all, might retaliate by pro- 
 hibitive or discriminating taxes. Hence Congress did not, in 
 the first act, convey to the states the power to tax these banks. 
 Later, however, it relented and prescribed a method, and one 
 method only, by which the states should tax national banks. 
 In this federal statute permitting the taxation of national banks 
 we find embodied the prevailing theory and practice of the prop- 
 erty tax of that period. The statute says, in substance, that the 
 shares of stock in national banks must be assessed to the stock- 
 holder, not to the bank, although the bank may be the agent 
 of the stockholder in paying the tax, also that the shares must 
 not be taxed at a higher rate than is imposed on any other like 
 moneyed capital. Then to prevent double taxation which 
 might have arisen where the stockholder resided in a different 
 state or town from that in which the bank was located. Congress 
 defined the situs of the stock as in the place where the bank 
 was located. 
 
 It is hard to trace the origin of a practice which may have 
 sprung spontaneously in many different places from similar 
 conditions which had to be met. But one cannot but be im- ' 
 pressed by a reading of the statutes, and by the frequency with 
 which the phraseology of the federal law is repeated therein, 
 with the idea that this law has had a great deal to do with 
 destroying the theory of personal situs. On the other hand, 
 it has certainly not checked in the least (except so far as the 
 banks alone arc concerned) the very general tendency to regard
 
 176 INTRODUCTION TO PUBLIC FINANCE 
 
 a corporation as an artificial person and to levy the taxes on its 
 property without reference to the stockholders. 
 
 Assessment Day. — The time element, the date to which the 
 assessment refers, is usually defined so as to work the piactical 
 exemption of the current products of land. Thus for the most 
 part the assessment is made as of some day in the winter or 
 spring, before the crops of the year have been planted and long 
 after the crops of the year previous have been sold and taken 
 to market, at a time, that is, when barns and warehouses are 
 empty. This strikingly illustrates the prevailing American 
 conception that the property tax is a tax on capital, not on 
 income or revenue. With a sort of grim humour " All Fools' 
 Day " is often chosen as tax day. Even in those states, mostly 
 among those having the Southern t}^e of this tax, which make 
 the day to which the assessment refers fall in the autumn, the 
 crops and produce of the year are usually expressly exempted 
 by law. 
 
 Definitions. — The property included in the base of this tax is 
 most commonly defined as " all property, real and personal, in 
 the state not specifically exempt." The exemptions will be 
 discussed below. The terms " real and personal property " 
 are most commonly taken in their ordinary common law mean- 
 ing. But this is by no means the universal rule. In many cases 
 certain items are arbitrarily defined " for purposes of taxation " 
 as real or as personal property. Ordinarily, land and the 
 legally immovable physical improvements thereon are real 
 estate. Certain rights, however, attaching to land, mortgages 
 secured on land, and franchises over lands are arbitrarily called 
 real estate or personal property for purposes of taxation, irre- 
 spective of their common law character. As these arbitrary 
 definitions are not uniform from state to state, they give rise to 
 considerable confusion. Sometimes even the following of the 
 common law principle makes curious shifting. One of the most 
 striking illustrations of this is the classification of possessory 
 claims to government land and of the improvements upon it 
 as the personal property of the settler thereon during the five 
 years that he is acquiring his title, and before the government
 
 PROPERTY TAXES 177 
 
 patent has been issued. The census of 1890 pubhshed tables 
 and charts which made it appear that the then "new" state of 
 Montana had a remarkably high proportion of personal property 
 and comparatively little real estate. This was due in large part 
 to the above classification. The arbitrary nature of these 
 definitions vitiates almost all direct comparisons of the statistics 
 of assessments between different states. 
 
 It occasionally happens that for tax administrative reasons 
 or to avoid special difficulties arising from some peculiarity of 
 the law, very illogically arbitrary definitions are made. Thus 
 telegraph poles and lines are defined in one state as personal 
 property, a device intended merely to give the assessor an extra 
 commission ; again, in New York special franchises or the right 
 to use the public streets is defined as real estate. The reason 
 for this latter definition is that in that state each taxpayer is 
 allowed to deduct the amount of his debts from the entire 
 amount of his personal property, and under that law, if fran- 
 chises were defined as personal property, the corporations own- 
 ing them would deduct their bonded indebtedness, leaving 
 nothing taxable on the franchise. 
 
 Occasionally certain items of income are defined as property 
 for purposes of taxation. These instances are usually of re- 
 ceipts, like those from ships plying in foreign water, or insurance 
 premiums, or brokers' commissions, which are not represented 
 by any taxable capital in the state. This is a survival of the old 
 personal theory of the property tax. 
 
 The classes of personal property taxable and actually taxed, 
 at least to a hmited extent, are usually household and office 
 furnishings, stocks of goods in shops and warehouses, farm 
 tools, machinery, and live stock. Other forms of personal 
 property generally taxable according to law, but rarely taxed, 
 are money and credits.' The moot questions in regard to the 
 taxation of the latter will be discussed below. 
 
 Sec. 4. Exemptions. — Property exempt from taxation 
 comprises in the first place all pul)lic property, also greenbacks 
 and federal bonds exempt by federal law. The only excej^lion 
 here is that in a few states public property may be included
 
 178 INTRODUCTION TO PUBLIC FINANCE 
 
 when the apportionment of state taxes is made to towns or other 
 assessment districts. Next in general extent come exemptions 
 granted from religious, pious, charitable, or benevolent reasons, 
 such as churches, cemeteries, asylums, and homes for the aged, 
 the infirm, and widows. The breadth and extent of these 
 exemptions varies considerably from state to state, but even in 
 the most meagre cases includes all church buildings and ceme- 
 teries. An interesting extension of this idea is the exemption in 
 many states of the secret societies, like the Masons and Odd 
 Fellows, on the ground of their charities. Another very gen- 
 eral class of exemptions comprises those for educational pur- 
 poses, such as schools, colleges, and the like, usually only those 
 endowed, also pubHc libraries, and literary, scientific, and phil- 
 osophical societies. A smaller group is composed of associations 
 like agricultural societies, volunteer fire companies, and others 
 doing some work assumed to be of a public character. Lastly, 
 there are many miscellaneous exemptions granted for social 
 or economic reasons or for reasons relating to the fiscal admin- 
 istration ; among these are limited amounts of certain classes 
 of personal property, as a few hundred dollars' worth of house- 
 hold furniture, tools of mechanics and farmers, a limited amount 
 of land, machinery, etc., for promoting new industries for a 
 limited period of time. But there is little uniformity among 
 the various states with reference to this group of exemptions. 
 
 In general it may be said of the exemptions granted that, 
 while they have, of course, been granted only to those who had 
 sufiicient political influence to secure them, they do not in any 
 but a very few exceptional cases represent an abuse of political 
 power. The motives were in general altruistic or for the public 
 weal. It is, furthermore, a thoroughly well-estabHshed prin- 
 ciple of fiscal law that, whenever, and in so far as, any such 
 property yields any private profit, it loses its exemption. 
 
 Sec. 5. The Assessment Roll. — The Hst of taxpayers with 
 their taxable property is usually made up annually and does 
 not assume the form of a fixed cadastre in any of the states, 
 although in some states it approaches that form slightly. The 
 original conception of the tax, as a personal tax, is the chief
 
 PROPERTY TAXES 179 
 
 reason why the roll usually begins with the taxpayer and not 
 with the property, and the consequent frequency of assessment 
 prevents the roll from attaining a permanent form. In the case 
 of real estate, however, there is here and there a provision which 
 contains the possible germ of a cadastral system. In a few 
 states real estate is revalued only once in four years, but altera- 
 tions and new improvements are assessed annually. In some 
 states the county surveyor provides maps and block books 
 which the assessor uses as the basis of his work. But even in 
 those states there is little permanence imparted to the roll by 
 this practice. Two reasons for the absence of a cadastral 
 system, especially in the more recently settled states and in 
 those parts of the country which are growing rapidly in popula- 
 tion, is the constant and frequent change in ownership of land 
 and the rapid fluctuation in land values. 
 
 Valuation. — The criterion of value for purposes of taxation 
 is always the seUing value, and rarely the rental value.^ The 
 reader should remember that there is practically no tenant 
 class in the United States, that agricultural land is for the most 
 part cultivated by its owners, or by tenants who expect to 
 become land owners. The annual value of the use of land is a 
 conception rarely used in business. It is the capital value or 
 selling value that is almost always referred to and used. Lands 
 change hands with considerable frequency, and with great ease 
 and freedom. How much land is worth per acre in the country 
 and per square, or per front, foot in the cities at purchase is 
 usually a better-known fact than rental values. While admit- 
 tedly the value of land depends on the product, yet rental 
 values, when determined, are usually computed on the basis 
 of a percentage of the capital values rather than of the product. 
 Assessors in making up their rolls depend upon prices paid 
 when transfers are made, or upon appraisements, for determin- 
 ing the value of land, and rarely, if ever, seek any information 
 as to rentals. This is equally true of city real estate and of 
 farm lands. In the same way boards of cquaHsation in at- 
 
 ' Delaware and New Jersey and parts of Maryland and Pennsylvania offer the 
 necessary exceptions to prove the rule. In these old states rentals are considered.
 
 l8o INTRODUCTION TO PUBLIC FINANCE 
 
 tempting to check up the work of assessors investigate selling 
 prices, and not rentals. In fact, the leasing of land is so rare, 
 and usually occurs under such peculiar circumstances, that 
 rentals never afford a satisfactory basis of valuation. Accord- 
 ing to the United States Census Bureau, only 35 per cent of 
 the farms of the country are cultivated by tenants, but among 
 these rented " farms " are many truck farms, dairies, nursery 
 gardens, and florists' gardens in the vicinity of cities, which are 
 more often rented than is agricultural land proper. Another 
 reason why rental values are not used for taxation purposes is 
 that in many states there are large tracts of land not under 
 cultivation. Less than 50 per cent of all land in the United 
 States is " improved " ; that is, under cultivation, and less than 
 three-fourths of that actually in farms is " improved." Yet the 
 unimproved, unused land has a selling value in the market, 
 and is taxable. In the same category fall the unimproved city 
 lots, held for speculation. 
 
 The use of the selling value, or a capital concept, instead of 
 the rental value, introduces an element of uncertainty into the 
 assessment or valuation of land for purposes of taxation. A 
 great deal is left to the discretion of the assessors ; they have no 
 mathematical rule which they can follow. In the British prop- 
 erty and income tax. Schedule A is the most sure and certain 
 group, on account of the prevalence of a universal system of 
 leasing, and in the German states the values in the cadastre can 
 be fixed with a high degree of certainty and accuracy on the 
 basis of annual rental value or known annual produce. Nothing 
 of that sort is possible in the United States. What is usually 
 meant by the terms " full cash value," or " true value," is 
 perhaps best defined as, in the terms of the California statute, 
 " the amount at which property would be taken in payment 
 of a just debt from a solvent debtor." It is not what would be 
 paid by the highest bidder, nor what the property might bring 
 at a forced sale, but more nearly what it would be appraised at 
 in the settlement of an estate for division among the heirs. 
 This conception is at best vague, and leaves much to the discre- 
 tion of the officers. Hence it is, that in order not to err by ex-
 
 PROPERTY TAXES l8l 
 
 cessive valuations, the assessors, in practice, universally fall 
 below the true value as defined by law. In states where a heavy 
 state tax is apportioned on the basis of local assessments, there 
 is a further motive for undervaluation ; namely, the endeavour 
 on the part of the assessor to save money for his constituents 
 by evading part of the state tax. The prevailing practice of 
 undervaluation has been recognised by law in some states. 
 Thus in lUinois only one-fifth of the true value is to be entered 
 in the roll. But, nevertheless, undervaluation goes on just the 
 same and the 20 per cent is computed on less than 100 per cent 
 of the true value. 
 
 Inequalities in Valuation. — Far worse than the general 
 undervaluations which create inequalities between districts are 
 special or individual undervaluations. These are in rare in- 
 stances the result of corruption or conscious favouritism ; more 
 often they arise from the natural inertia of the officials who do 
 not make the roll keep pace with the changes in property and 
 its value. Various devices have been resorted to, to obviate 
 or lessen these inequalities. The official boards of review usu- 
 ally become mere umpires to decide disputes between assessors 
 and dissatisfied taxpayers. Somewhat more successful in cities 
 has been the introduction of a graduated scale of values in each 
 block, the inner lots being valued according to their distance 
 from the corner. In the West it is quite common to find a 
 provision to the effect that unimproved land must not be valued 
 at less than improved land of the same quality and similarly 
 situated. This is doubtless a provision suggested by Henry 
 George's theory. 
 
 A rather important provision, as tending to stimulate the 
 assessor to take greater pains in his work, is that which requires 
 that land and the improvements thereon shall be valued and 
 assessed separately. This seems to have originated in Cali- 
 fornia. It has recently been rediscovered by New York, and 
 adopted there with great enthusiasm. 
 
 Personalty. — The assessment of ])crsonal properly presents 
 the greatest difiiculties. The main difficulty is to find it. Some 
 kinds of tangible personal property, such as cattle and animals
 
 l82 INTRODUCTION TO PUBLIC FINANCE 
 
 on farms, wagons, machinery, tools, etc., are not difficult to 
 find, and as easily valued. In states where there are large 
 herds of cattle, as in Nevada, it is the custom for assessors to 
 agree upon a uniform value per head. Household furniture 
 can as easily be found, but difficulty at once arises over values. 
 In every state, except New York, the taxpayer is by law re- 
 quired to fill out a minute inventory of all his furniture and 
 other personal property. But he frequently ignores the law, 
 and the assessor proceeds by a sort of doomage process, which 
 amounts usually to a guess based on the general character of 
 the house the taxpayer lives in, his household equipment, and 
 his general financial standing. In New York, where no state- 
 ment is required, the taxpayer is allowed to appear on " griev- 
 ance day " and " swear off his taxes," if he feels that the guess 
 made by the assessors is too high. The enforcement of the 
 statement and the reliance placed upon it varj^ from state to 
 state, and even from locality to locality within each state, to 
 such an extent that no generalisation can be made with safety. 
 It is certainly the intention of the law that every taxpayer 
 should file a statement of his entire property, and the penalties 
 for failure to do so are severe. But it is equally true that this 
 provision is not uniformly enforced, and that the vast majority 
 of the statements filed are incorrect and incomplete. These 
 statements usually have to be sworn to when filed, and the 
 widespread perjury and consequent contempt of law constitute a 
 sad and a menacing feature of the political life of the country. 
 
 Sec. 6. The Taxation of Mortgages. — One of the moot 
 questions in the United States is whether credits and money 
 should be considered property for purposes of taxation. The 
 debate on this question has been especially lengthy in connec- 
 tion with mortgages, because they are usually of record, or will 
 be reported by the borrower, so that they are more easily dis- 
 covered than other credits. If we include the evanescent forms 
 of discussion, it is safe to say that there has been far more 
 literature on the taxation of mortgages than on all other sub- 
 jects relating to taxation in the United States. 
 
 In most states a note secured by a mortgage is taxable as
 
 PROPERTY TAXES 183 
 
 property of the mortgagee, and the property which secures the 
 mortgage is taxable to the mortgagor without deduction for the 
 mortgage. It is obvious that this procedure rests on the old 
 conception of the general property tax as a personal tax. The 
 thought of the legislator is that the lender is able to pay a tax 
 by virtue of the interest income he receives. That in most 
 cases the lender will reimburse himself by shifting the tax to 
 the borrower in the form of higher interest does not, in the 
 opinion of the legislator, present any good reason why an at- 
 tempt, at least, should not be made to reach the lender. The 
 most recent departure from this rule is to impose a special tax 
 on the mortgage of the nature of a registration tax at a rate 
 considerably lower than would be the result of taxing it as 
 property. The property by which the mortgage is secured is 
 then taxed in full to the borrower. This is in substance the 
 outcome of the long struggle in New York State. This method 
 assumes that the holding of the mortgage represents taxpaying 
 abihty of some sort vested in the lender. It is not unlike the 
 conception underlying the Prussian law which imposes an addi- 
 tional tax on funded income in the form of a property tax, 
 even though the income from the property has already been 
 taxed as part of the taxpayer's income. Another solution of 
 the problem is to treat the mortgage as an interest in the prop- 
 erty and to try to divide the burden between the two parties. 
 This in any case avoids double taxation. In California the 
 attempt was made to compel the lender to pay the tax by at 
 least making him advance it. It became evident, however, 
 that he shifted the tax to the borrower, whose last state was 
 worse than his first, because he had to pay not only the tax but 
 the cost of shifting as well. In Massachusetts a similar com- 
 promise was made in that the mortgage and the surplus of the 
 property over the mortgage were assessed separately, one to the 
 lender and one to the borrower, but these two parties were al- 
 lowed to agree as to who should pay the mortgage tax. Generally 
 the borrower assumed the whole burden with corresponding 
 reduction in interest. This is obviously a roundabout way of 
 accomplishing a very simple thing, hence some few states simply
 
 l84 INTRODUCTION TO PUBLIC FINANCE 
 
 ignore the mortgage entirely. Thus the statutes of Washington 
 provide " that mortgages and all credits for the purchase of 
 real estate shall not be considered as property for the purpose 
 of taxation." Recently that state has extended the same prin- 
 ciple to all credits. This latter provision simply legalises a 
 prevailing practice, for credits other than mortgages were rarely 
 found by the assessor. 
 
 Money and Credits. — It is the law in most of the states 
 (Washington by recent enactment is one of the exceptions), 
 and it is prevailing public sentiment, that money on hand, or 
 on deposit, and credits are taxable property. But it is only in 
 rare instances that they are taxed. Of the more usual attempts 
 to uncover personal property of this class through the machinery 
 of oaths, affidavits, and the like. Professor Daniels, in his work 
 on Public Finance, says : " The effectiveness of such laws is 
 inconsiderable. If Jove laughs at lovers' vows, he probably 
 gufifaws at taxpayers' oaths. Even the Psalmist's hasty alle- 
 gation of universal mendacity needs little qualification in this 
 province of finance. Where the taxpayer's conscience is tender, 
 he finds (as one puts it) that virtue is perforce its own reward. 
 This phase of the system is described in one tax report as 
 * a tax upon ignorance and honesty,' and in another report 
 we are told that ' the payment of the tax on personalty is 
 almost as voluntary and is considered in pretty much the 
 same light as donations to the neighbourhood church or 
 Sunday school.' " 
 
 There are two consequences of this almost universal evasion. 
 The first is that when money is loaned under circumstances 
 which make it at all likely that it will be found by the assessor, 
 the rate of interest is raised above what it would otherwise be 
 by an amount sufficient to cover the tax, together with another 
 extra charge for the cost of shifting and attendant risk. The 
 second is that any " ignorant and honest taxpayers " who may 
 report this class of property are unduly taxed. It seems, then, 
 to be futile to try to tax this class of property, and the under- 
 lying reason for the failure to reach it, and for the objection 
 which people in general have to paying it, is probably to be found
 
 PROPERTY TAXES 185 
 
 in the fundamental fact that it should not be taxed at all. Although 
 credits may be included within the term " property," from the 
 point of view of law, they are not property in any true economic 
 sense. Like money, credits are representative wealth. 
 
 The following citation from the report of the California 
 Commission on the reform of the revenue system of that state 
 explains this point : "If we take the view that the property 
 tax should be a real tax, based upon things or property without 
 respect to who may own them, then it is illogical to regard a 
 credit as property. A credit is merely a right on the part of the 
 creditor to receive and to enforce payment of the obligation 
 due from some other person. The notes, bonds, or other docu- 
 ments embodying the credits merely stand as evidence of the 
 existing contract. The very existence of the documentary 
 proof and the phraseology in which many of these documents 
 are couched demonstrate very clearly that the creditor himself 
 is not in possession of the money, or lands, or the goods which 
 secure the loan, and the transfer of which to the debtor brought 
 the credit into existence. The creditor has only the right to 
 receive these things, or similar things, back at some future 
 time. If the United States government borrows $100,000,000 
 upon bonds, — which are merely its promise to pay, — there 
 is a transfer of $100,000,000 in gold from the buyers of the bonds, 
 or the creditors, to the United States treasury. The creditors 
 who hold the bonds feel themselves no poorer than before, but 
 no one would seriously contend that by this simple transaction 
 the property or wealth of the country has been increased a 
 particle. There is only $100,000,000 of real wealth involved, 
 which has passed into the possession of Uncle Sam from that of 
 his creditors, and which will be returned when the bonds are 
 paid. Nor would any one seriously contend that the payment 
 by the United States of some of its indebtedness and the can- 
 cellation of the bonds destroyed any wealth. Standing against 
 every credit there is an equal amount of indebtedness, and the 
 maturing of this indebtedness destroys no material wealth, nor 
 does its creation add anything to the material wealth of the 
 world or to the substantial property which has to bear the
 
 l86 INTRODUCTION TO PUBLIC FINANCE 
 
 burden of taxation. To consider that credits are property as 
 well as the goods and other property by which they are secured 
 is like adding together two sides of an account — the assets 
 and the liabilities. To treat credits as property, and also the 
 lands, goods, and other forms of wealth in the hands of the 
 community, would result in an obvious duplication of values, 
 and if taxes were levied upon that basis would result in double 
 taxation, unless the debtor were allowed to deduct the amount 
 of his debts in the same way that we permit him to do in the 
 case of mortgages. But the existing laws do not usually per- 
 mit that, save and except that the debtor may deduct his debts 
 from the amount of his credits. Illustrations of the way in 
 which the taxation of credits works objectionable double taxa- 
 tion might be multiplied and the argument extended indefinitely, 
 but the above illustrations ought to be sufi&cient to make clear 
 the fundamental principles involved." 
 
 Sec. 7. Taxation of Corporation Franchises. — As has been 
 stated above, corporations, when subject to the general property 
 tax, are generally regarded as legal persons and are taxed in 
 the same manner as any other persons. A special difficulty is 
 involved in the taxation of the so-called intangible personal 
 property of the corporations. This class of property, some- 
 times called " the franchise," sometimes " the corporate excess," 
 and often simply " the intangible property " is the capitalised 
 value of that part of the net earnings that is in excess of a reason- 
 able return on the amount invested in the real estate, machinery, 
 and other tangible property of the corporations. Its value 
 for purposes of taxation is usually obtained by ascertaining, 
 first, the value of the real estate and other tangible property; 
 second, the aggregate market value of the stock, bonds, and 
 other funds representing the property ; and third, by deducting 
 the first from the second. The remainder is assumed to be 
 the value of the intangible property. When the market value 
 of the securities cannot be ascertained, the net earnings are 
 capitalised in order to ascertain the aggregate value of the 
 property. This whole process presents great difficulties and 
 leaves much to the discretion of the assessing officials.
 
 PROPERTY TAXES 187 
 
 The legal theory is that this excess value is the value of a 
 class of property called the franchises, conferred upon corpora- 
 tions by governmental authority. The courts have defined 
 franchises as : " special privileges conferred by government on 
 individuals and which do not belong to the citizens of the 
 country generally by common right." ^ As these franchises 
 are legally property, they are included in the taxable property. 
 It is generally recognised that there are three, or possibly four, 
 different kinds of franchises that enter into and contribute to 
 the corporate excess. But the attempt to assess or value them 
 separately is rarely made, and in the nature of things is not suc- 
 cessful. Their value merges in one mass with other elements 
 analogous to " good- will," and the only practical method of 
 valuation is to treat them as a unit. 
 
 The first of the franchises recognised by the courts is the 
 right " to be " a corporation, a privilege accorded to any three 
 or more persons who associate together in the manner pre- 
 scribed by law for the formation of private corporations. This 
 franchise conveys the right to use the corporate name, to have 
 a corporate seal, to sue and be sued, and in general to enjoy the 
 privileges ordinarily permitted to corporations. While this 
 franchise is theoretically included with the others in the corpo- 
 rate excess, it is also subject to a fee at the time it is granted 
 and may also, together with the second, be subject to an annual 
 fee-like tax, in addition to the taxes imposed upon it as part of 
 the property. These charges may be uniform or they may be 
 graduated. The second sort of taxable franchise is called the 
 franchise " to do and to act." This is inevitably conferred at 
 the same time as the first mentioned and is but slightly different 
 in character. Third, the revenue laws, as interpreted by the 
 courts, seem to recognise two other kinds of franchises, which 
 we may call, for convenience, special and general, but they are 
 so closely analogous as to be exceedingly difficult to distinguish 
 one from another. These are both subject to taxation as 
 property, and are included in the assessment of the property 
 
 > Such franchises arc not to he confused with the right to exercise the electoral 
 power.
 
 l88 INTRODUCTION TO PUBLIC FINANCE 
 
 of the corporations. One of these franchises requires a special 
 grant ; the other is acquired automatically under the enjoyment 
 of the powers conferred by the general law for incorporation, 
 and is, as will be explained below, very closely akin to " good- 
 will." These two classes of franchises are here grouped together 
 and treated as one class, simply because they are to be valued 
 for purposes of taxation in practically the same manner. 
 
 The first of all to be recognised as taxable franchises were 
 the special franchises enjoyed by public-service corporations, 
 such as water companies, gas companies, street railway com- 
 panies, and the like, which use the public streets, under some 
 special permission. These are " special " in the sense that they 
 have to be specifically described in each case and cannot be con- 
 veyed by general statute, and they virtually convey the right 
 to use some public property. They are often very valuable, 
 and that they were so was early recognised. 
 
 From the practice of assessing these special franchises there 
 grew up the practice, which has frequently been sanctioned by 
 the courts, of assuming that every class of corporations enjoys 
 a sort of general franchise that is distinct from the mere right 
 to be a corporation, or to act as a corporation. Thus banks 
 have been taxed for their " franchises " and their value ascer- 
 tained in the manner described above. While these two classes 
 of franchises, which for convenience we have called the special 
 and the general, are apparently, in the opinion of the courts, 
 almost precisely alike and are treated in the same manner for 
 the purposes of taxation, they are, from the economic point 
 of view, fundamentally different. 
 
 The franchise of a bank, in this sense, is closely analogous 
 to that kind of property known as " good- will." This is a class 
 of property which presumably might be taxed as property, 
 but which as a rule is never taxed except in those cases in which 
 it is enjoyed by corporations, and then it is taxed as a franchise. 
 It is a question, open for serious consideration, whether the 
 taxation of such a franchise, tantamount to the taxation of the 
 good-will, against corporations, while similar items of property, 
 if this be property, are not assessed against individuals and
 
 PROPERTY TAXES 1 89 
 
 firms, does not constitute an unjust discrimination against cor- 
 porations. 
 
 Sec. 8. Objections to This Tax. — The general property tax 
 has been subjected to severe criticisms and has frequently been 
 condemned. We may now examine the grounds on which this 
 condemnation rests. Among many there are two of great 
 importance, (i) It is urged that the tax is unjust because 
 property forms no criterion of taxpaying ability. It is main- 
 tained that income is a far better basis. (2) It is urged that the 
 general property tax is inexpedient because so difficult to ad- 
 minister justly, especially in the matter of the discovery and 
 assessment of personal property and because of its effect on the 
 movement of capital and forms of investment. Against these 
 serious objections it is urged that when there is a tolerably just 
 system of income taxation already in existence, a property tax 
 in addition thereto fulfils the requirements of justice because 
 it imposes a heavier burden on " funded " income, which is 
 regarded as indicative of more faculty, since it is less precarious. 
 It also supplements the income tax by making property in 
 enjoyment, the use of which is an indication of tax faculty, a 
 part of the base, as, for example, picture galleries. And, lastly, 
 the comparative steadiness of the return from the property 
 tax is a great recommendation from the fiscal standpoint. It 
 would seem, then, that the objections to the general property 
 tax as the main part of a system may still stand, but that there 
 may be room for such a tax as a subordinate part of a larger 
 system, the demands of justice being met by the proper relation 
 between the different parts of the system. In Switzerland and 
 Prussia the general property tax is part of a more elaborate 
 system. In the United States it stands almost alone for com- 
 monwealth purposes, supplemented in some states by other 
 taxes intended to reach certain forms of revenue-yielding 
 property. The universal condemnation of the American com- 
 monwealth general property tax is therefore not due to the 
 defects in the tax itself, but mainly to the fact that it is not 
 properly supplemented by other taxes. 
 
 The first fjuestion that arises when the general property
 
 190 INTRODUCTION TO PUBLIC FINANCE 
 
 tax stands alone, and a question which, although not so promi- 
 nent, also arises in other cases, is : Can the method of assessment 
 be made sufficiently effective to reach uniformly and equitably 
 all forms of property, especially personal property? The 
 answer to this question that has been given by the experience 
 of the United States is emphatically in the negative. This is 
 especially true when the administration of the assessment is 
 left to officials popularly elected for a short term, in small dis- 
 tricts, and by the taxpayers whose property they are to assess. 
 It is also in the negative, but somewhat less unanimously so, 
 when the assessment is under the control of an impartial 
 bureaucracy appointed by some higher authority and not be- 
 holden to a local constituency. In the one case the assessor 
 is apt to be too friendly to the assessed, in the other too igno- 
 rant of local conditions. 
 
 Sec. 9. Scientific Judgment of the General Property Tax. — 
 The property tax as the sole or chief form of direct taxation 
 has few supporters among scientific writers. So universal 
 and unanimous has been the condemnation heaped upon this 
 tax that we must consider in detail some of the objections that 
 have been raised. 
 
 Professor Seligman sums up his interesting discussion of this 
 tax in words to the following general import : 
 
 The general property tax is a failure as the main source of 
 revenue from the triple standpoint of history, theory, and prac- 
 tice. 
 
 1. Historically, it was once well-nigh universal. In a com- 
 munity mainly agricultural it was not altogether unsuited to 
 the conditions. But as soon as industry and commerce became 
 important, it failed to extend so as to comply with the require- 
 ments of justice. It became, in fact, even where not so con- 
 sidered, a tax on real property. Everywhere but in America 
 it has been (o) divided into a number of subordinate property 
 taxes, (b) allowed to become a subordinate member of another 
 system, or (c) entirely abandoned. Sooner or later it will have 
 to be abandoned in America. 
 
 2. Theoretically the general property tax is deficient in two
 
 PROPERTY TAXES 191 
 
 respects. First, it assumes that there is an ascertainable general 
 property. But since property is a composite of inseparable but 
 widely differentiated elements, this assumption is contrary 
 to the fact. " The general mass of property has disappeared, 
 and with it vanishes the foundation of the general property tax." 
 Secondly, " property is no longer a criterion of faculty or of 
 taxpaying ability." Two equal masses of property may be 
 unequally productive, because used by men of differing talents, 
 and thus differently joined with the personal element, or because 
 the possession of them may give rise to fortuitous gains, or be- 
 cause the owner of one mass of property may be labouring under 
 peculiar economic disadvantages. 
 
 It is the income which property yields that is the best index 
 of the taxpaying power which the property represents. 
 
 3. Practically, " the general property tax as actiially adminis- 
 tered to-day is beyond all peradventure the worst tax known in the 
 civilised world.^' As at present administered, it fails entirely 
 to reach intangible property. It debases public morals by 
 putting a premium on dishonesty. It is regressive and presses 
 hardest upon those relatively least able to pay.^ 
 
 This is strong language, — even stronger has been used. 
 
 Recent Regeneration of the Property Tax. — Against this 
 condemnation we may set the following important considera- 
 tions. As this tax becomes more a tax on things ownable 
 than a tax on persons in proportion to their property or 
 estates it becomes much more manageable. Thus if instead 
 of trying to include mortgages, choses in action, stocks and 
 bonds we tax the property they stand for and represent, one 
 ground for criticism of the tax is removed in no small part. 
 There is a very proper place in the general system of taxation 
 for a tax, mainly local, on real estate and tangible personal 
 property including the property of corporations as well as of 
 individuals. If other taxes reach the signs of ability which 
 the old general property aimed at but missed many objections 
 disappear. Again in recent years the administration of the tax 
 has improved. In the great cities, especially, trained assessors, 
 
 ' Scligman, Essays, pp. 23-61.
 
 192 INTRODUCTION TO PUBLIC FINANCE 
 
 equipped with proper maps, and using well-nigh scientifically 
 accurate methods have reduced the inequalities to a negligible 
 minimum. While rural assessments are not so well adminis- 
 tered as urban, considered by and large, yet there are whole 
 states where under competent supervision of state tax com- 
 missions excellent assessments at approximate equality are 
 being made. As we now see it the redemption of a large part of 
 the general property tax is possible and in its proper place 
 as a property tax, if not a general property tax, it may be useful 
 for years to come. 
 
 Part 2. Special Property Taxes 
 
 Sec. 10. Forms of the Land Tax. — The land tax is one of 
 the oldest contributions. It has three forms : (i) it may be 
 based upon each unit of area, sometimes with an attempt to 
 classify the different units as to fertility ; (2) it may be based 
 upon the estimated value of the land or upon an estimated 
 average annual yield or surplus ; (3) it may be based upon 
 the actual yearly yield, and be as it were a share in the product. 
 The tax was common in the latter part of the Middle Ages as a 
 recognition of the monarch's right of proprietorship in the soil. 
 A good example of this, among many others, is afforded by the 
 so-called quit-rents in the American colonies. ^ In their first 
 form these payments are not strictly taxes. They are acknowl- 
 edgments of the people's tenure. But they frequently grow into 
 taxes. In France, as we have seen, the taille developed from 
 feudal dues. The impot fonder now yields 200,000,000 francs. 
 In England the old land tax has been converted into a redeemable 
 rent charge, but the revenue from land is still taxed in the general 
 income tax and yields £1,500,000 annually. Local taxation in 
 most countries falls largely on land. In Prussia the land tax 
 was in 1895 transferred entirely to the local bodies. 
 
 Economic rent as the surplus of revenues from land, after 
 all expenses have been deducted, has always been regarded as a 
 legitimate object of taxation. It has been strongly argued that 
 this tax cannot be shifted. But as the land tax is not always 
 
 1 See Ripley and Wood.
 
 PROPERTY TAXES 1 93 
 
 confined to rent-bearing land, being generally imposed upon all 
 land, even the poorest in cultivation, and as modern economic 
 theory does not regard rent as an inevitable surplus, this old 
 argument needs thorough revision. (See Chap. X.) 
 
 It is in the assessment of this tax that the cadastre has been 
 most widely used. The principles upon which the best cadastres 
 have been built are the following : (i) A careful measurement 
 of the land is made and recorded. In the older ones the land 
 is entered in rough historical units: the " yoke," the " hide," 
 the " seed." Sometimes the cadastre is intended to serve other 
 purposes, as that of a record of titles. In any case the names 
 of the owners or occupiers are entered with each piece. (2) A 
 record is made of the yield of each unit of area, and from that is 
 estimated either the gross revenue or the net revenue, — more 
 frequently the latter. As a rule the cadastral revenue is less 
 than the actual net revenue. Another method is that of record- 
 ing the market value. 
 
 The cadastre, when finished, is subject to more or less fre- 
 quent revision. A partial revision which involves the record- 
 ing of changes of title, etc., is generally made currently. An 
 entire revision is only undertaken after periods of considerable 
 length. The making of a complete cadastre is a matter of 
 considerable expense and takes no little time. In many cases 
 more than the mere land is recorded, buildings and other im- 
 provements being frequently entered in the same cadastre. 
 
 It is generally urged in justification of the retention of the 
 land tax, even in countries where there are other taxes that fall 
 upon the revenue from land, that the income accruing from land 
 is constantly increasing in every growing community, and that 
 the expenditure of the government accrues largely to the benefit 
 of the land-holders, and appears in the form of an increased 
 value or rental. The same reasons are urged in support of a 
 higher rate for the land tax. 
 
 On the basis of a cadastre the land tax is generally apportioned ; 
 less frequently it is proportioned. In general, the tax lends 
 itself better than most others to the apportionment method. 
 With a fixed valuation as a basis which varies comparatively little
 
 194 INTRODUCTION TO PUBLIC FINANCE 
 
 from year to year, it seems perfectly natural and easiest to 
 apportion the amount that it is desired to raise among the 
 different pieces or units. 
 
 Sec. II. The Building Tax. — The older forms of the land 
 tax often included the building tax, with which it was closely 
 connected in character. At present, this contribution generally 
 forms an independent tax on the revenue from the site and the 
 building. It is, like the land tax, a tax on a fixed source of in- 
 come. Its incidence will receive special attention elsewhere. 
 
 The buildings taxed may be classified according to value, or 
 according to the uses to which they are put, or according to 
 their location, whether urban or rural. There are two very 
 different forms of the building tax: one is intended to fall on 
 the income derived by the owner from the building ; the other 
 simply taxes the occupier according to the rent, taken as the 
 index of a certain amount of tax faculty on his part. The 
 second is very much like a consumption tax. The first regards 
 the revenue derived as a source from which the tax may be paid. 
 But even this first form, when paid by an owner who is also an 
 occupier, is very much like a consumption tax. 
 
 The building tax, wherever in use, is one of a number of other 
 similar taxes; it never stands alone. In ease of assessment it 
 has many advantages. The valuation is simple and inexpen- 
 sive. Alterations affecting the base can be easily and accu- 
 rately ascertained. Unlike the land tax, the building tax is 
 regularly assessed each year. Hence this tax is more often pro- 
 portioned than apportioned. The building tax may be ex- 
 tended into a sort of industry tax, as when it is assessed with 
 higher rates upon buildings used for industrial or commercial 
 purposes. An example of this method of assessing the business 
 tax is that of France cited above. 
 
 Sec. 12. Increment Value Land Tax. — Mention was made 
 above of the introduction in German cities of a tax on the in- 
 crease in the value of lands resulting from the growth of popula- 
 tion. Such a tax has also been used by central governments. 
 A notable example is the tax of Great Britain, a description of 
 which will serve to show the nature of all these taxes. The
 
 PROPERTY TAXES I95 
 
 history of that tax throws some light upon its purpose. The old 
 land tax of 1692 was made a redeemable rent charge in 1798 and 
 most of the more valuable land had been redeemed in the course 
 of the next century. Most land was, therefore, by virtue of the 
 agreement of redemption made in 1798 supposedly free from 
 taxation in England, save and except (and the exception is im- 
 portant) that the rent of land might be included in taxable in- 
 come, and the local rates were levied on the basis of rent paid. 
 But there was no tax being levied on the capital value of land in 
 1909 when the increment value land tax was proposed. In 
 1909 England was in need of larger revenues, and in casting 
 about for them Lloyd George hit upon the scheme of a tax on 
 land. He argued that the redemption of the old land tax applied 
 only to the value as it was in 1798 when the rent charge which 
 might be redeemed by payment of its capital value was fixed, 
 and that any increase in value since then was beyond the scope 
 of the old contract of exemption. However, he proposed to 
 tax not the increment since 1798 but only that which might 
 accrue from time to time after 1909. His plan aroused intense 
 opposition in the House of Lords where the land-holders were 
 represented and led to a political conflict between the Lords 
 and the Commons over the right of the Lords to refuse their 
 assent to a finance bill. An appeal to the people resulted in 
 sustaining the measure and also in what would in the United 
 States be considered as an amendment to the constitution, al- 
 though in Great Britain there is no written constitution to 
 amend. For the Lords lost the right to veto a finance bill. 
 
 The increment value land duty was one of four taxes levied 
 at the same time. The others were : First, a " reversion value 
 duty," which is a tax on the increase which may be found to 
 have occurred in the value of a piece of property which has 
 been leased, when, on expiration of the lease, it reverts to the 
 original owner. Second, an " undeveloped land duty," an 
 annual tax on land lying practically idle or not used and de- 
 veloped as it might be. .The tax was light but developed some 
 revenue. Third, a "mineral rights duty" falling upon the 
 annual rental value of mining rights. Wc shall confine our
 
 196 INTRODUCTION TO PUBLIC FINANCE 
 
 attention to the increment value land duty alone, since the others 
 are self-explanatory, or at least will be so when the former is 
 understood. 
 
 The increment value duty is a tax on the increase in the value 
 of land since April 30, 1909. It is levied on the occasion of a 
 sale, or of a transfer occasioned by death. The base is the in- 
 crease in value ascertained on the " occasion " between (i) the 
 value as of April 30, 1909, or (2) on the second and subsequent 
 sales or transfers each giving rise to a new " occasion " and the 
 next preceding " occasion." To fix the value from which sub- 
 sequent increases should be computed a new Doomsday Book, 
 based on a survey and valuation of all the lands in Great Britain, 
 was to be made. This was a gigantic and costly undertaking, 
 as there was no such valuation of land on a capital basis in 
 existence. The tax was to apply only on the increment in the 
 site value, which was the value of the land considered as stripped 
 of all that had been done by man to enhance its value. As 
 nearly as may be site value is the present value of the original 
 and indestructible characteristics of the land. Agricultural 
 lands were exempt, partly because it was at that time believed 
 that they were not increasing in value, but more because the 
 tax was conceived of as aimed at land which was passing from 
 the agricultural state to industrial or urban uses. The theory 
 of the tax seems to be that the site value of land is due to the 
 growth of population rather than to any economic activity 
 of the owners and is hence peculiarly indicative of ability to 
 pay taxes. Elaborate rules were set up for arriving at the site 
 value too intricate to be reproduced here. 
 
 The rate was 20 per cent on the excess of the increment in 
 value over 10 per cent of the original value. An example will 
 show the tax more clearly than can be done by description. 
 The site value of a piece of land was fixed in the Doomsday Book 
 at £1000, five years later it was sold and the site value reascer- 
 tained was found to be £1500. The tax would be 20 per cent 
 of £1000 plus 10 per cent thereof, or £1100, subtracted from 
 £1500, or 20 per cent of £400, and amounts to £80. Another 
 period of years passes by and the land is sold again. It is
 
 PROPERTY TAXES 197 
 
 now the increase over £1500 with due allowance of 10 per cent 
 which becomes the subject of the tax. So much of the land of 
 England is leased and sublet that leasehold interests are often 
 sold or inherited and so part interests or leasehold interests 
 were subjected to the tax, as well as the interest held by the 
 owner of the fee. 
 
 A study made of the incidence of this tax and a comparison 
 of it with the general property tax of the United States shows 
 that under parallel conditions the general property tax, which 
 draws the increment value under taxation each year as long as 
 it exists, would be many times heavier than is the increment 
 value tax.i The reason for this is that the property tax is 
 regularly recurrent each year, while the increment value tax 
 occurs only occasionally, the owner meanwhile having the use 
 of the full property undiminished by the tax. 
 
 This tax must not be confused with Henry George's single 
 tax. It falls on the so-called unearned increment and was 
 devised by a man named George, but there the resemblance 
 ceases. The single tax would have to be on the annual value 
 and could not be on the capital value. The single tax would 
 have to be an annual tax and not one on " occasion." 
 
 This tax came to an untimely end. The Doomsday Book, 
 a very costly book to write, was not completed when the war 
 broke out. Moreover during the intervening period the reve- 
 nues from this tax were grievously disappointing. The British 
 government during the war had no time to spend on an unre- 
 munerative tax which was so costly to administer, and its collec- 
 tion was suspended. We are informed that in 1920 the repeal 
 of the tax is under contemplation. 
 
 Sec. 13. Taxation of Capital. — The taxes we have already 
 considered cover most fixed capital. Circulating capital also, 
 in all of its many forms, has been subjected to separate taxes. 
 This is as true of those countries which have the general property 
 tax as of those which attempt to accomplish the desired results 
 by the taxation of the various elements of revenue. How to 
 
 » See Plehn, " A Study of the Incidence of an Increment Value Land Tax," 
 Quarterly Journal of Economics, May, 1918.
 
 198 INTRODUCTION TO PUBLIC FINANCE 
 
 reach this kind of revenue and to make the faculty which it 
 represents bear its share of the pubhc burden is one of the most 
 difficult practical problems of taxation. The chief difficulties 
 arise from the elusive nature of circulating capital and the inti- 
 mate way in which it is connected with many of the processes 
 of industrial life. Justice and equahty demand its taxation. 
 But various pleas of expediency are against it. Capital is hard 
 to reach, and if it is not fairly taxed, the result may be injurious 
 to trade. There are two forms in which this tax has been applied 
 with some effectiveness. One is that of a tax on mortgages, 
 the other that of a tax or taxes on corporations and banks. 
 Some results have also been attained by the attempt to tax 
 stocks and bonds. Public stocks are especially easy of assess- 
 ment. But there is an objection to taxing them when the other 
 forms of investment escape, because of the bad effect on public 
 credit. If it is distinctly declared beforehand that the bonds 
 are to be taxed, their selling price is lowered. If it is not so 
 declared, at the time of issue, and the tax is subsequently assessed, 
 the process is regarded by the holders as equivalent to a partial 
 repudiation of the debt, and subsequent loans are looked upon 
 askance. When, however, all forms of revenue-yielding capital 
 are, nominally at least, subject to taxation, this objection to 
 taxing public securities disappears. If the tax is not to have 
 the effect of reducing the capital value of the stock, bond, or 
 other security, it must fall upon every form of capital. But 
 so great are the difficulties of making it thus universal that, 
 as a general rule, such a tax affects the rate of interest on all 
 new investments in the taxed form. The foregoing applies 
 only to a tax on bonds as property or capital and not to the 
 inclusion of the interest thereon as part of taxable income in 
 general. 
 
 Taxation of Mortgages. — Where there is a complete system 
 of public records for deeds, mortgages, and contracts, necessary 
 to their validity, it is comparatively easy to tax these recorded 
 securities. Thus it is that mortgages are generally easily tax- 
 able. This, however, results in inequality if the tax is not 
 extended beyond the recorded contracts. When the mortgage
 
 PROPERTY TAXES 199 
 
 is upon property already taxed, as, for example, by the building 
 tax or a general property tax, the question arises whether both 
 the borrower and the lender should be taxed, or only one, and 
 if so, which one. An able writer says on this point, " Tax the 
 mortgagee on the amount of the mortgage, and the mortgagor on 
 the value of the property minus the mortgage. That is the 
 only rational system." ^ Indeed, it would be, if every other 
 form of capital were taxed ; but when that is not the case, the 
 result is in every respect the same as though the owner were 
 taxed alone. Generally he pays more. 
 
 Stoppage at the Source. — -Taxation at the source has been 
 warmly recommended for reaching interest on capital ; i.e. to 
 have the debtor advance the tax and shift it if he can to the 
 lender or share it with him. In the case of corporations, this 
 method is applied to the dividends. As Bastable ^ has well 
 shown, such a tax is a combined tax on interest and on profits, 
 and is therefore partly outside our present purpose. The 
 taxation of corporations is not always the taxation of circulating 
 capital merely. Corporations often own other taxable property, 
 — land, buildings, etc. But in the United States, one of the 
 main objects of the introduction of taxes on corporations was to 
 reach forms of personal property that generally escaped. The 
 other object was, of course, to extend the general property 
 tax to cover all property. We find that the basis of the corpora- 
 tion tax is, in many instances, the capital stock at its par value, 
 or at its market value ; and in a good many instances, the 
 bonded indebtedness is also included. When the nature of the 
 business is such that the capital stock and bonds do not repre- 
 sent all the capital concentrated in the hands of the corporation, 
 as, for example, in the case of banks and insurance companies, 
 then the business transacted, the gross earnings, the dividends, 
 or the net earnings become the basis. But no clear line is 
 drawn between the taxation of interest and profits, so that 
 corporation taxes often approach, in character and operation, 
 business taxes.^ 
 
 ' Polilkal Science Quarterly, V, .35. ' P. 422. 
 
 ' See Seligman, Essays, Chaps. VI, VI 1 and VIII.
 
 200 INTRODUCTION TO PUBLIC FINANCE 
 
 Sec. 14. Post-war Capital Levies. — Quite different from the 
 foregoing is the so-called post-war capital levy. In many 
 countries, burdened with great war debts, it has been proposed 
 (1920) to levy a heavy, once and for all, tax on capital to raise 
 money with which to reduce the debts materially at an early 
 date. At present writing these are only proposals and the form 
 they may ultimately take if ever adopted is not discernible. 
 Most of the countries in which the proposal is made have in- 
 come taxes, or taxes taking a large part of incomes directly, and 
 have no very important taxes based on capital or property 
 per se. They have already raised the rate of the income tax 
 and of the other taxes about as high as seems practicable. 
 Hence they are casting about for new taxes. One of the taxes 
 hit upon is loosely designated as a capital tax or a capital levy. 
 
 When we come to examine what is meant by a capital tax 
 we find no great consensus of opinion. Strictly speaking capital 
 would include all sources of fixed or funded incomes as distinct 
 from earned incomes, and business operating capital as well. 
 If that be what is meant, the question at once arises why go to 
 the enormous trouble and expense of valuation and assessment 
 of all property, which as the experience of the United States for 
 three hundred years shows is an extremely difficult task ? More- 
 over, this concept seems to imply that what is to be taxed is 
 each individual's personal capital or estate, which is the most 
 difficult of all forms of a property tax to assess. One might at 
 once inquire. Why not raise the rate of the income tax on un- 
 earned incomes high enough to accomplish the same result, 
 even if it ran to several hundred per cent? For, since what is 
 desired is an equitable apportionment of a single levy, and 
 since income is assumed to be as fair a basis as can be found, 
 and since the recipient of earned income and business profits 
 is ob\dously a possessor of capital, the mere verbal absurdity of 
 collecting over 100 per cent of the base chosen for apportion- 
 ment is of no significance. 
 
 Inequality. — But nearer inspection seems to show that this 
 is scarcely what the more influential of the proponents of a capi- 
 tal tax mean, although there are some who carry the logic of
 
 PROPERTY TAXES 20I 
 
 their proposal to its extreme, even to capitalizing wage incomes, 
 to arrive at " human capital," and including all capital in a heavy 
 tax levy. Among the recipients of unearned income and hence 
 possessors of capital are many who have after all a bare living 
 based on years of toil and sacrifice on their part or on the part 
 of some one upon whom they were dependent. These would 
 doubtless be placed in sore straits by a levy amounting to 
 several years' income or to a serious invasion of their capital 
 resources. What seems to be meant by these persons is the 
 capital of the well-to-do and particularly of those in business 
 whose capital is mobile. The British government recom- 
 mended recently that " war fortunes " be investigated as the 
 possible subject of such a tax. This indicates that a still 
 further hmitation of the field of the levy is possible. In this 
 form it would become a sort of glorified excess profits tax. 
 Whether public stocks and especially war bonds should be in- 
 cluded turns on the extent to which that is regarded as tan- 
 tamount to repudiation. Those who carry the notion to an 
 extreme would include public debts. 
 
 The proposed capital tax has been a subject of interesting 
 economic analysis. How can a person pay a tax equal to say 
 25 per cent or even more of his capital? There are several 
 possibilities. The first is some form of borrowing, or of dedica- 
 tion of the income of several years or of part thereof for many 
 years to the payment. Where this is not feasible a sale of 
 some property may be possible. Whatever property the gov- 
 ernment might be obliged to seize for collection would probably 
 be sold ultimately. The bondholders who are to be paid from 
 the proceeds of the tax are possible purchasers or possible 
 lenders. These two possibilities are tantamount to paying 
 the bonds by substituting private credit or private property 
 interests for pul)lic credit. Whether this would facilitate 
 the readjustment of the burden to the resources of the people 
 more justly than a more gradual system of taxes would do so 
 depends obviously on the selection of ta.xable capital made, 
 and on the effect the procedure might have on the stimulus 
 to eflFort. Generally speaking private credit is reckoned on a
 
 202 INTRODUCTION TO PUBLIC FINANCE 
 
 higher rate of interest than is pubhc credit. That would have 
 two effects. First, the immediate strain would be increased, 
 but second, the period of liquidation would be shortened. If 
 there is any force at all to the argument that the taxpayer 
 strives after a definite net income or the maintenance of a fixed 
 standard of living then a sudden large tax may drive him to 
 work harder than would a comparatively smaller annual tax, 
 although still a heavy one, running for many years. But there 
 is obviously some point where the extra effort becomes too great 
 and despair or discouragement sets in. Even a democracy 
 may impoverish its taxpayers by excessive tribute not re- 
 expended for a productive purpose. In such a case repudiation 
 of the debt in whole or in part is a possible lesser evil for the 
 immediate present. But no nation which hopes ever again to 
 use its credit, or fears, in a wholesome way, ever again being 
 forced to use its credit, dares to repudiate its debts, even if 
 repudiation be confined to the debt due the people at home. 
 
 A Poor Reconstruction Measure. — Lastly a general capital 
 tax large in amount is so certain to upset all the calculations 
 and plans of the taxpayers, and to overthrow prescription that 
 it looks extremely dangerous. As a desperate resort in time 
 of war such a tax might be justified. As a measure for recon- 
 struction after a war it seems too likely to introduce uncer- 
 tainty and disorder where certainty, peace, and order should 
 prevail. It is bound to be inequitable, first, because experience 
 has shown that accurate assessment of capital or property is 
 impossible. Inequalities which hurt but little when the tax 
 is I per cent to 2 per cent become unendurable at 10 per cent 
 and still more so at 25 per cent or more. Second, because it is 
 not proposed as a recurrent or permanent tax but as a " once 
 for all " levy. This leaves no opportunity for the softening 
 influence of time to smooth out, by interaction of economic 
 forces, the initial inequalities. 
 
 Inheritance Taxes 
 
 Sec. 15. The Nature of Death Duties. — The group of taxes 
 levied on the occasion of the death of a property owner and
 
 PROPERTY TAXES 203 
 
 most commonly referred to as inheritance taxes or death 
 duties, grew in importance very rapidly during the thirty years 
 ending in 1920.^ It is difficult to decide whether these are 
 direct or indirect taxes. It is a delicate question, whether some 
 if not all of them are first paid out of the estate left by the 
 deceased person and then the burden is shifted to the heirs or 
 legatees, or whether they are to be regarded as both paid and 
 borne by the recipients of the inlieritance or bequest. It is of 
 course obvious where the burden falls. It falls on the heirs or 
 legatees. From the administrative point of view these taxes 
 are distinctly indirect taxes, for the responsible taxing official 
 cannot take the initiative. He must wait, patiently if he can, 
 for the grim reaper, death, to swing his scythe before taking any 
 steps to assess or collect the tax. 
 
 While the base is property the tax is not generally regarded 
 by the lam^ers or by the courts as a property tax. From the 
 legal viewpoint it is a tax on the exercise of the right of suc- 
 cession. A definition very frequently quoted by lawyers and 
 by the courts in the United States is that the inheritance tax 
 is "an excise tax on the transfer or transmission of property 
 from a decedent to his heirs or to those who take under his 
 will." The classification of the tax as an excise tax arises from 
 the peculiar use of the term " direct taxes " in the federal con- 
 stitution, a use discussed at length in the chapter on income 
 taxes in this book. But since the inheritance tax is based on 
 property and perhaps sometimes paid out of property an econ- 
 omist might well say that it is a special property tax. 
 
 This tax may take any one of three different forms. The 
 first, and perhaps the oldest, is that of a fee or fees and charges 
 for probate procedure, or for the issue of legal papers, such 
 fees being made so large as to be in effect a tax. These charges 
 or taxes suggest, as do the others in this group, although in 
 lesser degree, the old feudal " relief " or " heriot," which was, 
 in the Middle Ages, required to be paid from the estate of a 
 
 ' Max West, The Inheritance Tax, 2d ed., 1908. Seligman, Essays, p. 307 ff. 
 Bastable, Public Finance. Millis, Quarterly Journal of Economics, Vol. XIX, 
 p. 288.
 
 204 INTRODUCTION TO TUBLIC FINANCE 
 
 dead vassal, or by his heirs, in recognition of some higher 
 authority, and to legalise the succession. These charges are 
 very often collected by means of stamps affeed to certain docu- 
 ments the use of which is made obligatory and which are essen- 
 tial to the validity of the probate proceedings. 
 
 Another form is that of an estate tax. In this form the 
 tax is assessed and levied on the corpus of the estate of the 
 deceased, without regard to the division thereof into shares 
 for distribution among the heirs or legatees. In practice we 
 rarely find an estate tax pure and simple. It is usually modi- 
 fied to conform somewhat to the principles of the third form 
 or is combined with an inheritance tax proper, which is the third 
 form. A pure estate tax is objectionable because it is so apt to 
 cast a burden on the residuary legatee only. Thus if a man 
 leaves a definite sum to each of two children and the remainder 
 of his estate to his widow, the widow bears the whole tax. 
 This objectionable feature of the estate tax is less troublesome 
 in the cases where succession to definite pieces of land, or to 
 specified stocks or bonds, or to fixed parts of the income of an 
 estate, is involved. In the settlement of an estate, especially 
 if the estate tax is or has been anticipated, an adjustment of 
 the burden among the successors is usually provided for in ad- 
 vance. 
 
 The remaining or third form of this tax is the most common. 
 This is the inheritance tax proper. In this form the tax is 
 levied on the distributive shares separately. That is, the tax 
 is assessed upon the amount each heir or legatee would receive 
 if there were no tax. Each and every beneficiary is separately 
 and independently liable. This renders possible a classifi- 
 cation of beneficiaries for the purpose of determining the rates, 
 and of making abatements. 
 
 The Meaning of the Term Estate. — While it may seem, at 
 first glance, a petty technicality, it is, nevertheless, important 
 at this point to warn the reader against a very confusing double 
 meaning lurking in the word " estate " as used in the tax stat- 
 utes. This double meaning is so serious that it has even per- 
 plexed the courts on many occasions. There is first the estate
 
 PROPERTY TAXES 
 
 205 
 
 of the decedent, then arising therefrom come the several 
 estates of the heirs and legatees. Careful statute writers are 
 coming to confine the term estate to that of the decedent, using 
 " distributive share " to indicate an interest passing to a suc- 
 cessor. But many statutes still contain the ambiguity, and 
 unless one is very alert, and sometimes in spite of all care, one 
 is misled. In the United States federal inheritance tax law of 
 1898 the ambiguity was so serious that the Supreme Court 
 (see Knowlton v. Moore, 178 U. S. 41) gave the law a forced 
 interpretation in order to make sense at all. 
 
 It seems to be a possible legal theory that the moment before 
 a man breathes his last breath his property lies in his estate, 
 and the moment after that last breath his property is in the 
 several estates of his successors. Practically, however, so far as 
 unsupervised use and enjoyment is concerned, there is an 
 interval during which the property rests in the custody of the 
 state, or of the court. This interval is necessary for the delib- 
 erative and recordative proceedings setting up and proving the 
 new estates and the rights and titles of the successors. During 
 this interval the legal title to the property rests in the executors 
 or administrators recognised by the court. No one else can pass 
 title. Yet their control of the property is by no means free or 
 unrestricted. They must administer the property and may 
 pass title only as trustees for the heirs or legatees whose rights 
 of estate are merely in suspense as to use or sale, during an 
 interval. During this interval, presumably at its very begin- 
 ning, the estate tax, if there be one, attaches, and at its close 
 and presumably as an incident essential to its close, the inheri- 
 tance taxes attach. These simple and somewhat obvious facts 
 as to the time when the original estate ceases and the suc- 
 cessors' estates begin have a very direct bearing on the con- 
 stitutionality of the federal estate tax in the United States. 
 Unfortunately the courts have not expressed themselves clearly 
 on these important matters. 
 
 British Death Duties. — In Great Britain the old " probate 
 and account duty," a tax which may be very roughly described 
 as certain fees expanded into taxes, still appears and is credited
 
 2o6 INTRODUCTION TO PUBLIC FINANCE 
 
 with small, but from year to year diminishing, sums among 
 the budget " receipts of revenue." This duty applies only to 
 the personal property of persons who died prior to 1894, in 
 which year the whole group of these death duties or taxes was 
 thoroughly revised. These receipts of revenue are only the 
 remnants of the old law. Without going into details we may 
 explain that the " probate duty " was levied on the estates of 
 personal property in probate, while the " accounts duty " was 
 levied on gifts inter-vivos made within a year prior to death. 
 Originally, in Great Britain, a " legacy duty " was imposed on 
 bequests only and not on successions, and a similar tax is still 
 imposed on any personal property which is free of preexisting 
 settlements. (See below.) The laws of that country relating 
 to " settled estates " seem very complicated to one not to the 
 manner born. Briefly stated, successions to beneficial interests 
 in real property and sometimes in personal property are often 
 fixed, determined, or " settled " in such a manner that the holder 
 of an estate has sometimes only a limited power, or even no 
 power, of disposition and such fixed or settled succession may 
 be for many years or generations. When such a " settlement " 
 is made the amount " settled " is subject to a tax at one per 
 cent called the " settlement estate duty." But this is incident 
 to the settlement only and does not affect the main tax or chief 
 death duty. That duty, the great revenue-producing tax in 
 this group, for Great Britain, is the " estate duty " established 
 in 1894 and revised in 1907. This falls on the entire estate left 
 by a decedent. The rates are graduated according to the size 
 of the estate, and rise from thirty shillings on small estates 
 between £100 and £300 to 10 per cent on estates between 
 £750,000 and £1,000,000 with additional and higher rates 
 graduated up to 15 per cent on any excess over £1,000,000. 
 Property passing to a surviving spouse is exempt. Differ- 
 entiation as to relationship is brought about by additional 
 taxes on collateral heirs and legatees in the form of two other 
 duties. One is the legacy duty mentioned above which falls 
 on the distributive shares of personal property not " settled " 
 and the other is a successions duty on the shares received as
 
 PROPERTY TAXES 207 
 
 " settled estates " of real estate, of leasehold interests (which 
 are numerous), of annuity interests in land, and of settled 
 personalty. The rates of these collateral inheritance taxes 
 range from 3 per cent for brothers and sisters and their descend- 
 ants up to 10 per cent for very remote relatives and for strangers 
 to the blood. ^ 
 
 Finally, to cover property held by " bodies corporate or in- 
 corporate," which might, by passing without probate, escape 
 the taxes on occasion of death, there is an annual tax of 5 per 
 cent on the annual value of property so held. This tax is 
 classed with the " death duties." 
 
 The British death duties form a rough system. While the 
 estate duty is subject to the same criticism which is made be- 
 low on the estate tax of the United States, that criticism ap- 
 plies here with somewhat less force by reason : first, of the fact 
 that the estate tax is part of a system, and, second, of its deft 
 adaptation to the British system of property rights. More- 
 over, being an older tax than that of the United States, it has 
 shaken down into place and settlements are made with refer- 
 ence to it. 
 
 History of These Taxes in United States. — In the United 
 States probate fees have played an insigniiicant role as revenue. 
 They are mainly fees proper, not taxes in the guise of fees. 
 Most of the states now tax inheritances, that is, distributive 
 shares. Some of them still confine the tax to collateral heirs 
 and legatees only, although there is a pronounced trend toward 
 the inclusion of direct heirs as well. Since 1916 the federal 
 government has had an estate tax, that is, one based on the 
 entire estate left by the deceased. It has on several occasions 
 resorted to other forms of death duties which will be described 
 below. These taxes will be more easily understood if we first 
 discuss their theory. 
 
 Sec. 16. The Theory of These Taxes. — The arguments or 
 theoretical foundations on which these taxes rest seem to fall 
 into two classes: (i) non-fiscal or socio-political, and (2) fiscal. 
 
 * See Max West, Inheritance Tax, for more details. The rates given above are 
 pre-war rates. For war rates see chapter on War Finance.
 
 208 INTRODUCTION TO PUBLIC FINANCE 
 
 The main socio-political argument is to the effect that the so- 
 called right of bequest, and to a lesser extent the right of suc- 
 cession as well, is, in last analysis, merely a privilege conceded 
 by the state or by government to the individual, and is not 
 properly a right or at least not a right correlative, for example, 
 with the right to own property. The privilege, so runs the 
 thought, is granted for the purpose of stimulating thrift and 
 industry by appealing to love of kin and to the natural desire 
 to provide for those dear to one. It is in any case a revokable 
 privilege and need not be extended beyond what is deemed 
 desirable to promote those ends which society had in view in 
 granting it. Therefore, the privilege is subject to such re- 
 strictions or limitations as may be deemed wise. There is, 
 underlying this argument, an assumption that all property 
 left by a decedent would normally revert or escheat to the 
 state. If, then, the state takes part only, it is voluntarily waiv- 
 ing its right to take all. This theoretical foundation has the 
 approval of the courts. 
 
 A special socio-political argument runs to the effect that 
 large estates are socially undesirable and that the inheritance 
 tax may properly be directed to reducing such estates. The 
 argument is highly political and is capable of demagogical appli- 
 cation. 
 
 The fiscal argument falls into two parts : One is the ease 
 with which large revenues may be obtained by this tax; the 
 other is that an inheritance, while not in all cases an unex- 
 pected windfall, is evidence of a sudden accretion of ability to 
 pay a tax. Furthermore, this ability arises at a time when, 
 owing to the unavoidable circumstances attendant upon the 
 transfer of the property to the heir or legatee, the property is 
 possibly put into more liquid and freely transferable form. In 
 so far as there may be such a fluid condition the payment of 
 the tax is not likely to create a serious disturbance, or none 
 much greater than the unavoidable disturbance which death 
 brings. With a limitation, applying to cases where direct heirs 
 have had an expectation of succession, the tax may be said to 
 fall on new ability and at a time when it is convenient to pay it.
 
 PROPERTY TAXES 209 
 
 Counter Arguments. — The force of these arguments is great. 
 But there are some arguments advanced on the other side. 
 Against the socio-political argument some have asserted, dog- 
 matically, that inheritance (and even bequest) is a sacred right, 
 a necessary correlative of the right to own property. Further- 
 more, so it is argued, the tax distinctly discourages thrift and 
 accumulation and hence by curtailing the growth of capital 
 is socially destructive. It is, by some, assumed that the tax is 
 paid out of capital, and then, being spent by government as if 
 it were income, just so much capital is directly dissipated, les- 
 sening the country's capital. Whether inheritance is a right 
 or a privilege is a matter of opinion. But the force of the 
 argument as to the dissipation of capital depends mainly upon 
 the definition of capital. There may be cases where the indi- 
 vidual heir or legatee makes payment by a permanent sacri- 
 fice of capital. But in many more cases he pays by a temporary 
 sacrifice of income. Even if an individual's capital is curtailed 
 there is no equivalent diminution of the productive capital of 
 the community. If to pay the tax an heir sells a piece of land, 
 the land is still in existence as a productive agency, although 
 in other hands. Moreover, unless the funds so obtained by 
 the government are wasted, they are applied to the needs of the 
 many, and perhaps to greater social advantage than they 
 would have been if used by the individual. 
 
 Tax Evasion as Ground for Inheritance Tax. — One hears 
 in legislative halls some rather curious arguments, one of which 
 is so persistent as to be worthy of mention. That one is to 
 the effect that " probably the deceased has, during his life- 
 time, evaded or escaped some of the just taxes on his property, 
 and now that death brings to light what he possesses, the 
 government has a fine chance to get even." In an inheritance 
 tax law of one American state it was actually provided that 
 if the heirs could prove that the property they were to receive 
 had been fully taxed in past years they would be exempt from 
 the tax, otherwise they must pay. This is a poor apology for 
 an argument, for the punishment falls on the innocent heir or 
 legatee and not on the guilty dead. Moreover, a government
 
 2IO INTRODUCTION TO PUBLIC FINANCE 
 
 should be strong enough to collect its own tribute at all times. 
 Generally, however, it is the revenue so easily to be had which 
 appeals to the legislator as an all-sufficient reason for the impo- 
 sition of the tax. 
 
 Sec. 17. The Rates of These Taxes. — These taxes are 
 usually progressive. Where they fall on the distributive shares 
 they are progressive in two ways, once with the size of the share 
 or amount of property passing to a given person, and again 
 with the remoteness of the relationship of the beneficiary to 
 the deceased. Estate taxes of course can be progressive in 
 one way only. Progression based on relationship is justified 
 under both of the arguments which support these taxes. For 
 a man clearly does not cherish the privilege of bequeathing his 
 property to a stranger to the blood as highly as he does that of 
 leaving it to his wife or son. Looking at it from the point of 
 view of the heir or recipient a bequest from a distant relative, or 
 from a stranger to the blood is more of a windfall than is a 
 direct inheritance, and one feels the tax less in consequence. 
 Again, the direct heirs have already been living in many cases 
 in expectation of the estate and the accretion of ability to pay 
 is less than in the case of a collateral heir or a stranger to the 
 blood. 
 
 The forms of the rate schedules are too numerous to be 
 described here in detail. The main features only can be pre- 
 sented. The heirs or legatees fall naturally into three main 
 classes : (i) the spouse and the direct heirs, sometimes in the 
 ascending line as father, grandfather, as well as those in the 
 descending line, as son, grandson, (2) collateral heirs to all 
 degrees, and (3) strangers to the blood. Brothers and sisters, 
 however, are often placed in a preferred or favoured class of 
 collaterals to which nephews and nieces are added. Second 
 cousins also often come in a separate class. Generally the 
 more remote collaterals, that is, beyond second cousins, are 
 treated as are strangers. 
 
 The widow (or widower) is usually again preferred among 
 the direct heirs, not so much by lower rates as by a larger free 
 or exempt estate and larger deductions or abatements. Thus
 
 PROPERTY TAXES 211 
 
 the widow may receive a deduction, amounting to exemption 
 if her estate is less than the deduction, of say $25,000, while 
 the son or daughter get only a $10,000 deduction and other 
 direct heirs still less. The intricate questions of joint estates 
 and community property and the common practice of carrying 
 property in the wife's name complicate the whole problem. 
 This is a matter we cannot enter into here. The exemptions or 
 deductions granted other classes diminish as the relationship 
 to the deceased grows more distant. 
 
 The progression in the rates is most often in coarse grades. 
 There is usually a series of grades by amount for each class of 
 beneficiaries in the inheritance tax. Thus for direct heirs the 
 rates, modified in turn by the deductions, may run from i per 
 cent to 15 per cent; for brothers and sisters, nephews and 
 nieces, from 3 per cent to 25 per cent ; for uncles, aunts, and 
 cousins, from 4 per cent to 30 per cent ; and for other collaterals 
 and strangers, from 5 per cent to 30 per cent. The progression 
 within each class, that is, the progression rising with the amount 
 of property received, may be degressive in form. That is, each 
 higher rate may apply only to the excess over the amount at 
 wMch the preceding grade stopped. The exemption being 
 deducted, no matter how large the estate or share, also has the 
 effect of bringing about progression. While progression is 
 clearly justified in the case of a strict inheritance tax, it often 
 works out so badly in the case of an estate tax that its appli- 
 cability here at all is dubious. Why, for example, should the 
 heir to $10,000 from a million dollar estate bear the burden of a 
 higher rate than the heir to $10,000 from an estate of, say, $20,- 
 000? If the rate of the estate tax were proportional this 
 difficulty would disappear. The fact is that the estate tax is a 
 bungling contrivance at best and should give way to the inheri- 
 tance tax proper. This statement appHes with full force to the 
 United States. Possibly in England, owing to her peculiar 
 property laws, to the so-called settlement of estates, and the 
 hke, the estate tax is a better tax. 
 
 How heavy the estate and inheritance taxes may be made 
 is a very interesting problem. These taxes are of a kind that
 
 212 INTRODUCTION TO PUBLIC FINANCE 
 
 can always be evaded, although the evasion may cause serious 
 inconvenience. The usual form of evasion is a transfer before 
 death. The utmost ingenuity is exercised by lawmakers and 
 administrative tax officials to stop this gap. Any gifts in con- 
 templation of death are considered taxable, but not, of course, 
 until after death. But what is a gift in contemplation of death ? 
 Ingenious lawyers can cover up the transfer in a thousand dif- 
 ferent ways, some of which defy detection. It is arbitrary to 
 say that gifts within a set period, say, two years, or five years, 
 prior to death, are to be considered made in contemplation of 
 death, yet some laws do so provide. Usually, however, this 
 provision is inserted merely to shift the burden of proof from 
 the government to the beneficiaries. Moreover, there is always 
 the possibility that the tax may check accumulation. The 
 consensus of opinion seems to be that a limit of 25 per cent or 
 30 per cent reached only for large estates going to collateral 
 heirs is indicated by experience and by reason. The problem 
 is complicated by the fact that the higher rates fall on remote 
 heirs or legatees. One of the lesser purposes of the tax, which 
 is to force the subdivision of estates, is thus partly defeated. 
 For the effect of such high rates on collaterals is in a measure 
 to keep the property in the family, that is, among the direct 
 heirs who pay the lower rates. 
 
 Frequency of the Occasion. — The succession taxes are taxes 
 " on occasion," that is, of death, and there is no necessary 
 attempt at equality, that is, equality between families. In 
 some famihes death comes at frequent intervals, in others of 
 tougher fiber the life of each generation is long. In the first 
 group the " occasion " for the imposition of the tax recurs at 
 frequent intervals, in the other it comes infrequently. In the 
 first case a family estate might be rapidly depleted by recurrent 
 inheritance taxes. Some estate tax laws recognise this and for- 
 bid the reimposition of the tax more than once in say five years, 
 upon the same estate or property. 
 
 An Insurable Risk. — Where an income tax has been long 
 established and there is no prospect of its repeal, well-to-do 
 men sometimes provided for it by carrying insurance on the
 
 PROPERTY TAXES 213 
 
 life of the owner of property. It is obvious that the tax is a 
 loss, certain to occur at some time, but uncertain as to time, 
 and, among a group of property owners, uncertain as to whom 
 it will fall on first, and is, like the death which occasions it, 
 a properly insurable risk. Should the policy be written to 
 insure against any inheritance tax whatever, be it large or 
 smaU, naturally the premiums would have to be larger than life 
 insurance premiums, for a sum definite. For economy the 
 insured must himself carry the risk of increased rates of tax. 
 Where family pride requires that the family estate shall pass 
 unimpaired and the owner regards himself as only a sort of 
 life tenant he may feel in duty bound to sacrifice from his own 
 income during hfe enough to pay the premiums on a life insur- 
 ance policy large enough to cover the tax. Possibly this ex- 
 plains why the practice of insuring against the inheritance tax 
 is prevalent in England. There is, moreover, a marked prac- 
 tical advantage in having a sum available in cash immediately 
 after death to pay the tax with. 
 
 In the United States, although insurance companies use the 
 inheritance tax or the estate tax as "a talking point " in selling 
 insurance, the above described practice has not taken deep root. 
 This may be in part due to the absence of " settled estates," 
 and to the uncertainty as to how much one's fortune, and 
 hence the tax, may amount to. These two obvious considera- 
 tions call attention at once to the fundamental fact that there 
 is always a better set of determinants as to whether one 
 should carry life insurance or not than this tax. These de- 
 terminants may indicate insurance, tax or no tax. By itself 
 the tax is an insufiicient reason for insurance as most well- 
 to-do men can increase their fortunes faster than by insurance 
 saving. 
 
 In passing it is well to note that insurance carried by a dece- 
 dent and payable to a named beneficiary is not normally sub- 
 ject to an estate tax nor to an inheritance tax unless the law so 
 specifies. In some cases the law does so specify as to large 
 amounts of insurance. The federal estate tax law so specifies. 
 Presumably, too, the use of any considerable part of one's
 
 214 INTRODUCTION TO PUBLIC FINANCE 
 
 estate to buy insurance for specified beneficiaries would con- 
 stitute a transfer in contemplation of death. 
 
 Sec. i8. United States Federal Inheritance Taxes. — The 
 federal government in the United States has resorted to in- 
 heritance taxes on several occasions. It has used the tax three 
 times as a war tax.^ From 1789 to 1802 there was a stamp tax 
 on inventories, receipts of legacies, and on probates of wills and 
 letters of administration. From 1862 to 1870 there was a 
 " legacy tax " and a " successions tax " together with stamp 
 taxes on probate documents. The legacy tax was on shares of 
 personal property and was graduated according to kinship. 
 The later (1864) succession tax covered real estate. In 1898 an 
 inheritance tax was imposed which lasted until 1902. It was 
 graduated both as to kinship and amount.- Finally, we have 
 since 191 6 a federal estate tax. 
 
 The present federal estate tax is strictly an estate tax levied 
 on the entire " net estate of the decedent " and has no regard 
 for the distributive shares. Gifts inter-vivos or transfers made 
 within two years of death are taxable as presumptively made in 
 contemplation of death. Estates of residents enjoy an exemp- 
 tion of $50,000, but property within the United States left by 
 non-residents is taxable in full. The rates are graduated from 
 I per cent on the first $50,000 over the exemption to 25 per 
 cent on the excess over $10,000,000. Any items of property 
 once subjected to the estate tax are not again taxable there- 
 under within five years. A gravely unjust feature of the law 
 is the thrusting of the burden upon the residuary legatee, if 
 there be one, who ultimately bears the whole tax. 
 
 Conflict between Federal and State Taxes. — There is serious 
 conflict between this tax and the state inheritance taxes. The con- 
 flict is not merely in the invasion of a field already fairly well 
 occupied by the states, but directly in the application of the law. 
 The federal tax is computed on the entire estate of the deceased 
 
 ' For details see West, Inheritance Tax, pp. 87 £f. 
 
 2 The difficulty over the term "estate" commented on above arose in the case 
 of this law. At first it was interpreted administratively as meaning that the tax 
 was to be computed on the estate of the decedent. But the Supreme Court finally 
 ruled (Knowlton vs. Moore, 178 U. S. 41) that it was strictly on the shares.
 
 PROPERTY TAXES 21 5 
 
 and does not take into consideration the tax to be le\ded on 
 the shares. Neither do the state tax inheritance laws, for 
 the most part, allow for deduction of the federal tax, each 
 share being taxed in full as left by the deceased or as it would 
 have been without the federal tax. This ruling is, however, 
 being modified and probably will have to give way. If it does, 
 it still more clearly shows the encroachment of the federal law 
 upon the revenues of the state. 
 
 Constitutionality of Federal Tax. — There is doubt as to the 
 constitutionaHty of this tax. Under the Constitution all law 
 relating to property rights and in regard to the devolution of 
 property is state law. Congress may not deprive the states 
 of the power to establish the right of succession and of bequest, 
 nor can it limit or abridge those powers. The power to tax is 
 the power to destroy. If by taxation Congress takes away part 
 or all of the value of property left by a decedent it takes the ker- 
 nel of the state's right and leaves the shell only. When the 
 inheritance tax of 1898 was before the courts it was first decided 
 that the tax was upon the distributive shares, and was a " burden 
 cast upon the recipient and not upon the power of the state to 
 regulate." The whole argument implies that a tax imposed 
 on the net estate of the decedent and thus directly impinging 
 on the determination of the devolution would be invalid as 
 limiting the power of the state in its own proper field. There 
 is a distinct difference between this estate tax and one on the 
 transfer or right to receive property after the state, by exercise 
 of its powers, has established the right. If, as may be con- 
 tended, the estate of a deceased person passes first to the state 
 and remains for a time in custody of the state, the federal tax 
 is a direct attack on the state itself. If, on the other hand, the 
 estate of the deceased is, on the very instant of death, broken 
 up into the several estates of the heirs and legatees, it breaks 
 up only by virtue of and in accordance with the laws of the 
 state, which are nullified or vitally amended by the interposi- 
 tion of the federal tax and the seizure by the federal government 
 of part of the estate precedent to the distribution. The argu- 
 ment in Knowlton vs. Moore (178 U. S. 41) rests wholly on the
 
 2l6 INTRODUCTION TO PUBLIC FINANCE 
 
 fact that having decided first that the tax before the court fell 
 on the distributive shares the court could then claim that the 
 state had finished the exercise of its reserved powers and there 
 was no barrier for Congress to step in and tax. But the matter 
 is wholly different where the tax is on the estate, before dis- 
 tribution or while in the custody of the state. Probably the 
 courts will be called upon to pass upon this point. 
 
 The commonwealth inheritance taxes in the United States 
 need no special description. They are strictly upon the dis- 
 tributive shares and sufficiently covered by the general de- 
 scription above. 
 
 Conflict of Tax Laws. — But there is one point of importance 
 and that is double taxation or taxation of the same property 
 by two states. The states generally claim the right to tax all 
 the property passing under their jurisdiction. After much 
 litigation and by gradual concessions they now for the most 
 part consider real estate as taxable only where it lies, and not 
 at the residence of the deceased if that be in another state. 
 But as to personal property there is no agreement. Almost all 
 the states insist (i) that personal property takes its situs at 
 the residence of the owner deceased, and yet (2) that any 
 personal property like stocks and bonds found within a state's 
 confines is taxable there. The inconsistency does not prevent 
 one state from asserting both principles. Thus in the case of 
 one decedent resident in the state his shares of stock in a cor- 
 poration outside the state are taxed as part of the estate pass- 
 ing within the state, while in the case of another decedent, 
 non-resident, shares of stock in a corporation within the state 
 are taxable. So the same shares may be taxed in two different 
 states. A working basis might be reached, as one has been 
 for real estate, but for the very practical reason that so many 
 rich men live in the great financial centres. New York, for 
 example, does not like to contemplate surrendering the taxes 
 on all the property of her rich residents, including their invest- 
 ments in other states. The other states are equally loath to 
 lose the taxes on shares of stock and the like, representing 
 property within their bounds. ^ Probably the best principle is
 
 PROPERTY TAXES 21 7 
 
 the personal or residence one. Yet for the property tax the 
 reverse rule is adopted. 
 
 This practical difficulty has given occasion for the suggestion 
 that since the geographical boundaries of the states are for 
 property and taxation somewhat artificial, the administration 
 and collection of the inheritance tax should be transferred to 
 the federal government, the proceeds to be distributed on some 
 agreed basis, such as population, property, or needs in some one 
 line as schools. Obviously this means a uniform system 
 throughout the country. 
 
 Sec. 19. Administration. — There are a few other features 
 of the inheritance taxes which may be briefly mentioned. 
 These taxes are strictly taxes " on occasion," and the occasion 
 is beyond administrative control. The yield is irregular and 
 cannot be entered in a budget preestimate save by guess. 
 
 Owing to the necessity for legal sanction for the passing of 
 property, the administration of the tax is largely bound up 
 with the courts, and becomes a part of probate procedure. 
 But the probate judges are not ordinarily versed in taxation. 
 For protection of the revenues the tax administrative authori- 
 ties have to enter in and especially to take part in the fixing of 
 valuations. A valuation sufficiently accurate to satisfy the 
 court that each heir or legatee receives his due share is often 
 woefully inadequate to protect the revenue of the government. 
 A probate court is not necessarily concerned at all with the 
 value of the property which passes to the residuary legatee. 
 But the tax administration is. Hence inheritance tax ap- 
 praisers are required, working under the supervision of the 
 regular tax department. 
 
 It will serve to clarify the description above if we give a 
 concrete example. The following tables give the California 
 classes and rates and an illustration of their application. 
 
 The following example will indicate the proper method of 
 computing the tax, under the above schedule of rates.
 
 2l8 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
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 PROPERTY TAXES 
 
 219 
 
 EXAMPLE 
 
 Name and 
 Relationship 
 
 Inheritance or 
 Transfer 
 
 Computation 
 
 Tax 
 
 Ann Smith, widow 
 
 $1,074,000.00 
 
 $24,000 exempt 
 
 1,000 at 1% 
 
 25,000 at 2% 
 
 50,000 at 4% 
 
 100,000 at 7% 
 
 300,000 at 10% 
 
 500,000 at 12% 
 
 $ 10 
 
 500 
 
 2,000 
 
 7,000 
 
 30,000 
 
 60,000 
 
 
 
 30,000.00 
 
 74,000 at 15% 
 
 11,100 
 
 
 Henry Smith, adult 
 
 $110 
 
 ,610.00 
 
 son 
 
 10,500.00 
 8,000.00 
 
 $10,000 exempt 
 
 15,000 at 1% 
 
 5,000 at 2% 
 
 $2,000 exempt 
 8,500 at 3% 
 
 $150 
 100 
 
 
 Janet Smith, sister 
 William Smith, uncle 
 
 
 250.00 
 255-00 
 
 Ernest Harmon, 
 
 2,500.00 
 
 $1,000 exempt 
 7,000 at 4% 
 
 
 280.00 
 
 stranger 
 
 
 $ 500 exempt 
 2,000 at 5% 
 Total tax 
 
 
 1 00.00 
 
 Value of estate 
 
 $1,125,000.00 
 
 $111 
 
 ,495.00
 
 CHAPTER IX 
 
 PERSONAL TAXES: THE POLL TAX AND THE 
 INCOME TAX 
 
 Section i. Poll or Capitation Taxes. — The simplest form 
 of personal taxation is the collection of an equal contribution 
 from each subject by a poll or capitation tax. Such a tax can- 
 not be large, because if it were it would impose a burden beyond 
 the ability of the poor to carry. A poll tax by itself can rarely 
 be made to yield sufficient revenue for the support of the govern- 
 ment. A uniform per capita tax standing alone is not just 
 unless all wealth is equally distributed, and only in very 
 primitive communities is such equality of wealth found. 
 Hence it is that the poll tax now possesses little more than an 
 historical interest. 
 
 In the United States the poll tax has been extensively used 
 in the past. It is now being slowly but steadily abandoned. 
 Only ten years ago it was found in some form in nearly every 
 state in the Union. To-day, 1920, its use is actually pro- 
 hibited by constitutional law in some states. It began as a 
 distinct commutation for personal services which were originally 
 required of the citizen, such as work on the roads, service in 
 the militia, or special services for schools. 
 
 Its use as a road tax is interestingly illustrative of the thought 
 underlying its adoption. In the beginning work on the roads 
 was considered to be a duty in which every one should share. 
 So every able-bodied man was expected to turn out with pick 
 and shovel, or to bring his team, and to work. But of course 
 there were some who wanted to be excused, or whose soft hands 
 or weak backs were not effective. These were allowed to pay 
 for substitutes. If on the average it took, say, two days' work 
 
 220
 
 PERSONAL TAXES: POLL AND INCOME TAXES 221 
 
 by each able-bodied man in the community each year to keep 
 up the roads, then two days' pay of common labor would be 
 equivalent in money, as commutation of work. In some such 
 way were the rates fixed. As time passed better roads were 
 needed, and work on the roads like every other kind of work 
 became specialized. The roads required continuous care. 
 Working on the roads ceased to be demanded as a common 
 duty. Meanwhile some citizens had grown wealthy and it 
 seemed fair that they should pay more than others. So while 
 the old tax remained, the large new costs were met from the 
 general taxes. 
 
 Again, in the days when the " school marm boarded round " 
 first with one family, then with another, it seemed quite natural 
 to collect a poll tax to raise money for her meagre cash salary. 
 This tax was aimed primarily at those who did not contribute 
 in other ways as by board to keeping the schools going. Hence 
 the school poll tax. When, again, voluntary servdce in the 
 militia was the " proper thing," it seemed quite natural to say 
 to those who stayed at home and would not drill, You shall 
 pay something in commutation of this public service. Then 
 we had the military poll tax. 
 
 But the commutation idea was not the sole origin of the poll 
 tax. Quite frequently the poll tax was aimed broadly at those 
 who having no taxable property " ought to pay something 
 an^-way." So it became in the end a widely accepted doctrine 
 in democratic communities that every one should pay a uniform 
 poll tax to start with and more if some other test showed he 
 could do so. On some such theory also rested the poll taxes 
 directed specifically at certain classes of aliens. 
 
 Still another type of poll tax had its origin in a sort of fee. 
 This may be illustrated by the typical instance of the California 
 hospital poll tax. During the gold rush many men arrived 
 in San Francisco ill with diseases contracted during the long 
 voyage. A hospital was needed. What more natural than to 
 charge every passenger a hospital fee or poll tax? To insure 
 collection the steamship had to pay it, but it was, of course, 
 collected by the steamer as part of the fare. But sick men with
 
 222 INTRODUCTION TO PUBLIC FINANCE 
 
 no friends to care for them turned up in every county and soon 
 there was a " hospital poll tax " collected in every county 
 annually to support the county hospital, which for a time 
 served as poorhouse as well. In this class we might include 
 the voter's registration fee or poll tax. Yet this is possibly 
 better explained as the converse of the slogan " no taxation 
 without representation," that is, " no representation without 
 taxation," a dogma not so popular as it once was. 
 
 The poll tax was usually levied on adult males in the prime of 
 life ; that is, on males between twenty or twenty-one years 
 of age and not over forty-five or sixty years. Wives and de- 
 pendents were excluded. This selection is largely due to the 
 commutation idea. In some of the older commonwealths, 
 dating from colonial times, the poll tax was made more uni- 
 versal and was combined with the property tax. Thus every 
 taxable person was rated for his poll as though it were prop- 
 erty at a sum which multiplied by the tax rate on property 
 would result in a uniform poll tax. When so used it would 
 normally reach women who had independent property as well 
 as males, but was not other\vise applied to women. 
 
 In many countries the poll tax evolved into a tax which took 
 cognizance of differing ability to pay. One such tax changed 
 from a simple poll tax to one in which the rates differed for dif- 
 ferent social classes, the nobles of different ranks, the clergy, 
 the bourgeoisie, the artisans, and the peasants ; then, later, 
 it was made to vary also with real differences in income. Finally 
 it became an income tax. This is the accepted history of the 
 Prussian income tax. But in the United States the poll tax 
 did not evolve at all. Rather, it stagnated and decayed. To 
 change the figure of speech, the poll tax, where it survives to-day, 
 stands as a decaying monument set up in the past ; and like the 
 gravestones in old cemeteries these remaining poll taxes are 
 moss-grown and leaning, passing memorials to dead democratic 
 institutions of the past. 
 
 Inequality of Poll Taxes. — Practically the returns of the poll 
 tax are insignificant. The expense of collection is relatively 
 large. Its administration encounters friction and causes opposi-
 
 PERSONAL TAXES: POLL AND INCOME TAXES 22$ 
 
 tion. Popular thought, not realising that justice and equality 
 in taxation can be tested only by the whole complex of taxes, 
 seizes on the inequality which might be a good ground for objec- 
 tion if the tax stood alone, and holds it to be unjust. It is 
 being repealed just as fast as the revenues it yields can be spared. 
 Too often the repeal is not accompanied by any new taxes 
 reaching the same sort of ability. 
 
 Sec. 2. Personal Income Tax. — The most advanced form 
 of personal taxation is a personal income tax. Most income 
 taxes are personal in intent. Yet it is possible to frame an in- 
 come tax which is non-personal in effect, a tax on income with- 
 out special reference to its recipient. 
 
 When, however, the " great merits " or the " justice and 
 equality " of an income tax are extolled it is generally a personal 
 income tax that is meant. A tax on income " from property," 
 on income in process of payment, on income where you can catch 
 it without bothering the income recipient, might be regarded 
 as a complex of taxes rather than as an income tax proper. 
 
 The taxation of income is old. It antedates the Christian era 
 in many countries. How old it is we do not know. There 
 are records of it in the history of India and we find the funda- 
 mental concept of income taxation recorded in many places in 
 the Bible. ^ The Jewish tithe was a simple and very natural 
 form of the income tax.^ 
 
 In primitive communities the concept of income was simple. 
 It included the yield of the fields and the increase in flocks 
 and herds. The intricate concept of net income did not, in 
 those days, arise to plague taxpayers and tax-collectors. All 
 there was to do was to measure the grain on the threshing floor 
 and count the lambs, calves, or colts. No certified public 
 accountant or expert government inspector was needed. 
 
 1 See citation from Laws of Manu, p. 4. Deuteronomy 18:4;^ 26:12. In 
 Deuteronomy 26 : 5-1 1 we fmd the ancient form of taxpayer's oath, which sounds as 
 though it might be more efifective than the modern one taken before a notary. See 
 also Lev. 28:32. 
 
 2 The ancient taxes were originally pure income taxes in underlying concept. 
 But they were attached to income from land, which was in early days the sole or 
 the most conspicuous form of income. When other taxes arose the old tax on the 
 produce of the soil and on Qocks and herds was gradually transformed into a land lax.
 
 224 INTRODUCTION TO PUBLIC FINANCE 
 
 Modern Concept of Income Intricate. — In modern times, 
 despite the fact that most people think about income as a very- 
 simple thing, the concept is really one of the most intricate in 
 the whole field of business and of economics. The ancient 
 farmer regarded the grain on the threshing floor as all income. 
 The modern farmer has to find out first what he can sell his grain 
 for in money. Then he finds out the money cost of seed, fertil- 
 iser, labour, tools, machinery, depreciation of barns, and many 
 other expenses. Taking the latter from the former he has net 
 profit or income. The books of accounts of a great corporation 
 contain thousands of entries ; the proper placing of each one 
 as outgo or receipt is a matter of nice judgment and often pre- 
 sents problems which only experts are supposed to be competent 
 to solve. Tax laws and especially the tax regulations contain 
 lengthy and intricate rules for determining income. Income 
 for purposes of taxation is, as we shall see, more or less ar- 
 bitrarily defined and measured. It has to be so defined for 
 clearness and accuracy, and in some items is arbitrarily de- 
 fined to reach or attain some ideal of uniformity or to stand- 
 ardise practice. 
 
 For purposes of taxation we deal solely with private income, 
 whether individual or corporate. This is because our main 
 purpose is to make comparisons of one person with another 
 as to ability to pay taxes. Society's income, national income 
 as a whole, is quite a different concept. The net increment of 
 community wealth is quite a different thing from the sum total 
 of all individual or private incomes. For taxation purposes 
 what we try to ascertain is my income, your income, and every 
 other taxpayer's income. 
 
 Tentative Definition. — We may tentatively define income as 
 receipts during a given period of time. But a full definition 
 requires a definition of these terms. The above definition is 
 given only as something to build upon. 
 
 Receipts. — Theoretically the receipts may be in goods, in 
 services, in enjoyments, or they may be in money. Practically, 
 and especially for purposes of taxation, goods, services, and en- 
 joyments per se, unless they.are of a kind customarily valued in
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 225 
 
 money, are not considered as income. Thus the goods and 
 services that the housewife creates and renders, in cooking and 
 housekeeping, or the mother, in the care of the children, are not 
 accounted income, despite the obvious fact that they add to the 
 family well-being and save outgo. But the enjoyments and 
 benefits one receives from living in one's own house are in some 
 countries considered income at a valuation equivalent to the 
 rental one would receive if he leased the house to another. One 
 cannot forecast, but it seems possible that if it should become 
 customary to pay the wife and mother for her services in cook- 
 ing, housekeeping, and nursing these items might sometime 
 come to be thought of as income, even when not paid for. Total 
 taxable income may increase without any increase in well- 
 being. Farm produce of the kind ordinarily sold according 
 to the custom of the locality is often considered income even 
 when not so sold, but used or consumed by the farmer and his 
 family. Yet fish caught by the farmer in the brook down in 
 the meadow, game, flowers from the farm garden, and sleigh- 
 rides behind the farm horses in winter are never counted as 
 income. The money test is quite arbitrary and the results 
 are ofttimes very whimsical. The story of the impoverished 
 villagers who got rich by taking in each other's washing is very 
 much in point. Their books of accounts might show incomes, 
 offset, of course, by equal expenses. But the expenses being 
 personal spending would not be deductible for income tax pur- 
 poses and so although just as poor as before the villagers might 
 be taxed on their income. To avoid income tax each family 
 in the village of the story would have to do its own not its 
 neighbour's washing. Yet we may say that under an income 
 tax law the receipts that are taxable income are receipts in money 
 or in moneys worth. 
 
 More definite and distinctly characteristic is the fact that 
 in stating income some lapse of time, as a day, a week, a year, 
 must he named. No other form of statement is possible. " Dur- 
 ing a period of time " is absolutely essential to the idea of in- 
 come. Ordinarily the period of time used is a year, so that 
 unless it is otherwise specified we mean annual receipts in all
 
 226 INTRODUCTION TO PUBLIC FINANCE 
 
 that follows. The importance of the time element cannot be 
 overstated.^ 
 
 Transfers of Capital are Not Income. — Care was taken in the 
 first tentative definition not to say all receipts during a given 
 period of time. That was done, not merely to exclude the kinds 
 of goods, services, and enjoyments not ordinarily valued in 
 money but also to exclude from an individual's income transfers 
 to him of capital or property. 
 
 Capital and Income Distinguished. — In business, in account- 
 ing, and by economists capital is ever set over and against income 
 and income distinguished from capital. The same distinction 
 rules in taxation. The chief difference between a property tax 
 and an income tax is that the base of the property tax is capital 
 value, the base of the income tax is income value. The distinc- 
 tion is very vital to an understanding of the income tax. 
 
 What is the fundamental concept of capital has been the 
 subject of voluminous discussions.^ For our present purpose 
 we are fortunate in being able to narrow our study to one phase 
 only of this discussion. That phase identifies capital with 
 property. With capital regarded as the means of production, 
 that is, as consisting of all these things interposed between the 
 bare hand and the satisfaction of a want, we are not directly 
 concerned. Nor have we to decide whether we shall include 
 consumer's goods in capital. Taxation falls in the field of dis- 
 tribution ; that is, all taxes in last analysis are taken from the 
 shares of the product, wages, interest, rent, and, if you are 
 pleased to distinguish a fourth category, profits. Again, it is 
 important to note that we are concerned only with the value 
 of capital, a concept determined in the field of exchange. There 
 is a difference between land and property rights to land. Im- 
 proved land may be productive capital, its ownership is private 
 capital or property, its vahie is taxable capital or property value. 
 
 1 Failure to specify any time element in the legal definition of income in the tax 
 law of the United States, which law says simply "income," is a logical weakness that 
 has led to serious controversy. It has become apparent that it is not sufficient to 
 leave the essential element — time — unspecified, see below. 
 
 2 The whole subject is interestingly discussed by Professor Irving Fisher in The 
 Nature of Capital and Income.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 227 
 
 We are not, in taxation, so much concerned with how the loaf 
 came to be, whence came the flour or how the baking was done, 
 but far more with who get the slices when it is cut. We as- 
 sume that a man's ability to pay is based upon the value of his 
 property and the amount of his earnings and both are of course 
 measured by exchange value. In taxation we deal only with 
 values or measured wealth, and solely with private wealth. 
 When we consider the taxation of a railway we are not looking 
 upon it as a great complicated tool, or complex of machinery, 
 but as property. We inquire who owns it and what ability to 
 pay taxes that ownership represents, not how it carries goods or 
 enhances social well-being. 
 
 In taxation, moreover, we are dealing with persons and their 
 property or their income. The more personal a tax is the more 
 the emphasis falls on the ownership and value of wealth, that 
 is, on income or property and its value. The ownership of a 
 piece of fertile land which yields an income and makes a man 
 " rich" is the index of ability to pay taxes. What causes the 
 fertility or how that fertility is brought to fruition by labour 
 are important questions, but beyond the immediate issue. 
 
 For present purposes it seems best to regard capital or property 
 value as derived from income. Capital may be the source of in- 
 come, hut its ownership is significant only as the right to receive 
 income and its value is fixed by the income. 
 
 An assured income, not dependent solely on the labour of its 
 recipient (which, of course, is not absolutely " assured "), 
 usually has a property or capital value. Conversely, with cer- 
 tain partial exceptions or modifications, all property values are 
 the capitalized values of assured series of annual receipts. The 
 series may be long or it may be short, regular or irregular. This 
 condensed statement is of the first importance and requires 
 careful study and some amplification. 
 
 Income is a Series of Receipts. — Professor Fisher has pic- 
 turesquely described income " as a flow through a period of 
 time and not, like capital, as a fund at an instant of lime." 
 The metaphor is excellent for bringing out the contrast. But 
 unfortunately we cannot mentally handle, nor in language
 
 228 INTRODUCTION TO PUBLIC FINANCE 
 
 other than figurative describe, a flow without stopping it or 
 dividing it into a series, as it were, of drops. Pay day comes 
 but once a week, or month. Wages do not flow, they come in 
 drops. The only way in which we can become conscious of the 
 passage of time is to note the sunrise and sunset, or to count 
 the ticks of the clock, or by reference to some other series of 
 events. Obviously this mentally divides or stops the flow. 
 Sometimes income is likened to the flow of a stream of water. 
 When, however, we wish to measure the flow of a stream we 
 have to stop it, or to divide the stream mentally if not physically 
 into measurable parts. Thus the miner or the irrigationist 
 measures water by the miner's inch, a cubic quantity accumu- 
 lated at the end of a space of time. So too the actuary, who 
 in problems of insurance is busied in computing the amount of 
 capital corresponding to a given income, or the income corre- 
 sponding to a given amount of capital, never deals with a con- 
 tinuous flow, but always with a series of incoming or outgoing 
 payments each at a given point of time. If we know the amount 
 and date of each of a series of receipts, we can compute the 
 present or capital value thereof ; and conversely if we know the 
 present or capital value, we can compute the series of receipts 
 which justifies it. This we can do whether the series is regular 
 or irregular, immediate or future, long or short. Capital and 
 income are then two connected ideas. There can be no such 
 thing as capital without income, present or future, in goods or 
 services if not in money. In this case the two terms describe 
 each a difi'erent side of the same shield. But curiously enough 
 there can be income without capital. The wages of labour are 
 income but have no capital value. 
 
 Receipts in Uses and in Money. — We have to recognise dif- 
 ferent kinds of capital or property whose value arises from dif- 
 ferent kinds of receipts, (i) Some kinds of property, like tools, 
 furniture, books, pictures, clothing, and utensils yield from time 
 to time, when used directly by their owners, a series of satis- 
 factions or advantages which we may caU revenue or income by 
 use. Property of this kind has a selling or present value be- 
 cause of the uses to which it may be put, the series of satisfac-
 
 PERSONM. TAXES: POLL AND INCOME TAXES 229 
 
 tions or helps which it affords. The owner may, however, lend 
 the property to others for a series of receipts in money. This 
 carries the property into class (2) below. The money then meas- 
 ures, roughly it may be, the value of the uses or enjoyments 
 afforded. The measurement is often rough, because deprecia- 
 tion, replacement cost, sentimental considerations, or the inertia 
 of the owner and the imperfections of the loan market for such 
 things as these prevent arrival at a sure and certain value. The 
 main point just here is that such property has a value dependent 
 on use whether rented or not. (2) Other kinds of property, 
 including rights in or to the property of others, when lasting or 
 durable in character, yielding definite returns according to use 
 or by contract, like land, or real estate generally, mortgages, 
 bonds, and sometimes stocks, have a present or capital value 
 which can be definitely ascertained from the yield or receipts 
 owned. The connection here between the capital and the in- 
 come is so definite in many cases that the one can be accurately 
 computed from the other, and contracts based on the computa- 
 tion can be made and enforced. UnHke the first case we have 
 here a case in which the money equivalents of capital to in- 
 come and income to capital are sometimes very definite. There 
 is nothing more definite and certain in the whole field of economic 
 measurements than the relation between the value of a govern- 
 ment bond and the interest it pays. The value depends on the 
 interest. 
 
 There is a third class of receipts to which we shall come in 
 the discussion below, which have no corresponding capital 
 value and which are always and strictly income, and nothing 
 but income. 
 
 Use Receipts Not Taxable. — Receipts through use or satis- 
 faction from use, not by lending and not commonly measured 
 in money, connected with property of the sort discussed under 
 (i) above are not considered income for income tax purposes, 
 except rarely when the property in question is of such a char- 
 acter that the use values can by analogy to rental or money 
 values be readily determined. But income in money received 
 by the owner of such property, as for example when it is rented,
 
 230 INTRODUCTION TO PUBLIC FINANCE 
 
 is always included. This distinction corresponds to the common 
 concept of income. Thus, no income tax law requires the 
 owner of a fine painting to list as part of his taxable income 
 the satisfaction he gets from looking at it or from proudly 
 displaying it to admiring friends. There is no practical way 
 of measuring such satisfaction. But every income tax law 
 does require the furniture dealer who rents out furniture, 
 pianos, or paintings, to pay a tax on the money income he 
 receives. It should be observed, however, that property whose 
 value depends on use income solely may be taxed as property, 
 despite the fact that only with great difiiculty can it be taxed 
 through its income. Thus my arm-chair by the fireplace may 
 be taxed as property, but I cannot well be expected to list as 
 income the joy of sitting in it. 
 
 Income connected with property of the sort described under 
 (2) above is almost always taxable income under an income tax. 
 Sometimes there is a difficulty in deciding whether the re- 
 ceipts and the property should be classed under (i) or under 
 (2). Thus when an owner occupies and uses his own home, 
 the income in use may be taxable at a value per annum deter- 
 mined by analogy to homes that are' rented. In countries 
 where the home is generally rented the exceptional owner who 
 occupies his own home would consider its rental value as a 
 part of his income and it would be natural for the income tax 
 law to do the same. But in other countries where the reverse 
 is the case it is more natural to class the home as use property, 
 not as income property, then it is taxed as property, not as 
 income. 
 
 Capital and Income are Intimately Related. — It is important 
 to bear in mind that property value, or capital, and income 
 value are, so far as the cases under (2) are concerned, two inti- 
 mately related things. While the writer holds the view ex- 
 plained above that the income value is the cause or source of 
 the capital value, it is not necessary to establish that point. 
 The two may be regarded as simply two different ways of look- 
 ing at the same thing, or as suggested, two sides as it were of 
 the shield. Thus we may say, as is the custom in America,
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 23 1 
 
 that a given building is worth $100,000, meaning that it should 
 sell for that ; or we may say, as is quite common in England, 
 that the same building is worth $5000 (or £1000) per annum. 
 The two statements describe the same facts. The British 
 property and income tax law specilles the " annual value " 
 of land as taxable ; the British increment value duty falls on 
 the capital value of land. 
 
 The prevailing market rate of interest, with due allowance 
 for risk, depreciation, and other factors, is commonly used in 
 measuring the relation between capital values and income 
 values, under (2). Thus the bonds of a strong and solvent 
 government in times of peace may sell on " a three per cent 
 basis." Thirty dollars a year in perpetuity is thereby estab- 
 lished as the equivalent of $1000 payable now. 
 
 Capital so considered is not necessarily regarded as a stock. 
 It is a fund in the sense that it is the present value of an income, 
 or an expected series of future receipts. That my capital may 
 at any given moment contain, in addition to those kinds of 
 property, which are the right to receive incomes, some cash or 
 liquid items, not tied to income, does not require a different 
 analysis ; for the value of a cash item depends on the prospect 
 of investment, that is, of the purchase of income, which it holds 
 in itself. Capital so considered is not like the waters of a 
 stream accumulated in a reservoir into which it flows. It is 
 rather a comprehensive aspect of the stream itself. 
 
 Future Income Has a Present Capital Value. — This brings 
 us to the last point that we need to consider in connection 
 with capital of class (2). That is, that the income, or a series 
 of payments, is not necessarily derivable in the immediate 
 future. It is the expected future income no matter how re- 
 mote that gives value to a vacant, unused lot of land. The 
 income may not begin for twenty years or more, but unless it 
 is expected to begin sometime and to continue for a while it 
 would be folly to buy the land. Since the income tax can 
 deal only with the income measurable, that is, income already 
 received, such a tax is not applicable when the income is remote 
 and therefore somewhat uncertain. The only available basis
 
 232 INTRODUCTION TO PUBLIC FINANCE 
 
 of taxation in such a case is the property value. It is doubt- 
 less because, in the United States, there is so much property 
 having a present value dependent on incomes expected to arise 
 only after many years, so much property without present 
 income, that the property tax is, in this country, so strongly 
 entrenched. 
 
 It should now be clear that so far as property and income of 
 group (2) is concerned the tax may be placed either (a) on the 
 property value or (b) on the income, if the property be now 
 income bearing, and that substantially the same effect may be 
 reached by one method as by the other. A new permanent 
 tax on income will diminish the corresponding property value, 
 and a new permanent tax on the property, by diminishing the 
 income, will likewise diminish the property value. Without 
 going into refinements it may be said that if interest stands 
 at 5 per cent a tax on property at i per cent is roughly the 
 equivalent of a tax on income at 20 per cent. But this of 
 course applies only in class (2).^ 
 
 Incomes Which Have No Corresponding Property Value. — 
 So far we have considered only two kinds of receipts, one in 
 uses, satisfactions, or enjoyments which are not taxable in- 
 come, the other owned or contractual and classed as income. 
 But there are other receipts which are always counted as income 
 and which, in a sense, are the simplest and most common kinds 
 of income. These are the earnings of personal exertion, such 
 as wages, salaries, fees, and the profits of trading. The striking 
 thing about these is that there is no way to tax them directly 
 save as income. There is no corresponding capital or property 
 value. It is not necessary to discuss the refinements some- 
 times entered into as to whether this sort of income may be 
 considered as related to human capital of brain or of brawn, 
 that is, to accumulated knowledge, developed skill, or strength 
 and acquired cunning. The simple fact is that where personal 
 liberty prevails we never in the business world capitalise a 
 wage or a salary nor the earnings of vocations of any sort. 
 
 1 Further consideration of this interesting point will be found under Incidence, 
 Chapter X.
 
 PERSONAL T.\XES: POLL AND INCOME TAXES 233 
 
 The Two Kinds of Income : Funded and Unfunded. — From 
 the point of view of taxation, then, there are two main kinds of 
 income, (i) income to which there is a corresponding capital 
 value, and (2) income from exertion. These are properly 
 distinguished as funded and unfunded, but are more often 
 sentimentally called earned and unearned incomes. Almost 
 instinctively the legislator recognises a difference between 
 these two and accords to each a different treatment. Usually 
 earned incomes are treated more tenderly than are the un- 
 earned and are taxed more lightly. It has just been said that 
 this distinction is accorded almost instinctively. It is rare 
 that one hears any discussion in legislative halls of the reasons 
 for making the distinction. It seems to be assumed without 
 argument that it should be so. Thus Gladstone called funded 
 or unearned incomes " lazy incomes " and by that phrase car- 
 ried through Parliament a measure imposing heavier taxes on 
 them than on earned incomes. Yet when it is remembered 
 that the funded income may be the result of years of toil and 
 privation spent to accumulate something to live on in old age, 
 the reflection cast by the term " lazy incomes " seems ill- 
 deserved in some cases. Many funded incomes may have 
 been earned by hard and deserving labour. 
 
 While income earned by the sweat of one's brow does seem a 
 thing more dear than income which comes in periodically with- 
 out present effort, there are better reasons than this sentimental 
 one for a different treatment of the two for taxation purposes. 
 One reason is that by tradition, and perhaps in its very nature, 
 the state is a partner in the ownership of all property. It has 
 been called a silent partner, but the state's existence is so 
 essential to the existence of property and to its security, that 
 the partnership is very real. The right of property and the 
 validity of contracts are subject to such restrictions, benefi- 
 cial to the owners in the aggregate, as the state may in its 
 wisdom impose. Taxation of property, or of income that has 
 a capital or property value, is one way the state has of assert- 
 ing its community or property-partnership interest. Another 
 reason is that out of earned income should come savings. The
 
 234 INTRODUCTION TO PUBLIC FINANCE 
 
 number of persons who have earnings but have little property 
 is very great. Social welfare, from many considerations, re- 
 quires that these persons should save. One such consideration 
 is that he who has little or no income other than from his earn- 
 ings is in duty bound to provide, by savings, a fund for the future 
 both of himself and of his dependents. His income is there- 
 fore far less free income than is that of the man of property, 
 however small the property may be, who has met that obli- 
 gation. But these reasons, while justifying lower rates on 
 earned than on unearned incomes, do not by any means justify 
 the entire exemption of earned incomes, nor do they justify 
 hostile and confiscatory taxes on unearned incomes. 
 
 The difference in treatment of the two kinds of income is 
 sometimes worked out in the income tax itself and sometimes 
 is brought about by the addition of other taxes on the capital 
 value of unearned income. In the United States the state and 
 local taxes on property impose a heavy burden on the capital 
 value of unearned incomes and have the effect when con- 
 joined with the income taxes of imposing a heavier burden on 
 the unearned incomes. 
 
 Taxation of Income Not Simple. — There seems to be a de- 
 cided inclination for theorists to regard the income tax as a 
 particularly ideal tax. Some socialists have proposed a single 
 income tax as the acme of perfection. It does, indeed, seem 
 to be capable of being made to conform very fully to all require- 
 ments of the faculty or ability theory. But in practice there 
 are quite as many difficulties in the equitable working out of 
 the income tax as are to be found in other taxes. We have 
 not by any means completely solved the problem of just taxa- 
 tion by placing an income tax law on the statute books. There 
 are difficulties of legislation and difficulties of administration 
 to be met. 
 
 The difficulties of definition of income are so great that legis- 
 lators often decUne, or fail, to attempt it. The result is that 
 the statutes sometimes say, in effect, " income is income." 
 Thus the United States income tax law says that " gross in- 
 come " includes " gains, profits, and income.^' The British in-
 
 PERSONAL TAXES: POLL AND INCOME TAXES 235 
 
 come tax law is better in verbal form in that it says that 
 taxable income is either " the annual value " of property, or the 
 " annual amount of profits," yet it is equally unexplanatory. 
 It defines by synonym. The matter is thus left largely to ad- 
 ministrative determination.^ 
 
 Is an Increment in Property Value Income ? — Aside from 
 difficulties in phraseology we encounter at the very start in- 
 herent difficulties. One of these is very important and may be 
 used as an illustration. Is an increment in property value 
 income? Let us take the case of a man who owns an ofiice 
 building site with an adequate building on it. It may be that 
 as time goes on the demand for offices in his building increases 
 and the rents go up. The rentals are, of course, income. But 
 in consequence of the increase in rentals the property value 
 increases. The lot and building will sell for more. Is the 
 increment in value income? Probably many people with the 
 specific illustration before them would say no. The rentals 
 are income and so is their increase, but the increment is not, 
 they would say. A bookkeeper would not ordinarily include 
 the increment in his annual income account, although he might 
 from time to time " write up " the value of the proprietorship 
 to cover the increment. If the property were sold the incre- 
 ment would be put down as a profit but still with careful dis- 
 tinction from annual income. The essential feature of income, 
 namely receipts during a period of time, is lacking when we are 
 confronted with a single profit on some one occasion. Another 
 reason for this common attitude is apparently a more or less 
 well-founded opinion that while the owner of such a building 
 may properly spend the annual receipts he ought not to spend 
 the increase in the value of his property. For in so doing, 
 although his original investment value might remain the same, 
 he is in a sense " impairing his capital." Possibly the practical 
 
 • It is rumarkahlc, however, how vital the phraseology of a definition becomes. 
 The inclusion of the word "annual" in the British definition and its omission in the 
 American make a vast difference in the frame of mind. The question of the tax- 
 ability of "stock dividends" and other items of increment in capital value which 
 vexes Congress and the Courts might not have arisen had the constitution said 
 "annual income" instead of just "income." In Great Hritain theris is no such 
 controversy.
 
 236 INTRODUCTION TO PUBLIC FINANCE 
 
 consideration that he would have to sell the property before 
 he could lay hands on the increment to spend it has something 
 to do with this view. There seems to be in the popular mind a 
 clear idea that income is something spendable without impair- 
 ing one's future, even when that future is growing brighter every 
 year. Spending is associated with the satisfaction of our 
 wants. Our wants are regularly recurrent. That is, we grow 
 hungry once in so often and with striking regularity. From 
 the connection between income and spending comes the thought 
 that income is something regular and recurrent at definite 
 times. The more certain and regular an income is the more 
 desirable it is. Increments in property values do not appear 
 to be either regular, recurrent, or certain. Yet the whole 
 notion is vague and depends upon what one ought to do if he 
 be wise. Hence there is a real difficulty. 
 
 It is possible that increments in property values would not 
 have given the lawmaker or the administrator much trouble 
 if they were all of the character of the one in the illustration. 
 The government might very well be content with the growing 
 taxes on the growing rentals and let the increment go ; or if 
 such increments be regarded as special evidence of ability to 
 pay the government might impose on them another and a 
 different sort of tax. But all cases are not so clear. Dealers 
 in land and buildings make an income not only by bringing 
 buyers and sellers together, but sometimes by buying and 
 holding real estate for the increment. A part of their profits 
 comes from the increment accruing while they hold the prop- 
 erty. When this is incidental to their regular business they 
 always consider the entire profits as income. There may be a 
 similar increment in the value of the dry goods a merchant 
 buys and sells. The gains of a regular trader in grain from a 
 rise in prices even though they are irregular in time and in 
 amount, are nevertheless income. The same principle is in- 
 volved in the question of the taxability or non-taxability of 
 " stock dividends " when they are made for the purpose of 
 adjusting the par value of the capital stock of a corporation to 
 the actual value of the corporation as a going concern, to the
 
 PERSONAL TAXES: POLL AND INCOME TAXES 237 
 
 value, that is, based on the earnings. Such stock dividends are 
 distributions of capital increment. Stock dividends made to 
 cover an investment of earnings in the business are somewhat 
 diflferent. The difficulty arises because there is a difference in 
 degree as well as in kind. 
 
 Decrease in Property Values. — The question is all the more 
 troublesome from the fact that the converse, a decrease in 
 property value, is often treated the other way. That is, such a 
 decrease is often treated as a loss deductible from income. 
 Taxpayers are very insistent that depreciation and obsolescence 
 shall be treated as losses. That places decreases in property 
 values on the income side, not on the capital side of accounts. 
 But one can differentiate such losses from negative increments. 
 To keep productive agents in condition and to maintain the 
 income is a cost. A triie negative increment, such as the de- 
 crease in land value where population moves away, cannot be 
 restored or made good, at that spot, and is not a cost, although 
 it may be socially wise to allow for it so that other land may be 
 developed. 
 
 How Tax Laws Treat Increment Values. — The tax laws 
 generally treat this puzzle as a Gordian knot, to be cut, not to 
 be untied. They cut it in one of two ways. They either dis- 
 regard the increment altogether when it comes unaccompanied 
 by active dealing, as in our first illustration ; or they tax it in 
 every form when realised. That is when the increment is re- 
 duced to a clear money valuation on the occasion of a sale or 
 other transfer, as by inheritance, resulting in an appraisal of 
 the property. Inasmuch as legislators, tax administrators, and 
 the courts have not yet solved the problem, we may perhaps 
 be excused from attempting a rigid solution. The logic of our 
 position (stated above) as to the relation of income to capital 
 would incline us to the view that since the increment is due to 
 the increase in present or future income, it is not itself income. 
 A thing that is the effect of a cause cannot at the same time be 
 of the cause. 
 
 Annuities. — Difficulty is encountered in the case of annuities 
 and pensions payable for a fixed term of years or, it may be,
 
 238 INTRODUCTION TO PUBLIC FINANCE 
 
 for life. Annuities are bought in order to have a regular income 
 to spend and pensions are for the pensioner to live on usually 
 in old age. Hence to most people they look remarkably like 
 income and income of an exceptionally desirable sort. But 
 annuities are computed by actuaries with keen minds who are 
 skilled in argument and they have not failed to call the attention 
 of lawmakers and tax administrators to the mode of compu- 
 tation of annuities. They maintain that each annual payment 
 in an annuity of a flat or fixed sum each year is composed of 
 two parts, one of which is by nature interest and hence unde- 
 niably income, and the other a repayment of or using up of 
 capital. Even a pension paid on retirement after long service 
 is properly regarded as the result of the accumulation of with- 
 held wages into a capital sum which put at interest is paid 
 back, interest and capital together, in each instalment during 
 the inactive or retirement period and up to death. Income 
 tax lawmakers sometimes yield to the argument and allow a 
 deduction for part of the annuity as a capital transfer, or as in 
 the case of the Massachusetts law, compromise and impose a 
 lower tax rate on annuities than on other incomes. Sometimes, 
 however, so-called annuities are perpetual, in which case they 
 are generally the income of a life estate in some property, which 
 life estate passes to the next heir, and as such they are pure 
 income. The British law with some exceptions taxes purchased 
 terminable annuities in full as income. In his work on British 
 Property and Income, Stamp reports (p. 190) that the amounts 
 are not large. But the main difficulty is that a purchased life 
 annuity is computed on the theory of " the expectation of life," 
 a theory true of a large group of men, but not necessarily indi- 
 vidually true even for any one man in the group, while the in- 
 come tax must apply to each man by himself. Thus if the law 
 allows a deduction for principal used up after the manner cal- 
 culated in actuaries' tables, one-half the annuitants will get 
 too much, the other half too little, allowance. The difficulty is 
 practically beyond solution, because one man's life cannot be 
 assumed to be sure to equal the average life of many. Since, 
 however, life annuitants and pensioners are usually old or dis-
 
 PERSONAL TAXES: POLL AND INCOME TAXES 239 
 
 abled, we might consider that as an additional and sufl5cient 
 reason for a lower rate on the entire annuity or pension and thus 
 achieve average equity as well as the halo of mercy. Since 
 pensions are growing in favour as a means of providing for dis- 
 ability and old age and are likely to become very common, the 
 proper solution of the problem is pressing. 
 
 If annuities are taxable in their entirety as income, there 
 would be little gained in buying one for a definite term, as ten 
 or twenty years, for a man would save money by investing his 
 capital and spending the interest plus a part of his principal 
 each year. But the case would be different with a life annuity, 
 as he could not forecast how long he might hve.^ 
 
 Mining Dividends Like Annuities. — The analogous case of a 
 mine often receives a different consideration and treatment. 
 Many people buy mining stock and spend the entire dividends 
 as income, regardless of the fact that the ore bodies are ex- 
 haustible and when the ore deposits are gone the original capital 
 or investment is gone. No income tax law would allow an 
 individual stockholder to set aside out of his dividends, as non- 
 taxable, the amount necessary in the end to restore his capital 
 or original investment. Yet, when this very thing is done by 
 the company, in the guise of a depletion fund, so that the divi- 
 dends are in fact less each year in consideration of the ultimate 
 repayment of the investment as capital, the income tax law is 
 complacent. 
 
 ' The theory of the federal income tax in the United States as applied 
 to purchased annuities requires the deduction of the principal or premiums 
 and the return for taxation of the interest portions of an annuity only. The 
 regulations (Articles 47 and 72, Regulation 45, Act of 1918) to date are 
 couched in language difficult of interpretation. The annuitant is told that he 
 may consider as " proceeds of insurance " and hence as no part of his gross 
 income, " during his life only so much of the amount received by an insurer 
 under life, endowment or annuity contracts as represents a return, without 
 interest, of premiums" (Art. 72). In another place "where an insurer receives 
 under life insurance, endowment or ;innuily contracts sums in excess of the pre- 
 miums paid therefor, such excess is income for the year of its receipt" (Art. 47). 
 Since the actuarially computed part of the annuity wliich is capital would seldom 
 or never correspond to the actual in a life annuity or pension the general principle 
 that a receipt is not a receipt until rcfluccd to possession would lead us to infer that 
 the regulation means that the annuitant pays no tax until the annual jiayments 
 received sum up to the amount paid in [iremiums. We are informed that this is 
 the practice. Hence most annuitants will not be taxed for many years, and some 
 who die early never.
 
 240 INTRODUCTION TO PUBLIC FINANCE 
 
 Allowable Expenses. — Not all the difficulties in regard to 
 income turn on the distinction between capital and income. 
 There are difficulties as to what are properly allowable expenses. 
 There are great difficulties in the measurement of the value or 
 amount of the income, especially in estimating incomes not 
 wholly in money. There are times when valuation enters here 
 almost as importantly as it does in the assessment of property. 
 
 Types of Income Taxes. — Income taxes are not all alike. 
 The differences are often more than superficial. Thus the 
 British tax includes the annual value of certain kinds of prop- 
 erty, whether realised in money or not, that is, it includes value 
 in use, and excludes from income a great part of the increment 
 in property values even when realised in money. Per contra 
 the American tax is almost strictly a tax on " realised money 
 income." Unlike the British, it excludes nearly all value in 
 use and includes capital increment value when realised. There 
 is great significance in the title of the British tax, which is a 
 tax on property and income. A tax, that is, on the annual 
 value of property and on the annual amount of profits. The 
 British tax makes a sharp distinction between different kinds 
 of income — the American does not. One result of this is that 
 the British tax is, as to some of its important schedules, dis- 
 tinctly an assessed tax. One of the most surprising things 
 about the American tax is that there is no regular official assess- 
 ment at all. This feature will be commented upon below. 
 The American tax is very nearly completely dependent on the 
 taxpayer's own declaration. The British tax depends on 
 declaration in only one of the five schedules and for the super- 
 taxes. The British tax gives the taxpayer a jury of his neigh- 
 bours to which he can present his grievances. The American 
 taxpayer has a legal, but for a poor man otherwise visionary, 
 right to appeal to an official in Washington, sometimes more 
 than three thousand miles away, but no other appeal short of 
 the courts. 
 
 Another difference often made much of between different 
 income taxes is connected with the mode of collection. Some 
 income taxes make large use of " stoppage at the source " ;
 
 PERSONAL TAXES: POLL AND INCOME TAXES 241 
 
 Others collect directly from the taxpayer. Stoppage at the 
 source means, for example, that the tenant pays the tax on his 
 landlord's rent, deducting from the rent the amount of the tax 
 he has paid ; or again, that a banker or other agent transmitting 
 interest or other income pays the tax for his client ; and simi- 
 larly that employers may be required to pay or advance the tax 
 on salaries of their employees. Since the income tax is usually 
 progressive or graduated and since there are usually abatements 
 or exemptions for small incomes, it is obvious that stoppage at 
 the source necessitates a method of repayment by the govern- 
 ment of any excess stopped at vthe source. There is also 
 involved a declaration by the taxpayer to determine the amount 
 of tax he should pay if his income is large enough to carry him 
 into the higher grade rates. Stoppage at the source seems to 
 work to the apparent satisfaction of the Englishman. Yet a 
 similar system in America failed. Perhaps its failure was due 
 to the imperfection and half-heartedness of the administrative 
 plans. The absence of any adequate repayment scheme for 
 overcharges added to the dissatisfaction. But the fact that the 
 British tax is largely an assessed tax, while the American is not, 
 had very much to do with it. The substitution in the United 
 States of " information at the source " has not been a happy 
 thought. It is a sort of informer system, making folks " tattle- 
 tales," and involves administrative difficulties far more costly 
 in the long run than any returns it will bring in. 
 
 Fitting the Tax to Custom. — An income tax, possibly more 
 than any other, but certainly quite as much, must, if it is to 
 work smoothly, be skilfully fitted to the economic organisation 
 and customs of the country in which it is to be used. It would 
 be useless, for example, to provide that each owner residing in 
 his own home should pay a tax on the rental value of the home, 
 if all homes were owned and none rented. For it would then 
 be practically impossible to ascertain administratively the 
 rental value. Tenancy has to be the normal thing before such 
 a rule will work. In countries where interest payments are 
 universally made through banking houses and trust companies 
 the tax thereon can be stopped at the source. But what of the
 
 242 INTRODUCTION TO PUBLIC FINANCE 
 
 village grocer who has a sheaf of farmers' notes in a tin box on a 
 shelf in a cupboard? What use would it be to include farm 
 produce consumed on the farm as income, in neighbourhoods 
 where there is no regular market and no known local price for 
 eggs, chickens, butter, milk, garden truck, pork and beef, and 
 other things on which the farmer lives ? 
 
 So, too, must the setting of the income tax in the system of 
 other taxes be carefully considered. There are persons who 
 advocate a different rate for earned and unearned incomes in 
 the United States federal income tax, after the model of Eng- 
 land. They seem to forget that the recipients of funded or 
 unearned incomes pay nearly all of the local and state taxes, 
 which make a very heavy additional burden. 
 
 Net Income. — Income taxes are levied on net income. In- 
 come tax laws, and administrative regulations generally, begin 
 with a definition or statement of what constitutes gross income, 
 and then specify the deductions which may be made therefrom 
 in order to arrive at net or taxable income. 
 
 Gross income broadly speaking includes all receipts except 
 of pure capital assets, as by inheritance, or bequest, gift or pur- 
 chase, or life insurance, or return of loans or compensation for 
 damages of a capital nature. But receipts from property in- 
 surance are often technically treated as gross income, there 
 being allowed, however, an offset of the loss incurred, which 
 in most cases would wipe out the receipt. While life insurance 
 in lump sum is considered afe a capital payment, annuities are 
 not wholly so considered. The dividing line between transfers 
 of capital assets sole, and those which are not capital but income, 
 is often so indistinct that both the laws and the regulations are 
 very specific as to what receipts may be considered as excluded 
 from income. 
 
 Exempt Income. — From gross income are also excluded all 
 forms of income that for any reason may be exempt, except, 
 however, those so-called exemptions which as we shall see are 
 in effect a part of the system of rates. People are sometimes 
 surprised to find that they have income which they spend, but 
 which under the tax law is not regarded as income at all, but
 
 PERSONAL TAXES: POLL AND INCOME TAXES 243 
 
 is treated legally as if it never existed. To illustrate, in the 
 United States up to the present writing (1920) it is considered 
 unconstitutional for the federal government to tax salaries paid 
 by the states and by the local governments which derive their 
 powers from the states. This includes the great body of school 
 teachers' salaries. Such salaries are therefore no part of 
 gross income, but are treated as if they did not exist at all. 
 
 Abatements Which are Often Called Exemptions. — In the 
 United States a man living with his wife is allowed an exemption 
 of $2000 and $200 more for each dependent. These exemp- 
 tions are deducted after the net income is determined and are 
 in effect a means of reducing the rate he pays. The $2000, or 
 more, is treated, to use the illuminating term of the statute, as 
 a " credit" ; that is, as income which has already been taxed. 
 While, so far as the individual taxpayer is concerned, it is a 
 matter of unconcern what the deduction is called, yet the 
 purpose is very different. 
 
 The deductions allowed in arriving at net income from gross 
 may be grouped as : (i) expenses, including interest paid out 
 and certain taxes, (2) losses, and (3) depreciation of capital 
 assets. 
 
 Deductible Expenses. — Expenses are confined to business 
 expenses. That is, they exclude personal spending and exclude 
 investment of savings. Personal, living, or family expenses are 
 never deductible. Neither are sums paid for new property, 
 for betterments, sums put in the bank, or premiums paid for 
 life insurance. Sometimes, however, the latter are deductible, 
 not because they are not regarded as savings, but with the 
 intent to foster this sort of thrift. Included are sums paid for 
 labour, rentals for the use of business property, interest on 
 borrowed capital and certain taxes. These deductions do not 
 seem to need comment except the taxes. There are some taxes 
 which are obviously incidental to doing business and to getting 
 an income. Thus an imj^orter must pay duties and, though he 
 may reimburse himself when he sells the goods, these are a cost. 
 Personal taxes, taxes on one's home, and other non-business 
 taxes should not be deducted any more than any other personal
 
 244 INTRODUCTION TO PUBLIC FINANCE 
 
 expenses. But income tax laws are not always so logical as 
 they might be as to these, perhaps because of the frequent 
 intermingling of personal and of business taxes. But they are 
 logical in not allowing the income tax itself as a deduction. 
 This is primarily because it is a personal tax and not so easily 
 confused with business taxes. There is a curious and inter- 
 esting arithmetical result which would come from deducting 
 the income tax of last year from the income of this year. This 
 can be shown strikingly if we take an exaggerated case. Sup- 
 pose a man has a taxable income of $10,000 a year, something 
 for living expenses being exempted, and that war necessities 
 require a tax of 100 per cent. If allowed to deduct the income 
 tax of this year from his next year's net taxable income of 
 $10,000 he would have next year no tax to pay. But the third 
 year he would again pay a big tax. With lower rates the result 
 would not be so striking but would be there in a degree. Con- 
 sequently, the government's revenue would go up and down each 
 succeeding year. 
 
 That business losses should be deducted is always regarded 
 as proper. But the propriety of deducting other losses is not 
 so clear. This is especially true of capital losses, as was dis- 
 cussed above. In general, losses may not be deducted until 
 fully reahsed, or hke bad debts " written off." Upon this the 
 regulations must obviously be very strict. A difficulty, usually 
 resolved in favour of the revenue, arises when a loss exceeds the 
 income of the year in which it is to be deducted. The excess 
 may not ordinarily be carried forward. 
 
 There are great administrative difficulties in the allowances 
 for losses and there are still greater ones in the allowances for 
 depreciation, obsolescence, and depletion. Repairs to property, 
 especially to property used in business, are obviously necessary 
 to keep the property efficient and the income flowing. But the 
 line between a repair and a betterment is vague. Obsolescence 
 is still more vague, at least as to measurement. The main 
 difficulty here is that obsolescence is considered as proceeding 
 with the passage of time and at the end of a period, often many 
 years, results in a loss. But the taxpayer is not content to
 
 PERSONAL TAXES: POLL AND INCOME TAXES 245 
 
 wait until the loss is realised and measurable, but wants it 
 allowed periodically. Accountants have, very properly, been 
 trying to train the business world to a conservative estimate of 
 assets and to the exercise of care in the preservation of capital. 
 In this they often run counter to an equally commendable 
 desire on the part of the tax officials to conserve the govern- 
 ment's revenues. The controversy leads into technicalities 
 too intricate for this text. 
 
 Depletion of exhaustible and limited resources, as of the 
 content of a mining property or standing timber, gives unending 
 practical troubles. If a man has a stock of leather which he is 
 using up to make shoes, or of cotton to make sheeting, it is 
 clear that the cost of materials is a part of the cost of manu- 
 facture. By analogy, if he has a stock of coal underground 
 which he is mining and turning into merchantable coal he claims 
 the right to deduct the original cost of the coal underground. 
 So far the matter seems simple enough. But coal underground 
 is not bought by the ton, it is bought sight unseen, quantity but 
 indefinitely known. Moreover, costly shafts, tunnels, and 
 other works are necessary to reach it, and such works become 
 useless and valueless as soon as the mineral they reached is 
 gone. The practical problem this presents is very difficult of 
 solution and too intricate for an elementary text. RuHngs and 
 regulations are usually wholly arbitrary and hence an unending 
 source of friction. 
 
 Often certain gifts or contributions to charities, to churches, 
 and to schools are allowed as deductions from income. These 
 deductions rest on considerations quite apart from and foreign 
 to taxation principles and are usually limited to certain frac- 
 tions of the income. 
 
 After these deductions have been made we arrive at net 
 income. Sometimes there is still another step to arrive at net 
 taxable income, as by the deduction of the credits. Bui this 
 is rather an incident to the application of the rates than to the 
 determination of the income. 
 
 Rates are Degressive. — Income tax rates are usually pro- 
 gressive and the form of progression is usually degressive.
 
 246 INTRODUCTION TO PUBLIC FINANCE 
 
 Sometimes, as in the Prussian income tax, there is a complete 
 scale or schedule of rates set forth for different grades of in- 
 comes. In other cases there is a flat or normal rate, as it is 
 called, applicable to all incomes, and then a series of surtaxes 
 applicable to the higher incomes. Degression is usually achieved 
 by the simple device of deducting a fixed amount from the 
 income before the rate is apphed, the rate on the remainder 
 being proportional. So far as the surtaxes are concerned they 
 too may be given a degressive effect by applying each one only 
 to the " excess over " certain amounts. This abstract state- 
 ment must suffice here. The subsequent discussion of actual 
 laws will afford ample illustrations of the way in which this 
 result is achieved. 
 
 The universal allowance of a credit or so-called exemption 
 from all incomes not only brings about the progression that is 
 desired but works the exemption of the small incomes. Thus 
 in the United States a man without family or dependents whose 
 income is less than $1000 pays personally or directly no tax 
 at all. The arguments upon which this exemption rests are : 
 (i) that the minimum of existence can pay no tax, and (2) that 
 there are other taxes, especially the taxes on consumption, which 
 impose a sufficient burden on those whose incomes are small. 
 Where the line is drawn is, of course, purely arbitrary and a 
 matter of opinion in each country. Countries which make 
 large use of consumption taxes should, it would appear, grant 
 a higher exemption than those which levy no consumption 
 taxes. 
 
 Application of Income Tax to Corporations. — Logically the 
 income tax if it is intended to be personal in character should 
 be levied on individuals only. In fact any other system leads 
 to cross purposes, double taxation, and many sorts of unpleasant 
 inequalities. This is especially the case if the tax is to be 
 progressive and the trouble becomes worse as the progression 
 is intensified. The whole theory of progression rests on per- 
 sonal ability to pay. But there are many practical considera- 
 tions which lead to the le\y of a tax on artificial persons or 
 corporations. Ease of assessment, the collection of large sums
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 247 
 
 at one time, and, by going directly to the sources, the preven- 
 tion of evasion, are among the obvious advantages. The tax 
 on corporation incomes is usually at a flat rate. If any so- 
 called exemption or deduction from the net income is allowed 
 corporations, as $3000 or $5000, the deduction is to be re- 
 garded more as an allowance for error than as an effort to 
 graduate the rate. Progression is wholly out of place here. 
 
 Tax on Dividends May Work Inequality. — While it is rela- 
 tively easy to allow the taxpayer a credit for the tax paid on his 
 dividends by the company, if he has other income equal to or in 
 excess of his personal exemption, it is not so easy to adjust the 
 burden when his income is all dividends, or largely so. Thus 
 if there be a tax on the earnings of corporations amounting to, 
 say, 5 per cent, and the personal income tax with the same 
 tax rate allows an exemption of $1000, then a man whose in- 
 come is all from dividends would not benefit by the personal 
 exemption at all. His neighbour whose income comes from 
 some other source would get his exemption and would receive 
 his income clear of tax on the first $1000. The only way in 
 which this can be remedied is to arrange a system of rebates 
 such as was mentioned above in connection with stoppage at 
 the source. 
 
 Sec. 3. The Place of the Tax in the System. — The form of 
 the income tax will be determined by the place given it in the 
 system of taxation. If it were possiVjle to administer a single 
 tax of any sort in accord with the demands of justice, the in- 
 come tax would be, theoretically, the one to be chosen. But the 
 objections to any single tax, already stated, bear upon this 
 as well as upon any other. Theoretically, it is best to make 
 the income tax the central one of the system, the gaps of which 
 are filled in by other taxes. If this be the intention, then the 
 income tax can be arranged in the form in which it is most easy 
 to administer. Thus the very small incomes can be exempt from 
 the income tax, being covered by direct and indirect consump- 
 tion taxes. In this way one source of difficulty and friction is 
 avoided. Then no distinction need be made in the assessment 
 of income from different sources. For if it ])e decided to tax
 
 248 INTRODUCTION TO PUBLIC FINANCE 
 
 income from funded investments at a higher rate than other 
 forms of income, this additional tax can be laid on in the form of 
 a property tax. How far the exemption of smaller incomes 
 should go, or to what extent funded incomes should be more 
 heavily burdened, depends upon the concrete facts in each 
 case. An abatement of the burden in cases where there are 
 already more than the usual claims on the income, as of a large 
 family, is also sometimes given. 
 
 Sec. 4. Prussian Income Tax. — As an example of an in- 
 come tax, not, perhaps, ideally perfect, but still laid down in 
 accord with the general principles enunciated above, we will 
 study somewhat in detail the Prussian pre-war income tax.^ 
 In order to have in mind the main features of the development 
 already outlined above. Chap. V, we quote from Mr. Hill the 
 successive stages in the growth of personal taxation in Prussia : 
 
 " I. A uniform poll tax, 181 1. 
 
 "2. A class tax, collecting somewhat more from the prosper- 
 ous, and not less from the poor, 1820-1821. 
 
 "3. To supplement the class tax, an income tax with com- 
 paratively few classes, a uniform rate, and a maximum limit, 
 1851. 
 
 " 4. Classification made finer, the maximum limit removed, 
 and the class tax below made practically an income tax with a 
 progressive rate, and the exemption of incomes up to 420 M., 
 
 1873. 
 
 "5. Exemption of incomes up to 900 M., reduction of the 
 
 remaining rates of the class tax, and of the two lowest rates of 
 
 the income tax, 1881-1883. 
 
 " 6. Principle of progression extended to all incomes under 
 100,000 M., incomes under 10,000 M. taxed less than before, 
 and higher incomes more ; a declaration of income by the tax- 
 payer required, and a finer classification adopted, 1891." 
 
 To make the new tax still more clear, we quote the rates 
 from the law itself : 
 
 1 For history see Hill, Quarterly Journal of Economics, VI, 207; Wagner, "Die 
 Reform der directen Staatsbesteuerung in Preussen im Jahre i8gi," Schanz' Finanz 
 Archiv., VIII Jahrgang, H Band. A full statement of the law is there appended.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 249 
 
 TARIFF OF RATES 
 
 Incomes 
 
 Rate 
 
 Incomes 
 
 Rate 
 
 From 
 
 To (inclusive) 
 
 M. 
 
 From 
 
 To (inclusive) 
 
 M. 
 
 M. 
 
 M. 
 
 M. 
 
 M. 
 
 900 
 
 1,050 
 
 6 
 
 3,900 
 
 4,200 
 
 92 
 
 1,050 
 
 1,200 
 
 9 
 
 4,200 
 
 4,500 
 
 104 
 
 1,200 
 
 1,350 
 
 12 
 
 4,500 
 
 5,000 
 
 118 
 
 1,350 
 
 1,500 
 
 16 
 
 5,000 
 
 5,500 
 
 132 
 
 1,500 
 
 1,650 
 
 21 
 
 5,500 
 
 6,000 
 
 146 
 
 1,650 
 
 1,800 
 
 26 
 
 6,000 
 
 6,500 
 
 160 
 
 1,800 
 
 2,100 
 
 31 
 
 6,500 
 
 7,000 
 
 176 
 
 2,100 
 
 2,400 
 
 36 
 
 7,000 
 
 7,500 
 
 192 
 
 2,400 
 
 2,700 
 
 44 
 
 7,500 
 
 8,000 
 
 212 
 
 2,700 
 
 3,000 
 
 52 
 
 8,000 
 
 8,500 
 
 232 
 
 3,000 
 
 3,300 
 
 60 
 
 8,500 
 
 9,000 
 
 252 
 
 3,300 
 
 3,600 
 
 70 
 
 9,000 
 
 9,500 
 
 276 
 
 3,600 
 
 3,900 
 
 80 
 
 9,500 
 
 10,500 
 
 300 
 
 The rate increases 
 
 From 
 M. 
 
 To 
 M. 
 
 In Stages of 
 M. 
 
 By 
 
 M. 
 
 10,500 
 
 30,500 
 
 1,000 
 
 30 
 
 30,500 
 
 32,000 
 
 1,500 
 
 60 
 
 32,000 
 
 78,000 
 
 2,000 
 
 80 
 
 78,000 
 
 100,000 
 
 2,000 
 
 100 
 
 In the case of incomes from 100,000 M. to 105,000 M. the tax is 
 4000 M. And from that point on the proportional rate of 4 per 
 cent is assessed upon the lower limits of stages of 5000 M. each. 
 This rate is progressive from about two-thirds of i per cent 
 at 900 M. to 3 per cent at 10,000 M. Then the rate is nearly 
 proportional at 3 per cent up to 30,000 M. Then progressive 
 again, until at 100,000 M. 4 per cent is reached, after which it 
 is proportional again. Each taxpayer having an income of 
 over 3000 M. is required to " declare " it. He has to fill out a 
 blank calling for a statement of income from each of four .sources : 
 (i) from capital invested, interest, and dividends; (2) from
 
 250 INTRODUCTION TO PUBLIC FINANCE 
 
 landed property and houses, including all crops, whether con- 
 sumed in the house or not, but deducting the cost of cultivation ; 
 (3) from trade, industry, or mining, deducting the cost of main- 
 tenance ; (4) from any employment, wages, salaries, fees, and 
 including pensions and every source of income not covered by 
 (i), (2), and (3). Deductions are allowed (i) for interest on 
 debts, except that on business debts ; (2) for permanent legal 
 burdens (example, maintenance of reserves) ; (3) contributions 
 to sick funds ; (4) life-insurance premiums. This division of 
 the income into different parts is for the sake of accuracy of 
 declaration, not for the sake of assessing different rates on the 
 different kinds of income. 
 
 Persons with large dependent families or labouring under 
 any special economic conditions seriously affecting their faculty 
 are allowed an abatement of not more than three grades, pro- 
 vided their incomes are not over 9500 M. Persons having less 
 than 3000 M. deduct 50 M. for each child under fourteen years 
 of age, and if there are three such children, a reduction of one 
 grade is made. 
 
 Corporations and stock companies pay the income tax on all 
 dividents over 3^ per cent. This makes double taxation of this 
 income, which is regarded as particularly " capable." In other 
 ways the attempt is made to tax funded income more heavily. 
 The exemption of incomes below 900 M. ($225) and the lower 
 rate for smaller incomes is justified on the ground that the con- 
 sumption taxes already impose a burden on these persons. 
 
 The assessment of the tax is not perfect. It is said to be 
 considerably better, however, than the assessment of property 
 in America. Large incomes escape in part. It has, however, an 
 advantage in that the evasion of the tax does not in Prussia, as it 
 does in America, intensify existing differences and inequalities. 
 Other parts of the system tend to offset the failure in this case. 
 
 Sec. 5. British Property and Income Tax. — The British 
 income tax, correctly called " the property and income tax," 
 may serve as another illustration, but it differs very much from 
 the Prussian. We follow the pre-war form of the tax as 
 obviously better for illustrative purposes than the abnormal war
 
 PERSONAL TAXES: POLL AND INCOME TAXES 251 
 
 lax. In the first place, as has already been stated, it is rather a 
 system of taxes on revenue than a tax on the aggregate income 
 of each person. It is a system of modified property taxes, 
 mth a wage and salary tax appended. In Prussia the inten- 
 tion is to make the total income the base irrespective of the 
 source, and reference to the sources is called for in the declara- 
 tion merely as a means of getting at the total with greater accu- 
 racy. In England the different sources are kept strictly apart, 
 and there is a difference made in the treatment of each kind of 
 income, the tax being in some cases " stopped at the source." 
 The total income is with some exceptions called into use only in 
 estimating the exemptions and abatements. The taxpayer has 
 the right by summing up his whole income to show that he has 
 been taxed too much, or is entitled to exemption. In that 
 case he is reimbursed. In 1907-1908 the abatements proper 
 amounted to £885,670; exemptions on account of small in- 
 comes amounted to £886,134. The total abatements of all 
 sorts, £2,798,289. So separate are the different parts of this 
 tax that Mr. Wilson says of it : ^ "To the bulk of the people 
 it is known in its most obnoxious (?) form as a tax upon ordi- 
 nary incomes, salaries, professional earning, profits of trading, 
 etc." Bastable (p. 449) says : " Inequalities are, however, 
 removed by the comprehensiveness of the tax." 
 
 The various revenues are taxed in five " schedules," known as 
 Schedules A to E. 
 
 The following outline of these schedules from the Acts of 
 1842 and 1853, with subsec^uent amendments, is taken mainly 
 from Williams' The King's Revenue, a most admirable compila- 
 tion, which should be frequently consulted by every student 
 of British finance. 
 
 ^^ Schedule A. — For and in respect of the property in all 
 lands, tenements, hereditaments, and heritages in the United 
 Kingdom, and to be charged for every twenty shiUings ^ of the 
 annual value thereof : 
 
 ' P. IIS, National Budget. Cf. Stamp, British Incomes and Property. 
 * Sec below for "deductions" allowed. Under B only one-third the annual value 
 is now charged. The text gives the old law.
 
 252 INTRODUCTION TO PUBLIC FINANCE 
 
 " Schedule B. — For and in respect of the occupation of all 
 such lands, tenements, hereditaments, and heritages, as afore- 
 said, and to be charged for every twenty shillings ^ of the annual 
 value thereof : 
 
 " Schedule C. — For and in respect of all profits arising from 
 interest, annuities, 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, 
 and to be charged for every twenty shiUings of the annual 
 amount thereof : 
 
 " Schedule D. — For and in respect of the annual profits or 
 gains arising or accruing to any person residing in the United 
 Kingdom from any kind of property whatever, whether situate 
 in the United Kingdom or elsewhere, and for and in respect of 
 the annual profits or gains arising or accruing to any person 
 residing in the United Kingdom from any profession, trade, 
 employment, or vocation,^ whether the same shall be respectively 
 carried on in the United Kingdom or elsewhere, and to be 
 charged for every twenty shillings of the annual amount of such 
 profits and gains : 
 
 " And for and in respect of the annual profits or gains arising 
 or accruing to any person whatever, and whether a subject of 
 His Majesty or not, although not resident within the United 
 Kingdom, from any property whatever in the United King- 
 dom, or any profession, trade, employment, or vocation, ex- 
 ercised within the United Kingdom, and to be charged for every 
 twenty shillings of the annual amount of such profits and gains : 
 
 " And for and in respect of all interest of money, annuities, 
 and other annual profits and gains not charged by virtue of 
 any of the other schedules contained in this Act, and to be 
 charged for every twenty shillings of the annual amount 
 thereof : 
 
 " Schedule E. — For and in respect of every public office or 
 employment of profit, and upon every annuity, pension, or 
 stipend payable by His Majesty or out of the public revenue 
 
 1 See footnote, page 251. 
 
 2 See lower rates for "earned" incomes, explained below.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 253 
 
 of the United Kingdom, except annuities charged to the duties 
 under the said Schedule C, and to be charged for every twenty 
 shilhngs of the annual amount thereof." 
 
 All incomes not exceeding £160 are exempt. The following 
 " abatements " are allowed on all classes of income: £160 on 
 all incomes exceeding £160 and not exceeding £400; £150 
 on incomes exceeding £400 and not exceeding £500; £120 on 
 all incomes exceeding £500 and not exceeding £600 ; £70 
 on all incomes exceeding £600 and not exceeding £700.^ 
 
 The following " deductions " (not called abatements) are 
 allowed under Schedule A, namely, one-eighth in respect of 
 lands, and one-sixth in respect of houses for repairs, etc. That 
 is, income from lands is charged at 175. 6d. for each pound, and 
 that from buildings at 165. Sd. per pound. 
 
 " Relief," in the form of a reduced rate, is given by an act 
 passed in 1907 to " earned " incomes, in addition to all other 
 exemptions, abatements, or deductions. " Earned " income 
 means — 
 
 (c) " any income arising in respect of any ofhce or employ- 
 ment of profit held by the individual, or in respect of any pension, 
 superannuation, or other allowance, deferred pay, or compen- 
 sation for loss of office given in respect of the past services of 
 the individual or of the husband or parent of the individual, 
 in any office or employment of profit . . . ; and 
 
 (b) " any income from any property which is attached to 
 or forms part of the emoluments of any ofiice or employment of 
 profit held by the individual ; and 
 
 (c) " any income which is charged under Schedule B or D, 
 and is immediately derived by the individual from the carry- 
 ing on or exercise by him of his profession, trade, or vocation, 
 either as an individual, or, in the case of a partnership, as a 
 partner acting therein." 
 
 This " relief " extends only to earned incomes up to £2000. 
 
 The reader should note the careful distinction made in the 
 law between " persons " and " individuals." The former 
 includes legal persons, such as joint stock companies and cor- 
 
 ' All pre-war.
 
 254 INTRODUCTION TO PUBLIC FINANCE 
 
 porations other than governmental. This is especially impor- 
 tant under Schedule D. 
 
 " The annual value of lands, etc., charged under Schedule 
 A, is understood to be the rent by the year at which the same 
 are let at rack-rent, if the amount of such rent shall have been 
 fixed by agreement commencing within the period of seven years 
 preceding the fifth day of April next before the time of making 
 the assessment, but if the same are not so let at rack-rent, 
 then at the rack-rent at which the same are worth to be let 
 by the year." This rule does not apply to tithes, quarries, 
 mines, etc., but does apply to lands, etc., capable of actual 
 occupation, no matter how enjoyed. 
 
 " Only one- third of the annual value is charged under Schedule 
 B; nurseries and gardens are charged under Schedule D." 
 Mortgages are taxed under Schedule A, owners being allowed 
 to deduct what they advance in taxes from the interest they pay. 
 Owners in occupation pay under Schedule B. 
 
 Clergymen or ministers of religion are allowed a deduction 
 of one-eighth on the value of any dwelling-house for which they 
 pay rent, in respect of the portion of it which they may use for 
 oflScial purposes. 
 
 The greatest difiiculties of assessment arise under Schedule 
 D, and in 1907 the assessors were empowered to require an 
 employer to give particulars of name, residence, and pay of any 
 employees, and every person is made liable to be called upon 
 to make a full return of his or her income. Normally the in- 
 come taxable is the average of the profits or gains for the past 
 three years, but if the taxpayer so elect, he may be assessed 
 on the actual amount of profits and gains for the year. Com- 
 missioners are empowered to make deductions in respect of 
 " wear and tear " of machinery or plant used, and, generally 
 speaking, the assessable profits are what are left after deduction 
 of all outgoings attributable to the expenses of materials, 
 labour, etc. Individuals are allowed to deduct fife insurance 
 premiums paid. 
 
 Many of the terms used in the schedules as quoted above 
 will probably be unintelligible to American readers, as some of
 
 PERSONAL TAXES: POLL AND INCOME TAXES 255 
 
 the forms of income to which they apply are not found in the 
 United States, or at least are not commonly recognised as dis- 
 tinct classes. On that account the following exhibit of the 
 amount of income " brought under review " by the department 
 administering this tax will probably prove instructive. The 
 details of gross income are for the fiscal year 1905-1906 and 
 the whole table is from Williams' The King's Revenue. 
 
 Schedule A. Profits from the ownership of : 
 
 Lands £52,151,543 
 
 Houses 205,486,455 
 
 Other Property 1,310.673 
 
 £258,948,671 
 ScJtedide B. Profits from the occupation of lands 
 
 (farmers' profits mainly) 17,460,062 
 
 Sclicdide C. Profits from British, Indian, colonial, and 
 
 foreign government securities 46,925,674 
 
 Sdwdulc D. Profits from businesses, concerns, profes- 
 sions, employments (except the last of a public nature, 
 see Schedule E) and certain interest : 
 
 I. Businesses, professions, etc. 
 (including salaries of em- 
 ployees), other than those 
 enumerated below . . . £367,814,155 
 11. Railways in the United King- 
 dom 41,241,692 
 
 III. Mines 19,999,972 
 
 IV. Gasworks 7,413,611 
 
 V. Iron works 2,683,637 
 
 VI. Water works 5,816,300 
 
 VII. Canals, etc 3,847,201 
 
 VIII. Quarries 1,695,799 
 
 IX. Markets, tolls, etc 869,635 
 
 X. Fishings in the United King- 
 dom and sporting rights in 
 
 Ireland 203,304 ^ 
 
 XI. Cemeteries 183,612 
 
 XII. Salt springs or works and 
 
 alum works 150,5 73 
 
 XIII. Indian, colonial, and foreign 
 
 securities {pUicr than gov- 
 ernment) 14,794,821 
 
 XIV. Coupons 12,061,156 
 
 XV. Railways out of llic United 
 
 Kingdom 16,111,221 
 
 Curried forward £323>334>407 
 
 » Some sporting rights arc under Schedule A.
 
 256 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
 Brought forward 
 XVI. Loans secured on the public 
 
 rates £6,687,134 
 
 XVII. Other interest 4,677,654 
 
 XVm. Other profits 2,399,047 
 
 XIX. Profits from the occupation of 
 lands, the occupiers of 
 which have elected to be 
 assessed under ^c/ifJ^/e Z) . 13,821 
 
 ScJwdide E. Salaries of government, corporation, and 
 public company officials 
 
 Total gross income brought under review 1905-1906 . 
 Less deductions, abatements, etc. . . . 
 
 Taxed income 
 
 £323,334,407 
 
 508,664,345 
 93,185,804 
 
 £925,184,556 
 293.159,810 
 
 £632,024,746 
 
 HYPOTHETICAL CASE OF A COMPOSITE INCOME 
 
 See Page 257 
 
 Reference 
 Number 
 
 Schedule 
 
 Item 
 
 Amount 
 
 I 
 
 A 
 
 Profits from the ownership of lands, houses, 
 
 
 
 
 etc. 
 
 £500 
 
 2 
 
 B 
 
 Profits from the occupation of lands at one- 
 
 
 
 
 third the annual \alue 
 
 200 
 
 3 
 
 C 
 
 Profits from government securities 
 
 200 
 
 4 
 
 D 
 
 Profits as an author 
 
 100 
 
 5 
 
 D 
 
 Profits as a solicitor (partner in a firm — 
 
 
 
 
 total profits, £5000) 
 
 2500 
 
 6 
 
 D 
 
 Profits from investments in a public com- 
 
 
 
 
 pany (total profits, £55,000) 
 
 500 
 
 7 
 
 •D 
 
 Profits from investments in municipal stock 
 
 100 
 
 8 
 
 D 
 
 Profits from investments in foreign bonds 
 payable by coupons cashed in the United 
 
 
 
 
 Kingdom 
 
 100 
 
 9 
 
 D 
 
 Salary as a land agent 
 
 500 
 
 10 
 
 E 
 
 Salary as a borough auditor j 
 
 300 
 
 
 
 Total 
 
 £5000 
 
 The income taxes are, whenever possible, " stopped at the 
 source," that is, they are paid to the government before the 
 income (the rents, interest, salaries, etc.) is paid over to the 
 recipient. This has long been considered the characteristic 
 feature of the British income tax. Williams estimates that
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 257 
 
 two-thirds of the taxes are thus indirectly collected. Stoppage 
 at the source applies to practically all of Schedule A and to all 
 of Schedules C and E. On account of the definiteness of in- 
 comes under Schedule B the collection is equally certain. Even 
 under Schedule D many items can be stopped at the source. 
 
 The hypothetical case of a composite income of £5000 per 
 annum by Williams given on page 256 will illustrate some of the 
 more puzzling points. 
 
 The methods of taxing items 1,2, and 3 are simple and require 
 no explanation. 
 
 Item 4 is income as an individual and, although not over 
 £160, is not exempt because this individual's total income is 
 over £160. It is, however, " earned " income and would be 
 entitled to " relief " but for the fact that the total of this indi- 
 vidual's income is over £2000. 
 
 Item 5 requires no explanation. 
 
 Item 6 is income on which the tax would be paid by the 
 company, as a " person " having income beyond the limits 
 of any abatements, that is, £55,000, the highest sum entitled 
 to abatement being £700. If the hypothetical individual in 
 this case had less than £700, instead of £5000 income, he would 
 receive abatement on this item. Technically this tax is collected 
 directly and not " stopped at the source," but so far as the indi- 
 vidual is concerned, the effect is much the same. This is the 
 only item " net," less the tax appearing in the list. 
 
 The taxes on all the remaining items, 7 to 10 inclusive, are 
 " stopped at the source," that on 8 being withheld by the 
 banker or broker when he cashes the coupons. 
 
 The income tax is the variable element in British finance, and 
 the rate is fixed each year with reference to the needs of the 
 government. From 1896 to 1900 the rate was M. in the pound ; 
 1900-1901, IS.; 1901-1902, IS. 2d.; 1902-1903, 15. 3J. ; 1903- 
 1904, lid.; 1904-1908, 15. 
 
 The rates of the British income tax are very difficult to state. 
 But if ons bears in mind the history of the rates he has a clew 
 to what is otherwise something of a labyrinth. That history 
 we shall try to state.
 
 258 INTRODUCTION TO PUBLIC FINANCE 
 
 History of British Income Tax Rates. — There was originally 
 but one rate, a flat rate. Graduation, or degression in the 
 effect of the rate after the fashion illustrated in our chart in 
 Section 8 of Chapter II of Part II in tlys book, was achieved by- 
 deducting a series of " abatements " from the net income, 
 larger abatements being allowed for smaller incomes and all 
 abatement stopping at a moderately large income, formerly 
 £700. The old abatements are given just above. This flat 
 rate expressed originally as so and so many pence in the pound, 
 and lately, as it rose, in shillings and pence in the pound, was 
 called " the income tax," or the " standard rate." This is the 
 rate " stopped at the source." Whfle this rate is to-day only a 
 point of departure, there being lower and higher rates as well, 
 it is still thought of as the income tax. When it was decided 
 to make a difference in the treatment of earned incomes, from 
 that accorded unearned incomes, nothing other was at first 
 disturbed in the old law, but the result desired was attained by 
 granting a " relief " to the earned incomes. A " relief " 
 differed from an " abatement " in that it was a reduced rate, 
 while an abatement was a deduction from income. In 1909 a 
 supertax of bd. in the pound on the excess over £3000 for all 
 incomes which exceeded £5000 was imposed. So far the 
 matter was comparatively simple. Nor does it especially com- 
 plicate matters that there are personal exemptions granted 
 married persons of £25 and to all persons of £25 for each de- 
 pendent. 
 
 But further changes came in as the income tax rate was 
 raised. Among them were ultimately: (i) a graduation of the 
 " relief," (2) the imposition of a supertax on large incomes, 
 (3) the graduation of the supertax, and (4) a relief to small 
 unearned incomes. Including only these features the rates could 
 be stated in two series, one a low series for earned and another 
 higher series, up to a certain point, for unearned incomes. At 
 a comparatively high point the two series merged. But that 
 very doubling of the series and merging brought another com- 
 plication. Many incomes are partly earned and partly un- 
 earned. So adjustment of abatements and reliefs came in.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 259 
 
 The ultimate resulting complex is distinctly appalling. It is 
 comforting to note that even British officials have difficulty 
 with it. They resort to so-called " effective rates " or percent- 
 ages computed, with due allowance for all the modifying " allow- 
 ances," " reliefs," graduations and supertax and thus show 
 what the actual rate to be paid is at each point. The one 
 thing to cling to, however, is the notion that there is a sort of 
 theoretical belt-line to which the income tax applies and that 
 all other rates start downward or upward from there. Yet in 
 fact only unearned incomes between £2000 and £2500 now (1920) 
 pay exactly the standard rate and no more, no less. There is 
 finally one more complication and that is that the rates at cer- 
 tain points " kick back " or recoil like an old-fashioned muzzle- 
 loading musket. Thus, for example, an income of £130 was for 
 the war tax exempt. But one of £131 did not receive an abate- 
 ment of £130 as might perhaps be expected, but of only £120, 
 and was taxable on £11, at, of course, the lowest rate of its class 
 be it earned or unearned. In like manner an income of £3000 
 paid at one time no supertax. But an income of a little over 
 £3000 paid the supertax not only on the excess over £3000, 
 but on £500 above £2500 as well. The same feature occurs 
 at many other points in the scale. To mitigate the harshness 
 of this kick-back the taxpayer is allowed to make a present to 
 the government of the margin by which his income exceeds a 
 certain limit and would thus carry him into a higher effective 
 tax rate, and then to calculate his tax as though his income were 
 within the limit. So the amount paid on £131, which as a tax 
 would figure out, literally, 245. and gd., is reduced to £1. That 
 is, the taxpayer gives the government the extra £1 over £130 
 and then claims exemption. At £701 this reduces the tax from 
 £87 125. 6d. to £75 12s. 6d. plus the £1 donated to the govern- 
 ment or in all to £76 125. 6d., which is a considerable reduction. 
 At £712 or £713 it becomes a matter of indifference which 
 calculation is used. 
 
 With the foregoing as a clew we may now enter the labyrinth. 
 In T014 the annual budget, adopted just before the war broke 
 out, fixed the income tax at is. 7,d. in the pound and the super-
 
 26o INTRODUCTION TO PUBLIC FINANCE 
 
 tax which had before that been simply 6c?. in the pound on 
 incomes over £5000, but computed on all over £3000, was 
 graduated for all incomes over £3000. The " abatements " 
 were £160, if the total income did not exceed £400; £150 on 
 incomes between £400 and £500; £120 on incomes between 
 £500 and £600; and £70 on incomes between £600 and £700. 
 Earned incomes received relief as follows: If under £1000 they 
 paid only gd. ; if between £1500 and £2000, is.; if between 
 £2000 and £2500, 15. 2d., and above that came under the full 
 rate, and when the income exceeded £3000 the supertaxes 
 applied. The rates of the supertax were graduated from ^d. 
 in the pound on the first £500 below £3000 ; 'jd. on each pound 
 over £3000 up to £4000 ; gd. between £4000 and £5000 and so 
 on, reaching finally a maximum supertax equal to the income 
 tax rate plus a penny on all income over £7000. But after the 
 war broke out, in November, 1914, the income tax was doubled 
 and so were the relief rates and the supertax rates. 
 
 The War Income Tax Rate. — As war needs increased the 
 rates rose, finally reaching 6s. in the pound as the income tax, 
 and a graduated supertax reaching 45. 6d. on the excess over 
 £10,000. Earned incomes beginning at £131 with abatement 
 of £120 paid 2s. 3^/. up to £500, the other abatements dropping 
 to £100 between £400 and £600 and to £70 between £600 and 
 £700 ; then the relief rates rose to 35. o^. between £500 and 
 £1000; 35. gd from £1000 to £1500; 45. 6^/. from £1500 to 
 £2000; 55. 3^. from £2000 to £2500, after which the income 
 tax of 6s. came in, while the supertax began at £3000, strik- 
 ing back on the first £500. At the same time relief was also 
 accorded to small unearned incomes, namely, at 35. up to £500 ; 
 35. gd. between £500 and £1000; 45. 6d. between £1000 and 
 £1500; 55. 3(/. between £1500 and £2000; after which the in- 
 come tax of 6s. applied, and also the supertaxes as per the scale 
 above. It should be understood that each higher rate applies 
 only to the excess over the amount to which the previous rate 
 applied ; also that mixed incomes received only proportionate 
 abatements and reliefs. The war taxes reached down to 
 workers receiving as low as two pounds ten shillings a week,
 
 PERSONAL T.\XES: POLL AND INCOME TAXES 261 
 
 and took from them two and a half days' wages each year. 
 The supertax began with is. on £500 in every income of £2500 
 or more, and is. 6d. in £500 on every income of £3000 and rose 
 by 6d. for each additional £1000 up to £10,000, so that it was 
 45. 6d. on the excess over £10,000. The highest rate was 
 therefore 6s. plus 4.S. 6d. or 105. 6d. less the effect of the abate- 
 ments and reliefs. 
 
 The result of all this was a slightly irregular degressive rate 
 rising ver}'- sharply below the 6s. belt line, and approaching as 
 an ultimate, but never quite attainable, limit los. 6d. in the 
 pound or 52^ per cent.^ It is interesting to note that the 
 vertical increases shown on the chart, page 79 of this book, 
 have been materially modified by the interaction of the new 
 abatements and graduated reliefs, and that if the new " effec- 
 tive " rates are plotted the curve is much smoother although 
 still showing many abrupt changes. 
 
 Before leaving the British income tax there is one point 
 which may be mentioned, since the British tax in many of its 
 ' schedules is imposed on the annual value of property, all ques- 
 tions as to the increment value of property are thereby auto- 
 matically settled. Only when an increment value becomes part 
 of the " annual profits and gains " under Schedule D, and then 
 usually only as to persons whose income is made by regular 
 trading in stocks, bonds, lands, and other capital investments, 
 would an increment in capital value be likely to come under 
 the income tax. 
 
 The Administration of British Income Tax. — The assessment 
 of the British income tax is under the immediate direction of 
 the local Commissioners of Income Tax, who, save in the 
 cities, are men of property. There is a commission in each of 
 twenty-two districts or divisions. The commissioners are ap- 
 pointed by the old Land Tax Commissioners, named by Parlia- 
 ment. The actual work of assessment is done by assessors 
 appointed by the commissioners. The assessors report back to 
 
 ' .\ Royal Commission is at work now, 1020, on a plan inrluclinR, among other 
 things, the smoothing out of the idiocyncracies of the rates resulting from piecemeal 
 amendments.
 
 262 INTRODUCTION TO PUBLIC FINANCE 
 
 the commissioners, whose clerk writes up the assessment roll. 
 But their work is confined primarily to assessments of income 
 under Schedules A, B, D, and E, not presenting special diffi- 
 culties and for which there is stoppage at the source. Special 
 commissioners assess railroads, insurance companies, and other 
 matters not local, and especially the supertax. Assessments 
 under Schedule C are made by the " Commissioners for Public 
 Offices." But there are Surveyors or Inspectors appointed 
 directly by the Treasury or by the Board, that is, the Com- 
 missioners of Inland Revenue, who also make many assessments 
 which the local commissioners cannot well manage, and who in 
 particular unify and systematise all the work of the assessors 
 and of the local and special commissioners. There are special 
 arrangements for cities and many other details we may not 
 enter into. An appeal lies to the general commissioners, that 
 is, to the local Commissioners of Income Tax, but in most cases 
 appeal matters are actually handled and settled by a Surveyor 
 and reported to the Commissioners. Final appeal lies to the 
 Board. Collectors appointed by the general commissioners re- 
 ceive taxes stopped at the source and collect all others, subject, 
 however, to extensive supervision and control by the central 
 Board. As stated above, much of the tax, 70 per cent during 
 recent years, is stopped at the source. This necessitates that 
 every taxpayer who is entitled to an abatement or a relief will, 
 and all subject to the supertax must, file a statement or return 
 of his entire income. Repayment of any excess collected at the 
 source, in cash or by allowance against the tax on other income, 
 which is the most common case, is promptly made. This 
 method gives what the American tax lacks : (i) final and con- 
 clusive assessment before the tax is paid ; (2) an easy, speedy, 
 and inexpensive appeal before local officers ; and (3) as complete 
 an audit as is ever possible. 
 
 Sec. 6. History of Income Taxes in United States. — The fed- 
 eral government of the United States made use of an income tax 
 during and for a few years after the Civil War ; that is, from 
 1862 to 1 87 1, a period of ten years. Another income tax law 
 was enacted in 1894. But this one was promptly held to be
 
 PERSONAL TAXES: POLL AND INCOME TAXES 263 
 
 unconstitutional so that the law never took effect. Thereafter, 
 the constitution was amended, in 1913, and Congress was ex- 
 pressly empowered to levy an income tax. This Congress soon 
 did, and the tax levied under the new provision of the con- 
 stitution became one of the main sources of war revenue. It is 
 still, 1920, in force. 
 
 Constitutionality. — In the United States the question of the 
 constitutionality of an income tax is of great historical interest, 
 not merely as related to taxation, but as related to greater 
 political and social questions. Incidentally the controversy 
 throws light on the distinction, never too clear, between a 
 direct and an indirect tax. For both these reasons a brief 
 statement of the old controversy, although now settled, must 
 be included here. 
 
 The constitution originally provided : 
 
 " Representatives and direct Taxes shall be apportioned among 
 the several States which may be included within this Union, accord- 
 ing to their respective Numbers, which shall be determined by adding 
 to the whole Number of free Persons, including those bound to Service 
 for a Term of Years, and excluding Indians not taxed, three fifths of all 
 other Persons." Article I, Section 2, Paragraph third. 
 
 " The 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 uniform throughout the United States ; " 
 Article I, Section 8, Paragraph first. (It should be noted that the 
 word faxes is not repeated in the uniformity clause.) 
 
 " No Capitation, or other direct, Tax shall be laid, unless in Pro- 
 portion to the Census or Enumeration hereinbefore directed to be 
 taken," Article I, Section 9, Paragraph fourth. 
 
 Under these provisions it would appear that in the case of a 
 direct tax the procedure would be, first, to fix the total amount 
 to be raised, then divide that by the total population and 
 multiply the result b}- the population of each state in order to 
 arrive at the share of each. These shares would then be raised 
 in each state on the further basis of apportionment selected by 
 the state authorities. If tlial basis were polls, the matter 
 would, of course, be simple in form. IJut even if that were tlie
 
 264 INTRODUCTION TO PUBLIC FINANCE 
 
 basis, it would obviously disregard any differences in ability 
 between the people of different states, as well as between people 
 in the same state. If any other basis, such as property or 
 income, were selected the differences between states and the 
 consequent inequalities would stand out quite as clearly. The 
 average per capita wealth or income now varies greatly from 
 state to state and any per capita apportionment would neces- 
 sarily be sadly unequal. Even the technical omission of the 
 word taxes from the uniformity clause could scarcely be urged 
 as a defence against such inequality. 
 
 It thus becomes of some importance to find out what the 
 framers of the constitution meant by the term direct taxes, 
 other than the one they named, to wit, a capitation tax. His- 
 torical research by Bullock and Seligman shows clearly that 
 by " other direct taxes " the framers had in mind only the sort 
 of taxes, land and building taxes, with which they were familiar, 
 and which the Congress had undertaken to apportion during 
 the Revolutionary War. Among these there was no income 
 tax. Moreover, an income tax was, in that day and generation, 
 a novelty, and it would not have been in the least likely that a 
 personal income tax would have occurred to the minds of the 
 framers of the constitution as even a possibility. 
 
 Down to 1895 the Supreme Court uniformly held that the 
 phrase " direct taxes " as used in the constitution meant only 
 capitation and land and building taxes. When face to face with 
 an income tax the court held that it was not a direct tax within 
 the meaning of the constitution, but fell among the duties, 
 imposts, and excises which must be uniform and need not be 
 apportioned. 
 
 The income tax law of 1S94 was enacted for two reasons. 
 One was for the purpose of meeting any deficit which might 
 arise from a downward revision of the tariff made by the Demo- 
 cratic party then in power. The other was to satisfy a mild 
 radical movement directed against the growth of large fortunes 
 and demanding heavier taxation of the rich. The forces of 
 conservatism at once arrayed themselves against the tax and 
 sent an army of the most eminent attorneys into court to plead
 
 PERSONAL TAXES: POLL AND INCOME TAXES 265 
 
 the case against the tax. From a controversy over a fine techni- 
 cal point of law, the contest soon grew into a legal, political, and 
 social struggle of mass against class. Justice Field in deciding 
 the case seems to ha\'e recognised that it involved far more 
 than the comparatively light tax before the court. He said: 
 " The present assault upon capital is but the beginning. It will 
 be but the stepping-stone to others larger and more sweeping 
 till our political condition will become a war of ihe poor against 
 the rich ; a war constantly growing in intensity and bitterness." 
 The decision was that the tax was unconstitutional. It rested 
 in part on minor technicahties in the law itself, but in the main 
 on the ground that the income tax is a direct tax, even within 
 the meaning of the constitution. Thus all previous rulings 
 were reversed. 
 
 The Sixteenth Amendment. — This decision intensified the 
 very movement which it was, perhaps, designed to check. It 
 failed signally to stem the rising tide of radicalism. So far as 
 the income tax was concerned it led to the sixteenth amend- 
 ment to the federal constitution, finally ratified February 28, 
 1913, which reads: 
 
 " 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." 
 
 This amendment ended the controversy over the powers of 
 Congress with respect to the income tax. It is sufficiently self- 
 explanatory, except as to one phrase, which still (1920) requires 
 judicial interpretation. Does the phrase " from whatever 
 source derived " merely remove a minor point of difficulty 
 raised in the decision of the court in the case of the income tax 
 of 1894, namely, that a- tax on income derived from property is 
 a tax on the property, and hence a direct tax which must be 
 apportioned, or was it inserted as a sweeping investment of 
 Congress with power to tax the hitherto exempt salaries of 
 state olTicers, local officers, and school teachers, and the interest 
 on state and local bonds? These items of income have been 
 held to be exempt from a federal income tax on grounds origi-
 
 266 INTRODUCTION TO PUBLIC FINANCE 
 
 nating in the famous dictum of Chief Justice Marshall in 
 M'Culloch vs. Maryland, 1819, that " the power to tax is the 
 power to destroy," and since Congress may not destroy the 
 states it cannot tax any agencies or means necessary to their 
 existence, or to the performance of their reserved functions. 
 So far (to 1920) Congress has not seen fit to impose the tax 
 on incomes of these classes and the question has not been raised 
 in court. Whatever we may hold as to the expediency of 
 taxing interest on public bonds, it is hard to believe that a 
 uniform income tax on all persons including state officials 
 would destroy the necessary agencies of the states. The dictum 
 would clearly forbid a discriminating tax on such officials, but 
 would scarcely apply to a uniform one. Yet, conversely, a 
 state income tax on a federal salary does seem an impossibility. 
 
 The Civil War income tax and the attempted one of 1894 
 gave us many of the ideas now to be found in the federal in- 
 come tax law and on that account, as well as for their own 
 interest, are worth study. 
 
 The First Civil War Income Tax Law. — The resort to an in- 
 come tax early in the Civil War was suggested by the obvious 
 inequalities of a direct tax on real estate but apportioned to the 
 states on the basis of population. A bill was passed in 1861 
 providing for a tax of 3 per cent on the excess over $800 of 
 " the annual income of every person residing in the United 
 States." Income was not specially defined but was declared 
 taxable whether " derived from any kind of property or from 
 any profession, trade, employment, or vocation." It seems to 
 have been thought of as a tax in lieu of any tax on personal 
 property. It was called the " income duty," and not a tax, 
 to keep within the verbal requirements of the constitution as 
 it then read. The duty imposed by this law was never collected, 
 for before the date set when it should be collected Congress 
 reassembled and passed another income tax law superseding 
 the first. But this law gave us two ideas. One was the founda- 
 tion of the degressive progression of the rates, embodied in the 
 phrase " on the excess over," and the other that the tax is on 
 all residents, whether citizens or not.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 267 
 
 The Law of 1862. — The new bill was introduced in Congress 
 in 1862 with many misgivings, being regarded as objectionable, 
 inquisitorial, and " of all taxes least defensible," and was adopted 
 as a necessary evil. It was attempted to mitigate it by making 
 it a part of a comprehensive system of taxes. These included, 
 among others, taxes on corporations, some of them based on 
 gross receipts, others on bond interest and dividends. Salaries 
 of federal officials were taxable at 3 per cent on the excess over 
 $600 and this tax was withheld at the source. For other 
 persons the tax was also 3 per cent on the excess over $600. 
 Income was defined as the " annual gains, profits, or income of 
 any person residing in the United States, whether derived from 
 any kind of property, rents, interest, dividends, salaries, or from 
 any profession, trade, employment, or vocation, carried on in 
 the United States or elsewhere, or from any source whatever." 
 Here we find some more of the phrases still used in the income 
 tax law. Incomes exceeding $10,000 were taxable at 5 per cent 
 with a deduction of $600, but without benefit of the 3 per 
 cent rate up to $10,000. Pro\dsion was made to avoid taxing 
 as personal incomes receipts already taxed as income of corpora- 
 tions or in other special ways. While every one was required 
 to make a declaration the assessor or assistant assessor made 
 the assessment. An interval of sixty days was allowed for 
 making the assessment. These assessment provisions were 
 excellent in intent. It is unfortunate that they have not been 
 carried into the present law. Unfortunately, also, they were 
 better on paper than in practice. They broke down, not be- 
 cause they were not inherently good, but from the weakness 
 of the civil service at the time. The assistant assessors 
 were underpaid political appointees, with much authority 
 and little skill. The. personnel of the corps was constantly 
 changing, and selections were made on the basis of the old spoils 
 system. 
 
 One interesting feature of the law was that, with the intent 
 to equalise between the man who lived in his own home, or on 
 his own farm, and tenants, the latter were allowed to deduct 
 the amount they paid in rent from taxable income. This is
 
 268 INTRODUCTION TO PUBLIC FINANCE 
 
 perhaps the only feasible way of equalising between owners 
 and tenants in a country where ownership of the home is so 
 widespread, tenancy less common, and the difficulty of valuing 
 the rent so great. 
 
 The Invention of the American Form of Degressive Rate. — 
 In 1864 the progression was intensified. To many this seemed 
 objectionable. The principle of progression was unfamiliar. 
 One legislator said of it : "It seems to me it is a strange thing 
 to punish men because they are rich." After a long debate and 
 the consideration of many counter proposals Congress adopted 
 a system of rates involving degression. The form was the one 
 which is still characteristic of the United States income tax 
 and is peculiar to that country. The new rates were 5 per cent 
 on the excess over $600 up to $5000, 7^ per cent on the excess over 
 $5000 up to $10,000, and 10 per cent on the excess over $10,000. 
 It will be observed that, since each new rate applies only to 
 the excess over the highest sum to which the lower rate applies, 
 the effective rate, that is, the ratio to the entire income, never 
 changes abruptly.' 
 
 This law was, however, again amended before it went into 
 effect, and the 7^ per cent rate was cut out, the 10 per cent rate 
 being applied on the excess over $5000. In 1867 the pro- 
 gressive feature was modified and a flat rate was applied to the 
 excess over $1000. It is interesting that the principle of pro- 
 gression adopted, but abandoned, was revived in the later laws. 
 It should be noted in passing that the increase in the exemption 
 was more apparent than real as the constant fall in the purchas- 
 ing power of money during the Civil War made $1000 far less 
 effective than the original $600. 
 
 Assessment and Assessors. — While every taxpayer was 
 required to make a written declaration there was large de- 
 pendence on assessment and some degree of publicity. In 
 his report of 1864 the Commissioner of Internal Revenue 
 says : " the assessors . . . have become more thoroughly ac- 
 
 • For more details concerning this law and the whole of the Civil War income 
 tax see: Sehgman, Income Tax, pp. 44 ff.; Kennan, Income Taxation, pp. 237- 
 256; Howe, Taxation in the United States under the Internal Revenue System, 
 Chap. Ill; Von Hock, Finanzen der Vereinigten Staaten von Amerika, p. 2q6 et seq
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 269 
 
 quainted wdth their ooligations under the law than at any prior 
 period." 
 
 Yield of the Tax. — The income tax of the Civil War was slow 
 to bring in revenue at first, owing to its novelty and the lack of 
 trained assessors. During the period when patriotic feeling 
 ran high its yield was large. After that, evasion by false 
 declaration became prevalent and the revenue fell off. With 
 the general removal of the war taxes in 1870 the income tax was 
 repealed, as to incomes received after 187 1. Back taxes con- 
 tinued to come in for some time thereafter. 
 
 Income Tax Law of 1894. — The income tax law of 1894 
 carried over the old definition practically unchanged. The 
 tax was to be a very light one, being only 2 per cent on the 
 excess over $4000. It was to be accompanied by a tax at the 
 same rate on the entire net profits of corporations. Dividends 
 were not to be taxed again as individual income. Profits from 
 real estate sold were not to be taxable unless the real estate had 
 been acquired within two years prior to the sale thereof. This 
 is a somewhat novel method of solving the problem of the taxa- 
 tion of the increment in property values. A sworn statement 
 was to be required from all persons whose income was over 
 $3500. All formal assessment was omitted, and there was no 
 provision for an assessment roll. The administration was 
 placed in the hands of the collectors of internal revenue and 
 their deputies. This consolidation of assessment and collec- 
 tion with virtually no deliberate assessment at all is a very 
 vicious feature of the law which has unfortunately been inherited 
 by our later laws. Secrecy as to the returns was to rule. As 
 the law was never enforced it is of interest only as a carrier- 
 over of ideas. 
 
 The Corporation Tax of 1909. — In 1909, before the sixteenth 
 amendment to the constitution was ratified, Congress adopted a 
 tax on the net profits of corporations. This tax is often con- 
 sidered as the forerunner of the present income tax. It was 
 known as a special excise tax and as such was upheld by the 
 Sui)rcme Court. It is now closely correlated with the personal 
 income tax.
 
 270 INTRODUCTION TO PUBLIC FINANCE 
 
 All Incomes Accruing after March i, 1913, Taxable. — ^Imme- 
 diately upon the ratification of the sixteenth amendment Con- 
 gress began the preparation of an income tax law. This law, 
 approved October 3, 1913, took effect as to all incomes accruing 
 after March i, 1913. This last-mentioned date is important. 
 It is assumed that no income received prior to that date is 
 taxable. Property values as of that date are the starting point 
 in reckoning all increments of value or profits made from the 
 sale of property. This date also enters into the measurement 
 of capital for various purposes connected with the excess profits 
 tax, a tax conjoined, in a way, with the income tax. 
 
 The Several Acts. — The law of 1913 was in force nearly three 
 years when it was amended by the law of September 8, 1916, 
 and a much heavier tax was imposed. The law of 191 6 was in 
 turn amended October 3, 191 7. Finally the law was rewritten 
 during 191 8 and the resulting extensive revision became the law 
 approved late in February, 1919. This act is officially described 
 by its own terms as the Revenue Law of 1918. It includes 
 many taxes as well as the income tax. It would involve a 
 great deal of repetition to outline each of these laws in turn. 
 It will have to suflSce to outline the more important changes in 
 connection with each subject, following in the main the outline 
 of the present law. Reference, when not otherwise stated, 
 is to the law of 1918 passed in 1919.^ 
 
 Income Defined. — The general definition of gross income 
 is substantially the same as in the Civil War income tax law. 
 But it is somewhat expanded. It reads as follows : Gross in- 
 
 ' What follows, while a fairly complete statement of the most important features 
 of the law, is not a "taxpayer's guide." It is designed rather to support the theo- 
 retical principles discussed above by concrete illustration of an income tax at work. 
 It is hoped, if any one consults it for that purpose, that this outline together with the 
 theoretical analysis may make it clear why the law and the regulations require this, 
 and forbid that. Technical points have been omitted, and the writer has ventured 
 to omit things he considers unimportant to students. There is already an enormous 
 literature for those who would delve deeper. Montgomery, Holmes, Nelson, Black, 
 and scores of others have prepared treatises on the taxpayer's rights and duties. 
 The collectors will furnish free copies of the law, and of the regulations, and of the 
 excellent primers prepared under government direction. While these are designed 
 primarily for taxpayers, it would be hard to conceive any good reason why they 
 may not be obtained by students who may become taxpayers some day. See 
 bibliography.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 271 
 
 come " includes gains, profits/ and income derived from salaries, 
 wages, or compensation for personal services . . .^ of whatever 
 kind and in whatever form paid,^ or from professions, voca- 
 tions, trades, businesses, commerce, or sales or dealings in 
 property, whether real or personal, growing out of the owner- 
 ship or use of or interest in such property, also from interest, 
 rent, dividends, securities, or the transaction of any business 
 carried on for gain or profit, or gains or profits and income 
 derived from any source whatever." It is interesting to note 
 the rudiments of a grouping or classification of incomes. There 
 is a confused but apparent recognition of three kinds or classes : 
 (i) " salaries, wages or compensation for personal services," 
 which may be thought of as regular contractual earned income ; 
 
 (2) income from " professions . . . business, commerce," pos- 
 sibly thought of as including personal earnings not regular nor 
 contractual and the profits of trading capital. With this would 
 be classed profits from sales of property; (3) " interest, rent, 
 dividends," or funded income. 
 
 In excess of caution the statute goes on to explain that gross 
 income does not include certain items some of which probably 
 nobody would ever suppose were income. These items may be 
 grouped as follows : (i) capital or property receipts, such as the 
 proceeds of life insurance (including return of premiums), 
 inheritances, and bequests ; (2) interest on state and local bonds ; 
 
 (3) amounts received under accident or health insurance and 
 as workmen's compensation for injuries and disability; (4) a 
 special exemption of $3500 of salaries of the military and naval 
 
 ' "Gains and profits" appears to be a phrase copied from the older laws. That 
 Congress has no power to add "profits," when not "income," to the constitutional 
 meaning of "income" was decided by the Supreme Court in the so-called stock- 
 dividend case, Eisner vs. Macomber, March 8, icj20. 
 
 2 The omitted matter is in parenthesis and designates which federal salaries are 
 
 taxable. 
 
 ' This phrase is new, self-contradictory, and most disconcerting. Whether it 
 has any special significance or is merely bad English, time alone will reveal. In- 
 come is something coming in and paid means going out. In any event the statute 
 would give way to the constitution, which reads "from whatever source derived." 
 The tax is not on salaries, etc., " paid," but on salaries, etc., received. Text writers 
 all interpret paid as equivalent to received. Montgomery, for example, explains 
 it as meaning "even if received in some other form than cash." Income Tax Pro- 
 cedure, 191Q, p. 210.
 
 272 INTRODUCTION TO PUBLIC FINANCE 
 
 forces engaged in the war of 191 7 ; (5) income of foreign govern- 
 ments, and of domestic governments from public utilities 
 or " any essential government functions." Under a long 
 standing court decision there are also excluded the salaries 
 of state and local ofi&cials. But this is not mentioned in 
 the law. 
 
 In the interpretation of the definition the department has 
 confined the idea of income in general to money income. Such 
 income is taxable when realised, or in the language of the regu- 
 lations when " reduced to possession." The fundamental 
 thought may be expressed as " realised money income." There 
 is one important set of exceptions. Where compensation for 
 personal services is received in part or in whole in some form 
 other than money, as in board and lodging, in supplies, in the 
 use of an automobile, or in commutation tickets for travel be- 
 tween home and work, the value of these items is returnable 
 as income. Money is to be taken in its broadest sense and 
 includes such things as bonds, shares of stocks, notes, and 
 similar items readily reducible to a cash value. 
 
 Gifts of capital assets are not regarded as income in the hands 
 of the recipient. Similarly gifts out of income which has al- 
 ready been taxed even though it may be used by the recipient 
 as income and spent as such is not to be included in the income 
 of the recipient. The theory on which this rests is trouble- 
 some. It is supported by the argument that it is done to avoid 
 double taxation. If a father supports an adult daughter, 
 giving her a specified allowance out of his income, it is held 
 to be sufficient to tax the father on his entire income and then 
 not proper to tax the daughter on her allowance. Yet clearly 
 if the income tax is a personal tax the daughter should pay 
 and theoretically the father should not be allowed to deduct 
 the allowance from his taxable income. The logic becomes a 
 little humorously mixed as well as bitter when the divorced 
 man finds that he has to pay the tax on alimony, and at the 
 same time suffer a reduction of his personal exemption from 
 $2000 to $1000. 
 
 In general, use or enjoyment income is excluded. Thus one
 
 PERSON.\L TAXES: POLL AND INCOME TAXES 273 
 
 who owns the home he lives in is not required to return its 
 annual value as taxable, despite the fact that he who pays 
 rent for his home may not deduct the rent as an expense. So 
 too the farmer who consumes some of the products raised on 
 his farm need not return them as part of his income. The 
 underlying reason for these particular rulings and provisions 
 is probably the difficulty in many cases, possibly in the great 
 majority of cases, of arriving fairly at the value of such items. 
 There are many parts of the country where a valuation of these 
 items would be sheer guess work. 
 
 Realised Incomes and Realised Losses. — There are no excep- 
 tions, other than those incident to the interpretation of the 
 facts, to the rule that the income, more particularly profits, 
 must be realised, that is reduced to possession, before it is 
 taxable. It is taxable when, that is for the year in which, it is 
 realised. The same rule applies to expenses, losses, and bad 
 debts which are deductible when realised. The result is a 
 general dictum that each year must stand on its own bottom. 
 This rule is harsh. But the harshness is being gradually modified 
 by increasing recognition of the fact that " closing a transac- 
 tion " may be only a formal step in a preceding continuous 
 process. The difficulties are too technical for an elementary 
 treatise. One illustration will have to suffice. In many parts 
 of the country farmers produce a single speculative crop, 
 such as cotton, wheat, or dried fruits. To secure a favorable 
 market the crop may have to be carried over one or more years 
 after the year in which it was raised. Originally under the 
 strict rule it appeared that the expense of raising that crop 
 could not be carried against the receipts from that crop, but 
 were a deduction allowed only against receipts in the year 
 in which the crop was raised. Since the gross receipts in that 
 year may have been nothing, or very little, this ruling possibly 
 made the entire gross receipts from the sale of the crop taxable. 
 But this is corrected by a recent ruling which permits the 
 farmer to carry the expenses against the specific croj) to the 
 production of which they contributed. This ruling is a fair 
 interpretation of " gains and profits."
 
 274 INTRODUCTION TO PUBLIC FINANCE 
 
 Gross Income Not Gross Receipts. — Gross income, the thing 
 with which the income statement begins, is not gross receipts. 
 This is a distinction of more theoretical than practical import. 
 Under the definition gross income is by law confined to " gains, 
 profits," etc., hence, the cost of goods or of property bought 
 for sale is to be deducted before the statement is begun, and 
 only the difference between the cost and the selling price is to 
 be reported. But while this is the law, it seems to be necessary 
 to show how the gains were arrived at and the official forms 
 furnished for the reports of the taxpayers provide that in all 
 cases where it is appropriate there shall be reported the cost 
 of goods bought, or the cost of materials used, as in manufac- 
 tures, and that cost is taken from the gross receipts from sales 
 before the computation required by the law is started. Prac- 
 tically it makes no difference in the tax. 
 
 Deductions from Gross Income. — To arrive at net income 
 there are the following deductions to be made from gross in- 
 come : (i) business expenses, wages, and rentals ; (2) interest 
 paid on indebtedness, except that incurred to purchase and 
 carry bonds and other property the income from which is not 
 taxable; (3) taxes, except income taxes and excess or war 
 profits taxes (special assessments are not considered taxes for 
 this purpose) ; (4) losses, and bad debts when realised and 
 written off; (5) exhaustion, wear and tear and obsolescence. 
 There are special provisions for ascertaining the depletion of 
 capital assets in the case of mines and forests. Finally there 
 are special provisions for the amortisation of plants and equip- 
 ment acquired or constructed for the production of war ma- 
 terials or for war service, and special allowances for a decline 
 in inventory values of stocks of merchandise on account of the 
 fluctuation of the purchasing power of money. 
 
 In the successive laws and in their interpretation there has 
 been a tendency toward increased liberality in the application 
 of these deductions. Thus originally the only losses allowed 
 as deductions were such as were incurred in one's regular busi- 
 ness. If a grocer, for example, speculated in mining stock on 
 the side and made a loss he could not claim a deduction on that
 
 PERSONAL TAXES: POLL AND INCOME TAXES 275 
 
 account. Although, if he speculated in sugar, buying it at 
 eight cents a pound and having to sell it at six cents a pound 
 he could deduct the loss. Under the present law (revenue 
 act of 1 91 8) all losses are deductible to the extent that they 
 are not covered by insurance. By regulation even insurance 
 in excess of the original cost of the property lost is not taxable 
 if the excess is necessary to and is used for the replacement of 
 the property lost. This is a feature dependent on rising prices. 
 
 Personal Expenses. — To guard against possible misunder- 
 standings the law expressly explains that personal expenses, 
 living or family expenses, may not be deducted, nor any expenses 
 or expenditures of the nature of investment or betterments of 
 property. But all taxes are deductible except the income 
 tax itself. This adds to the discrimination against tenants 
 and in favor of owners of houses. For an owner not only has 
 no tax to pay on the use value of the home but can deduct the 
 local taxes thereon as well. The deduction of personal taxes 
 is a mistake. Some taxpayers keep track of the penny taxes 
 they pay on ice cream cones, soda water, movies, etc. 
 
 Credits. — For purposes which will be more fully ex-plained 
 below in connection with rates there is a sort of distinction 
 to be made between net income and net taxable income for the 
 normal tax, but not for the surtaxes. Net taxable income in 
 this sense is net income less certain " credits." The amounts 
 covered by the credits are treated as tax paid, for this limited 
 purpose only. The credits are : first, income which is regarded 
 as having been taxed at the source; second, the so-called 
 personal exemptions. The first allowance now consists solely 
 of " dividends " on the shares of stock of those corporations 
 which are taxed on their net earnings, as will be explained more 
 f ullv below. Under the earlier laws similar credits were estab- 
 lished for other items of income the tax upon which was col- 
 lected by stoppage at the source, namely interest, certain 
 salaries, rent payments, and other items.^ The second credits 
 or exemptions have been changed from time to time. The 
 original so-called personal exemption under the law of 1913 
 
 1 See law of September 8, icji6.
 
 276 INTRODUCTION TO PUBLIC FINANCE 
 
 was of $3000 for all persons, and $1000 more if the taxpayer 
 were a married person living with the spouse. These personal 
 exemptions continued down to and including the law of 191 7. 
 In that year an additional " war income tax " was imposed, 
 and for computing that additional tax the exemption credits 
 were $1000 for single persons and $2000 for married. In 1916 
 there was a further allowance made to the head of a family of 
 $200 for each dependent. A dependent was at that time defined 
 as a child or defective supported by the taxpayer. In 191 8 the 
 credit for dependents was extended, being allowed to any person 
 whether head of family or not, and was to be allowed on 
 account of any dependent defined as a person " receiving his 
 chief support from the taxpayer, if such person is under eighteen 
 years of age or is incapable of self-support because mentally 
 or physically defective." In 1918, too, the additional income 
 tax known as the war income tax was added to or merged into 
 the regular income tax, so that there is now but one tax. The 
 personal exemptions were then made the same as for the former 
 war income tax, namely $1000 for single persons, $2000 for 
 married persons, and $200 for each dependent. None of these 
 credits are allowed in computing the surtaxes as will be ex- 
 plained under rates below. 
 
 The Rates. — The rates ^ are such as to establish degressive 
 progression. There are two different kinds of rates applied 
 cumulatively as the incomes increase in size. The first is 
 the so-called normal tax or normal rate. This is now in two 
 parts. That is, it has been split into two rates. One of these 
 may be appropriately called the subnormal rate. 
 
 Ignoring, for brevity of statement, the complication result- 
 ing from the collection of part of the tax at the source, that is 
 on the earnings of corporations, the application of the rates is 
 determined by the size of the net income. For the normal tax 
 it is the net income over the personal exemptions, for the sur- 
 taxes it is the net income regardless of the personal exemptions, 
 and, for that matter, of the other credits as well. All taxpayers, 
 
 ^ The rates under the law of igi3 were so trivial that they are not worth talking 
 about, so we are forced to consider the war-rates.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 277 
 
 big and little, clerks as well as their millionaire employers, 
 enjoy the " personal exemption." The subnormal tax under 
 the law of 1918 applied to the " first $4000 of net income " 
 above the personal exemption.^ The normal tax under the same 
 law applies to all net income above the personal exemption and 
 above the $4000, which is subjected to the subnormal tax only. 
 The normal tax in 1918 was 12 per cent. The revenue law of 
 191 8 provides that the normal tax for income received in 1919 
 and thereafter shall be 8 per cent and the subnormal 4 per cent. 
 The Surtaxes. — The surtaxes begin at $5000 of net income 
 without benefit of personal deduction. Each rate named in 
 the law applies to a group or grade of income designated by the 
 upper and lower limits. Thus the first surtax is i per cent 
 on the " amount by which the net income exceeds $5000 and 
 does not exceed $6000." That is, it applies then to one $1000 
 of income only. The second surtax is 2 per cent on the amount 
 by which the net income exceeds $6000 and does not exceed 
 $8000. It applies to one $2000 of income only. For each 
 succeeding group or grade there is an increased rate. As 
 stated above the first grade or group is one of $1000 but each 
 group or grade thereafter up to $100,000 of net income contains 
 $2000. The rate increases i per cent for each grade. It makes 
 it, perhaps, a little easier to remember some of the rates if we 
 observe that between $6000 and $100,000 of income there are 
 $94,000 divided into forty-seven grades of $2000 each, and that 
 including the i per cent for the short grade from $5000 to $6000, 
 the surtax rate for the last $2000 before we reach $100,000 is, 
 therefore, 48 per cent. After we pass $100,000 the progression 
 is not so regular. There are two grades of $50,000 each with an 
 increase in rate of 4 per cent for each grade. Then one grade of 
 $100,000 with an increase in rate of 4 per cent and one of $200,- 
 000 with an increase of 3 per cent. This carries us up to $500,- 
 cxx) of income and to a rate of 63 per cent. Then 64 per cent is 
 applied to all income between $500,000 and $1,000,000. Finally 
 the maximum surtax rate of 65 per cent is applied to the excess 
 over $1,000,000. 
 
 > Non-resident aliens do not bciient l)y the subnormal tax.
 
 278 INTRODUCTION TO PUBLIC FINANCE 
 
 The effect of these combined rates can best be seen when we 
 reduce the total tax in each grade to a percentage of the whole 
 income. The rate approaches 77 per cent of the entire income 
 as a limit. But it never reaches that limit. For, no matter 
 how large the income may be there is always the personal exemp- 
 tion to be deducted and always the benefit of the subnormal 
 rate on $4000. Moreover each higher rate of the surtaxes 
 always applies only to incomes above and never to that part 
 below the lower limit of its class. Hence, even if the income is 
 very large indeed, the rate will be appreciably below 77 per 
 cent. For example, with an income of $100,000,000, allow- 
 ing a personal exemption of $2000 the total taxes would be at 
 1918 rates: (i) the subnormal tax, 6 per cent on $4000, or 
 $240 ; (2) the normal tax 12 per cent on $99,994,000, or Si 1,999,- 
 280, and the cumulative surtaxes which amount to $64,933,510. 
 The grand total is $76,933,030, which is $66,970 less than 77 per 
 cent. For an income of $1,000,000 the grand total of taxes is 
 $703,030, which is quite a little below 64 per cent plus 12 per 
 cent or 76 per cent, which a careless addition of the rates might 
 lead one to look for.^ 
 
 To see what these rates really mean and to study the pro- 
 gression one computes for a number of different incomes in 
 series the ratio of tax to local income. Thus a married man 
 with no children having an income of $10,000 net pays : a 
 subnormal tax of $240, normal tax $480, surtaxes, $10, $40 
 and $60, together $110 ; grand total $830, or 8.3 per cent of his 
 total net income. Other points in the income scale may be 
 computed in the same way and the results plotted, if desired, 
 on a curve. Owing to the continuous carrying of the exemption, 
 and to the fact that each increase in the surtaxes applies only 
 
 > The computation of the surtax, which for large sums is tedious, if not assisted, 
 is simplified by the use of a table printed in the official form for the return, showing 
 the cumulative surtax at the end of each grade. The taxpayer takes from the 
 table the total surtax up to the grade next preceding that in which his income falls, 
 and adds to that the percentage called for of the amount by which his income enters 
 the last grade. Complicated as the rates may seem, their application in any one 
 case is simple and taxpayers will find little use for the tables, charts and ingenious 
 formulae which enterprising mathematicians have published. The real problem 
 is "What is my income?" If a taxpayer can answer that question the rest is easy.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 279 
 
 to the " excess over " what preceded, the change in the curve is 
 never abrupt. Theoretically there is an elbow, or bird's wing 
 joint, in the curve at each change in the rate. But even when 
 drawn on a very large scale the change in the direction of the 
 curve is barely perceptible except for the first few increases. 
 The symmetry is spoiled by the sudden change from the sub- 
 normal to the normal rate, which is coincident as well with the 
 incidence of the first two surtaxes. The accompanying graph 
 shows the curve up to $12,000 of income at the rates on 1918 
 incomes. From the point where the graph stops the curve 
 continues in very smooth degression toward but never reaching 
 77 per cent. In order to aid the eye in catching the effect 
 of the increase in rates the lines are prolonged to show where 
 they would have gone had a new rate not been injected. 
 
 *A 9 
 
 < 
 
 a 7 
 a 
 
 b 4 
 
 " 3 
 
 2 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 Unitec 
 
 Stat 
 
 js Tnc 
 
 ome Tax o 
 
 t 1918, 
 
 
 
 
 
 
 E 
 
 1 
 
 Effective Rj 
 
 ites u 
 
 ? to S12.0(X' 
 
 ) of Income 
 
 . 
 
 
 ,.--^t 
 
 ^e"^^. 
 
 
 
 
 
 
 
 
 
 
 
 ^^A 
 
 p- 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^ 
 
 
 
 
 
 
 
 
 
 
 
 .s.-:!i 
 
 f^. 
 
 
 
 
 
 
 
 
 
 
 ..et* 
 
 ^:^ 
 
 
 
 
 
 
 
 
 
 
 
 ff*'^ 
 
 ^^^ 
 
 
 
 
 
 
 
 
 
 
 
 
 ."^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 $2000 
 
 iJOOO 
 
 $6000 $8000 
 
 INCOMES 
 
 $10000 
 
 $12000 
 
 There is no other income tax, unless it be a copy of this one, 
 in which the degression is at once so smooth and yet so sharp. 
 The proposed reductions in the rate for 191 9 incomes are made 
 in the normal and subnormal rates only. This means that the 
 degression will be sharper still, because the very large incomes 
 benefit relatively less by the reduction in these rates. 
 
 Classes of Taxpayers. — The taxpayers may be roughly 
 grouped in three classes. There are: first, citizens, whether 
 resident or not, who are theoretically taxable on their entire 
 income whether it be earned or gained in the United Slates or
 
 28o INTRODUCTION TO PUBLIC FINANCE 
 
 outside. Then, second, there are residents who may not be 
 citizens, who are likewise taxable on their whole income, re- 
 gardless of its source. Lastly, third, there are non-resident 
 aliens receiving income from sources within the United States. 
 The tax is therefore personal so far as residents and citizens 
 are concerned, non-personal or falling on income per se as to 
 non-resident aliens. This is on the plan of getting all that 
 can be got. There are obvious inconsistencies in mixing the 
 two ideas of a personal and a non-personal income tax, and the 
 confusion in logic leads to many practical difficulties. These 
 are even more apparent in the New York state income tax, so a 
 discussion thereof will be postponed until we come to that tax 
 below. It is hardly to be hoped that non-resident citizens will 
 report all income not coming into or earned in the United States, 
 or that resident aliens will report income that does not come into 
 the United States. Sometimes it is said that there is another 
 classification of taxpayers into individuals and corporations. 
 But this is rather a classification relating to the mode of report- 
 ing and for purposes of collection, and not one of taxpayers in 
 the sense of tax-bearers. Technically or administratively there 
 is also a class of taxpayers, called fiduciaries, that is, guardians, 
 trustees, executors, administrators, receivers, and conservators 
 who handle the incomes of others. 
 
 Another way of classifying taxpayers is suggested by the appli- 
 cation of the personal exemptions. This gives us single persons, 
 some with and some without dependents, heads of families, and 
 lastly husbands and wives. The law seems to contemplate 
 that married persons may make a separate return each and be 
 taxed separately if they have separate incomes, or they may if 
 they so elect make a joint return. The regulations favour the 
 making of separate returns despite the fact that it reduces the 
 revenue. Since the parts are necessarily less than the whole, 
 the likelihood of running into the higher surtax rates is lessened 
 by separate returns. If separate returns are made, only one 
 credit of $2000 for the personal exemption is allowed. The 
 two thousand dollars exemption may all be taken by one alone 
 or may be divided between husband and wife in any proportion
 
 PERSONAL T.\XES: POLL AND INCOME T.\XES 281 
 
 they may desire. It is, however, only when the aggregate 
 income is above S5000, that is, when it reaches the first 
 surtax, that there is any advantage to the taxpayer in separate 
 returns. 
 
 The Returns. — The technical name for the declaration, or 
 statement of income filed by the taxpayer, is the " return." 
 Returns are required of : (a) individuals, if their net income 
 equals or exceeds the personal exemption without including 
 the exemption for dependents, that is, if the income of a single 
 person equals $1000 or of a married person $2000, or exceeds 
 those amounts ; (b) all corporations, except certain classes that 
 are, on account of the nature of their business, exempt ; ^ (c) 
 partnerships ; and (d) fiduciaries. The return from partner- 
 ship is required, not as the basis of a tax on the partnership as 
 such, but as the means of checking the returns of partners as 
 individuals. Fiduciaries make return of the income of persons 
 whose estates they control. 
 
 Personal Service Corporations. — The law of 1918 makes an 
 ingenious distinction as to " personal service corporations." 
 These are defined as corporations whose income is to be ascribed 
 primarily to the activities of the principal owners or stock- 
 holders — and in which capital is not a material income pro- 
 ducing factor. These are treated for taxation substantially as 
 partnerships. One may doubt whether this ingenious device 
 will stand scrutiny in court. 
 
 1 The exempt classes are: i. Labor, agricultural, or horticultural organisations; 
 2. Mutual savings banks not having a capital stock represented by shares; 3. Fra- 
 ternal beneficiary societies, orders, or associations, (a) operating under the lodge 
 system or for the benefit of members of the fraternity, and (6) providing for the pay- 
 ment of life, sick, accident, or other benefits to the members or their dependents; 
 4. Domestic building and loan associations and cooperative banks without capital 
 stock, organised and operated for mutual purposes; 5. Cemetery companies; 
 6. Religious, charitable, scientific, or educational corporations, and societies for 
 the prevention of cruelty to children or animals, with limitations; 7. Business 
 leagues, chambers of commerce, boards of trade; 8. Civic leagues; 9. Clubs; 
 
 10. Farmers', or other, mutual hail, cyclone, or fire insurance companies, mutual 
 ditch and irrigation companies, mutual telephone companies, and like organisations; 
 
 11. Farmers' cooperative selling associations; 12. Corporations organised for 
 the exclusive purpose of holding property and distributing the income ; 13. Federal 
 land banks and national farm loan associations. 
 
 All exemptions are strictly construed and are subject to limitations omitted 
 above, but which can be found, if desired, in tl*e law.
 
 282 INTRODUCTION TO PUBLIC FINANCE 
 
 The Taxation of Corporate Income. — As has been stated, 
 corporations were subjected to a tax on net income as early as 
 1909. With the coming of the personal income tax in 1913 and 
 with its development in the subsequent income tax laws, this 
 tax has been continued, but it is adjusted to and practically 
 incorporated into the income tax. Briefly stated the system is 
 that corporations make return of their net income and pay the 
 tax thereon at the normal rate, except that for 1919 and years 
 thereafter, unless again revised, the rate is to be 10 per cent, 
 although the rate on individuals is for 1919 and thereafter set 
 at 8 per cent. Any taxpayer receiving dividends from a corpo- 
 ration takes his credit, as above explained, for the dividend in- 
 come as tax paid. But the dividends are included in computing 
 the surtaxes. The difference in the rates between corporations 
 and individuals for 1919 and thereafter may be regarded as the 
 beginning of a differential rate as between earned and unearned 
 incomes, or, it may, if one prefer, be regarded as a continuance 
 of the older tax on corporations, the new income tax being 
 added to the old one. Some discrimination resulting from the 
 separate taxation of corporations will be discussed below. 
 
 " Withholding " under Law of 1916. — In the law of 1916 
 there were a number of provisions for the collection or stoppage 
 of the tax at the source, called " withholding." The system 
 was, however, by no means so extensive as in the British tax. 
 Withholding the normal tax and remittance thereof to the gov- 
 ernment was made the duty of all who paid over or transferred 
 to others: (i) interest on corporation bonds, (2) income paid 
 out in a fiduciary capacity, (3) interest, and dividends coming 
 from abroad, or going to foreign parts, (4) " any fixed or deter- 
 minable annual gains, profits and income, such as salaries, wages, 
 interest, rent, etc. . . ." 
 
 To make such a system acceptable there must be, as is ex- 
 plained elsewhere, an easily accessible and expeditious means 
 of promptly repaying to those entitled to a refund or abate- 
 ment by reason of small incomes, or otherwise, all excess taxes 
 stopped at the source. No such system was devised, or at least 
 there was no refunding system provided in which any taxpayer
 
 PERSON.\I. TAXES: POLL AND INCOME TAXES 283 
 
 had confidence. In its place it was arranged that any recipient 
 of the items of income hsted above could file with the with- 
 holder, or banking agent transferring such income, a certificate 
 to the effect that he claimed exemption. These certificates, 
 appropriately printed on yellow paper, could then be turned 
 over to the government in lieu of withheld taxes. These yellow 
 certificates at once became the " yellow dog " of the income 
 tax. The system was unpopular, it put banks and others to a 
 considerable expense, making them unpaid tax collectors to 
 their own disgust as well as to that of their customers. 
 
 Information at the Source. — In the present law (191 8) 
 there is withholding at the source only as to income going to 
 non-resident aliens. In place of the old system we have " in- 
 formation at the source." This means that every person 
 making a payment to another of " interest, rent, salaries, wages, 
 premiums, annuities, compensations, remunerations, emolu- 
 ments, or other fixed or determinable gains, profits, and income 
 of $1000 or more " (formerly $800) in any year must make 
 " return " of such payment to the government. This system 
 is better than the other in so far as it does not involve so many 
 persons, but worse than the other in its moral degradation. 
 It tries to make some persons spies and tattle-tales and for 
 that reason largely fails of its purpose. 
 
 Secrecy of the Returns. — Secrecy of returns is a very promi- 
 nent feature of the tax. Practically nobody but officials, under 
 bond and subject to severe penalties if they reveal the content 
 of the returns, ever lays eyes on a taxpayer's return. The few 
 exceptions made are safeguarded in every way. One incidental 
 and lamentable consequence is that no adequate statistical 
 compilation of the facts and figures in the returns can be made, 
 or published, lest by inference some one might guess at some 
 one else's income or some part thereof. In other countries 
 income tax returns give invaluable information as to the eco- 
 nomic well-being of different classes, which is useful for many 
 purposes. In the United States the facts are buried in the 
 official reports in general averages (of a sort) and in grand totals. 
 
 So strong is the sentiment for secrecy that it is held to be
 
 284 INTRODUCTION TO PUBLIC FINANCE 
 
 impossible to create local boards of review ; and an assessment 
 of any formal deliberative sort before collection is hampered 
 and made practically impossible. In place of assessment 
 checked, reviewed, and formally recorded officially we have in 
 the main self -assessment, checked by inspectors, and revenue 
 agents who proceed on the same theory and by the same methods 
 as do detectives of crime. 
 
 To a people unaccustomed to an income tax it may seem that 
 one's income is a very intimate, personal, and private affair, and 
 there is a natural dread of letting one's business rivals know 
 one's business. But as a matter of fact the income tax state- 
 ment or return would be no more likely to be examined out of 
 sheer curiosity or for purposes of gossip than are the property 
 tax returns about which no such veil of secrecy is drawn ; and 
 the business rival generally has better information already than 
 he could possibly obtain from the returns. Against such dark 
 secrecy it may well be urged that it is very important to feel 
 assured that all incomes, my neighbour's as well as mine, are 
 fairly and truly assessed, a thing that can never be if the final 
 assessments never see the light of day. Fear of publicity is a 
 bogie-man. This does not mean, however, that publicity should 
 be used as a means of duress, to force assessments in excess of 
 what is right, just, and equal. 
 
 Scant Assessment Procedure. — Assessment procedure is 
 exceedingly scant. The taxpayer files his return with the nearest 
 collector. Since there are none too many of these, and they 
 have offices only in the large centres, this is often done by mail. 
 The collector examines the returns. He may " increase the 
 amount of the return," but there is no provision of law under 
 which he may lower it. Possibly if he thought it too high he 
 would return it and allow the taxpayer to file a new one. The 
 collector then sends the return to Washington to the Com- 
 missioner of Internal Revenue. " As soon as practicable after 
 the return is filed, the Commissioner shall examine it," says 
 the law. But he has five years in which to make an assess- 
 ment.^ Meanwhile the taxpayer has been required to pay a 
 1 Sec. 250 ((i) Revenue Law of 1918. Regulations 45, Art. 1012.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 285 
 
 first instalment of one-quarter and another quarter every three 
 months thereafter. By a sort of statute of Hmitations the 
 government's right to assess lapses after five years, unless fraud 
 is alleged. Until the Revenue Law of 191 8 came into force 
 the tax was not payable until ten days after " notice and de- 
 mand " was served on the basis of collectors' lists approved 
 by the Commissioner. Under the present law and regulations 
 the procedure is still more vague. The regulation says : " After 
 checking the figures the Commissioner assesses the tax on the 
 basis of the collectors' lists. The collectors then send out bills 
 for the taxes, either as computed by the taxpayers or as recom- 
 puted." But this applies only when the Commissioner finds 
 the tax to be different from that self -assessed. 
 
 Nowhere in the law or in the regulations is there provision 
 for a formal assessment roll, and the only warrant for collection 
 other than the one the taxpayer makes out for himself is the 
 bill for taxes mentioned in the passage above quoted. The 
 whole procedure of assessment and collection is lax and dis- 
 orderly in the extreme. 
 
 The Tax Year. — The tax year is usually the calendar year, 
 and most taxpayers report income on that basis. If, however, 
 the taxpayer has a fiscal year, or year of accounting, different 
 from the calendar year and closes his books, say, March 31 or 
 June 30 each year, the result of this is a set of elaborate pro- 
 visions for computing the tax on income returned for a year 
 other than the calendar year at the differing rates for different 
 tax years. 
 
 A corporation may not lessen the taxes of its stockholders 
 by retaining earnings in surplus of reserv^e. If the profits not 
 divided are not necessary to the business, they are taxable as 
 income of the stockholders as if they had been divided. 
 
 Defects in the Law. — As was suggested above, the assess- 
 ment procedure is very defective. It is a well-established 
 tradition in American taxation, based on the soundest prin- 
 ciples of law and practice, that a direct tax may not be collected 
 save on the basis of a full and formal warrant embodied in a 
 carefully prepared and legally attested assessment roll. Self-
 
 286 INTRODUCTION TO PUBLIC FINANCE 
 
 assessment is not found in any other tax, direct or indirect. 
 But even if self-assessment is to be adopted the assessments 
 should be made final and conclusive before collection. 
 
 Briefly stated the only proper procedure is : first, the tax- 
 payer files a return with a local assessor. (This ofi&ce does 
 not now exist. There is an extra-legal office of advisor, but 
 the advisor is not an assessor.) Second, the assessor assesses 
 the income and enters the assessment on an official roll. Third, 
 the roll is examined by a local board of review, and to that 
 board the taxpayer may appeal if dissatisfied with the assess- 
 ment as made by the assessor. The board should have the 
 power to revise any assessment, on its own initiative or on 
 appeal. Its approval should be necessary to the validity of 
 the roll. Such boards do not exist at present. Appeal now 
 lies only to the Commissioner at Washington and except for 
 taxpayers residing near Washington is impracticable and not 
 worth while unless the amount of the tax in dispute exceeds 
 the cost of making the appeal, which is always large. For 
 taxpayers more than two thousand miles away, the cost of appeal 
 may easily exceed $1000. Fourth, a final appeal should lie 
 to some central authority, preferably divided into central 
 circuit and district boards, somewhat after the model of the 
 federal court. Fifth, the roll, duly corrected and approved, 
 should become upon a fixed date final and conclusive as to the 
 taxes of the year in question. On it the proper auditing ofiicers 
 would extend the taxes, charging them to the collector. The 
 roll should be the sole warrant for collection and ultimately the 
 official record of reference for taxes paid or still due. 
 
 Another defect in the law results from the collection of taxes 
 on corporate earnings and the method of credits to recipients of 
 dividends. A person who receives dividends and whose income 
 from other sources does not equal or exceed his personal exemp- 
 tion loses the whole or part of the benefit of the personal 
 exemption, which accrues to his neighbour who receives no 
 income from dividends. In like manner the benefit of the 
 subnormal tax is withheld from dividend receivers of less than 
 $6000 of other income. This is a very serious discrimination.
 
 PERSONAL TAXES: POLL AND INCOME TAXES 287 
 
 It can be remedied only by a system of refunds. A refunding 
 system, prompt and readily accessible and in which taxpayers 
 have confidence, is badly needed, not only to correct this but 
 other inequalities as well. 
 
 The rates of the surtaxes are extremely high, rising to a 
 point not justifiable on any sound theory of progressive taxa- 
 tion, or of equal sacrifice. They are so high as to restrict 
 accumulation and to retard production. They are strictly war 
 rates and if continued under peace conditions will ultimately 
 result in decreased revenues. Unfortunately this question has 
 become one of politics. ^ 
 
 A much discussed issue is the heavier taxation of unearned 
 incomes. Possibly the higher rates on corporation net incomes 
 for 1919 and subsequent years than are to be imposed on other 
 incomes is to be regarded as looking in this direction. In 
 reaching any decision due regard should be had of the fact that 
 property that is the source of unearned income bears all the 
 burden of state and local taxation. 
 
 Sec. 7. State Income Taxes in the United States. — While 
 there have been at various times among the American com- 
 monwealths some taxes called income taxes, there were none 
 worthy of that name before 191 1. The older ones amounted 
 to little more than a haK-hearted attempt to include with prop- 
 erty some few items of income, or to reach by way of taxing 
 income some sources of vested income which could not very 
 well be taxed on a property basis. As time passed it became 
 more and more apparent that intangible personal property 
 could not be made tributable under the general property tax. 
 There seemed, however, to be a distinct kind of taxpaying 
 ability, which had been in part aimed at by the old personal 
 property tax and which was not being reached. 
 
 In 191 1 Wisconsin proposed to kill two birds with one stone: 
 (i) to reach in part at least that sort of taxpaying ability 
 which an income tax alone can reach ; and (2) ultimately to drop 
 the vain effort to get at personal property. So an income tax 
 was imposed on all incomes, individual or corporate, earned in 
 ' See discussion of the limit of progression, p. 97.
 
 288 INTRODUCTION TO PUBLIC FINANCE 
 
 or derived from sources within the state. Money and credits, 
 farm machinery, household furniture, and personal adornments 
 were exempted from the old property tax and any tax paid on 
 personal property could be deducted from the amount of tax 
 assessed on income. At the same time the administration of 
 the entire tax system was centralised under the supervision of 
 the state tax commission, whose officers entered directly into 
 local assessment work. Owing largely to the excellence of its 
 administration and frequent adaptation of the law to meet the 
 difficulties which arose, the new tax became a marked success. 
 The tax was graduated, the rates rising from i per cent on the 
 first taxable $1000, up to 2 per cent for the fifth $1000, then by 
 ■J per cent per thousand, up to 6 per cent on the excess over the 
 twelfth $1000. The exemptions were $1200 for husband and 
 wife, $200 for dependent children, and $800 for single persons. 
 Curiously enough the rate on corporations was also graduated. 
 Individuals were not again taxable on dividends or interest 
 received from corporations. The proceeds were distributed 
 70 per cent to the local government where the taxed income 
 had its origin, 20 per cent to the county, and 10 per cent to the 
 state. The tax was so successful that it gave prestige to the 
 idea of a state income tax. 
 
 Since then Oklahoma, Connecticut, West Virginia, Massa- 
 chusetts, New York, Missouri, Delaware, New Mexico, and 
 North Dakota, nine more states, have entered the field of in- 
 come taxation, although some of them only in part. Oklahoma 
 gives high personal exemptions and seems to aim mainly at 
 income from productive sources within the state, notably from 
 oil production. The rates are progressive and the revenue is 
 used for state purposes. The laws of Connecticut and West 
 Virginia do not provide a personal income tax but cover cor- 
 porations only, and while called income taxes are more like taxes 
 in the corporate franchises. Both are for state purposes. 
 
 The Massachusetts law provides a classified income tax per- 
 sonal in character. It is in lieu of the old tax on intangible 
 personal property in so far as the income therefrom is taxable. 
 Income from stocks and bonds is taxed 6 per cent, annuities
 
 PERSONAL TAXES: POLL AND INCOME TAXES 289 
 
 and income from trades and professions are taxed i^ per cent, 
 while profits from dealings in money or intangibles is taxed 
 3 per cent. The exemptions are small. The administration is 
 centraHsed, the receipts, less cost, are distributed locally, with 
 a plan, to be reached gradually by 1928, of dividing the pro- 
 ceeds as the state tax is apportioned. Meanwhile the distri- 
 bution is a diminishing offset to the localities for loss of the taxes 
 on intangibles. 
 
 Missouri has a flat rate of i-| per cent on incomes defined 
 practically as are incomes under the federal income tax law. 
 Delaware has a somewhat similar tax of i per cent. New 
 Mexico, like Oklahoma, seeks to tax outsiders who make money 
 in the state. North Dakota, under the leadership of the Non- 
 partisan League, a somewhat revolutionary body, adopted an 
 income tax that distinguished between earned and unearned 
 incomes, a thing which as yet no other income tax in the United 
 States had undertaken to do, and also included stoppage at the 
 source. 
 
 The New York Income Tax. — The most general income 
 tax law is that of New York, which took effect in 1920 on 
 incomes of 1919. A franchise tax on corporations measured 
 by net income had been imposed in 191 7. The tax follows 
 rather closely the federal income tax law with divergences too 
 detailed for an elementary text, and besides, is at present 
 writing (1920) under amendment in the legislature. The rates 
 are graduated, being i per cent on net income not exceeding 
 $10,000, 2 per cent from $10,000 to $50,000, and 3 per cent over 
 $50,000. This law opens up in full one of the difficulties which 
 state income tax laws will have to meet and solve. That is the 
 question of interstate income. If this tax had taken the form 
 of a tax on residents based on personal income from whatever 
 sources derived, as recommended in the National Tax Associa- 
 tion's model tax system, no trouble would have arisen. But 
 New York, especially the city, is surrounded by states whose 
 residents work in New York, do business there, or derive income 
 from sources in New York. Among these arc the commuters, 
 who go back and forth daily. The New Yorker did not con-
 
 290 INTRODUCTION TO PUBLIC FINANCE 
 
 template with serenity paying a tax on his income which a non- 
 resident working beside him or doing business in competition 
 with him did not have to pay. So the tax was extended to 
 cover income earned in or derived from New York. That this 
 was not merely " grabbing everything in sight " but an attempt 
 at making the tax equal as between a New Yorker and a com- 
 muter is shown by a provision, appearing to mean that if a 
 non-resident has to pay an income tax in his own state he shall 
 be allowed credit therefor to such an extent that his total tax 
 shall equal what a New Yorker would pay on like income.^ 
 But since none of the neighbouring states yet levy a personal 
 income tax this provision is inoperative. The argument that 
 the tax on the non-resident is merely to equalise burden has, 
 however, its weakness. For, theoretically at least, the non- 
 resident pays, at his residence, in some form, all the taxes re- 
 quired to support government there ; and if the New York 
 taxes had remained on the old property basis, the New Yorker 
 would never have thought of asking the non-resident to help 
 out in meeting the increase in the property tax necessary to raise 
 the amount now to be raised by the income tax. The whole 
 thing shows a failure to appreciate that it is the entire system 
 or complex of taxes that must be considered in determining 
 questions of justice, not merely one tax by itself. 
 
 1 Failure of the law to make proper allowance of the personal exemption to a non- 
 resident was corrected by the federal court, which regarded that as discrimination.
 
 CHAPTER X 
 WAR PROFITS AND EXCESS PROFITS TAXES 
 
 Section i. A New Tax. — So much ingenuity has been 
 expended in the past by many generations of tax-gatherers in 
 devising ways and means for mulcting the taxpayer that the 
 invention or discovery of a new tax is a natural cause for sur- 
 prise. Yet the Great War has apparently given the world a 
 new tax, the excess profits tax. During past wars the sources 
 of revenue which the new tax attempts to tap have, to be sure, 
 been drawn upon. But they have been reached by means of 
 the other forms of taxation, by some of the taxes upon prop- 
 erty, upon income, and by consumption taxes. 
 
 This tax is new in the sense that it singles out a form of 
 profits — war or excess profits — never heretofore separately 
 distinguished as a tax base ; and it is new, also, as to the social 
 justification upon which it rests. The tax is levied on some- 
 thing conceived of as abnormal, and in addition to the fiscal 
 justification ever present in all taxes, there is a more or less 
 distinct intent to give the public a share in the gains of " profit- 
 eering " as something transitory and abnormal as well as 
 undesirable. Every other tax is based on something regarded 
 as normal and permanent, or at least recurrent, and even where 
 there is a regulative intent the regulation is designed and 
 thought of as permanent and not transitory. 
 
 Analogies with Other Taxes Partial Only. — While we have 
 no desire to overstress the newness of this tax, it is, perhaps, 
 of interest to consider whether the analogies to older taxes 
 which have been suggested will hold. It has been suggested 
 that the excess profits tax is analogous to the inheritance tax. 
 Inheritance may be regarded as something unexpected and of 
 
 291
 
 292 INTRODUCTION TO PUBLIC FINANCE 
 
 the nature of a windfall, but certainly not as something abnor- 
 mal. So this analogy goes but a little way. Again, it has been 
 suggested that there is an analogy to a special assessment for 
 benefits accruing to some individual by reason of government 
 action. But war was not declared for the purpose of creating 
 profiteers or their profits, and the private benefits which occa- 
 sion special assessments are not regarded as abnormal, but as 
 more or less designed. Again the analogy goes but a little way. 
 Finally, the tax is sometimes thought of as analogous to " un- 
 earned increment value " taxes. The analogy here is closer. 
 But it is valid only in so far as " unearned " is interpreted to 
 mean undeserved or abnormal, which is generally a strained 
 meaning. An increment in the value of land is a normal phe- 
 nomenon. The tax has been called a variant of the income tax. 
 But its sole relation to the income tax is that it uses a form of 
 income as its base. There is otherwise not even a superficial 
 resemblance. 
 
 Sec. 2. What are Normal Profits? — The base of the tax 
 is the excess of profit over an assumed normal profit. While 
 the social mind had been prepared for the concept of this new 
 tax base, by the subtle interpretation of unearned, in the term 
 " unearned increment," as meaning undeserved, there has 
 never been before such a complete, widespread, and almost 
 unquestioning acceptance of the idea of unmerited profits as 
 is involved in this tax. Astronomers and biologists for a long 
 time past, and, more lately, social statisticians have used for 
 scientific analysis that form of average called the mode, but 
 that idea has never been very clear or distinct in the popular 
 mind. Yet here we have a legislatively expressed conviction 
 supported by general assent of the people that there is a modal 
 or normal profit to which the business man is fairly entitled, 
 and that abnormal profit ought to be trimmed away as if it were a 
 noxious growth, or at least made wholesome by a public use. 
 
 As a source of revenue in times of peace, even in " piping 
 times of peace," the excess profits tax is a tax that is difficult 
 to justify or defend. But as a war tax it has a few distinct 
 merits. They are merits of expediency, not of justice. It is
 
 WAR PROFITS AND EXCESS PROFITS TAXES 293 
 
 effective in getting revenue. It garners for government some 
 of the results of war inflation of prices. 
 
 Lloyd George Justifies Excess Profits Tax. — In his first war 
 budget speech in November, 1914, Mr. Lloyd George epito- 
 mised war taxation in the following remarkable statement : 
 " During the war and during the period of reconstruction . . . 
 I think we can look forward to something like four or five years 
 when the industries of this country will have the artificial 
 stimulus which comes from these abnormal conditions. . . . 
 I want to impress upon the Committee with all the earnestness 
 at my command, that it is desirable that the nation, during 
 this period of inflation, should raise as much money out of taxa- 
 tion as it can be induced to contribute. It is easier to raise taxes 
 in a period of war and to lower them in a period of peace than it 
 would be to raise even lower taxes in a period of peace. War 
 is the time for sacrifice, and that makes a difference. It is a 
 time when men know that they are expected to give up com- 
 forts, possessions, health, Hmb, life — all that the State requires 
 in order to carry it through the hour of its trial. It is a time 
 of danger, when men part wiUingly with anything in order to 
 avert evils impending on the country they love. Every twenty 
 millions raised annually by taxation during this period means 
 four or five millions taken off the permanent burdens there- 
 after imposed on the country." 
 
 Evils of Inflation. — Inflation is a nasty by-product of war, a 
 result of war spending, and of the errors of war finance. In- 
 flation spreads its influence unevenly from class to class and 
 from man to man, enriching some and impoverishing others. 
 It is undoubtedly less disturbing, at a time when the least 
 possible disturbance of industry is highly essential, to gather 
 some of the needed extra revenues from those who profit by the 
 irregular rise in prices, than it would be to increase the general 
 taxes. Those who get rich from war inflation can certainly 
 well afford to pay war taxes. To use the phrase of the street, 
 " a good way to get money for the government is to take it 
 from those who have it." The defect of the tax is that it has 
 so little equality.
 
 294 INTRODUCTION TO PUBLIC FINANCE 
 
 Sec. 3. Origin and Spread of the Tax. — The war profits 
 tax, which soon evolved into the excess profits tax, was first 
 proposed in 191 5 in Denmark and Sweden. It was the large 
 and extraordinary profits made by traders, especially by ex- 
 porters, in supplying the needs of Germany which attracted 
 attention and caught the ever greedy eye of the tax-gatherer. 
 These traders had exceptional opportunities for profit, since 
 their trade routes were intact while almost all other trade routes 
 into Germany were cut off. Much of this rich trade was in 
 foodstuffs and it was at first suggested that the tax be called the 
 " goulash " or stew tax, implying that it was aimed at the 
 German stew-pot. From here the tax spread with incredible 
 rapidity to all parts of the world. Like the Spanish influenza 
 it speedily infected all the belligerent countries on both sides of 
 the fighting lines and also most neutral countries. Writing as 
 early as March, 1917, J. C. Stamp was able to list thirteen 
 countries which had been invaded by this tax {Economic Journal, 
 March, 1917). 
 
 When first devised the tax was aimed only at those unusual 
 or abnormal profits which were distinctly traceable to war 
 conditions as a cause, or to " trading on the world's misery." 
 So its very first victims were naturally the manufacturers of 
 munitions. But other profits soared at the same time and the 
 line of demarcation between " war profits " and other unusual 
 profits proved exceedingly hard to draw. So post hoc easily 
 became propter hoc and all profits were drawn into the net. 
 While the war profits idea, and with it the abnormal profits 
 concept, stuck fast, all large profits, even though they might be 
 quite normal, came under suspicion. Although large profits 
 were fully covered by the income tax with its surtaxes, excess 
 profits were often identified with large profits or gains. Two 
 examples will show how the idea ran away from its own logic. 
 Gold mining was at first included, although with a partial 
 return to common sense it was later excluded. Now, gold has a 
 fixed price, which was not changed by the war. But all the 
 expenses of mining, the cost of labour and of materials, went up. 
 By no possibility could a gold mine make a war profit; quite the
 
 WAR PROFITS AND EXCESS PROFITS TAXES 295 
 
 contrary, all gold miners suffered inevitably a war loss. Yet 
 a rich " strike " was to be considered an " excess profit." 
 Again, one of the early American excess profits tax laws under- 
 took to cover indi\aduals, partnerships, and corporations and 
 included as taxable excess profits personal earnings in excess of 
 $6000, much to the surprise and indignation of many lawyers 
 and other professional men, many of whom earned less rather 
 than more during the war. By what reasoning $6000 was hit 
 upon as " normal " earnings is hard to see, the more so as the 
 income tax surtaxes would have covered the same " excess " 
 earnings. Exceptions there were of many industries. Thus 
 agriculture was in many countries exempt, and in the United 
 States the tax was finally confined to corporations. 
 
 So long as the emphasis lay on war profits, as the object of 
 the tax, normal profits, the base from which the computation 
 starts, was identified with a pre-war profit. The comparison 
 was at first a direct one in absolute figures. If a given firm was 
 making, before the war, $100,000 a year and in a year during 
 the war made $150,000, then $50,000 was considered the war 
 profit. Obviously this assumes that trade is along old lines, 
 that there is no new plant and equipment and no change in 
 products. But these assumptions were rarely true to life. 
 How should one proceed if there were new capital investment? 
 The answer was, allow the new capital the same rate of return 
 as was earned before the war on the old capital, and tax only 
 the excess over that amount. But suppose again it were an 
 entirely new concern which was not in business before the war. 
 What then? Here the answer was: allow an arbitrary rate of 
 return on capital, arbitrarily declaring that rate to be the normal 
 profit rate, and tax all over that as excess or war profits. In 
 arriving at the arbitrary rate to be allowed the thought that 
 there is a basic rate, a generally accepted " due return " on 
 capital, which ought to be allowed, comes up at once. So any 
 specific reference to pre-war actualities fell away and an a 
 priori normal rate came in. Different countries fixed difTerent 
 rates. But even after this due return rate had been satisfac- 
 torily, if arbitrarily, fiixed differences in risk rose uj^ to perplex.
 
 296 INTRODUCTION TO PUBLIC FINANCE 
 
 A company with rapidly wasting assets cannot live on six, 
 seven, or eight per cent annual profits. Capital will not go into 
 highly speculative enterprises (motion pictures is the stock 
 example) unless it has a chance at big profits to offset possible 
 big losses. Some flexibility was necessary. America adopted 
 the idea, in part at least, of the going rate in like concerns or 
 like lines of business. Great Britain gave the administration 
 power to allow additional rates for risk or other peculiar reasons 
 in selected exceptional businesses. Thus aircraft manufacture 
 was allowed 9 per cent in addition to the general normal rate, 
 which was 6 per cent, making 15 per cent the normal for this 
 business. But more important than this, the ideas of depre- 
 ciation, obsolescence, and depletion of capital were greatly 
 extended, so that any excess profit or return on capital over 
 the rigid normal assumed for all capital which might be assumed 
 to be due to the special conditions of a given industry were thus 
 eliminated from profits and treated as expenses. 
 
 So kaleidoscopic and rapid were the changes in the forms of 
 these taxes in different countries that an attempt to describe 
 them, save at undue length, would be confusing in the extreme. 
 We can only touch on some of the main features in the taxes of 
 Great Britain and of the United States and shall confine our 
 attention mainly to their final form, reached just after the 
 armistice. 
 
 Sec. 4. The British Excess Profits Duty. — The " excess 
 profits duty " of Great Britain was fixed in 191 8 at 80 per cent 
 of the amount by which the profits of the taxable year exceeded 
 the " pre-war standard of profits." This " pre-war standard" 
 had by this time settled down to mean one of two things. It 
 was either the average profit of any two of the last three years 
 prior to the war, or a statutory percentage of the capital at the 
 end of the last pre-war year} The taxpayer might use which- 
 ever basis was the larger. Obviously the larger the normal the 
 smaller the excess would be. New capital and new concerns 
 
 1 By applying the statutory rate to the pre-war capital, as the normal, Great 
 Britain preserved the idea of a pre-war profit. The American idea, as we shall see, 
 was of a pre-war normal rate of profit.
 
 WAR PROFITS AND EXCESS PROFITS TAXES 297 
 
 received the statutory allowance together with 3 per cent addi- 
 tional to cover the general risk of investment in a war period. 
 It will be observed that the pre-war normal idea was preserved 
 as far as possible, although of course the arbitrary fixing of the 
 statutory rate cut loose somewhat from actual pre-war facts. 
 The statutory rate was iLxed at 6 per cent for companies and at 
 first at 7 per cent, then finally 8 per cent for other forms of 
 organisation. Mention has already been made of the special 
 allowances which the referees might make for lines of business 
 with peculiar risk or other conditions. It is obvious that the 
 determination of invested capital takes on great significance. 
 To avoid repetition this will be discussed under the American 
 tax only. Although the general rules of income tax accounting 
 prevailed, " profits " were by no means identical with " income." 
 The subject of this tax was the proprietors' trading profit only.^ 
 Hence interest, annuities, and all proceeds of investment are 
 excluded from the computation. It should be noted that the 
 appHcation of the statutory rate being to pre-war capital, the 
 tax is essentially a war profits tax, whether the constructive 
 statutory or the actual pre-war profits are used as the normal. 
 One grave difficulty of clinging so tenaciously to the pre-war 
 basis was that as time passed and changes came, that basis 
 became more and more antiquated and out of proper compari- 
 son with present facts. 
 
 Sec. 5. The History of the War and Excess Profits Tax 
 Laws. — In the United States the " war profits and excess 
 profits tax " reached its most highly developed form as applied 
 to net income made during the year 1918. This tax had a fore- 
 runner in a tax of 12,} per cent on the profits of manufacturers 
 of munitions levied under the Act of 1916. A general war 
 profits tax was imposed by the act of March, 1917, to be re- 
 placed by the excess profits tax in the act of October, 191 7, 
 both reappearing in new and consolidated form in the revenue 
 law of 1918. An interesting feature, fortunately for one year 
 only, has been already referred to. That was the extension of 
 the tax to cover the excess of personal earnings not necessarily 
 
 1 In this the British tax was unlike the American and was dislinclly more logical.
 
 298 INTRODUCTION TO PUBLIC FINANCE 
 
 profits when over $6000. This part of the tax of 191 7 caused 
 much discontent and was barely endured even as a war measure. 
 Profits earned in 1919 and thereafter are taxable only under the 
 excess profits tax, the so-called war profits provisions coming 
 to an end in January, 1920. At the same time the rates of the 
 excess profits tax were reduced. 
 
 The " war profits and excess profits tax " (Act of 1918) ap- 
 plied only to corporations organised for profit. ^ As its name 
 implies it was a combination of two taxes and was theoretically 
 separable into two parts. One was the excess profits tax proper, 
 the other was the so-called war profits tax. The first was theo- 
 retically on the excess of profits over pre-war average earn- 
 ings. The two taxes were interwoven and interlaced. Un- 
 like the British these taxes were based on net income from 
 every source, as returned for income tax, and not on profits 
 only. 
 
 The Tax as Enforced. — The two normals, which when in- 
 creased by an arbitrary allowance of $3000 for each were called 
 " credits " and were deducted from profits in order to get the taxa- 
 ble item, differed in the following respects. The excess profits 
 normal was 8 per cent of the capital used in the business for the 
 taxable year.^ The tax fell on the difference between the actual 
 profit and this normal profit plus an arbitrary allowance of 
 $3000. The war profits normal was the average profits of the 
 three pre-war years 191 1, 191 2, and 1913, plus or minus, as the 
 case might be, 10 per cent of the increase or decrease in the in- 
 vested capital of the taxable year over the average invested 
 capital of the same three pre-war years. Of course, if there 
 were no pre-war business or capital, it was 10 per cent of the 
 capital used in the taxable year, although to this administrative 
 exceptions were permitted. To this normal an arbitrary 
 allowance of $3000 was added to make the technical pre-war 
 
 ' Gold mining was specifically exempt. We omit provisions exempting very 
 small profits, those giving abatements to incomes under $30,000, and the special 
 provisions for profits on government contracts and for railroads and other utilities 
 taken over by the government during the war, and some other minor adjustments. 
 
 2 Note that unlike the British tax this cuts entirely loose from the pre-war con- 
 cept ; we have here a pure normal profit concept.
 
 WAR PROFITS AND EXCESS PROFITS TAXES 299 
 
 credit or deduction. To repeat, the excess profits tax assumed 
 that an 8 per cent return on capital is normal under all condi- 
 tions. The war profits tax assumed that pre-war actual earn- 
 ings were normal and when that was not ascertainable that 
 10 per cent on capital is a fair estimate in view of the high tax 
 rate to be applied to the war profit. 
 
 The excess profits tax was graduated not by size of the excess 
 but by degree of excessivity measured in terms of rate of profits 
 to capital. Thus on that part of the taxable excess which did 
 not exceed 20 per cent of the capital the rate was 30 per cent, 
 on all over 20 per cent of the capital the rate was 65 per cent. 
 Up to 20 per cent, then, the excess was considered mild, above 
 that it became more intense. The war profits tax was a straight 
 80 per cent of the excess of net income over the war profits 
 credit.^ 
 
 But the two taxes were not to be levied on any one company. 
 In effect only that one was paid which was the larger of the two. 
 The interweaving of the two taxes was, however, preserved. The 
 excess profits tax was computed first. Then the war profits 
 tax was computed. If the first exceeded the second it stood 
 as the tax and the second was dropped or forgotten. But if 
 the second exceeded the first the first was not simply dropped, 
 but was considered as being included in the second. It seems 
 to have been the purpose of this provision to facilitate the re- 
 peal or dropping of the war profits tax without disturbing those 
 parts of the law relating to the excess profits tax. The law 
 reads as though the two were one tax with three grades each 
 having a different rate.^ 
 
 ' The American war profits tax, although the rate was nominally the same, was 
 heavier than the British in so far as it applied to all net income and not merely to 
 profits. It was lighter in so far as the 10 per cent allowance exceeded the British 
 6 per cent allowance. In practice the heavy depreciation allowed probably made the 
 American tax the lighter one. 
 
 * At some time in the discussions over this tax and over the income tax 
 some one hit upon the term bracket — apparently taken from printers' brackets 
 1 ] — to describe the items entering into, and the calculations to be made 
 in any one distinct part of the computation of the tax. The same term is 
 used in connection with the income tax to describe parts of the income reported 
 for a fiscal year, which parts, because the fiscal year did not corrcsixmd with the 
 calendar year, were each subject to a different tax rate. Once understood the 
 term is useful, for abbreviated expression, much as slang is sometimes useful.
 
 300 INTRODUCTION TO PUBLIC FINANCE 
 
 Beginning in 1920 and applying to the net income earned in 
 1 91 9 the rates of the tax are to be 20 per cent for the excess up 
 to 20 per cent of the invested capital and 40 per cent on the rest. 
 
 Finally it crept into the law which provided for igi8 net income "a tax (the "war 
 profits and excess profits iax," not taxes) equal to the sum of the following: 
 
 "First Bracket 
 
 "30 per centum of the amoimt of the net income in excess of the excess profits 
 credit (determined under section 312) and not in excess of 20 per centum of the 
 invested capital; 
 
 "Second Bracket 
 
 "65 per centimi of the amount of the net income in excess of 20 per centum of 
 the invested capital ; 
 
 "Third Bracket 
 
 " The sum, if any, by which 80 per centum of the amount of the net income in 
 excess of the war profits credit (determined under section 311) exceeds the amount of 
 the tax computed under the first and second brackets." 
 
 It will readily be seen that if 80 per cent of the amount of net income in excess 
 of the war profits credit exceeded the amount of the tax computed under the first 
 and second brackets, then whatever the 80 per cent amounted to was the total tax. 
 For after taking away from that 80 per cent the entries found in the first two 
 brackets, to get the amount to be entered in the third bracket, one then adds all 
 three together again to get the total tax. What all this sliding down hill and then 
 running up again amounted to was merely to bring clearly before the eye the in- 
 crease in the tax by reason of the war profits tax, and yet to preserve the fiction 
 that there was only one tax. The fiction was useful only to facilitate the change 
 in the succeeding year, to a single excess profits tax by the simple expedient of 
 dropping out the third bracket. It is a triumph in the art of law writing worthy 
 of the high repute for sagacity attributed by tradition to the Philadelphia lawyer. 
 
 Numerical Example: 
 
 Data from books: 
 
 Pre-war invested capital (average three years) $50,000 
 
 Pre-war net income 10,000 
 
 Invested capital 1918 100,000 
 
 Net income igi8 40,000 
 
 Computed items: 
 
 Excess profits credit : 
 
 Specific $3,000 
 
 8% of $100,000 8,000 11,000 
 
 War profits credit: 
 
 Specific $3,000 
 
 Pre-war net income 10,000 
 
 10% of increase of capital 5,000 $18,000 
 
 First Bracket 
 
 20% of 1918 capital is $20,000 
 
 Deduct excess profits credit 11,000 
 
 $ 9.000 
 (i) Tax at 30% $ 2,700
 
 WAR PROFITS AND EXCESS PROFITS T.VXES 301 
 
 Difficulties. — Two great logical difficulties of economic and 
 legal interpretation of this tax at once presented themselves. 
 These in turn gave rise to grave practical difficulties. Had it 
 not been that patriotic fervor prevented any one from question- 
 ing these taxes they would doubtless have gone into court at 
 once and have been tied up in an unending snarl of litigation. 
 These two difficulties were : (i) what is invested capital and 
 how can it be measured ; (2) since the assumed universal 
 normal of 8 per cent or 10 per cent could not, in the nature of 
 things, recognise equally normal departures in special cases 
 from the arbitrary general normal, what allowances for risk, 
 depreciation, obsolescence, and depletion should be made, if 
 any, to reach the proper normal in the special cases? The 
 answers to these questions made to fit the peculiar concept 
 of the excess profits have unfortunately been reflected in the 
 interpretation and administration of the income tax with 
 results that bid fair to be disastrous in that tax. The two 
 questions may be considered together as essentially one. 
 
 The value of invested capital necessarily depends on the 
 earnings. This is true of all businesses. But the difficulty 
 is best seen in speculative businesses. No matter how costly 
 a mine shaft and tunnels may have been they are as worthless 
 as gopher holes if they tap no ore. Yet in this excess profits 
 
 Second Bracket 
 
 1918 income exceeded 20% of 1918 capital by . . $20,000 
 
 (2) Tax at 65% $13.000 
 
 Total tax (i) and (2) $15,700 
 
 Third Bracket 
 
 Total net income $40,000 
 
 Deduct war profits credit 18,000 
 
 Basis of computation at 80% $22,000. 
 
 80% of 822,000 is $17,600 
 
 Deduct sum of (1) and (2) i5.70o 
 
 (3) Tax in third bracket 1.900 
 
 Total tax (i), (2), and (3) $17,600 
 
 Note the company also paid an income tax of 12% on $40,000 less : $2000 
 specific allowance plus the above taxes credited of $17,600, in all $19,700. 
 
 That is 12% of $20,300, or ^>436 
 
 Total of all taxes $20,036 
 
 Other numerical examples abound in the lext-books and other rcfcrcuces.
 
 302 INTRODUCTION TO PUBLIC FINANCE 
 
 tax it is required to fix the value of invested capital independ- 
 ently of income or earnings because that value is going to be 
 used in turn to compute the normal income. In short one 
 has to fLx the shadow in the absence of the body which casts 
 the shadow. The thing cannot be done and in trying to do it 
 the government has given an exhibition of how fast a pupp\- can 
 turn round when he's trying to catch his own tail. The result 
 was that invested capital came to be defined in substance as 
 the amount paid in by the stockholders, whether originally 
 or out of profits, in money or in property. Obviously this is 
 approximately identical with the value of the capital in the 
 case of a bank and of some similar staid and steady enterprises. 
 But in all other cases it amounts to counting your chickens 
 before they are hatched. Who can say what a dollar put into 
 a street railway ten years ago is worth to-day ? 
 
 The difficulties became acute in the case of mining and oil 
 industries. A partial solution has been reached as a working 
 basis. That solution was to take where possible the market 
 value of the property as of March ist, 1 913, as a starting point, 
 add at cost subsequent capital expenditures, and deduct ordi- 
 nary wear and tear on machinery, etc., and a cost allowance 
 estimated on the basis of what the ore body or sands contain 
 per ton of ore or barrel of oil extracted. Market value was, 
 of course, originally based on future earnings, but since market 
 value was a knowable fact prior to the present time logic is 
 not quite broken although badly strained by using this method. 
 Estimates of what is under the ground are sheer guesses. The 
 whole subject is full of trouble. 
 
 It is of course to the interest of the taxpayer to get as high a 
 valuation of invested capital as possible, for then the deprecia- 
 tion and depletion allowances and, also, the normal profit 
 allowances are larger. The excess profits tax is so heavy that 
 the taxpayers strain themselves to get these items up. The 
 result will be a permanent diminution of the income tax which 
 might otherwise never have taken place. 
 
 The A-priori Normal. — It was remarked at the beginning 
 of our discussion of this tax that astronomers and statisticians
 
 WAR PROFITS AND EXCESS PROFITS TAXES 303 
 
 have developed a very definite scientific meaning for the con- 
 cept of the normal or modal average. By the formal method 
 of least squares and the less rigid short cut application of the 
 theory of probability a scientific mode or measure of the normal 
 can be arrived at for any set of homogeneous items. It should 
 be clear, however, that so far as this tax is concerned no scien- 
 tific accuracy of method has been applied nor can one well be 
 applied because the data are not homogeneous. What has been 
 done has been to fix by statute what it is believed ought to be 
 the normal. This congressional " ought " and the actual " is " 
 do not agree, save in a few instances. 
 
 Sec. 6. Yield of Tax Depends on Inflation. — It has been 
 remarked above that as a war tax the excess profits tax is not 
 without some merit because it appropriates some of the profits 
 of inflation. As a matter of fact its yield depends very largely 
 on inflation, on paper profits reckoned in depreciated money, 
 not necessarily corresponding to any real profits. This we may 
 show most easily by an illustration. 
 
 Let us assume there was a small cross-roads grocery store, 
 incorporated, doing business at the same place before and 
 during the war. We will assume further that it served in all 
 years from 191 1 to 1919 substantially the same old customers, 
 with the same quantity (physical quantity) of groceries, from 
 the same old shop with the same old equipment, and all the 
 time with the same old clerks. In short what we aim to assume 
 is that there has been no change save in the prices of the goods 
 bought and sold. In 191 8 the store pays, let us say, twice as 
 much money for the goods bought and sells at twice the old 
 retail prices, paying also double the old wages to its clerks. 
 It cost, of course, two dollars in 191 8 to stock a shelf which in 
 191 1 could be filled for one dollar. We will assume that the en- 
 tire stock turns over three times each year on a 10 per cent profit 
 margin between cost and retail selling price. For simi)licily 
 we will assume that clerk hire and all general expenses are 
 covered in merchandise cost, so that the 10 per cent is net in- 
 come or profit. The concern does not borrow but the additional 
 turn-over capital (in dollars) is advanced by the stockholders
 
 304 INTRODUCTION TO PUBLIC FINANCE 
 
 out of other private resources. We will assume that the prem- 
 ises cost $10,000 and have not been written up because tangible 
 property is slow to respond to inflation, and that the stock 
 of goods carried represented in 191 1 an average investment of 
 $50,000. By the assumption then the profits before the war 
 were $15,000 per annum. In 1918 the stocks of goods repre- 
 sent an average of $100,000 and the profits for the year are 
 therefore $30,000. There will be an excess profits tax to pay 
 of $8260, but no war profits tax. We ignore the income tax 
 of $2368.80. 
 
 Analysing the figures we have : profits before the war, $15,000 
 or 25 per cent on a capital of $60,000 ; profits 1918, $30,000 less 
 tax of $8260 or $21,740, which is a little less than 19 per cent 
 on a capital of $110,000. The stockholders, despite the fact 
 that they have put $50,000 more into the business, receive in 
 dividends (out of which there is the income tax to pay) only 
 $21,740, which has a purchasing power of only $10,870 as com- 
 pared with their $15,000 before the war. By our assumption 
 the stockholders would have been no better off in 1918 had they 
 kept the whole $30,000 than they were in 1911, with dividends 
 of $15,000, the changes being merely those necessary to make 
 the figures correspond to the actual fall in the purchasing power 
 of money. Yet they are assumed to be making an " excess of 
 profits " and are taxed accordingly very heavily. It may be 
 urged against this contention of ours that the 25 per cent profit 
 assumed in the example was always too high, and it is of course 
 true that if the standard profit basis assumed were reduced to 
 8 per cent and a little over there would have been no tax. But 
 that very contention shows the nature of the tax. It is a tax 
 on an assumed excessivity, not as so often alleged one on profit- 
 eering during the inflation period. 
 
 Does This Tax Raise the Cost of Living? — It is commonly 
 asserted that the tax increases the cost of living and that it 
 enters into prices, carrying them high enough to give the trader 
 his old rate of profit even after he has paid the new taxes. ^ If 
 
 1 We may overlook the fact that the tax was sprung as a surprise and not enacted 
 until the books were closed for the year.
 
 WAR PROFITS AND EXCESS PROFITS TAXES 305 
 
 this be true our corner grocery company would have had to be 
 able to raise their prices, not merely 100 per cent as assumed, 
 but enough more so that after paying the tax they would have 
 had full $30,000 clear. Could they do it? This is a difficult 
 question of shifting and incidence, the general principles of 
 which are discussed in another place. The specific answer here 
 turns largely on business psychology and will depend a good 
 deal on the nature of the competition the business encountered. 
 If its immediate competitors were partnerships or individuals 
 who did not have this tax to pay the situation would not be 
 favorable for shifting the tax. New competition would, however, 
 not be likely to arise. Competition acts slowly and it is dis- 
 tinctly not safe to assume that fear of competition would enter 
 into the problem while prices were so violently fluctuating. 
 It would have done the stockholders little or no good to have 
 borrowed the additional capital needed even if they could have 
 gotten it as low as 8 per cent, despite the fact that their added 
 capital of $50,000 earned 13 per cent, for the borrowed money 
 would not enter into the " invested capital " and the tax would 
 have been much higher, enough so to more than wipe out the 
 profit they might otherwise make by use of the borrowed funds. 
 If the original conditions were such as to warrant 25 per cent 
 profits those conditions would, new competition being barred 
 by the uncertainty and stress of war times, probably persist. 
 Hence it seems highly probable that the company would feel 
 forced to raise retail prices more than in proportion to the rise 
 in wholesale prices. This it could do in part by raising the retail 
 price of goods already in stock, whenever a rise in wholesale 
 prices occurred, and in part by increasing the margin of profit 
 used in marking its goods up. If, as is certainly likely to be 
 the case, the rapid rise in prices curtailed purchases and lessened 
 the volume of business in physical, not in money, measure it 
 might be possible for the company to shift the tax in part if 
 not wholly to the consumer. Among the store's customers there 
 would be some living on fixed incomes who would have to curtail 
 purchases or buy only lower grades, so the physical volume of 
 business would naturally fall ofi'. Our conclusion must be.
 
 3o6 INTRODUCTION TO PUBLIC FINANCE 
 
 therefore, that while the tax is often a very real burden on the 
 seller or manufacturer it also raises prices to the consumers, who 
 furthermore suffer from being obliged to get along with less 
 or poorer supplies. It is important to note that the period 
 of inflation during which this tax has been in force is one in 
 which the rate of business mortality, as measured by the lia- 
 bilities of concerns which failed, has been remarkably low, 
 compared even with prosperous pre-war years. This can hardly 
 be explained on any other ground than that the heavy taxes, 
 together with the ordinary wasteful costs which must be as- 
 sumed to exist at all times in a fairly uniform ratio, have both 
 been absorbed by rising prices. 
 
 Inequality of the Tax. — One feature of the tax often com- 
 mented on is its extreme inequality. If our corner grocery 
 company had promptly disincorporated as early as 191 7 it 
 would have saved the whole tax. A partnership in the same 
 business and of the same size of business on an opposite corner 
 would not pay this tax. If the stockholders had not been in a 
 position to put up the additional capital but had borrowed it 
 the tax would have jumped from $8260 to $10,160, or nearly 
 $2000 more. That is, one of two concerns doing the same busi- 
 ness may pay more than the other, the difference depending 
 solely on the method of financing, which may or may not 
 mean higher profits to the stockholders. 
 
 Sec. 7. Discouragement of Business by This Tax. — The 
 extent to which business is discouraged by heavy and unequal 
 taxation is often quite out of proportion to the burden or in- 
 equality of the taxation. It is a generally accepted truism 
 that every tax tends to discourage the occurrence of the phe- 
 nomenon on which it falls. If, as in Mexico at one time, the 
 sale of cattle involved a heavy tax, cattle would not be sold if 
 they could be otherwise used to advantage. This tendency 
 never wholly absent is reduced to a minimum when the tax is 
 regular and is expected to occur each year, and is operative at 
 its maximum when the tax is regarded as temporary only. If a 
 tax of 100 per cent is imposed on all buildings constructed this 
 year, and it is known that there will be no tax next year, most
 
 WAR PROFITS AND EXCESS PROFITS TAXES 307 
 
 new buildings would be built next year. The excess profits tax 
 was understood to be a war tax and it was confidently expected 
 that it would be repealed as soon after the war as possible, being 
 reduced or scaled down as fast as possible. This common 
 understanding was confirmed in the federal revenue act of 191 8 
 by actually setting forth the high rates for 1919 and the lower 
 rates for 1920 and each year thereafter. This was a most 
 egregious blunder — an attempt by one party " to put one over " 
 on the party coming into power, which instead "put one over " 
 on the taxpayers and consumers. No concealment of the 
 programme was made. But no course more calculated to dis- 
 courage production could have been devised. He who had 
 standing timber did not cut enough to bring his profits into 
 the excess class, even though by such restraint he could raise 
 his price on the small amount cut far into the profiteering 
 scale. So it was with him who had coal or oil in the ground or 
 land for sale. By waiting a year an oil company could reduce its 
 tax on the oil by a very considerable amount, more than enough 
 to carry the oil in the ground. He who had leather for sale 
 thought he might well leave it in the warehouse another year 
 until taxes came down. So it was with every industry where 
 postponement was possible. Only where production processes 
 could be stopped only at a loss greater than the taxes, or where 
 the profits would not run into the taxable excess class, or where 
 it was feared prices might fall and the profits be forever lost, 
 or where the consumer could clearly be made to bear the whole 
 tax, did production continue, and in still less cases did it make 
 its normal expansion. This was disastrous from the point of 
 view of general social welfare. The great post-war need was 
 rapid restoration of production, and a rapid increase therein 
 too. 
 
 A lumber company reasoned this way. If we stop cutting 
 there is some loss, possibly offset in part by new growth ; but 
 if we cut this year a large part of our profits ranging up to a 
 maximum of 75 per cent will go for taxes; if we wait a year 
 the cumulative demand will hold prices up, and next year the 
 taxes will be at least one-third less ; if we wait two years perhaps
 
 3o8 INTRODUCTION TO PUBLIC FINANCE 
 
 there will be no taxes. The company then makes a computa- 
 tion as to just how much it can cut and sell to best advantage 
 this year and next year in view of the tax. It is a foregone 
 conclusion that the amount will be much less than the tempt- 
 ing prices would otherwise have brought forth. If it decides 
 to cut enough to run into the excess profits it will be sure first 
 that it will get a price large enough to cover the tax in its entirety. 
 This explains how and why it is that the excess profits tax re- 
 strains production, enhances the high cost of living, and in 
 general hampers industrial reconstruction. The interesting 
 feature is that it is continuance of the tax in face of the antici- 
 pated removal of the tax quite as much as the high rate of the 
 tax which causes this discouragement of industry. 
 
 This brings us to another interesting consideration. The tax 
 has been extolled as giving the government a share in the 
 plunder of the profiteers and thus restoring to the people some 
 of that which they had lost. In so far as the tax was unexpected 
 and retroactive, being suddenly imposed, say in 191 7, on the 
 profits of 1916, this result is achieved. But after that as we have 
 seen it can be largely shifted or evaded. Moreover, as it falls 
 only on profits that are at once large as well as excessive, it 
 misses a very considerable amount of profiteering. There 
 may be relatively very excessive profits on a small output, 
 capital charges running over to later years' production, say 
 of oil, and yet no tax will be paid unless the body of pro- 
 duction be large enough to carry into the technical excess of 
 the tax law. 
 
 Tax Condemned by Secretary of Treasury. — The Secretary 
 of the Treasury, the Hon. Carter Glass, reporting to Congress 
 in December, 1919, said: " . . . . The Treasury's objections 
 to the excess profits tax even as a war expedient (in contradis- 
 tinction to a war profits tax) have been repeatedly voiced before 
 the Committees of the Congress. Still more objectionable is 
 the operation of the excess profits tax in peace times. It en- 
 courages wasteful expenditure, puts a premium on over-capi- 
 talization and a penalty on brains, energy and enterprise, 
 discourages new ventures, and confirms old ventures in their
 
 WAR PROFITS AND EXCESS PROFITS TAXES 309 
 
 monopolies. In many instances it acts as a consumption tax, 
 is added to the cost of production upon which profits are figured 
 in determining prices and has been, and will, so long as it is 
 maintained upon the statute books, continue to be, a material 
 factor in the increased cost of living."
 
 CHAPTER XI 
 THE INCIDENCE AND EFFECTS OF TAXATION 
 
 Section i. Definitions. — The most difficult problems in 
 taxation come under the heading of this chapter. Many of 
 them are too intricate for an elementary treatise, so little more 
 will be attempted than to state the nature of the problems 
 and to suggest a mode of approach. 
 
 We begin with definitions. An endeavour will be made to 
 confine the term shifting to the transference of the tax from the 
 person who first pays it to some other person who reimburses 
 the first payer, or to its passage from one to another in a series 
 of persons. In like manner we shall try to confine the term 
 incidence or final incidence to the coming home of the tax to its 
 final resting place with some person who cannot shift it any 
 further. So far as it is possible to do so, both terms will be 
 confined to the shifting of the burden of the tax actually col- 
 lected by the government. The problem involved is: out of 
 whose pocket did the money come which went into the public 
 treasury; or, conversely, in whose pocket would that money 
 have remained if it had not been taken by the government? 
 
 These terms, shifting and incidence, are often used much 
 more broadly. For there are burdensome effects of the imposi- 
 tion of a tax which are almost inseparable in thought from the 
 incidence of the tax per se. Thus a tax on liquor dealers may 
 be so high that prices must be raised, custom falls off, and bar- 
 tenders are discharged or their wages are reduced. Passing 
 over for the moment the question whether the taxes actually 
 paid come out of the pockets of the dealers or out of those of 
 their customers, can we say that any of it came out of the wages 
 of the bartenders? If we do so say, what would be our con- 
 
 310
 
 THE INCIDENCE AND EFFECTS OF TAXATION 311 
 
 elusion if the tax were so high as to kill the trade ? Bartenders 
 would receive no wages and yet could not be said to bear any 
 tax for no tax was paid. A very severe burden has fallen on 
 dealers, customers, and employees, yet no tax is paid. Wher- 
 ever it is possible we shall refer to such incidental burdens as 
 these as effects of the tax and regard them as something more or 
 less separable from the questions of shifting and incidence. 
 We may not succeed in this any better than have many other 
 writers who have attacked the same problem. The difficulty 
 is that the effects mingle with the incidence and the incidence 
 with the effects. Every tax has a repressive effect, separable 
 in thought but not always in computation from the money 
 burden it involves. 
 
 We may use a simple illustration to convey the three ideas : 
 shifting, incidence, and effects. An American bookseller, in a 
 college town, imports some books from England, subject to a 
 customs duty, and sells them to the college students. He pays 
 the duty at the custom house. But he adds it to the price he 
 charges the students. That is, he shifts the tax. The students 
 who buy the books clearly cannot avoid the tax. So we may 
 say that the final incidence is on them. But, by reason of the 
 tax, fewer books are bought. The publishers' profits are less, so 
 are the booksellers' profits, and, there being just that much less 
 demand for printers and booksellers' clerks, their wages are 
 depressed. Moreover some students are unable to buy the books 
 who might have done so had there been no tax. These are all 
 effects of the tax which do not add to the revenues of the 
 government, and are not traceable in the money collected. 
 If the tax is high these effects may be more serious than the tax 
 revenue warrants. 
 
 Sec. 2. Some Taxes are Intended to be Shifted. — Many 
 taxes are levied on persons who are expected to shift them. 
 This is almost universally true of the indirect taxes. It is the 
 deliberate intent of the legislature that they shall be shifted. 
 It is the convenience of collecting from ihc few, that is, from 
 the importers, dealers, or the manufacturers, rather than from 
 the many scattered consumers, which determines the procedure.
 
 312 INTRODUCTION TO PUBLIC FINANCE 
 
 These taxes present no special diflSculties. It should be 
 observed, however, that a tax is, as it were, a sticky substance, 
 and like pitch or shoemaker's wax, some of it may adhere to 
 every hand or thread that touches it. Thus it is clear that an 
 importer can succeed in shifting the customs duties which he 
 pays only if he sells the taxed goods to advantage. He may 
 obviously be left with some tax-paid goods unsold, or be obliged 
 to sell them at a sacrifice. He uses every endeavour to avoid 
 this, but occasionally it does happen. 
 
 Some Taxes are Expected to Stay "Where First Imposed. — 
 In sharp contrast to the indirect taxes stand a number of direct 
 taxes which are commonly thought of as non-shif table. The 
 legislature aims the tax at some person who is expected to be 
 both payer and bearer. We may choose as an example a poll 
 tax. It is generally considered as non-shiftable. But are 
 there no circumstances under which a poll tax can be shifted? 
 Perhaps there are some. Let us first suppose that the poll tax 
 is not universal, but is aimed at a single class or confined to one 
 district. There have been poll taxes aimed at " foreign miners " 
 and there have been others, like a county road poll tax, imposed 
 in a single district. In the first case the employer may have to 
 assume the tax or, what is the same thing, pay that much more 
 in wages if he wants to employ foreign miners. In the second 
 case workers will not go into the county and be taxed unless 
 they can get wages enough higher than they would get outside 
 to cover the poll tax. A possibility, at least, of shifting seems 
 then to exist. But, of course, the industries involved may not 
 be so prosperous as to stand the added cost, especially if the tax 
 is very high. In that case we may have serious effects, but no 
 shifting because no tax is paid. 
 
 But what if the poll tax is universal, payable ever^^-here and 
 by everybody? Assume for a moment that most of the people 
 are workers who earn only a bare subsistence in wages. If the 
 employers do not assume the taxes the workers cannot live, so 
 it is argued. But the employers will not be able to pay the taxes 
 unless the market price of the products will cover them, which in 
 turn may mean restriction of output and lower wages. We may
 
 THE INCIDENCE AND EFFECTS OF TAXATION 313 
 
 not thus lightly assume that the tax is shifted to the consumer. 
 Then, too, the workers are consumers and it would help them 
 not at all if they shifted the tax on to one another. This line 
 of reasoning leads us, we find, into a vague theory of diffusion, 
 and weird confusion of thought. The trouble probably lies in 
 the fact that a false assumption was made in the hypothesis that 
 the workers themselves cannot carry the burden. This is an 
 assumption never wholly true of all the workers and seldom 
 true of any large group of them. Some of the Spanish rulers in 
 the Philippines had a cynical theory that it was good for the 
 Indians {i.e. the natives) to be compelled to pay taxes. For, 
 so the theon,' ran, if they did not have to pay taxes they would 
 not work, and if they had to pay taxes under penalty of con- 
 finement they would work at least long enough to earn the 
 money to pay the taxes with, which was better than being idle 
 all the time. This may seem a harsh doctrine. But perhaps 
 it points to a trait in human nature. The fact probably is that 
 a universal poll tax is not shifted nor diffused. The men who 
 pay it work more or work harder than they would if not taxed 
 and so earn or produce enough to live on and to pay the tax as 
 well. The same is probably true of all taxation to a far larger 
 extent than is realised. 
 
 This refutation of the diffusion theory does not seem com- 
 plete by itself. But the position that a general direct tax 
 cannot be diflfused is strengthened if the use made of the taxes 
 by the government is beneficial and promotes production. 
 Good roads, for example, may increase production by more than 
 enough to pay these costs. Good schools may make labour 
 more productive and so may other activities of government. 
 May it not be that good government creates the sources of its 
 own revenues in a very real sense ? 
 
 The foregoing illustration seems to suggest that a universal tax 
 is not shiftable, while a limited or restricted one may be shifted. 
 
 Sec. 3. Taxes on Rent, Interest, and Wages. — There was a 
 time when the shares in distribution, rent, interest, profits, and 
 wages seemed to be so intimately and directly dependent on 
 the agents or factors in production, land, capital, and labour,
 
 314 INTRODUCTION TO PUBLIC FINANCE 
 
 that a tax on land was thought of as necessarily a tax on rent, 
 a tax on capital or business as a tax on profit, and a tax on 
 labour as a tax on wages. So it became the custom to discuss 
 the incidence of taxation under the captions : taxes on rent 
 (or land), taxes on profits (or capital), and taxes on wages (or 
 labourers). The practice was never wholly successful because 
 no actual taxes among the many levied were specifically aimed 
 exclusively at any one share or source. An exception was 
 perhaps to be found in some of the old land taxes. But in 
 modern times it is certainly not safe to assume that any of the 
 prevailing taxes can be traced even in the first instance exclu- 
 sively to any one share in distribution or to any one source. 
 
 Taxes as They Are. — It seems far more practical to study 
 the incidence of : (a) taxes on property, (b) taxes on persons and 
 income, (c) taxes on production, and (d) taxes on consumption. 
 The advantages of this are that we shall be deahng with actual 
 taxes, and not trying to subdivide them artificially. 
 
 Sec. 4. Incidence of a Permanent Tax on Property. — A 
 permanent tax on property is equivalent to an appropriation 
 by the government of a part of the income of the property. 
 In the chapter on the income tax we discussed the relation be- 
 tween income on the one hand and property value on the other. 
 It was there shown that the vahie of any piece of property de- 
 pends upon the income. It follows then that the appropria- 
 tion by the government of a part of the income will lessen 
 proportionately the capital value of the property to the owner, 
 provided all other things remain equal. Among the other 
 things which must remain equal are the beneficial activities 
 of government surrounding the property. These must be 
 neither increased nor decreased. If other things remain equal, 
 the permanent removal of the tax should raise the selling value 
 of the property. But if the removal of the tax means a break- 
 down of government, no such result is to be anticipated. 
 
 Capitalisation and Amortisation. — This theory that the tax 
 affects the value of the property has been called the capitalisa- 
 tion theory or, looked at from another point of view, the amor- 
 tisation theory. It is called capitalisation when we are think-
 
 THE INCIDENCE AND EFFECTS OF TAXATION 315 
 
 ing of the tax as vesting in the government a theoretical or 
 constructive interest in the property. It is called amortisation 
 when we regard the tax as involving a writing off by the taxed 
 property owner of a part of the value of his property in pro- 
 portion as the tax is to the total income, or as decreasing the 
 selling value of the property. 
 
 The clearest illustration is found in a permanent tax unex- 
 pectedly levied on some one piece or class of property. Thus 
 if certain securities which it was expected would always be tax 
 free are suddenly subjected to a tax, it is ob\dous that they 
 would sell thereafter for less than before. He who was the 
 owner at the time of the imposition of the tax will have to 
 write off or amortise the capitalised value of the tax. He who 
 buys thereafter obtains them at a price which is based on the 
 income less the tax. In a sense he holds them tax free. As 
 Professor Sehgman has well shown, it is the exclusive non-general 
 character of the tax which makes this case so clear. Another 
 feature contributing to the clearness is the unexpectedness of 
 the tax. For if it had been foreseen, the tax would have been 
 discounted from the very first. 
 
 There is an alluring simplicity about this theory which has 
 tempted many to overlook some of the grave practical diffi- 
 culties of its application. Thus we seem to arrive at the con- 
 clusion that the imposition of the tax involves a confiscation of 
 property and a loss falling on one generation to the exemption 
 of all subsequent generations. But the hard-headed business 
 man cannot easily be convinced that the tax he pays on his land 
 or building is no burden on him, but merely represents a loss 
 having been borne for him by the previous owners. A burdcnlcss 
 tax seems to involve a contradiction in terms. Possibly the diffi- 
 culty lies in the fact that other things will not remain equal, 
 and that the assumption that they do remain equal is essential 
 to the truth of the theorem. We must beware that we do not 
 assume that the loss occasioned by the imposition of the tax 
 is other than theoretical. It may be merely a loss of some- 
 thing which would never have been had but for the grace of 
 government and the good use of tax revenues.
 
 3l6 INTRODUCTION TO PUBLIC FINANCE 
 
 Another way of stating this important theory is that a perma- 
 nent tax makes the government a partner in the property. 
 The larger the government's partnership interest becomes, the 
 smaller, so runs the theory, is that of the owner. There are 
 two dangers in this analogy. One is that it may be under- 
 stood to imply that the government is a non-contributing 
 partner seizing but not creating a value, reaping where it has 
 not sown. The other is that it may lead one to think of the 
 government's interest as being salable capital, similar in kind 
 to that of the owner. Such it distinctly is not. 
 
 It is not necessary to go so far as to consider what would 
 happen to the value of the owners' capital if, because of the re- 
 moval of the tax, government disappeared entirely. For in 
 such a case the taxpayer would not have any salable property, 
 the very law on which property rights rest disappearing. But 
 let us assume that the non-collection of the tax meant no more 
 than poorer government, such as less order, worse streets, or 
 poorer schools. Would the selling value of the property rise 
 by removal of the tax under such circumstances? Certainly 
 not. It seems then that the government is usually a con- 
 tributing partner and not a confiscatory agency at all. It is a 
 silent partner as to the inside management of the property, 
 but an active partner as concerns the outside management and 
 environment and a partner often bringing into the firm a very 
 goodly contribution indeed. 
 
 Again the government's partnership interest is quite unlike 
 the owner's in kind, in that it is not a salable interest. The 
 government has no way of realising its interest save as revenue 
 through the annual tax. It cannot treat it as capital at all. 
 We can speak of it as a capitalisable interest only constructively 
 and for purposes of computation merely. 
 
 The kind of tax we have here under consideration is one 
 attaching distinctly to the property. It must be a tax on the 
 property as such, or it may be on the income from the property 
 specifically as property income. A general income tax does not 
 satisfy the requirement even when funded or property income is 
 included.
 
 THE INCIDENCE AND EFFECTS OF TAXATION 317 
 
 In discussions of the capitalisation theory we often find the 
 tax spoken of as a permanent rent charge. So conceived it is 
 easy to shew that the larger the rent charge the smaller the re- 
 maining interest of the taxed owner. There is, however, an 
 important difference between a rental and a tax. A rental 
 collected by government implies that the property is in the 
 first degree public or communal property and however highly 
 developed the private rights in the property may be they are 
 secondary in character. A tax implies that the property is 
 primarily private property subject, however, to the tax levy. 
 Sometimes it is hard to draw the line. The so-called land 
 taxes in Bengal are computed and fixed much as rentals would 
 be. The actual cultivators, the ryots, are proprietary tenants 
 under the classes of superior proprietors, the talukdars and the 
 zamindars. But the superior proprietors are in turn tenants 
 of the State rather than taxed owners. When an old land 
 tax is turned into a redeemable rent charge, as was the old 
 British land tax, it seems almost to lose its tax character. In 
 such cases as an exception to the rule the government is in 
 point of fact selling its old tax interest as capital. 
 
 Very different indeed from those ancient charges are modern 
 taxes like the American property tax or that part of the British 
 property and income tax which falls specifically on property 
 incomes, in so far as that part of the tax is separable from the 
 general income tax. 
 
 Sec. 5. Incidence of the American General Property Tax. — 
 It is interesting and instructive to apply this theory to the Ameri- 
 can property tax. From the beginning all property owners, 
 or would-be property owners, have known that there would be 
 a tax on the selling value of the property. They knew that as 
 property advanced in value the increment would be drawn in 
 and become taxable as well as any original value. They have 
 probably assumed that the tax rate would remain the same or 
 would advance very slowly. To make a simple numerical illus- 
 tration let us assume that the anticipated tax was at the rate 
 of i\ per cent of the selling value of the property and that 5 per 
 cent or twenty years' purchase is to be used in capitalising
 
 3i8 INTRODUCTION TO PUBLIC FINANCE 
 
 income. These two assumptions amount to this. Out of 
 every $500 of net income (tax not deducted) $100 goes to the 
 government and $400 is retained by the owner. The owner's 
 share, his salable property, is worth $80 for every $4.00 of his 
 income and the government has a constructive interest worth 
 $20 for every dollar of tax. We need not be disturbed by the 
 fact that the income which determines these values may not be 
 present income. For the present value of the property is less 
 the more remote the income is in time. The ratios remain 
 substantially the same, subject only to slight modifications 
 arising from the fact that the tax is paid every year even though 
 there be no present income. 
 
 An office building from which the owner clears $5000 a year 
 before payment of the tax would represent a total capitalised 
 value of $100,000 divided by our assumption into two parts or 
 interests. One is that of the owner and is worth for sale $80,- 
 000 ; the other is the interest of the government constructively 
 worth $20,000. He who bought or built the building for 
 $80,000 gets his 5 per cent clear on $80,000 and pays a tax of i|- 
 per cent on that value. The government gets its $1000 a year 
 in taxes representing constructively a capital value of $20,000. 
 Assume that in the course of time the rental income rises to 
 $10,000 (before payment of the tax). The two interests double. 
 One, the owner's, is now $160,000, the other, the government's, 
 is $40,000. If the tax had remained at $1000, that is, if the 
 rate had fallen the two shares would have been $180,000 and 
 $20,000. Can we say that by reason of the tax not falling in 
 rate the owner has lost $20,000 of his increment? Hardly, for 
 he never was entitled to expect the rate to fall, or to expect the 
 tax to stay at $1000. He cannot be said to have lost that 
 which he never had nor ever anticipated having. Moreover, 
 it is very doubtful if government had not kept pace in its devel- 
 opment with the general growth whether the rents would have 
 advanced so that he would have had the increase of $80,000 in 
 capital worth. 
 
 But suppose, now, that the government plunges into reckless 
 spending of no direct economic value to the community or to
 
 THE INCIDENCE AND EFFECTS OF TAXATION 319 
 
 the property owners and doubles the tax rate permanently. 
 At 2^ per cent tax the owner's share drops in selling value to 
 $133,333 and the government's share rises in constructive value 
 to $66,666. The net income of $10,000 divides $6666 to the 
 owner and %2>m to the government. Since the tax rate is 
 based on the owner's share, which falls in value, a doubling of 
 the rate does not double the government's revenue. Here we 
 see capitalisation working in full force, $26,666 being trans- 
 ferred from one partner to the other. But it is important to 
 note that the case rests on the assumption of uneconomic 
 spending of the tax money. For otherwise the whole value, 
 capital and rental, would go up. 
 
 The foregoing explains why property taxpayers resent and 
 oppose any increase in the tax rate, especially a sudden one, or 
 a transfer to the property tax of some burden heretofore carried 
 by other taxes. It also helps us to understand why property 
 taxpayers so seldom oppose bond issues for pubhc improve- 
 ments, even though such issues raise the tax rate. For in this 
 case they hope that the improvement will not only add enough 
 to their income to enable them to pay the added tax, but leave, 
 perhaps, something over for themselves as well. That is, the 
 owner of the building used in our illustration might approve a 
 new water system if he hoped it would raise his rental income 
 enough to pay the added taxes. 
 
 Within proper limits and with the reservations above set 
 forth, the capitalisation or amortisation theory seems applicable 
 to a tax on any kind of property. Some writers have confined 
 it to land, others tt) monopoly property, still others hold it true 
 only when the tax is not universal. It certainly affords an 
 important approach to the study of any new exclusive tax like 
 the British increment value land tax, which, as shown elsewhere, 
 was recognised as causing an immediate drop in the value of 
 the lands affected. 
 
 The notion that by reason of amortisation old taxes on 
 property become burdenless is extremely mischievous for it 
 leads to a light regard of extravagance in pubhc spending. It 
 is only wise spending by a good government that makes any
 
 320 INTRODUCTION TO PUBLIC FINANCE 
 
 taxes easy to bear. A change from good to bad government 
 may change a tax once easily borne into grievous confiscation. 
 
 Sec. 6. Personal Income Tax Not Shiftable. — We con- 
 sidered the incidence of a poll tax at sufficient length in the 
 introductory section. Among the other personal taxes the 
 income tax is clearly of most importance. Many income taxes 
 can be broken up into taxes on the component parts of income, 
 and thus in part reduced to taxes on property computed by the 
 income. But a universal personal income tax graduated by 
 the size of the income and not determined by the kind or source 
 of the income, seems to present little basis for shifting. A 
 differential rate on funded income constitutes a tax on property, 
 and may be capitalised as shown above. So far as the income 
 tax includes the increment value of property it is likewise 
 analogous to a special property tax. So far as an income tax 
 falls on wages and other analogous personal earnings, it can be 
 shifted only when it creates some fundamental change in the 
 conditions of employment, that is, the market for personal 
 services. It is obvious that such a change will be brought about 
 only by a tax that is not uniform. It must, to be shifted, be a 
 tax that puUs some up and pushes others down. In a uni- 
 versal income tax properly adjusted there is little chance of any 
 such change and we may conclude that for the most part the 
 tax stays where it is put. All things considered, the income 
 tax more nearly than any other absorbs for government the 
 equivalent of that gain which accrues to the individual from 
 good government. 
 
 Sec. 7. Taxes on Producers and Dealers. — The taxes dis- 
 cussed above are for the most part designed with some care and 
 some consideration of their final incidence. They are aimed 
 either at a distinct type of ability or at abihty in general, and in 
 the main they reach their goal. 
 
 Much more difficult are the problems of the incidence of those 
 taxes which have no such distinct intent as to incidence. Taxes 
 levied or falling at random on producers, on dealers, and on 
 commercial and industrial enterprises, generally, are assessed 
 and levied with the primary consideration of getting revenue.
 
 THE INCIDENCE AND EFFECTS OF TAX.\TION 32 1 
 
 Their final incidence is left to be worked out by the interaction 
 of the various economic forces affected. Thus customs duties 
 and excises are presumptively borne by the consumers as we 
 have seen above. The operation of customs is in the main so 
 simple as to present few difficulties. 
 
 Taxes Cannot be Shifted at Will. — There is, however, a 
 naive assumption often made by business men and the pubhc, 
 that any tax levied in the first instance on a producer, on a dealer, 
 on a commercial or on an industrial enterprise will be shifted 
 along to the ultimate consumer in just the same manner as a 
 customs duty, for example, is shifted. The thought is that 
 costs must be met, and accountants put taxes down with the 
 costs, hence all the producer has to do is joyfully to add the 
 tax to the price and presto change he gets it back. Generally 
 no distinction is made between taxes. The landlord, as we 
 are informed by the newspapers, passes all his taxes to the 
 tenants, the farmer adds his school and road tax to the price 
 of wheat, the grocer raises the price of butter and eggs, tea, 
 cofifee, and spices in order to get back his income tax, and above 
 all, the railroads, pubhc utihties, and all monopolies, so people 
 say, pass on their taxes to the long-suffering pubhc with unerring 
 certainty. The theory is simplicity itself. Its adherents seldom 
 stop to inquire what good it does the farmer to shift his tax 
 as a producer if as a consumer he receives a share of every other 
 producer's taxes. Above all these theorists fail to consider that 
 if the farmer could raise the price of wheat just because his road 
 or school tax has gone up, there could have been nothing to pre- 
 vent him from raising the price of wheat before that new tax 
 was levied. Nor do they seem to reahse that if a landlord can 
 raise his rents because he pays a tax, he would be a fool and a 
 bad citizen as well, though, perhaps, a " good fellow," not to 
 do so, tax or no tax. 
 
 The fact is there is only a half truth in this naive but popular 
 theory. It is true that many a tax levied on a producer or 
 dealer raises prices, rarely by the whole tax, usually by a large 
 part, occasionally by a small part only. But the great fallacy 
 in the popular theory lies in the assumption that the whole
 
 322 INTRODUCTION TO PUBLIC FINANCE 
 
 matter lies within the power of the sellers alone to determine. 
 There are always two parties to a sale, a buyer as well as a 
 seller. If the buyer is unwilling or unable to pay a price high 
 enough to cover the tax as well as the costs, or can get the 
 commodity somewhere else for less, the seller cannot raise the 
 price. He has, then, the option of paying the tax himself, or 
 quitting production and seeking to make a living somehow else. 
 As taxes are now very nearly universal he will be hard put to 
 it to find a way of making a living without paying a tax. The 
 price of wheat is fixed in the world markets for wheat, and the 
 Dakota wheat farmer may strive as hard as he pleases to pass 
 on the last new Dakota tax levy, but he will not cause even a 
 tiny ripple in the " wheat pit." Nor is it quite conceivable that 
 a Dakota wheat grower would accept less than the market 
 because his taxes happened to be less than he had expected. 
 If office buildings are scarce relative to the demand office rents 
 will be high, and, as the world goes, probably the taxes on office 
 buildings will be high too, but if a lot of new office buildings 
 are put up rents will come down and there is not therein any 
 definite assurance that taxes will come down too. In fact, as 
 things generally go, taxes under those circumstances are a little 
 more likely to go up. We are not quarrelling so much with the 
 conclusions reached by these naive theorists, although they are 
 mostly wrong, as we are with the line of reasoning by which 
 the conclusion is reached. That line of reasoning proves too 
 much, as the very important exceptions noted show. 
 
 Sec. 8. The Tax Can be Shifted Only if Market Conditions 
 Change. — The fact is that the tax will be shifted only when 
 its imposition alters the conditions of the market for the com- 
 modity in question. It must first actually lessen the supply 
 before the price can be raised. If the tax does that, it may be 
 shifted ; if not, it cannot be shifted. The Dakota farmer, as 
 was suggested above, cannot add his taxes to his price just 
 because he wants to. But if the Dakota taxes are so high that 
 wheat raising does not pay enough to cover them as well as 
 the costs of production, wheat raising may stop in Dakota and 
 the consequent reduction in the world supply of wheat may
 
 THE INCIDENCE AND EFFECTS OF TAXATION 323 
 
 put the price up. If, encouraged by the subsequent rise in 
 wheat prices, Dakota farmers return to producing wheat and 
 the new supply brings down prices again, some of them may 
 find that they bear the whole tax. If taxes on wheat raisers 
 were absolutely uniform in proportion to net profits all over 
 the world, an equihbrium would presumably be struck at some 
 level of prices which would leave, after taxes were paid, approxi- 
 mately the same profit (or just a Httle more) to the wheat 
 growers as they could get in any other industry. A certain 
 degree of shifting or diffusion of the taxes would have taken 
 place. But if the taxes vary greatly from one wheat-growing 
 community to another it is idle to contend that all would be 
 shifted. For it is so obvious that he who runs may read, that 
 a tax in one locality may easily be high enough to kill the indus- 
 try there. If, again, the taxes were uniform all over the world 
 per ton of wheat produced, they would bear heavily on those 
 whose costs per ton were high and be negligible for those whose 
 costs per ton were very low. 
 
 While the considerations discussed immediately above bear 
 on all types of taxes, there is a more present interest in taxes 
 levied on production or on products, such as a tax on gross 
 sales, gross receipts, and taxes at so much per unit of output. 
 It is difficult indeed to trace the incidence of these taxes fully. 
 But we can approximate an answer to the questions : (i) whether 
 they will cause prices to rise, and (2) whether, if they do so, the 
 producer or the consumer suffers more. Of course if prices do 
 not rise, both the incidence and the effect are wholly on the 
 producer. 
 
 A Tax on Candy. — Let us take, for example, the tax on 
 candy levied in the United States during the war. The tax was 
 5 per cent of the manufacturer's sales. We may assume what 
 is probably the case (i) that the ])usiness is competitive, (2) 
 that the demand for candy is elastic, and (3) that there is not 
 much difference in the cost per pound whether produced on a 
 large scale or on a small scale. Probably at first, after the 
 tax is imposed, the price would be raised by (he full amount of 
 the tax. Then the effect of decreased demand would be felt
 
 324 INTRODUCTION TO PUBLIC FINANCE 
 
 and prices would fall a little. This would force out the weaker 
 manufacturers, those who before were only just meeting their 
 costs. Then a new equilibrium of prices would be reached at a 
 price which practically throws all the tax paid on the consumer. 
 But production is less, the aggregate profits of the manufac- 
 turer are less, and the manufacturers and their employees are 
 not quite so well off. The verification of this theory by the 
 facts since our tax went on is rendered impossible by the dis- 
 turbed condition of prices in general during and after the war. 
 
 A Tax on Milk. — Taxes levied on goods produced under 
 competition and at increasing cost per unit of output, the 
 demand for which is inelastic, are very rare. By their very 
 nature such industries are carried on in relatively small units, 
 that being the cheapest way to conduct them. That is prob- 
 ably one reason why they are seldom taxed on the basis of prod- 
 uct or output. But again it may be that they do not seem to 
 be proper subjects of taxation because they are mostly goods 
 which rank as necessities. Only in the field of food and other 
 necessities will men continue the unequal fight against the law 
 of diminishing returns. When such taxes are levied they are 
 inevitably shifted in toto to the consumer. A tax on milk is 
 scarcely a political possibility. Yet the recent regulations re- 
 quiring pasteurising and other sanitary measures impose in 
 effect a tax on milk. The entire cost of these is shifted, as any 
 tax would be, entirely to the consumer, for any part borne by 
 the producers means at once bankruptcy of the marginal 
 producers and lowered supply followed by higher prices. It is, 
 moreover, practically certain that the consumer in such cases 
 as this will suffer more than by the mere imposition upon him 
 of the total tax. He will certainly have to pay the cost of 
 shifting it as well. And, furthermore, as the tax involves the 
 use by the producer of added capital and also subjects him 
 to greater risk, the consumer must pay for all that. 
 
 A Tax on Street Railway Gross Receipts. — The case of a tax 
 imposed on an industry obeying the law of increasing returns 
 is very different. By their very nature these become monop- 
 olistic, for they necessarily produce more cheaply on a large
 
 THE INCIDENCE AND EFFECTS OF TAXATION 325 
 
 scale than on a small scale, and the small unit cannot survive 
 in competition with larger ones. Moreover, the demand in 
 these industries is usually elastic, at least within the range of 
 prices likely to be set. A street railway may ser\^e as an illus- 
 tration and a 10 per cent tax on gross receipts will be assumed. 
 Such a tax on a street railway (leaving out of consideration 
 for the moment regulation of its rates by law) will raise fares 
 a little, but not nearly enough to reimburse the company for 
 the tax, and will very materially reduce its profits. Raising 
 fares means loss of passengers, and lowering fares, within any 
 probable range, will increase travel. The expenses of a street 
 railway fall into two parts, fixed expenses which run on whether 
 the company carries few or many passengers, and variable ex- 
 penses which increase or decrease in exactly the same ratio as 
 the number of passengers. The following table shows, very 
 roughly, the effect of all these combined elements on the profits 
 of a company : 
 
 Rate of 
 fare 
 
 cents 
 S 
 6 
 7 
 8 
 
 9 
 
 10 
 
 Average 
 
 number of 
 
 passengers 
 
 carried per 
 
 day 
 
 150,000 
 
 122,500 
 
 100,000 
 
 82,000 
 
 67,500 
 SS.ooo 
 
 
 
 Variable 
 
 
 Net 
 
 Tax 
 
 10% 
 of gross 
 
 Gross 
 
 Fixed 
 
 expenses, 
 
 Total 
 
 profits 
 
 receipts'. 
 
 expenses 
 
 2c. per 
 passenger 
 
 expenses 
 
 before 
 tax 
 
 $7500 
 
 $3500 
 
 $3000 
 
 $6500 
 
 $1000 
 
 $750 
 
 7350 
 
 3500 
 
 2450 
 
 S9SO 
 
 1400 
 
 73S 
 
 7000 
 
 3500 
 
 2000 
 
 S500 
 
 1500 
 
 700 
 
 6560 
 
 3SOO 
 
 1640 
 
 S140 
 
 1420 
 
 656 
 
 6075 
 
 3500 
 
 1350 
 
 4850 
 
 1225 
 
 607 
 
 5500 
 
 3500 
 
 1 100 
 
 4600 
 
 900 
 
 SSO 
 
 Net 
 
 profits 
 
 after 
 
 tax 
 
 $250 
 66s 
 800 
 
 764 
 618 
 35° 
 
 It is obvious that if there were no tax, and the company 
 could fix the rate of fare where it pleased, it would probably fix 
 the rate at seven cents, for at that rate it makes a profit of 
 $1500 per day, which is larger than it would get at any other 
 rate. Closer inspection of the table shows that if it were pos- 
 sible to collect fares in fractions of a cent, the company might 
 prefer to fix the rate at about 7.05 cents, for it will be observed 
 that the profits fall away a little faster below seven cents than 
 they do above seven cents, indicating that there is a maximum 
 profit at a rate somewhere between seven cents and eight cents
 
 326 INTRODUCTION TO PUBLIC FINANCE 
 
 greater than at exactly seven cents. But as the difference 
 between $1400 at six cents and $1420 at eight cents is small, it 
 would be but a trifle over seven cents. 
 
 At first glance it might be inferred that the company would 
 also make the largest possible profit after paying the tax, if it 
 charged seven cents as before rather than any other rate. For 
 if it went up to eight cents it would make only $764 as against 
 $800 at seven cents. But again one must carefully observe 
 the figures above and below the seven-cent line. The drop 
 from $800 at seven cents to $665 at six cents is a drop of $135, 
 while the drop from $800 at seven cents to $764 at eight cents 
 is only $36. This is a greater proportional difference than be- 
 fore the tax and is too great a difference to be neglected. It 
 indicates that there is a maximum profit greater than $800 to 
 be had somewhere between seven cents and eight cents. A 
 separate calculation, which it scarcely seems necessary to intro- 
 duce here, shows that at seven and one-quarter cents the net 
 profits after paying the tax would be about $812 and that 
 is the maximum profit it could obtain at any rate of fare. The 
 interesting and vitally important thing is that this after-the-tax 
 maximum profit always corresponds to a higher rate of fare than 
 does the before-the-tax maximum. It is never much higher but 
 always higher. With the particular figures used in our illus- 
 tration it was 7.25 cents as against 7.05 cents, approximately. 
 
 No public utility commission can restore to the company its 
 lost profits or reimburse the whole tax. Humpty-dumpty 
 pro"fits made his fall when the tax was imposed and can't be put 
 together again as long as the tax continues. If before the tax 
 went on, the legal rate in the illustration were five cents (which, 
 everything considered, was far too low) and the profits were, 
 as in the table, $1000, and if after the tax the company were 
 permitted to raise the rate to seven cents, it would still be 
 $200 shy on former profits. 
 
 To sum up, then, the effects of the tax are : (i) a slight raise 
 in rates (if permitted), (2) if rates are raised a goodly number 
 of people walk or stay at home or ride in automobiles who 
 would otherwise ride on the cars, (3) the profits of the com-
 
 THE INCIDENCE AND EFFECTS OF TAXi\TION 327 
 
 pany are inevitably lessened, whether rates are raised or not, 
 (4) new capital is consequently harder to get, and (5) if rates 
 are raised fewer platform men and other workers fmd employ- 
 ment. 
 
 Sec. 9. A Tax on Gross Sales. — Among recent suggestions 
 for post-war taxes is one for a tax on gross sales. Generally 
 this is understood to mean a tax say of i per cent or 2 per cent 
 on the gross amount for which any goods are sold. What 
 would be the probable incidence of such a tax? Would it all 
 be passed on to the consumer ? If the foregoing considerations 
 are correct its shifting and incidence would be most unequal. 
 In some cases it would be passed on, in others it would be ab- 
 sorbed by the producers. If the demand were very stubborn the 
 consumer would bear the tax and more. If the demand were 
 very elastic the producer or seller might have to absorb it. If 
 the cost of producing or selling were constant per unit of output 
 the effect would be different from a case where it was a dimin- 
 ishing or an increasing cost.
 
 CHAPTER XII 
 
 FEES AND INDUSTRIAL EARNINGS > 
 
 Section i. The Connection between Fees and Industrial 
 Earnings. — There is the closest sort of connection between 
 fees and the industrial and commercial earnings of the State. 
 In the case of the sale of goods or services by a State the private 
 persons pay the price of the wealth which they obtain. The 
 price is fixed by economic conditions. It cannot exceed a 
 certain sum, for if it does, the citizen will not buy. But in most 
 cases considerations of a pubHc character induce the State to 
 enter upon the industry or commercial enterprise, and these 
 very considerations are inducements to a lowering of the charges. 
 As the public element comes to be more clearly recognised, a 
 part of the economic forces fail to act. The State sacrifices 
 part or all of the gain, but makes no loss. As the pubHc ele- 
 ment presses still more to the front, the State pays, at the general 
 cost, a part of the expense, and charges the particular persons 
 specially benefited merely a fee for the service. Many modern 
 public institutions have gone through a process of development 
 from one stage to the other, and the different stages are found 
 contemporaneously in different countries. But while this is 
 the order of progression in new functions, it is not the historical 
 order of the rise of these two forms of payment for public ser- 
 vices. Fees are the older of the two. 
 
 Fees and the Consciousness of " Public " Life. — Fees are 
 not to be found in the ancient civilisations, because of the inti- 
 mate relation between the individual and the State. Only 
 when there is a distinct consciousness of " public " functions 
 
 * For definitions and classification, see Chap. U. 
 328
 
 FEES AND INDUSTRI.\L EARNINGS 329 
 
 can we have fees. Payments in the Middle Ages for the services 
 of the courts, of the church, of the schools, etc., were mainly 
 of the nature of private remuneration. As soon, however, as 
 any function comes to be recognised as public in character, fees 
 arise. At first contributions are more or less freely and willingly 
 rendered for the use of markets, roads, bridges, protection, and 
 the like. Frequently there is an arbitrary assumption made 
 that a special benefit is conferred and a fee is charged. As the 
 State emerges from feudalism, the growth of public consciousness 
 is marked by a rapid multiplication of these fees, which form a 
 system of public revenues without taxes. After that the line 
 of development is in the direction of the curtailment of the fee 
 system and the growth of the tax system. Fees mark the 
 transition stage in the division of labour in the public service. 
 There is a growth of the conception of common benefits as 
 distinct from special private benefits, and a corresponding 
 removal of functions from one to the other category. At the 
 same time new functions arise which are supported by fees, 
 until finally the recognition of public interest outweighs that of 
 the individual interest. Some fees, however, become fixed in 
 character and are not subject to these transforming tendencies ; 
 but the public interest is recognised in this case by limiting the 
 fees to a very small part of the total cost. Thus many court 
 fees are retained, but the larger part of the rapidly growing 
 expenditure for the support of justice is now met from taxes. 
 Those functions in connection with which there are fees are 
 regarded as conferring a divided benefit. The individual pays 
 for what he receives, the State for what the public gains thereby. 
 Sec. 2. Judicial and Legal Fees. — The extension of the 
 fee system by the courts to cover a very large part of the cost 
 of the judicial system, even to such a degree as to make litiga- 
 tion impossible to all but the rich, was a transition stage in the 
 development from the Middle Ages to the present. Nowhere 
 was the fee system for court costs more abused than in England. 
 Later practice, while placing more of the burden on the general 
 treasury, has retained an extensive tarifi" of such " costs." 
 Moreover, in not a few instances, the assessment of the "costs"
 
 330 INTRODUCTION TO PUBLIC FINANCE 
 
 upon the party responsible for the litigation, as shown by the 
 fact that he loses his suit, makes these fees approach in character 
 punitive fines. This is the characteristic of American practice. 
 In many cases the special benefit conferred is not very clear, 
 but is arbitrarily assumed to exist, and the fee levied as though 
 it were for such benefit. * 
 
 Since the middle of the seventeenth centurj^, a large part of 
 many of the legal fees have been collected by means of stamps 
 or stamped paper, the latter being necessary to legalise the 
 transaction ; the officer who furnished or cancelled the stamp 
 being supposed to investigate and vouch for the propriety of 
 the transaction. A notary's fee in most of the American com- 
 monwealths is of this character, the fee being receipted for by a 
 stamp embossed upon the paper. Similar fees or taxes on acts 
 and transfers are very common in France. Other such fees are 
 collected in the form of the sale of a license to perform certain 
 acts which would not be legal without such a permit ; and then 
 there is a charge for recording the act after it has been performed 
 in accord with the permit. Of this character are the fees for 
 marriage licenses and recording of marriages. The act itself is, 
 also, often subject to the payment of a tax. The general char- 
 acter of the legal fee is seen from the following list : fees for pass- 
 ports and similar papers of identification, fees for recording and 
 legally recognising births, deaths, marriages, and divorces, 
 changes of residence or legal standing, for papers in evidence 
 of honours, degrees, orders, titles, offices, etc., for patent rights 
 and copyrights, for consular services in vouching for invoices, etc. 
 
 Sec. 3. Administrative Fees. — Many of the acts of the 
 various administrative departments are of such a character as 
 sometimes to confer a special benefit upon individuals for 
 which a fee is charged. The police may render extraordinary 
 services as in the protection of property on special occasions, 
 in the control of masses of people, preventing intrusion, etc. 
 Examples of these special services are very frequent. The same 
 is true of the special services of detectives for private persons. 
 
 Educational Fees. — Fees for public education are gradually 
 falling into disuse. They were originally charged for all grades
 
 FEES AND INDUSTRIAL EARNINGS 33 1 
 
 of instruction from the lowest up to the university. The 
 importance of primary education to the general welfare of the 
 people and to the prosperity of the State, when governed by 
 popular franchise, led to the abolition of fees for that grade of 
 instruction at a very early date. In England, owing to the 
 prevalence of an extreme laissez-faire view upon this subject, 
 fees for education were continued longer than in most countries, 
 having only very recently been entirely abolished. In the 
 higher grades, wherever such were in charge of the State, fees 
 were retained much longer than elsewhere. The great univer- 
 sities of the American commonwealths have set the example 
 of free tuition for their thousands of students, although they 
 still retain a number of small fees for registration, diplomas, 
 and certain incidental expenses connected with laboratory and 
 similar instruction. European State universities still generally 
 retain the fee system for most of the lecture courses. Schools 
 intermediate between those giving rudimentary education and 
 the universities are generally managed without fees, like the 
 lower grades. Educational functions of governments seem to 
 have been going through the same transformation which roads 
 have gone through. Already the larger part of the cost is met 
 from general taxes and but a small part from fees. Finally the 
 remaining fees will fall away. 
 
 Church Fees. — In those countries in which the State supports 
 the churches, or churches of a certain denomination, there are 
 a number of fees connected therewith, such as those for the use 
 of churches and churchyards, for baptisms, christenings, mar- 
 riages, burials, confirmations, and communion. The means for 
 meeting the rest of the expenses are drawn from two sources. 
 A part is sometimes taken from the general taxes or from special 
 taxes collected for the purpose, and the remainder from volun- 
 tary contributions by the attendants, or from the sale of sittings 
 and the Uke. This is the only important remnant of voluntary 
 contributions in any part of the financial system. In most 
 instances the voluntary contributions are for special purposes, 
 organised charity, missions, etc., which are, perhaps, not prop- 
 erly considered of a pubhc character.
 
 332 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
 Commercial Fees. — The fees rendered by individuals in 
 connection with their industrial and commercial enterprises 
 are very numerous. The oldest and simplest are charges for 
 the use of market-places, later for the use of pubhc exchanges, 
 etc. ; then come the charges for statistics collected by public 
 officers, and the charges for the use of bridges, roads, quays, 
 etc. The modern substitutes for roads — railroads, canals, 
 street railroads, omnibuses — are already passing from private 
 into public hands, and the period of transition is marked by a 
 more and more extended use of the fee system. Other means 
 of communication — the post, the telegraph, and the telephone 
 — are of the same character. Fees for coinage are also for ser- 
 vices to commerce. They are in use by every country in some 
 form or other. In the United States the charge for coinage 
 was one-fifth of one per cent. England allows the Bank of 
 England to make a similar charge when advancing notes upon 
 bullion, and to set the price in notes for gold coin and gold bars. 
 These fees must not be confused with the charges known as 
 seigniorage, the latter being a tax upon commerce. 
 
 Sec. 4. Special Assessments. — One of the most important 
 classes of fees is formed by special assessments. They are for 
 some benefit to real property. A special assessment is a fee 
 paid to cover the cost, less that of supervision by a salaried 
 pubhc officer, of a specified improvement to property under- 
 taken in the public interest. In his excellent study on this 
 subject Mr. Rosewater ^ tries to establish a difference between 
 fees and special assessments. He admits the similarity, but 
 points out that special assessments are restricted in purpose and 
 in place, are apportioned among the members of a class, are 
 assessed once and for all and for benefits to real property only. 
 Professor Sehgman makes the same distinction. But it is 
 certainly not defensible on purely theoretical grounds, for the 
 differences are not essential, but accidental. We might as 
 well set up a separate class of taxes on marriages, for they are 
 restricted in purpose, are assessed upon members of a class, 
 once and for all, and are for benefits to the family only. Like 
 
 1 Columbia College Studies, Vol. II, 3-
 
 FEES AND INDUSTRIAL EARNINGS ^^S 
 
 all other fees, special assessments are imposed by the taxing 
 power, cover both public and private benefits, and do not 
 exceed the costs. 
 
 The simplest case of a special assessment is when a street is 
 to be built, with necessary sewers and water-pipes. The costs 
 of this have to be met. There is a public interest in the street as 
 a thoroughfare. Private enterprise cannot be trusted to properly 
 protect the public interest. The city, therefore, must step in. 
 It could pay the cost from general taxes or from tolls, of both 
 of which the specially benefited persons would pay their share. 
 But in that case, temporarily at least, the abutting land owners 
 would reap an unearned harvest at the expense of their fellow- 
 citizens. It appeals to our sense of justice that they should 
 pay for it. They can always afford to do so, as they gain by 
 the improvement. This system has received large currency in 
 the United States, and has, according to Mr. Rosewater's 
 extensive investigations, given general satisfaction. 
 
 Another method has been used to some extent in England. 
 It is similar to that used by private speculators in America, 
 when they open up a new city, or suburb. The city condemns 
 and buys up enough of the land to be improved to furnish, 
 when sold after the improvements, the funds needed. This 
 method has a very limited application. 
 
 Special assessments are not frequent in Europe, but do 
 occur. Mr. Rosewater finds them in varied form in France and 
 Germany ; and they are proposed in England under the name 
 of the " betterment " tax. In the last-named country they 
 were early applied to " walls, ditches, gutters, sewers, bridges, 
 etc., damaged by the sea." But not until lately has the prin- 
 ciple of measuring the tax by the particular benefit been applied 
 or proposed, and even now the principle is not quite clear. In 
 England the assessment is to cover the cost of the removal of 
 injury rather than the cost of conferring a benefit. In England 
 the cost of improvements is assessed in general taxes from which 
 certain unbenefited districts are exempt. Strictly speaking, 
 the priiicipk; is nof regularly applied in England ;il all. 
 
 In the United Stales this fee finds almost universal acceptance.
 
 334 INTRODUCTION TO PUBLIC FINANCE 
 
 It is, indeed, remarkably well suited to the economic conditions 
 of a new country, and renders rapid improvement possible. 
 In some parts of the country there are harmful results that 
 arise from the desire to give property owners full control over 
 the improvements for which such assessments are to be made. 
 Thus, in some commonwealths, street improvements are only 
 made with the consent of the owners of a majority of the property 
 concerned. The result is that streets are opened irregularly, 
 and some of the main streets are untouched, while side streets 
 are improved. But this is an evil of expenditure rather than 
 necessarily connected with this mode of collecting the revenue. 
 The abuses of special assessments are few, and, on the whole, 
 it is a part of the tax system of which America can be justly 
 proud. Professor Bastable's criticism (p. 377) of these fees 
 rests upon a misconception of the method of handling the 
 assessments. They are assessed according to the cost of the 
 improvements ; the special benefit is the justification of the con- 
 tribution, not its measure. There is seldom any difficulty in 
 apportioning the cost fairly. No charge need be made for any 
 additional benefit beyond the cost, and the contributor has, 
 usually, a voice in deciding whether the proposed improvement 
 shall be undertaken or not. 
 
 In view of the fact that the prevailing theory of taxation 
 in this country is that which we have designated as the benefit 
 theory, it is natural that Americans should have been the ones 
 to have made the application of the theory in this particular 
 case. The special assessment is applied in just those cases in 
 which it is easiest to measure the special benefit. And although 
 the principle cannot be given a wider application with any 
 degree of satisfaction, it does, in this instance, comply with the 
 demands of justice and equality. It would, moreover, be 
 rather hard to find under the faculty theory any better justi- 
 fication. 
 
 Sec. 5. Postal Fees. — The post was included above among 
 those functions for which fees were charged. Whether that be 
 quite correct or not, depends upon the way in which the postal 
 system is run. If it is run so as to yield the largest possible
 
 FEES AND INDUSTRIAL EARNINGS 335 
 
 revenue over and above expenses, it is of exactly the same char- 
 acter as any other industrial enterprise upon which the State 
 enters. The State sells postal services for the highest price it 
 can get, or rather, for the largest net return. Its profits, the 
 post-office being a monopoly, are regulated by the principle of 
 charging what the traffic will bear. But no post-office is run on 
 this principle. The importance of the public service rendered 
 has led to the recognition of a large element of common benefit. 
 This recognition has not resulted in the entire abandonment 
 of charges for the ser\ace except in a few instances ; for example, 
 the free carriage of newspapers in the county in which they are 
 pubHshed. But it has led to the attempt to run the service 
 in such a way that expenses shall be met, and only a small 
 surplus, if any, shall accrue to the benefit of the treasury. 
 WTienever the surplus tends to grow, the rates are lowered or 
 the service improved. Of all the powers. Great Britain is the 
 sole exception to this rule, about one- third of her postal receipts 
 being profits. (1895, receipts £10,760,000, expenses £6,869,000. 
 But the allied telegraph service ran behind : receipts £2,580,000, 
 expenses £2,674,000.) The postal rates in Great Britain are 
 as low as in other countries, but the surplus is accounted for by 
 the extremely small size of the territory covered by the land 
 service, the concentration of population, and the cheapness of 
 water transportation, all of which makes it particularly easy to 
 do a large and profitable business at low rates. 
 
 There are some writers who regard any surplus acquired in 
 this way as practically the result of taxation, and class any 
 charge for the public service, above the cost thereof, as a special 
 tax. This classification presupposes that the service is, by 
 nature, of a public character, an assumption contrary to the fact, 
 for no function except that of governing itself, in the narrowest 
 possible sense, is hy nature of a public character, nor, on the 
 other hand, hy nature of a private character. On this considera- 
 tion, therefore, it is better to class these gains, not as taxes, but 
 as the earnings of a public industry. 
 
 Sec. 6. Public Industries not Primarily for Revenue. — In 
 modern times public industries can be quite as properly con-
 
 336 INTRODUCTION TO PUBLIC FINANCE 
 
 sidered under the head of expenditure as under that of revenue. 
 Historically, State industries, like pubHc or princely domains, 
 lands, forests, and mines, were mainly sources of revenue. 
 But a railroad is placed in the hands of the State primarily 
 because of the public interests involved, and the expenditure 
 for that purpose is more significant than the moderate surpluses 
 that accrue, in some cases, to the government. For that reason 
 we called attention to these activities under the head of expen- 
 diture. We have now to consider them as productive of so 
 much total wealth, a part of which is immediately spent for the 
 purpose which led the State into this activity, and a part, gen- 
 erally a very small part, saved to assist in the accomplishment of 
 other purposes. 
 
 Public Lands. — The oldest form of public property is land. 
 The public land originally embraced all the territory of the 
 State. Gradually parts of it were ahenated to a private pur- 
 pose subject only to the law of eminent domain ; but consid- 
 erable portions even to the present day belong to the State, or, 
 what is the same thing, to the local governments. In the mon- 
 archies of Europe such lands were once considered the property 
 of the prince. These lands were the main reliance for public 
 revenues in the feudal State. As the people gained a voice in 
 the government, they laid claim to these sources of revenue 
 for public purposes. From that time on, the public domain di- 
 minished both absolutely, by sale or alienation, and relatively as 
 the wealth of the people swelled. Some countries adopted a 
 very conservative policy in this respect, and retained their 
 domains in land and forests, while others adopted the plan of 
 steadily disposing of them. German states are examples of the 
 former poHcy, while England, France, and the United States 
 have been examples of the latter. England receives only 
 £520,000 annually of " Woods, Forests, and Land Revenues 
 of the crown." In the United States it was the possession of 
 vast tracts of land by the federal government, acquired by 
 gift from the commonwealths, and by purchase, which gave 
 that government an independent territory over which its control 
 was absolute, and formed one of its strongest supports, contribut-
 
 FEES AND INDUSTRIAL EARNINGS 337 
 
 ing most materially to the growth of federal influence. But 
 the public lands have not been a source of revenue to the govern- 
 ment. The money received from settlers has amounted to little 
 more than fees for the registration of titles, and except for the 
 ten years from 1830 to 1840 the lands have not yielded a clear 
 revenue. The extensive surveys which the government carried 
 out have been a large expense attributable to this source. 
 Under constitutional government there is little danger of the 
 failure of taxation as a permanent and regular source of revenue. 
 So that pubHc lands are not regarded as necessary for the 
 integrity of the government. The retention of pubhc lands 
 in Germany and Austria is not explainable by any danger of the 
 failure of taxation, but by the greater tenacity of the older 
 communistic idea. Democratically governed cities and towns 
 cling to their lands as strongly as the royal governments. 
 
 Forests. — Except when in charge of a highly trained body 
 of expert officials, as in Germany, the public lands do not form 
 a satisfactory source of revenue. They are not as a rule as well 
 managed as similar lands in private hands. Forests form an 
 important exception to this statement. A private owner can- 
 not afford to wait long enough for economical use of timber 
 land. The destruction of forests at private hands is a serious 
 danger. Only a permanent, long-lived institution like the 
 government can take proper care of forests. 
 
 Mines. — ■ Closely allied with the public ownership of lands 
 and forests is the public ownership of mines. This is one of the 
 oldest State industries, which is of late falling into disuse. 
 The working of mines by the government is being replaced in 
 Europe by a system which allows of private operation, but 
 guarantees the public interest by the collection of royalties, or 
 mining taxes. In the, older countries, where the idea of public 
 territorial ownership is stronger, the old system still prevails, 
 and, even where it is partially surrendered, the revenues derived 
 from royalties and taxes are proportionately large. But in the 
 new countries of the American continent and Australia private 
 ownership generally prevails, and no more revenue is derived 
 from this source than from any other taxed industry. The
 
 338 INTRODUCTION TO PUBLIC FINANCE 
 
 feudal idea of territorial ownership, a remnant of which still 
 survives in those countries of Europe which retain their in- 
 terests in the mines, is very different from that of private owner- 
 ship in fee simple as in America. This accounts for the dififer- 
 ence in the revenues from this source. 
 
 Sec. 7. Other Industries. — But while the modern State 
 has surrendered the extractive industries, a great many others 
 have been undertaken, not so much as sources of revenue as 
 because of the importance of the public interests involved. 
 Before the nineteenth century the most striking instances are of 
 the production of some commodity needed for the public ser- 
 vice or of articles of an artistic and costly character. Examples 
 of the latter are the Gobelin tapestries and the Sevres ware. 
 In supplying arms, forts, vessels, public buildings, and the like 
 there is no uniformity of practice among the nations. In only 
 a few cases is the method regularly that of government produc- 
 tion. There is a similar absence of uniformity in practice in 
 regard to all those industries which involve large public interests 
 for the conservation of which there is under private management 
 no good guarantee. In some cases, as the water-supply, there 
 is a general tendency in the direction of public ownership. 
 Whenever, as in this case, a pubHc interest is absolutely para- 
 mount to every other consideration, there is little attempt to 
 make the industry a source of revenue beyond what is necessary 
 to maintain the service. These industries, therefore, tend 
 rapidly to be supported by fees or taxes. Inasmuch as it is 
 generally the importance of the public interest that led to the 
 assumption of the industry by the government, this tendency 
 is universal. Roads, canals, the water-supply, the post-office, 
 telegraph, telephone, and the railroads all pass more or less 
 rapidly through these stages according to the importance 
 ascribed to the public interest in them. As already seen, the 
 post-office is now primarily supported by fees. The funds for 
 the support of water works are generally collected from the 
 users, as fees, or from certain classes of persons as special taxes, 
 but seldom as prices for the service. The experience of nations 
 with State-owned railroads is too recent and too varied to be
 
 FEES AND INDUSTRIAL EARNINGS 339 
 
 very instructive. States have been led into the ownership and 
 operation of railroads : first, because the roads needed the sup- 
 port of public credit ; second, because of military interests ; 
 third, because of the failure of private companies to protect 
 public interests. Railroads have more often been a source of 
 public expenditure than of public revenue. In Prussia alone 
 have the financial results been such as to add materially to the 
 income of the treasur}-. The question of government owner- 
 ship of railroads is one involving considerations broader than 
 merely fiscal ones, and does not properly belong to our subject. 
 In no case is it at all likely that merely fiscal considerations 
 will have more than a deterrent effect upon the solution of the 
 problem of the government's action in regard to the manage- 
 ment of the railroads. 
 
 While the industrial, commercial, or other economic func- 
 tions of the State are of continually growing importance, they 
 are not likely to be largely a source of net revenue. No- 
 where do we find principles that would lead us to anticipate 
 that revenues of this character will ever supply the place of 
 taxes. Indeed, if the usual evolution continues, these functions 
 may be performed by the State without a special charge upon 
 the benefited persons, and, while the liberties of the people 
 in respect to the enjoyment of these facilities will be greater, the 
 burden thrown upon general taxation will be equally so. If a 
 city now supplies a sewer system to citizens free of special 
 charge except for first construction, it may with the same logic 
 supply water. If a State furnishes roads at common cost, it 
 may certainly so far modify the management of railroads as to 
 apply the fee system and forego the collection of any surplus, 
 though in this case, as in that of the post-office, there would 
 seem to be as yet no sign of any tendency to go beyond the fee 
 system.
 
 PART III 
 
 PUBLIC INDEBTEDNESS 
 
 CHAPTER I 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 
 
 Section i. Size of Public Debts. — The national govern- 
 ments of the civilised world owed in 1908- 1909 more than 
 thirty-six and one-half thousand millions of dollars, or seven 
 and one-half thousand million pounds sterling. With the 
 addition of the debts owed by the local governments this sum 
 will exceed forty thousand millions of dollars, or eight thousand 
 million pounds. The nearest available figures are : 
 
 National debt of all countries, 1890 
 National debt of all countries, 1908 
 
 $27,524,976,915! 
 36,548,455 489 
 
 According to the best available authorities the national indebted- 
 ness of the world increased fourfold between 1848 and 1890, 
 and by 1908 it was fivefold. 
 
 Years 
 
 Aggregate Debt 
 
 Increase 
 
 Per Cent 
 OF Increase 
 
 1848 
 i860 
 1870 
 1880 
 1890 
 1908 
 
 $ 7,637,692,215 
 10,399,341,688 
 17,117 640 428 
 27,421,037,643 
 27,524,976,915 
 36,548 455,489 
 
 $ 2,771 649,473 
 
 6,718,298,740 
 
 10,303,397,215 
 
 103,939,272 
 
 9,023,478,574 
 
 36.34 
 64.60 
 60.19 
 •38 
 32.80 
 
 [From best available sources.] 
 
 1 Bastable, in his edition of igo3, says that the total of national debts can hardly 
 have been less than £7,000,000,000 at the close of the nineteenth century (p 626). 
 
 340
 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 341 
 
 The increase of national indebtedness between 1880 and 1890 
 was comparatively slight. But this was partly due to the pay- 
 ment of a large part of the national debt of the United States. 
 The increase since 1890 is largely attributable to the Boer War 
 in England and to the Spanish- American War. Other countries 
 have continued the process of debt-making — although less 
 rapidly, owing to the continuance of peace. The above figures 
 do not include pensions, which are really debts in the form of 
 annuities.^ 
 
 Reported National Debt of Specified Nations for the Fiscal Year, 
 
 1904-1905 
 
 Country 
 
 Austria . . . 
 Hungary . . . 
 Austria-Hungary 
 Belgium . . . 
 Bulgaria . . . 
 Denmark . . 
 France . . . 
 Germany . . . 
 Greece . . . 
 Italy .... 
 Netherlands . . 
 Norway . . . 
 Portugal . . . 
 Roumania . . 
 Russia . . . 
 Servia .... 
 Spain .... 
 Sweden . . . 
 Switzerland . . 
 Turkey . . . 
 United Kingdom 
 United States . 
 China .... 
 Japan .... 
 
 
 
 Per 
 
 Population 
 
 Total Debt 
 
 Capita 
 Debt 
 
 26,150,710 
 
 $ 785,243,792 
 
 $ 30 
 
 19,254,560 
 
 1,069,067,854 
 
 56 
 
 45405,270 
 
 1,095,606,825 
 
 24 
 
 7,074,910 
 
 606,762,617 
 
 86 
 
 3,744,280 
 
 66,162,890 
 
 18 
 
 2,464,770 
 
 65,269,644 
 
 26 
 
 38,961,950 
 
 5,929,395,672 
 
 152 
 
 60,605,180 
 
 823,290,138 
 
 14 
 
 2,433,800 
 
 164,001,050 
 
 67 
 
 33,476,120 
 
 2,424,448,935 
 
 72 
 
 5,509,660 
 
 464,246,824 
 
 84 
 
 2,240,100 
 
 71,657,217 
 
 32 
 
 5,423,130 
 
 855,114,614 
 
 158 
 
 6,400,000 
 
 264,723,487 
 
 41 
 
 129,309,300 
 
 3,738,394,688 
 
 29 
 
 2,676,990 
 
 89,736,313 
 
 34 
 
 18,618,100 
 
 1,858,191,268 
 
 100 
 
 5,260,810 
 
 103,803,418 
 
 20 
 
 3,425,380 
 
 19,798,382 
 
 6 
 
 24,028,900 
 
 537,767,716 
 
 22 
 
 43,218,000 
 
 3,877,318,133 
 
 90 
 
 81,511,815 
 
 989,866,772 
 
 12 
 
 407,253,000 
 
 587,654,208 
 
 I 
 
 46,732,200 
 
 483,942,912 
 
 10 
 
 For later figures see appendix to this chapter. 
 
 1 If these were included and capitalised at ten years' purchase, which would, per- 
 haps, lje a fair average, they would add to the debt of the United States at least 
 $i,50o,cxx),ooo.
 
 342 INTRODUCTION TO PUBLIC FINANCE 
 
 The table on the preceding page compiled from the States- 
 man's Year Book for 1906 gives the details of the population, 
 indebtedness, and per capita debt on the account of the national 
 governments only, of twenty-four of the most important nations. 
 The totals for the British Empire were : population 325,540,000, 
 total indebtedness $7,190,748,566 (£1,440,000,000), per capita 
 $22 (£4 10s.). 
 
 While the absolute amount of the debt has increased, the 
 burden has materially decreased since 1880, owing to the in- 
 crease in population and wealth. In 1880, the national indebted- 
 ness of countries other than the United States amounted to 
 $35.64 per capita, while in 1890 it was $32.90 per capita. During 
 the same period the national debt of the United States was re- 
 duced absolutely by over a billion dollars, and relatively from 
 $38.33 per capita to $14.24 per capita. The per capita debt 
 for the world at large on the national accounts only was in 1909 
 about $26, that of the United States in the same year about 
 $10. Of course statistics of this sort are neither perfectly 
 accurate nor easy to interpret. The only proper comparison 
 between different countries would be that of the ratio of the 
 interest charge to the annual income of the people. But the 
 annual income is very difficult to ascertain, and the errors 
 would, probably, be so great as to destroy the significance of the 
 result. But the foregoing figures, while not absolutely correct, 
 are sufficiently so to indicate that the policy of borrowing has 
 become a most vital part of the system of public finance. The 
 cause of the national debts is almost exclusively war and the 
 preparation for war. If the expenses of war and its preparation 
 had been excluded from their finances and the treasury relieved 
 of the subsequent burden of interest, civiHsed nations would 
 have been easily able to meet their current expenses. In Eng- 
 land the annual public-debt charges for interest and debt pay- 
 ments consume nearly one-fourth of the annual revenues from 
 every source. The policy pursued by England is to fix a perma- 
 nent debt charge against the annual revenues and to use all that 
 can be saved therefrom over and above the interest charges for 
 the payment of the principal. This so-called sinking fund
 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 343 
 
 system is suspended in time of war. The funded debt of 
 France, the largest ever contracted by any country, imposed 
 an interest charge of about 1,250,000,000 francs upon a total 
 revenue of about 3,500,000,000 francs. If we include certain 
 annuities and pensions, over one-third of the revenues of France 
 were consumed in this way, before the Great War. 
 
 Cash Reserves. — Germany is the only country of importance 
 that did not rely entirely upon the possibility of borrowing 
 money in case of war. That country maintained a special 
 cash reserve of many millions in gold, available for immediate 
 appHcation to war purposes, should it be needed. Although 
 the German Empire began in 1871 without debt, it had in 1908 a 
 debt of 1 ,588,000,000 marks. This was largely due to armament. 
 So that, although Germany held a cash reserve for military 
 purposes, it was practically a borrowed one, and she was making 
 her preparation for war on borrowed money. This policy does 
 not differ essentially from that of other countries. In the 
 Middle Ages, however, as in classical times, it was the practice 
 of nations to accumulate a treasure for war purposes in advance, 
 by collecting more revenue each year than was needed. This 
 practice is now obsolete and is also indefensible as too costly.^ 
 
 Deficit Financiering. — Modern nations, then, practise a 
 method of deficit financiering. They make provision in their 
 annual revenues for the current, regular, or "ordinary" expendi- 
 tures only, and rely for funds at other times upon their ability 
 to borrow. What then constitutes this ability to borrow upon 
 which so much reliance is placed that even the very existence 
 of the nation is allowed to depend upon it? Since when, and 
 how is it, that nations have been able to rely so absolutely upon 
 public credit ? The answer to both these questions is contained 
 in the analysis of public credit. 
 
 Sec. 2. Public Credit a Form of General Credit. — Public 
 credit is only one form of general credit, and it is comparatively 
 easy to point out wherein the former differs from the latter. 
 But credit in itself is by no means easy to define. Scarcely any 
 two of the able writers who have treated the subject are agreed 
 
 ' See Bastable, p. 567.
 
 344 INTRODUCTION TO PUBLIC FINANCE 
 
 as to its most important features. It has, moreover, as a term 
 in common use, suffered so many subtle changes in meaning 
 in the course of its history as to leave its modern significance 
 full of dangerous variations. The ordinary business man uses 
 the word daily to convey half a dozen or more different ideas 
 without recognising the differences. Scientific writers have 
 waged long and bitter controversies concerning its proper 
 definition. 1 Without going too deeply into the controversy, 
 we may say that there are practically three opposing views as 
 to the real nature of credit. First, there are those writers who, 
 like Nebenius and Rau, start from the etymological meaning 
 of the term and maintain that the confidence, or trust, reposed 
 by the creditor in the ability of the debtor to fulfil an agreement 
 in the future is the chief element in credit.- Second, there is 
 a class of writers who, like Knies, regard this element of con- 
 fidence, a mere psychical condition, as too intangible, too im- 
 material, to be of any value for a scientific definition. They 
 proceed entirely from observation of those transactions which 
 are said to involve the use of credit, and find in all such trans- 
 actions one feature which is never present in transactions not 
 designated as credit transactions. That feature is that the 
 completion of the transaction is regarded as being postponed 
 to a future time. This element of time, this postponement, 
 must then, they argue, be the essence of credit. Credit is, in 
 their eyes, merely a means of transferring ownership tem- 
 porarily, a means of paying for present goods with a greater 
 quantity of future ones. Third, there is still another school, 
 who, like McLeod, regard credit as analogous to money, money 
 being regarded as representing claims on the wealth of the whole 
 community, while a credit is a similar claim on the wealth of 
 some particular individual. McLeod even goes so far as to 
 identify the claim, the order, the promise to pay, or the right to 
 demand with " the credit." " A credit," says McLeod, " in 
 Law, Commerce, and Economics, is the Right which one Person, 
 
 1 A good idea of the extent of the controversy and of the conflicting views can 
 be gained from Knies, Der Kredit, Berlin, 1876. 
 
 ^Nebenius. Der bfentUche Credit, Carlsruhe und Baden, 2d ed., 1829; Rau, 
 Finanzwissensckajt, 3d ed., Heidelberg, 1S51 ; II Abt., p. ;:48.
 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 345 
 
 the Creditor, has to compel another Person, the Debtor, to Pay 
 or Do something." ^ 
 
 Sec. 3. Reconciliation of These Views. — These definitions, 
 apparently so contradictory, are not altogether irreconcilable. 
 They represent dififerent points of view rather than real dif- 
 ferences in meaning. Certainly nothing but credit is described 
 by any one of the three definitions, and certainly there are shades 
 of the meaning of the term that are aptly described by each of 
 them. As is so often the case when a word in common use is 
 defined for scientific purposes in several ways, we find that one 
 definition fits certain classes of things covered by the term better 
 than others. There are certain debts, for example, in which 
 the element of trust is paramount, others in which that of time 
 is more important, and again some in which the element of 
 claim or demand is the distinguishing thing. But it is also 
 true that there are no cases of the existence of credit where all 
 three of these features do not appear, the one or the other varying 
 in importance as the case may be. To fully understand a thing 
 so many-sided as credit, it is necessary to examine it from several 
 points of view. 
 
 If we start from the etymological meaning of the term, we 
 cannot avoid the conclusion that one of the chief elements of 
 credit is trust. Certainly without that intangible, unmeasurable 
 feeling or frame of mind known as confidence, trust, or faith, on 
 which Knies pours so much scorn, no debts would have come 
 into existence. As Professor Cohn well says, " Credit rests 
 on the development of opinions and institutions which arise 
 with the general advance of civilisation." ^ Modern usage has 
 not yet eliminated this original meaning from the term. It 
 
 1 Theory of Credit, Vol. I, p. 315. In a very scholarly article published in the 
 Quarterly Journal of Economics, January, 1894, Professor Sherwood discusses the 
 nature and mechanism of credit in a way to throw a great deal of new light upon 
 the subject. I do not believe that his analysis can be improved upon. lie dis- 
 tinguishes particularly the credit basis of money, as generic or universal credit 
 (which he calls "customary credits"), from that of the commonly so-called credit 
 transactions, which he calls "formal credits." It is with the latter only that we 
 are concerned here. They are legally enforciljle. They rest in the economic sense 
 "on a psychological trait of faith in the uniformity and reasonableness of other 
 men's voluntary acts." 
 
 '' Grundiegung, p. 553.
 
 346 INTRODUCTION TO PUBLIC FINANCE 
 
 cannot be altogether incorrect to make this a part of the defi- 
 nition. It is customary enough to conceive that credit or faith 
 is reposed by the creditor in the debtor, and that it varies in 
 amount, although never exactly measurable. But there are 
 many credit transactions in which the element of trust shrinks 
 into insignificance. An advance on a warehouse receipt, a Lom- 
 bard loan, a pawnbroker's advance, all of these and many like 
 them are credit transactions, but the element of personal con- 
 fidence plays little part in these. The creditor in these cases 
 never has to consider the character of the debtor nor his ability or 
 willingness to pay. After he has satisfied himself as to the value 
 of the security, all that he has to consider is the time the debt 
 has to run. It must be admitted, then, that there are a number 
 of cases of credit transactions in which the paramount element 
 is that of time. The first two of the above-stated views of the 
 nature of credit are, therefore, reconcilable in this way. They 
 may be regarded as essentially the same with a difference in the 
 emphasis, and it is correct to change the emphasis when dif- 
 ferent kinds of debts are considered. Both of them may be 
 covered by one definition, which may for two reasons be called 
 the subjective definition : (i) because it takes into consideration 
 feehngs, opinions, i.e. trust, confidence, behef ; (2) because it 
 looks at credit from the natural point of view of the creditor 
 who entertains that trust. 
 
 Subjective Definition. — From the subjective standpoint credit 
 is the confidence or trust reposed by one person in the ability 
 of some other person to fulfil a promise at some future time. 
 The emphasis will fall upon the feature of trust or upon that of 
 time according to the nature of the particular debt in point. 
 
 But that is not all : we have yet to dispose of that view which 
 identifies credit with the claim which the creditor has on the 
 debtor. In one aspect this view seems absolutely contradic- 
 tory to that which we have adopted. So much so that Knies 
 ridicules it, considering it quite as absurd as the reasoning of 
 John Law. He says it makes the debtor give credit : i.e. he 
 gives the claim, and the claim is credit. But McLeod's reason- 
 ing is not so easily disposed of. He has taken what may be
 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 347 
 
 well Galled the objective view. He has sought out embodied 
 credit. His, too, is the natural point of view of the debtor. 
 The opposition, therefore, between the two views is more 
 apparent than real, and arises from the fact that each is from a 
 different point of view. There are two sides to the shield. The 
 debtor sells a claim (a chose in action) which is a more or less 
 tangible thing having a present value, just as many another 
 right has ; as, for example, a patent right or a copyright. The 
 debtor is concerned only with the value of that claim. The 
 creditor, however, looks beyond the claim and desires to know 
 whether he can trust in the abiUty of the debtor to make the 
 claim good. By a very natural analogy, too, the language of 
 business says that the debtor enjoys good or bad credit, as 
 though the trust reposed in him by others, in whose minds it 
 exists, really became an attribute of him. There is still more 
 ground for McLeod's view, for, as has already been remarked, 
 it is often the nature of the claim created that adds to, or de- 
 tracts from, the credit. Any man, in ordinary times, can obtain 
 credit, if he comes prepared with collateral security and is 
 ready to create a claim that is good on that in case his other 
 resources fail him. It is clear, then, that the view of McLeod 
 is important, and also that it is supplementary to that already 
 adopted. It reveals many phases of credit that cannot be seen 
 at all from the subjective point of view. The two views taken 
 together make a complete explanation. 
 
 Objective Definition. — From the objective standpoint, credit 
 is embodied in claims which are accepted by the creditor in pay- 
 ment. These objective claims have a value like every other 
 exchangeable commodity, and are recorded in the various 
 " instruments of credit." 
 
 Public Credit and Private Credit Differ. — If these two defi- 
 nitions are accepted, we can proceed to point out wherein public 
 credit differs from ordinary or private credit. The peculiar 
 conditions which distinguish public credit from ordinary credit 
 arise from the fact that the debtor is the State. The State, be- 
 ing above the law, cannot be compelled, as the private individ- 
 ual can, to pay its debts. Puljlic credit is therefore subjectively
 
 348 INTRODUCTION TO PUBLIC FINANCE 
 
 defined as the confidence or trust reposed in the abihty and 
 wilHngness of the debtor (the State) to fulfil its promises at some 
 future time. Objectively the claim (in this case the bond) 
 shrinks to the character of an unsupported although generally 
 accepted promise. There are, to be sure, some important cases 
 in which the claim is apparently supported by something more 
 definite than the mere promise of the debtor ; as, for example, 
 when the revenues from certain productive enterprises are 
 pledged for the support of the debt charges. But even in these 
 cases, the creditor has no real resource against intentional bad 
 faith. In general the subjective standpoint gives a better 
 view of public credit than the objective, because the claims 
 cannot be enforced. 
 
 The fact that the debtor is the State has other important 
 consequences, (i) The State has sovereign power and can com- 
 pel its subjects to lend to it ; or, on the other hand, the creditor 
 may make advances on rather poorer terms than he would 
 otherwise accept, from motives of patriotism. (2) The debtor 
 State lives forever, and hence can make perpetual debts. (3) Its 
 affairs are all open to inspection, and the would-be creditor has 
 full opportunity to know its ability to pay. (4) Public credit 
 may be divided into various parts, according as it is the credit 
 of the central government or of some subordinate department 
 that is being considered. The consideration of the relations 
 of the different parts of the government in this respect belongs 
 to the field of public law rather than to that of public finance. 
 
 Sec. 4. The Late Development of Public Credit. — Public 
 credit was necessarily later in development than private credit. 
 General habits of lending on a large scale had to be established 
 before nations could borrow. The bankers and brokers of the 
 world had to develop the machinery for handling evidences of 
 debt before large public loans could be placed. Then, too, 
 inasmuch as the objective evidences of debt in the case of the 
 government were nothing but the unsupported promises of the 
 government, confidence that these promises would be kept had 
 to grow. At first the assurance rested on the honour of the 
 monarch, or upon some pledge or security given by him, such
 
 THE GROWTH AND NATURE OF PUBLIC CREDIT 349 
 
 as the crown jewels, crown lands, a lease of the revenues, and the 
 like. But later, as Bastable so ably shows,^ the development of 
 public credit goes hand in hand with the development of con- 
 stitutional government. It would seem that the control of 
 the purse by the very persons who were to pay the taxes gave a 
 steadiness and security to the financial administration that 
 aroused the confidence of money owners. 
 
 Sec. 5. Economic Effect of Debt. — Much attention has been 
 given by different authors to the economic effects of public 
 borrowing. It is now pretty well agreed that public borrowing 
 does not, as was once taught,^ create new wealth except in- 
 directly, through the use made of the capital taken when it is 
 used productively. Nor, on the other hand, does public bor- 
 rowing in itself directly destroy wealth. The money borrowed 
 may be devoted to some form of rapid consumption, as in war. 
 In this case the destruction of wealth is determined by the line 
 of expenditure decided upon, not by the borrowing merely. 
 But the feasibility of obtaining large sums in this way is said 
 to lead to more extravagant expenditure than would otherwise 
 be indulged in, since taxation for such purposes would be diffi- 
 cult. The consumed wealth is replaced by claims upon future 
 wealth which are not of such a character as to be available as 
 productive capital. But the loss incurred is distributed over 
 many years instead of being concentrated in a few. As in the 
 case of a spendthrift who mortgages his patrimony for wasteful 
 extravagance, so in the case of a nation which borrows for war, 
 the evil that arises is from the waste of war, not from the bor- 
 rowing. For a State to borrow for a productive purpose has 
 no other economic effect than for a private corporation to do the 
 same. 
 
 Sec. 6. Foreign vs. Domestic Loans. — There has also been 
 some discussion of the relative merits of domestic and foreign 
 loans and their differing economic effects. Sometimes it has 
 been claimed that foreign loans involve less disturbance of 
 domestic industry. The intimate relation existing between 
 modern nations in their commercial and industrial enterprises 
 * P- 579- * "The public funds a mine of gold."
 
 350 INTRODUCTION TO PUBLIC FINANCE 
 
 destroys to-day almost all the significance that might formerly 
 have attached to such a discussion. The payment of the 
 French indemnity of 5,000,000,000 francs to Germany after 
 the war of 1870 was carried out in twenty-seven months, and 
 not one single serious difficulty or disorder in the financial 
 centres was produced by it.^ So great is the mobility of modern 
 capital and so vast are the current transactions, that all of this 
 money could be easily turned into the same stream without 
 disturbing its placid surface. The only point of importance is 
 that a home debt is under the taxing power of the nation, while 
 a foreign debt is less so. This makes possible an easier adjust- 
 ment without the full stigma of repudiation. 
 
 The Frailty of Public Credit. — Public credit is a plant of slow 
 growth ; more than that, it is a delicate plant. It may be 
 injured beyond recovery by a single case of failure to fulfil the 
 promise in which it found expression. Many of the common- 
 wealths of the United States have repudiated their debts, and 
 have since then recovered their power to borrow but slowly, 
 and in some instances scarcely at all." Weak nations which 
 may be or have been coerced by stronger and wealthier nations 
 in the interest of citizens of the latter who were creditors of the 
 former, generally borrow more easily than stronger independent 
 nations, or parts of strong confederations, which have failed to 
 meet their obligations and cannot be coerced. 
 
 The credit of local governing bodies depends in great measure 
 upon their powers and duties in public law. Generally speak- 
 ing, a " municipal corporation," when acting legally within the 
 sphere prescribed to it, is like a private company, — its obliga- 
 tions can be enforced by legal or judicial procedure. Unlike 
 the sovereign State, a municipality can be sued without its 
 consent. Only with the positive sanction of the sovereign 
 State can a municipality default and escape punishment therefor. 
 
 1 Blackwood's Edinburgh Magazine, February, 1875, pp. 172-187. 
 
 2 Under the Eleventh Amendment to the federal Constitution, a state cannot 
 be sued in a federal court. This is contrary to the original intention of the Con- 
 stitution. See my monograph, Das Kreditwesen der Staaten iind Stadte dcr Nord- 
 amerikanischen Union in seiner historischen Enhvickelung, Jena, 1891. Egypt is 
 a good example of foreign coercion to enforce debt payment.
 
 APPENDIX TO CHAPTER I, PART III 
 PUBLIC DEBT AND THE WORLD WAR 
 
 The following tables are from a pamphlet by Louis Ross 
 Gottlieb, on the Financial Status of Belligerents, published by 
 the Bankers Trust Company, New York, 1920. 
 
 SUMMARY OF PUBLIC DEBTS OF PRINCIPAL 
 
 BELLIGERENTS 
 
 (Million dollars) 
 
 A. Allied Powers 
 
 Country 
 
 United States 
 Great Britain 
 Canada . . 
 Australia 
 New Zealand 
 France . . 
 Italy . . . 
 Japan . . 
 Russia . . 
 Belgium 
 Greece . . 
 
 Total . 
 
 Popula- 
 tion' 
 (thou- 
 sands) 
 
 106,653 
 
 46,089 
 
 8,361 
 
 4,971 
 
 1,162 
 
 39,700 
 
 36,717 
 
 57,998 
 
 182,18s 
 
 7,658 
 
 4,950 
 
 496,442 
 
 Before Entering the War 
 
 Date 
 
 Mar. 31, 
 Aug. I, 
 Mar. 31, 
 June 30, 
 Mar. 31, 
 July 31, 
 June 30, 
 July 31, 
 Jan. 1, 
 Jan. I, 
 Dec. 31, 
 
 1917 
 1914 
 1914 
 1914 
 1914 
 
 1914 
 1914 
 1914 
 1914 
 1914 
 1913 
 
 
 Annual 
 
 Debt 
 
 Debt 
 
 debt 
 
 per 
 
 
 charges 
 
 capita 
 (dollars) 
 
 1,208 
 
 23 
 
 11-33 
 
 3,458 
 
 119 
 
 7S-03 
 
 336 
 
 13 
 
 40.19 
 
 93 
 
 3 
 
 18.71 
 
 446 
 
 13 
 
 383-82 
 
 6,598 
 
 252 
 
 166.20 
 
 3,031 
 
 103 
 
 82.SS 
 
 1,261 
 
 54 
 
 21,74 
 
 5,092 
 
 218 
 
 27-95 
 
 722 
 
 25 
 
 94-28 
 
 188 
 
 8 
 831 
 
 37-98 
 45-19 
 
 22,433 
 
 Debt 
 
 charges 
 
 per 
 
 capita 
 
 (dollars) 
 
 0.22 
 2.58 
 
 i-SS 
 
 0.60 
 
 II. 19 
 
 6-35 
 2.81 
 
 0.93 
 1.20 
 3-26 
 1-62 
 
 1.67 
 
 B. Central Powers 
 
 Germany . . 
 
 Austria . . . 
 
 Hungary . . 
 
 Turkey . . . 
 
 Bulgaria . . 
 
 Total ■ . ■ 
 Grand Total 
 
 67,812 
 30,958 
 21,410 
 21,274 
 5,518 
 
 146,972 
 
 643,414 
 
 Oct. I, 
 
 Aug. 1, 
 Aug. I, 
 Mar. 31, 
 July .. 
 
 1913 
 1914 
 
 1914 
 1914 
 1914 
 
 1,165 
 
 42 
 
 17.18 
 
 2,631 
 
 lOI 
 
 84-99 
 
 1,602 
 
 53 
 
 74-82 
 
 667 
 
 45 
 
 31-35 
 
 171 
 
 8 
 
 30.99 
 
 6,236 
 
 249 
 1,080 
 
 42-43 
 44-56 
 
 28,669 
 
 0.62 
 3.26 
 2.48 
 
 3.13 
 
 1-45 
 
 1.69 
 1.68 
 
 351
 
 35^ 
 
 INTRODUCTION TO PUBLIC FINANCE 
 
 SUMMARY OF PUBLIC DEBTS OF PRINCIPAL 
 BELLIGERENTS 
 
 "(Million dollars) 
 
 A. Allied Powers 
 
 
 
 
 
 At Most Recent Date 
 
 Country 
 
 
 
 Annual 
 
 Debt 
 
 Debt 
 charges 
 
 
 Date 
 
 Debt 
 
 debt 
 
 per 
 
 per 
 
 
 
 
 charges 
 
 (dollars) 
 
 capita 
 (dollars) 
 
 United States .... 
 
 Aug. 31, 1919 
 
 26,597 
 
 894 
 
 249.38 
 
 8.38 
 
 Great Britain 
 
 
 
 
 July 26, 1919 
 
 37,657 
 
 1,421 
 
 817.04 
 
 30.83 
 
 Canada . . 
 
 
 
 
 Mar. 31, 1919 
 
 1,584 
 
 "5 
 
 189.4s 
 
 13. 75 
 
 Australia 
 
 
 
 
 Dec. 31, 1918 
 
 1,619 
 
 SO 
 
 325-69 
 
 10.06 
 
 New Zealand 
 
 
 
 
 Mar. 31, 1918 
 
 734 
 
 22 
 
 631-67 
 
 18.93 
 
 France 
 
 
 
 
 Mar. 31, 1919 
 
 30,494 
 
 1,930 
 
 768.11 
 
 48.61 
 
 Italy . . . 
 
 
 
 
 May 30, 1919 
 
 15,009 
 
 577 
 
 408.78 
 
 15-71 
 
 Japan . . . 
 
 
 
 
 Mar. 31, 1919 
 
 1,284 
 
 52 
 
 22.14 
 
 0.90 
 
 Russia . . 
 
 
 
 
 Aug. 31, 1919 
 
 54,402 
 
 766 
 
 298.61 
 
 4.20 
 
 Belgium . . 
 
 
 
 
 April I, 1919 
 
 1,889 
 
 8s 
 
 246.67 
 
 11.10 
 
 Greece . . 
 
 
 
 
 Mar. 31, 1919 
 
 521 
 
 18 
 
 105.25 
 346.04 
 
 3.64 
 
 Total . . 
 
 
 
 
 
 171,790 
 
 5,930 
 
 11.9s 
 
 
 
 
 
 
 
 B. Central Powers 
 
 Germany 
 
 Austria 
 
 Hungary 
 
 Turkey 
 
 Bulgaria 
 
 Sept. 30, 1919 
 Oct. 31, 1918 
 Oct. 31, 1918 
 Aug. 31, 1918 
 Mar. . . 1919 
 
 40,007 
 
 17,071 
 
 8,909 
 
 2,002 
 
 1,158 
 
 2,201 
 
 622 
 
 347 
 
 88 
 
 109 
 
 58997 
 551-42 
 416.11 
 94.11 
 209.86 
 
 32.46 
 20.09 
 16.21 
 4.14 
 I9-7S 
 
 Total 
 
 
 69.147 
 
 3,367 
 
 470.48 
 374-47 
 
 22.91 
 
 
 
 
 Grand Total .... 
 
 
 240,937 
 
 9,297 
 
 14.45 
 
 

 
 CHAPTER II 
 FORMS OF PUBLIC DEBTS 
 
 Section i. Forms Many. — Government borrowing takes 
 on many forms. Among the more common are : (i) circulating 
 notes or paper money not bearing interest ; (2) unpaid accounts, 
 most often represented by warrants, which are orders upon the 
 treasurer to pay money and which do not ordinarily, but may, 
 bear interest ; (3) short time notes, bearing interest ; (4) long 
 time notes, bonds or annuities, sometimes called generically 
 stocks (British) or rentes (French), but in the United States 
 always called bonds. 
 
 Paper Money. — Circulating notes issued by governments 
 to pay their obligations may be, on their face, redeemable or 
 irredeemable. When not specifically redeemable there is still 
 an understanding, or at least a hope, that when the difficulties 
 which caused their issue are overcome they will be redeemed. 
 On the other hand notes technically redeemable may never 
 be redeemed. Irredeemable notes are usually issued only as a 
 desperate resort in times of great stress. Redeemable circu- 
 lating notes are, however, often issued in the regular course of 
 business, especially when the government is regularly in the 
 banking business, or they may be issued as were the United 
 States gold and silver certificates, in part, to meet the con- 
 venience of the people, and as a regular part of the circulating 
 medium. 
 
 Warrants. — Governments like individuals carry open book 
 accounts showing that they owe money to certain firms, com- 
 panies, or individuals. In so far as these are current and are 
 settled at regular intervals or as soon as they can be closed and 
 paid, these are not ordinarily regarded as debts. Still more 
 2A 353
 
 354 INTRODUCTION TO PUBLIC FINANCE 
 
 important are accruing salaries ; for government expenses are 
 very largely salaries. When a " claim," as it is usually called 
 in the United States, matures under any running or other open 
 account, or a salary payment becomes due, it is usual for the 
 proper disbursing officer to issue a warrant directing the treas- 
 urer to pay the amount of the approved claim or salary. Such 
 a warrant is presumed to be a settlement of the claim or to be a 
 payment of salary, and must usually per force be accepted as 
 such by the claimant. If there are funds in the treasury the 
 warrant is practically a check or draft and is treated by the banks, 
 and hence in all other business circles, exactly as a check or draft 
 would be treated. But if the treasury is empty, temporarily 
 or for a considerable time, the warrant becomes distinctly an 
 outstanding evidence of debt. As funds flow into the treasury 
 outstanding warrants will be accepted and paid presumably 
 in order of presentation, although sometimes certain classes of 
 warrants are given precedence. Thus salary warrants may be 
 given precedence. The value of a warrant depends upon the 
 length of time that will probably elapse before it will be paid. 
 That is, unless the treasury is in position to pay it at once on 
 presentation, a warrant is subject to discount. Sometimes the 
 government itself assumes this discount or loss and in that case 
 the warrant would be stamped, or indorsed " interest pay- 
 able until redeemed." Such interest-bearing warrants become 
 virtually notes. 
 
 The use of warrants to meet claims largely in excess of funds 
 on hand is a loose, and undignified, way of doing government 
 business. It betokens a dangerous condition of perennial 
 deficit. Furthermore many claimants unaccustomed to the 
 use of warrants are loath to accept them. Where purchases 
 are to be made in the open market sellers may not come forward 
 at all unless they are offered cash. In other words, warrants 
 cannot be used to pay bills unless the claimant is willing or can 
 be compelled to accept them. Ordinarily an officer or employee 
 of the government has little choice in the matter once he has 
 taken office or employment. So too in time of war, quarter- 
 masters, commissary officers, and some others take what goods
 
 FORMS OF PUBLIC DEBTS 355 
 
 an army needs and pay for them in requisitions or orders which 
 are to all intents and purposes much like warrants. But still 
 cash is also needed to facilitate business for which the warrant, 
 requisition, or order is not adapted. Even an army may obtain . 
 goods for cash which it would never discover by search and 
 seizure. Hence governments issue or sell notes, or promises 
 to pay, in the open market to get the cash they need. 
 
 Treasury Bills. — Taxes do not always come into the treasury 
 in a regular stream, but often at fixed times once or twice a 
 year; and if the government is not in position to carry a cash 
 balance it may desire to raise money temporarily to tide over the 
 intervals. In time of war, also, or in other times of stress 
 money may be needed for covering expenses in the intervals 
 between tax receipts or returns from sale of bonds. The usual 
 device for meeting this situation is the treasury bill or ex- 
 chequer bill. The name implies that this is a promissory note 
 or an obligation of the treasurer or of the treasury department 
 and the government is not ex nomine obligated thereby. But, 
 of course, the government stands behind and will uphold the 
 treasurer or the exchequer. The officer technically responsible 
 for the note or bill cannot legally become so without authority 
 and acts strictly in an official capacity. In times of peace 
 these notes are for a short time only, and may bear a ver>^ low 
 rate of interest. They may even be one-day notes or payable 
 on demand and the treasury may depend upon its ability to sell 
 new ones at any time, to meet those which may be presented, 
 or, which is often the case, pays just enough interest to insure 
 that the holder will find it to his advantage to hold them, or, if 
 he must realise on them, can sell them to some one else for more, 
 a trifle more is enough, than he could get from the treasury. 
 A not uncommon procedure is to discount such notes in series 
 so that only a certain amount falls due on any one-day. Where 
 there is a bank, or a system of banks, closely related to the gov- 
 ernment the handling of such notes is greatly facilitated. The 
 secret of the facility with which such notes are handled in 
 ordinary times is found in the existence of large private funds 
 or many small ones seeking temporary investment. A business
 
 356 INTRODUCTION TO PUBLIC FINANCE 
 
 man or firm often has cash on hand preparatory perhaps to 
 reinvestment, or funds accumulating for some definite purpose 
 and not needed at once. It is an advantage to put these funds 
 into treasury notes because of the interest paid even though 
 the interest be not high, for the notes are very readily turned 
 back into cash, by sale in the market even if not due. 
 
 Treasury Bills in Time of War. — In time of war the treasury 
 note often becomes of great importance as a means of raising 
 cash quickly even in large amounts. But since an unforeseen 
 demand for immediate payment on demand of large sums on 
 any one day might be especially embarrassing, these bills in war 
 times are often issued for a set term, and for one longer than the 
 usual peace time term. Care is often taken so to date them 
 that no overwhelming mass shall fall due on any one day. In 
 war times, too, it is sometimes desirable to reach other possible 
 purchasers than the banks and men of finance. So the treasury 
 note may be made attractive to the general public. While 
 the war time treasury note is much the same in nature as the 
 peace time one, it is just enough different in detail as to make 
 it desirable to use a different name for it. So in the United 
 States the term treasury certificate is used. France used the 
 term bons de la defense nationale for some of hers during the war, 
 and for another series ohligationes de la defense nationale. Eng- 
 land used a variety of terms, among them " war expenditure 
 certificates." Analogous to the war treasury certificates are 
 savings stamps and savings stamps certificates, which are a varia- 
 tion of the treasury bill devised to reach small savings. 
 
 Sec. 2. Floating and Funded Debts. — Practically all of the 
 above forms of public debts are included under the loose general 
 term floating debt to distinguish that part of the debt from 
 the so-called funded debt, which consists of long-time obligations, 
 in the many forms explained below. It is advisable at this 
 point to find out if we can what is meant by floating and by 
 funded debt. Unfortunately the distinction is not any too 
 clear as the terms are used to-day, yet they are very common 
 terms. 
 
 Originally, this distinction was very simple, and correspond-
 
 FORMS OF PUBLIC DEBTS 357 
 
 ingly useful. In the words of Adam Smith : " Nations, like 
 private men, have generally begun to borrow upon what may 
 be called personal credit, without assigning or mortgaging 
 any particular fund for the payment of the debt ; and when this 
 resource has failed them, they have gone on to borrow upon 
 assignments or mortgages of particular funds." The first of 
 these is the unfunded debt, the other is the funded debt.^ But 
 although these terms are still in common use, the meaning 
 attributed to them has so entirely changed that to-day the 
 so-called floating or unfunded debt consists, in large part, of 
 outstanding claims upon very definite revenues, while it is 
 often the case that no particular fund or source of revenue is 
 directly pledged for the payment of the so-called funded debt. 
 Hence it is that Professor Cohn treats Smith's grounds of dis- 
 tinction as antiquated, and says that the real distinction is 
 found in the fact that the funded debts are those of longer 
 duration, and the floating debts those of shorter duration, 
 " although," he adds, " different causes and purposes of credit 
 lie behind the difference in duration." - The most elaborate 
 attempt to explain the modern use of these terms is that of 
 Wagner. As it is so complete, it is well worth summarising here. 
 Funded and floating debts can be distinguished by the following 
 characteristics, which are more or less clearly recognisable in 
 the different cases: (i) the purpose of the loan — floating 
 debts are generally for rapidly passing needs, especially for 
 the payment of the current dues of the treasury : funded debts 
 are to supply the capital for permanent needs of the civic 
 household ; (2) continuance of the debt — together with the 
 former characteristic, relatively shorter continuance of floating 
 debts, at least in intention ; longer continuance of funded ; 
 (3) the legal conditions of repayment — in the case of floating 
 debts, the different items are repayable at sight or within a 
 comparatively short period ; in that of the funded, the creditor 
 has a more limited control over the principal, the debtor (the 
 State) being bound to repayment according to a fixed plan for 
 
 1 Wealth of Nations, Bk. V, Chap. III. 
 * Finanzwisscnschaft, p. 757.
 
 358 INTRODUCTION TO PUBLIC FINANCE 
 
 amortisation, or making no agreement as to the repayment of 
 the principal. This last is regarded as the essential test.' 
 
 The difhculty found in drawing a sharp line between these two 
 classes arises from the fact that the distinction is at best purely 
 an arbitrary one. It may differ from state to state, or from 
 time to time in the same state, according to the temporary whim 
 of the public official or statistician. The terms are relative ones. 
 By a floating debt is generally meant one that is regarded by 
 the person using the term as a tem.porary one. One official 
 will call any debt temporary, or a floating debt, which has three, 
 five, or even ten years to run ; while another will refuse the 
 term to any debt that is to run longer than six months or a year. 
 Strictly speaking, the term " floating debt " ought never to be 
 applied to any debt that is, on the face of it, to run beyond 
 the end of the fiscal year next succeeding that in which it is 
 created. But there is no established custom for such a limita- 
 tion. In trying to draw a sharp line between these two classes, 
 we meet with the same difficulty that we met in attempting to dis- 
 tinguish between direct and indirect taxes. But we have even 
 less to go upon. Official, statutory, and scientific usage varies 
 so much that nothing is gained by attempting to collate all the 
 meanings. Even for the most general scientific purposes, there- 
 fore, these terms are of little value, and for the purposes of 
 classification the distinction is absolutely useless. 
 
 Sec. 3. Funded Debts, Bonds. — Passing now to the funded 
 debts we find great variety. Perhaps the simplest form is a 
 series of notes or bonds each promising to repay a set principal 
 or sum of money at the end of a term of years and to pay interest 
 at stated intervals. As an example, a city may issue bonds 
 for $1000 each payable 40 years from date of issue with interest 
 at 4 per cent per annum payable semi-annually. There are 
 many ways of varying the term. One of the most common is 
 for the government to reserve the right to redeem the bond after 
 
 1 Most writers make use of these terms ; few have defined them so accurately as 
 Wagner. For example, Adams, Public Debts, p. 147, concedes the term "floating 
 debt" only to those in which the government retains the right to investigate each 
 particular claim. This necessitates a new class of "temporary debts," consisting 
 of treasurer's notes, bills of exchequer, and the like.
 
 FORMS OF PUBLIC DEBTS 359 
 
 the lapse of a certain time and also to bind itself to do so after the 
 lapse of a longer time. Thus we find a bond payable or callable 
 after 10 years and to be paid in 20 years. A common way of 
 referring to such a bond is to call it a ten-twenty. This means a 
 bond which will be paid in twenty years but is callable in ten 
 years. The object of such an arrangement is to insure the 
 lender a fixed term during which his investment will not be 
 disturbed, and at the same time to give the government a chance 
 at the end of that term to pay off the obligation and relieve 
 itself of the burden. Such provisions are of great advantage 
 to the government in refunding operations. Thus if the govern- 
 ment, owing to war conditions, has to pay a high rate of interest, 
 but hopes after peace to be able to borrow money more cheaply, 
 the right to call in its war bonds enables it to sell new bonds at 
 low rates and with the money to pay off the old high rate bonds, 
 or what is the same thing to exchange or convert the old bonds 
 into new ones. Sometimes the bonds are callable at a date 
 prior to maturity in part of the whole issue only. The ones 
 which may be called are so designated when issued, or the selec- 
 tion may be made by lot. When a government foresees its 
 revenues it may arrange from the start for serial redemption. 
 Sometimes a government will agree that if it calls the bonds 
 before maturity it will pay a premium to compensate the 
 holder for the inconvenience. 
 
 " Perpetual " Debts. — There is, however, no necessary reason 
 why a government should fix a date of redemption or name any 
 sum as the principal sum. The government lives forever, 
 and its promise to pay a fLxed sum each year forever ought to be 
 good. The contract is eventually an annuity. Such a promise 
 is salable in the money markets at any time. A certain number 
 of them will usually be offered for sale at all times and the gov- 
 ernment can always step in and buy them and by so doing 
 reduce its debt. If the government is in a position to pay a 
 little bit over market prices it can almost certainly buy as many 
 as it wishes to buy. The advantage of not naming a sum at 
 which the government will or may redeem an outstanding debt 
 is that the price always represents the present value of a long
 
 360 INTRODUCTION TO PUBLIC FINANCE 
 
 series of annual payments, uncomplicated by the computation 
 necessary to correct a premium or a discount on the principal 
 payable at some fixed date. In this way the obligation becomes 
 a public stock (English) or a rente (French) where the attention 
 centers in the annual payment and not on the capital invest- 
 ment. This does not necessarily mean that the security or 
 the document may not have a par value entered or printed 
 upon it. For there is a convenience in having a face 
 value mentioned, slight though the convenience may be. It 
 facilitates the expression of the rate and comparison of notes 
 or bonds of different sizes. Thus a 3^ per cent rente perpetuelle 
 may be issued in denominations of 100 francs, 500 francs, 1000 
 francs and larger, and may be sold at 98 francs per hundred. 
 One statement of price and rates of interest describes the whole 
 series sufficiently if the rente certificate bears a par value. If 
 not, one would presumably have to quote the securities as selling 
 at so and so many years' purchase, which requires an awkward 
 computation. Thus 98 as par for a ^^ per cent rente perpetuelle 
 happens to be 28 years' purchase, but other fractions are more 
 diflficult. But the point is that unlike a bond (American) the 
 par value of a " consol " ^ or any annuity is not necessarily 
 the sum which is to be paid back under a special promise. 
 
 Bonds Used in the United States. — In the United States 
 perpetual annuities, although used in our early history, are now 
 quite uncommon, and public bonds almost invariably promise 
 to pay back the principal at some fixed time. This arises from 
 the practice, commented on several times, of expressing the 
 value of investment properties on the basis of capital value. 
 The European, unlike the American, thinks almost habitually 
 in terms of annual value, a concept quite troublesome to an 
 American. Whether this way of writing public bonds leads to 
 prompt liquidation of debt is an interesting problem in political 
 psychology. One thing is certain and that is that American 
 governments have paid their debts off faster than European 
 governments have done so. It may well be that the promise to 
 
 1 "Consol" is an abbreviation for "consolidated debt," and stands for the se- 
 curities issued after various conversions resulting in one standard series of seciurities.
 
 FORMS OF PUBLIC DEBTS 361 
 
 redeem at a definite date has, by focussing attention on that 
 as a goal, contributed to prompt payment. 
 
 Multiplicity of Forms of Debts. — It will readily be perceived 
 that there is an almost unlimited possibility of combinations 
 of the elementary forms described above, and an almost infinite 
 variety of public stocks and bonds possible. While infinity is 
 a large number, the observer of bond issues and other public 
 borrowings during the Great War might well be excused if, be- 
 wildered by the large number of different kinds issued, he con- 
 cluded they were nearly infinite. The purpose of issuing many 
 different kinds is to meet the tastes and needs of different 
 investors. It is, however, a matter of question whether the 
 resulting complexity is not a serious mistake. Two or three 
 of the simpler sorts ought to be enough. In five different 
 loans the United States rolled up a very considerable number of 
 different bonds. Had she started with a straight 5 per cent 
 bond and stuck to that, selling at market or at an assumed 
 market, varying only the time of maturity, the simplification 
 would have been enjoyable. 
 
 Life Annuities. — A favorite variant of the annuity is a life 
 annuity. This of course must be sold on life insurance prin- 
 ciples. But after the initial difficulty of fixing the payments is 
 overcome, there is an advantage to the government arising from 
 the fact that as the annuitants die the annual debt charge is 
 automatically decreased. The charge is higher at first but 
 gradually declines. Annuities for a fixed term of years only, 
 afford a similar means of putting pressure on the government 
 to reduce its debts by annual payments toward the principal. 
 
 Lottery Loans. — Another variant is introduced by the so- 
 called lottery loans. These appeal to the universal love of 
 gambling and may be used to give the government a profit, 
 or save some money, much as the " bank " in any gambling 
 game takes its percentage through the favorable arrangement of 
 the chances. The forms of lottery loans are legion. Prizes 
 may be awarded out of interest or out of principal, may take the 
 form of premiums in money, or of some more preferable type of 
 bond.
 
 362 INTRODUCTION TO PUBLIC FINANCE 
 
 Sec. 4. Should Bonds Be Taxable. — A much discussed 
 question in the United States is whether pubHc bonds should be 
 taxable or not. The matter is really very simple. But the 
 public mind is greatly confused and scarcely knows what the 
 issue is. What happened was as follows : As long as the 
 general property tax was the only tax likely to fall upon a public 
 bond the interest rate paid by the government would have to 
 be equal to the market rate of interest plus (i) the probable 
 tax and (2) the cost of shifting the tax. This was so because 
 the holder of a public bond feared that it would surely be dis- 
 covered and taxed. But he knew of many other places where 
 he could put his money and receive the market rate of interest 
 without a tax to pay. So if a state government issued a taxable 
 bond it paid out in extra interest more than it could hope to 
 get back in taxes. Moreover, it might not get the taxes back and 
 yet have to pay the higher rate of interest. It was not even 
 as broad as it was long, for the government was sure to save 
 the cost of shifting if it issued tax-free bonds, and to pay only 
 the market rate of interest. So it naturally came about that 
 public bonds were sold tax-free. But the matter took on a very 
 different complexion when the income tax came in. Not having 
 foreseen the income tax the covenant had customarily read 
 " free of all taxes," which was understood to cover an income 
 tax on the interest. Now if the income tax were a property 
 tax the situation would be much the same as it was when the 
 general property tax was the only one to consider, and the 
 sensible thing to do would be to continue the old exemption 
 plan. But the income tax is a personal tax, so the situation is 
 quite different. Interest on public bonds is funded income, 
 and instead of exempting it the logic of the tax requires that it 
 be taxed more heavily even than earned or unfunded income. 
 The matter is still further complicated by the surtax, especially 
 by the very high surtaxes ; for tax-free bonds constitute a fund 
 for investments by very rich persons where their income is free 
 of the surtaxes. The whole matter could be settled by pro- 
 viding that the exemption applies only to property taxes and 
 that the interest when it merges in a private income loses its
 
 FORMS OF PUBLIC DEBTS 363 
 
 identity as interest. While the amount of tax exemption won 
 in this way has been undoubtedly grossly exaggerated and the 
 contracts issued in the past must be respected, there is no good 
 reason for perpetuating the error in future issues. 
 
 Sec. 5. Special Provision to Enhance Credit. — Of special 
 ways of enhancing credit only three need be mentioned. Coun- 
 tries weak financially often pledge certain revenues to the pay- 
 ment of their debts. Thus the customs duties are often so 
 pledged. This even goes so far as to place the collection of the 
 duties in the hands of the creditors or of their governments, 
 or of some outside party. Countries whose currency is uncer- 
 tain often agree to pay interest and principal in some other 
 country or in some financial centre in the money of some country 
 whose currency is stable. Very rarely loans may be supported 
 by collateral. This form of loan was used by France and Eng- 
 land during the Great War not so much to support the loan, al- 
 though it had that effect, as for the purpose of moving funds 
 or credits to the point where heavy payments were to be made. 
 Owing to the breakdown of the exchanges and the one-way flow 
 of trade, there were no regular trade bills to be had by which 
 payments from Europe to the United States, for example, 
 could be made. When trade is normal it is usually large enough 
 so that the ordinary exchanges would carry the credits. Nor- 
 mally, too, a country which has collateral is not in need of 
 borrowing. 
 
 Sec. 6. Fixing the Rate of Interest. — In all of these forms 
 of debt-making the chief problem of the practical financier is to 
 fix the rate of interest as near as possible to the market rate. 
 It is best that it should not be below the market rate, for in that 
 case the bonds will sell for less than par, and the government 
 will have to pay back a larger sum than it receives. This 
 addition is accumulated and compounded interest, which it is 
 presumably easier to pay in annual instalments than at one 
 time. The amount of the discount at which such bonds will 
 sell depends, in part, on the length of time that they have to 
 run. 
 
 When the market rate of interest falls, as it generally does in
 
 364 INTRODUCTION TO PUBLIC FINANCE 
 
 time of peace, below that at which the debt was contracted, it 
 is generally desirable to reduce the rate of interest on the debt. 
 If, therefore, the government can call in its bonds, it goes 
 through the process of refunding ; that is, it issues new bonds at 
 the new rate of interest, and pays off the old ones with the 
 proceeds. This advantage is peculiar to the perpetual bonds, 
 and is consequently made use of whenever the rate of interest 
 falls, which fact can be ascertained from the quotations of the 
 bonds on the stock market. 
 
 Sec. 7. Productive Loans. — Borrowing to secure the means 
 for entering upon some productive enterprise is the chief cause 
 of the debts of the several States comprising federal States and 
 of local governments. Cities borrow to build waterworks, to 
 construct street railroads, to establish a gas or lighting plant, 
 etc. In the United States the different commonwealths have 
 borrowed to aid in the construction of railroads or to establish 
 banks. The enterprise in which the funds thus acquired are 
 invested furnishes an additional security for the loan, and 
 enhances the credit of the local body, because it is supposed 
 that the enterprise itself will yield the interest and other debt 
 charges. There are two ways of managing such enterprises. 
 One is by selling the commodity or service produced ; the other 
 is by the assessment of a fee upon the users. So far as the debt 
 is concerned there is little difference in these two methods. 
 The former, however, introduces a speculative element, while 
 the latter is more regular in its returns. Sometimes such enter- 
 prises fail, and the interest has to be paid out of the revenue 
 from taxation. Not infrequently debts of this same kind are 
 made to render assistance to private companies, and the ex- 
 pectation is that the companies will meet the interest charges. 
 The bulk of local debts the world over are of this general 
 character. 
 
 National " Invested " Debts. — National governments, too, 
 have sometimes contracted debts of this sort. Thus Prussia's 
 debt was almost all incurred for the purchase of railroads, 
 which pay the interest and provide for the sinking fund. Other 
 countries of Europe have similar " invested " debts. The
 
 FORMS OF PUBLIC DEBTS 365 
 
 United States has given aid to railroads, but on terms that 
 give no real surety that the debt charges will ever be met by 
 the roads. The wisdom of such loans depends solely on the 
 wisdom of entering upon such enterprises. It may even be 
 wise under certain circumstances to advance money borrowed 
 in this way to private companies which promise to provide some 
 much-needed facilities, even without any hope that the interest 
 and debt charges will be met in any other way than by taxation. 
 That such debts when contracted should be treated in the same 
 manner as any other debts, and paid as soon as possible, is a 
 matter of good business management. The failure of the 
 assisted private enterprise to make good the sums expended 
 is no reason for the refusal of the government to meet the obli- 
 gations thus incurred, and refusal under such circumstances 
 is as destructive of credit as would be the failure to meet any 
 other obligation. 
 
 These different forms of debts are all in constant use, and the 
 indebtedness of any nation will show almost all of them. The 
 experience of the most advanced nation shows that there is as 
 much need of a systematic arrangement of the different forms 
 of debts as there is of the different forms of taxes. The various 
 kinds of stocks are adapted to the differing needs of the treasury 
 and the tastes of the lenders. The former must be consulted, 
 perforce ; the latter, if it is desired to obtain the most favourable 
 terms; hence the scope for the exercise of good judgment on 
 the part of the fiscal officers in the choice of forms.
 
 CHAPTER III 
 
 NEGOTIATION, PAYMENT OF INTEREST, CONVERSION, 
 AND REDEMPTION OF DEBT 
 
 Section i. Two Methods of Negotiating a Loan. — There 
 are practically two methods for the negotiation of a public loan. 
 One is to prepare the bonds or other evidences of debt for sale, 
 fixing all the conditions and offering them to all comers who 
 will accept those conditions. The other is to determine the 
 amount to be raised, and then to negotiate with bankers or 
 capitalists or other persons in order to ascertain on what terms 
 the sum can be raised. There are, of course, many variations 
 of these plans, but these are the principal ones. In the first 
 case the State loses in a measure the advantage of competition 
 between the lenders. One of the best examples of this method 
 is the so-called " popular subscription." For example, a State 
 decides to issue a certain number of bonds at a fixed rate of 
 interest, selling them to all comers at a stated price. Certain 
 places are designated for the reception of subscriptions. If 
 the terms offered are too low, i.e. offer too little advantage to 
 the purchasers, it may be that only a part of the loan will be 
 taken up. If they are too high, the State, of course, suffers a 
 loss. In this case everything depends on the ability of the 
 fiscal officers to gauge the market. This task is comparatively 
 easy if the State already has a large number of stocks out- 
 standing, the market price of which will roughly indicate the 
 possible rate of interest that will be accepted on a pubhc loan. 
 But the extent to which the new loan will probably depress 
 the market will have to be considered. This method with the 
 added feature of the " drive " became a favourite method during 
 the World War. The drive consists in organizing a vast number 
 
 366
 
 NEGOTIATION AND REDEMPTION OF DEBT 367 
 
 of volunteer salesmen, holding public meetings to stimulate 
 enthusiasm and arouse confidence, advertising, and in general 
 agitation, all with a view to reaching every possible subscriber. 
 The assignment of a " quota " to each town or district as a goal 
 to work to is another feature. 
 
 If the second method be the one chosen, the State lets it be 
 known that bids for a certain sum are desired. The bankers 
 and capitalists, and sometimes the public at large, then com- 
 pete for the privilege of taking either the whole issue or a part 
 of it. The different bankers offer to provide the whole or a 
 part of the money needed at a certain rate of interest, or if the 
 face of the bonds and the rate of interest have been fixed, offer 
 to buy the stocks at a certain rate, generally quoted as so much 
 per hundred. The most favourable terms offered by reliable 
 bidders are then accepted, and they deliver the money in mass 
 or in instalments to the treasury, in such form as may have 
 been agreed upon, receiving in return the securities, which they 
 are then at liberty to dispose of as they see fit. If the market 
 price rises, the gain goes to the capitalists ; if it falls, they lose. 
 Of course the sums needed often exceed the wealth of any one 
 person or group of persons, and each purchaser has to depend 
 on his ability to dispose of the securities to raise the money to 
 meet his agreement. 
 
 In both of these cases various secondary considerations as 
 to the form of the loan, the length of time it has to run, etc., 
 affect the result. Sometimes it has been deemed wise to com- 
 bine the two methods. That is, to negotiate with the bankers 
 for terms on a part of the debt, and then to offer another part 
 on similar terms to popular subscription, or even to allow of 
 more general competition as to the terms. 
 
 Sec. 2. Place of Payment of Interest, and Minor Considera- 
 tions. — The amount of the interest or the rate is the chief 
 factor in the negotiation of a debt ; but the place and times of 
 payment and the kind of money in which payment will be 
 made are minor considerations of considerable weight. So, 
 also, is the size of the bonds. In the case of popular loans 
 which are intended to be subscribed for by the mass of the
 
 368 INTRODUCTION TO PUBLIC FINANCE 
 
 people, the bonds must be for small amounts; in other cases 
 the units may be larger. There is no uniformity in this matter. 
 The larger the bonds can be made, the easier it is for the treasury 
 to manage the debt. Of some importance, too, is the choice 
 between bonds that are payable to the holder, or to certain 
 persons by name, and those payable to persons registered on 
 the books of the State. If the bonds are payable to the holder, 
 there is no need of a record of the holders by the government. 
 The government is also spared the trouble and expense of record- 
 ing changes in ownership. But there is an advantage of greater 
 safety to the holders in the case of the recorded bonds, which 
 are thus insured against loss or theft. 
 
 It is in general customary to determine the place at which 
 the interest, etc., will be paid. This is frequently some im- 
 portant commercial centre, sometimes the treasury of the 
 State. If in the country issuing the bonds there be in circula- 
 tion a debased, redundant, or depreciating currency, it is often 
 agreed to pay the interest in some foreign commercial 'centre, 
 or in foreign money, in order to secure payment in a stable 
 currency. Thus many of the commonwealths of the United 
 States which contracted debts between 1830 and 1850 agreed 
 to pay the interest in London in order to insure the payment 
 in gold, and to guard their creditors against loss from the depre- 
 ciated currency then in circulation. When the states appealed 
 to Congress for assistance in the payment of their debts in 
 1842,^ this was alleged as a feature involving special hardship. 
 A large part of Russia's debt is payable in Holland and England, 
 and in all of it the kind of money is specified. The same is 
 true of the debts of many other countries. 
 
 Sec. 3. Conversion of the Debt. — While it is often neces- 
 sary, in order to obtain the required funds on the best terms, 
 to ofifer many different forms of public securities, yet in a time 
 of absence of pressure it may become desirable to simplify these 
 forms and to consolidate the debt. This involves the calling 
 
 1 See Johnson, Report on the Relief of the States, 27th Con., 3d Sess., House, No. 
 296; a perfect mine of information on the history of public debts in the United 
 States up to 1842.
 
 NEGOTIATION AND REDEMPTION OF DEBT 369 
 
 in of the outstanding paper and its conversion into another 
 form. Conversion is generally undertaken when a fall in the 
 rate of interest offers the State an opportunity to gain by the 
 process. The reduction of the rate of interest is possible 
 whenever the State enjoys the privilege of repayment. It can 
 then offer the creditor the choice of payment (for which it 
 could obtain the money by the sale of new bonds at the new 
 rate of interest) or of new securities at the lower rate. This 
 mode of conversion or reduction of interest is, of course, per- 
 fectly legitimate. The reduction of the rate arbitrarily with- 
 out the consent of the creditors is as much repudiation as the 
 refusal to pay altogether. It is by numerous conversions and 
 consolidations that the rate of interest on the bulk of the debt 
 of Great Britain has been reduced as low as 2^ per cent. 
 
 Sec. 4. Debts Must Be Paid. — The best justification of 
 debt-making is that it distributes the burden of some heavy 
 expenses upon a later period. The cost of this postponement is 
 the payment of the annual interest. In order to fulfil the in- 
 tention of the loan and to get rid of the cost of the process, it is 
 necessary to pay the debt. If these two reasons were not 
 sufficient, the danger of the recurrence of similar extraordinary 
 needs and new appeals to credit, and the eventual danger of 
 bankruptcy, point in the same direction. As we have already 
 seen, some of the forms of debts contain within themselves the 
 provision for payment. Life and terminable annuities involve 
 the payment of the principal in annual instalments. Other 
 forms call for payment in larger instalments or at the end of 
 a term, for which provision must be made by the collection of 
 funds beforehand. If, however, the expiration of the period 
 finds the debtor State not in the possession of the funds needed, 
 it may have to borrow again to fulfil its agreements. In the 
 case of most perpetual debts it would be obviously unfair to 
 call upon certain holders for the surrender of their bonds and 
 to allow other holders of the same sort of bonds to retain theirs, 
 especially if the rate of redemption is below the market rate. 
 The whole of any issue of bonds, therefore, must be treated as 
 a unit. This involves the gradual accumulation of a fund for
 
 370 INTRODUCTION TO PUBLIC FINANCE 
 
 the payment of all of the debt of the same kind and issue. 
 There is, however, another alternative. The government may 
 enter the market with this fund, before it is large enough to pay 
 all the debt, and purchase such of its securities as are offered 
 for sale. Care must be exercised in the application of this 
 method not to raise the price of the securities. In some cases 
 arrangements are made in advance for calling a portion of the 
 outstanding bonds by lot. This depreciates the whole issue, 
 because each bond is liable to be called. 
 
 The Sinking Fund. — Provision made for the accumulation 
 of a fund for the redemption of the debt is called the sinking 
 fund.^ The sinking fund may be defined in two ways ; either it 
 is an annual fund, i.e. a portion of the annual income, or it is 
 the accumulated capital from this and other sources applicable 
 to the payment of the debt. Not strictly the earliest, but the 
 first important, attempt at the arrangement of a regular sinking 
 fund is that of England in 1786 under Pitt. This was a re- 
 markable scheme. It is said to have been suggested by Price, 
 a clergyman, who in 1772 wrote An Appeal to the Public on the 
 Subject of the National Debt. His argument was based on the 
 productiveness of compound interest. He urged that a fixed 
 sum, however small, should be set aside every year for the 
 purchase of public stock, and that the interest on the stock 
 thus purchased should continue and should be applied to 
 further purchases. There would then be two sources from 
 which the debt would be cancelled : one, the payment of the 
 annual amount ; the other, the ever increasing interest fund. 
 The effect of such a scheme in eventually discharging any debt 
 was regarded as almost magical.^ It was not perceived that 
 the real efficacy of the scheme lay in the fact that the nation 
 continued to bear the whole burden of the initial interest charge 
 until the debt was paid, and that the real source of payment 
 was the excess of taxation over expenditure. In accord with this 
 idea Pitt appointed a " Board of Commissioners of the Sinking 
 
 ' See Ross, "Sinking Funds," Pub. Amer. Economic Assoc, Vol. VII, p. 445. 
 ^ As an illustration, compute the sum which a penny placed at interest in the time 
 of Christ would amount to at compound interest.
 
 NEGOTIATION AND REDEMPTION OF DEBT 371 
 
 Fund," who were to receive a fixed sum each year, with which to 
 purchase public stocks, at or below par. Interest on the stocks 
 thus purchased was to be paid to the commissioners, and 
 quarterly applied to new purchases. This much-admired 
 scheme amounted to adding £1,000,000 annually to the taxes 
 needed for other purposes, and continuing the entire burden of 
 taxation until the debt was paid. It is clear that what was 
 really used for debt payment was the surplus revenue. The 
 £1,000,000 was clearly that, and the interest on the stocks pur- 
 chased therewith need not have been paid but for the sinking 
 fund. There is, indeed, no source from which the debt can be 
 paid but taxation or similar net revenue. So great was the 
 faith of the government in this scheme that it continued the 
 payments to the sinking fund even while borrowing for the war 
 of 1793 and after. The fallacy of Dr. Price's arguments was 
 pointed out by Professor Robert Hamilton of Aberdeen in 1813. 
 Shortly after that, it was estimated that, as a result of the 
 sinking fund system kept up during a period of borrowing, the 
 government had, between 1785 to 1829, borrowed £330,000,000 
 at 5 per cent to pay a debt of the same size at 4^ per cent. The 
 scheme was then abandoned, never to be resumed. From this 
 time on only genuine surpluses were applied to the payment of 
 the debt. This abandonment of the idea of Price and Pitt, 
 however, had a rather disastrous result, in that it largely sus- 
 pended debt payment in favour of tax remission. Since 1875 
 England has tried a new plan. Without committing herself 
 to a policy which would involve paying debts with one hand 
 and borrowing with the other, and without relying upon mere 
 chance surpluses, she decided to appropriate a fixed sum from 
 the consolidated fund for the national debt services, to be 
 continued as long as there were no extraordinary calls upon the 
 funds. In 1895 £25,000,000 was the fixed charge for the 
 national debt services, of which £1,718,263 36. 7^. went into 
 the new sinking fund; whereas in 1875 the sum was fixed at 
 £28,000,000, and a larger amount went into the sinking fund. 
 During the Boer War and for a time thereafter the sinking fund 
 was suspended. Thus in 1901-1902 the " national debt ser-
 
 372 INTRODUCTION TO PUBLIC FINANCE 
 
 vices " stood as follows: the " fixed charge " was £23,000,000, 
 less £4,640,000, " sinking fund suspended," leaving £18,- 
 360,000, denominated as " inside the fixed charge " ; in addition 
 to this there was £3,250,000 interest on the war debt, which 
 was " outside the fbced charge." In addition to this England 
 has been converting her debt into terminable annuities, result- 
 ing in a mechanical method of debt payment which may in time 
 of pressure work as the old sinking fund did. 
 
 Sec. 5. American Sinking Funds. — The American system 
 of debt-paying began in 1790 with the application of a surplus 
 from tunnage fees and imports to the purchase of public bonds 
 in order partly to improve the market price of the bonds and 
 by thus improving the country's credit to facilitate conversion. 
 In 1792 the bonds thus purchased were made the basis of a sink- 
 ing fund, it being determined that the interest on them should 
 continue and be paid to a commission for the further purchase 
 of public bonds. In 1795 the sinking fund commissioners were 
 made the recipients of certain revenues to be applied to the 
 payment of definite portions of the debt. Ross thus sum- 
 marises this fund : " The sinking fund was now enlarged by 
 the following additional appropriations: (i) so much of the 
 permanent duties as, with existing income, should enable the 
 commissioners to pay, in 1796 and thereafter, a yearly 2 per 
 cent of the 6 per cent stock ; (2) the surplus dividends on the 
 government's $2,000,000 of United States Bank stock after 
 deducting the interest accruing on the remnant of the bank 
 loan ; (3) so much of the permanent duties as, with the surplus 
 dividends, should suffice to pay a yearly $200,000 on the bank 
 loan, till 1802, and then begin the redemption of the deferred 
 stock ; (4) the proceeds of the sale of public lands ; (5) the pro- 
 ceeds of debts inherited from the old governments ; (6) all 
 revenue surpluses of any year remaining unappropriated during 
 the next session of Congress." ^ This fund was not very effi- 
 cient on account of the excess of expenditures. It served one 
 very important purpose, however, that of regulating the credit 
 of the United States by showing the intention to pay. In 1802 
 
 1 Sinking Funds, p. 49.
 
 NEGOTIATION AND REDEMPTION OF DEBT 373 
 
 Gallatin organised another plan, which was continued for some 
 time. It was to increase the revenues beyond the current 
 expenditures and apply the surpluses to the debt payment. 
 The results of the two plans have been compared as follows: 
 " The inherited debt and accrued interest amounted in 1791, 
 when funded, to $76,781,953.14. The Federalists in ten years 
 reduced this to $72,733,599, but added $7,193,400 of new stock 
 mostly at 8 per cent, thus bequeathing a burden of $79,926,999 
 to their successors. Of this, Gallatin's sinking fund extinguished 
 $46,022,810 between 1801 and 181 1. The purchase of Louisiana, 
 however, added $11,250,000 to the principal, so that on January 
 I, 1812, the public debt was $45,154,189, over thirty-one mill- 
 ions less than the original Revolutionary debt." ^ This com- 
 parison is not altogether fair to Hamilton, the author of the older 
 plan, for his fund enabled important conversions to be suc- 
 cessfully made which reduced the debt charges. During the 
 War of 181 2 the payments to the sinking fund were suspended. 
 After the war the debt stood : 
 
 Old debt remaining $39,905,183.66 
 
 Funded war debt 49,780,322.13 
 
 Treasury notes 18,452,800.00 
 
 Temporar}' loans 550,900.00 
 
 Total burden on the sinking fund $108,689,205.79 
 
 The sinking fund was at that time composed of 
 
 Interest on stock held by com $1,969,577.64 
 
 Receipts from public lands 800,000.00 
 
 From duties 5,230,422.36 
 
 Sinking fund $8,000,000.00^^ 
 
 The policy of protection, inaugurated after the War of 1812, 
 separated income from expenditure. The ultimate purpose of 
 most of the taxation, namely protection, was considered so para- 
 mount that a high rate of taxation was continued for that 
 reason. The available surpluses were, therefore, large, and 
 were from time to time applied to the debt. Down to 1824, 
 when all the debt contracted up to that time was practically 
 
 ' Ross, p. 67. 2 Ross, p. 69, from Finance, Vol. II, p. 916.
 
 374 INTRODUCTION TO PUBLIC FINANCE 
 
 paid, the sinking fund was managed by a special commission, 
 but since then the Secretary of the Treasury has had charge of 
 it. The Civil War debt was by the act of February 25, 1862, 
 supposedly placed on a secure basis. " The coin paid for duties 
 on imports was to be applied first to the payment of interest 
 on the bonds and notes of the United States. It was then 
 to be applied ' to the purchase or payment of i per cent of the 
 entire debt ... to be made within each fiscal year, which is 
 to be set apart as a sinking fund, and the interest of which shall 
 in like manner be applied.' . . . The residue of customs 
 receipts was to be paid into the treasury." ^ While no such 
 regularity as was contemplated by this act was realised, yet 
 the debt has been paid from surpluses more rapidly than was 
 anticipated, until the reduction of the revenues in 1895, due to 
 a change in the policy in regard to the protective duties, to- 
 gether with a redundancy in the monetary circulation, which 
 resulted in a foreign drain upon the gold reserves held for the 
 redemption of notes outstanding, made new borrowing necessary. 
 The war with Spain involved a new increase of indebtedness, 
 which, however, was contracted on terms remarkably favour- 
 able to the government. The same general policy of debt re- 
 duction has continued, and the debt, which amounted to 
 $1,108,000,000 in 1900, was by 1908 reduced to $938,000,000. 
 The commonwealth constitutions of the United States very 
 generally imposed upon the legislatures the duty of providing 
 a sinking fund. Many of them, besides limiting the amount of 
 debt that may be created, either by naming a fixed sum or a 
 fixed proportion of the revenues that may be used for interest 
 payment, also provide that whenever a debt shall be contracted, 
 a tax shall at the same time be levied sufiiciently large to pay 
 the interest charge and provide a sinking fund. The general 
 distrust of the legislatures is emphasised in the constitutions 
 by making such laws irrepealable until the debt is paid. The 
 commonwealths are thus permanently committed to the policy 
 of debt payment, not so much on account of any deep-seated 
 belief in the efficacy of the particular methods laid down, which 
 
 ^ Ross, p. 79.
 
 NEGOTIATION AND REDEMPTION OF DEBT 375 
 
 may necessitate the continuance of debt payment even at a time 
 of borrowing, but on account of the widespread distrust of the 
 prudence of the legislatures. The same distrust has destroyed 
 the danger of the system, by almost entirely forbidding debt- 
 making by the commonwealths.^ 
 
 Sec. 6. Summary. — In conclusion, it would seem that the 
 experience of great nations shows : that debts must be paid ; 
 that they can be paid only by increased taxation ; and that the 
 possible weight of taxation for this purpose is determined by a 
 consideration (i) of the length of time it is thought desirable 
 that the debt shall run, (2) of the existing burden of taxation, 
 (3) of the general conditions of the people. When the debt 
 has been contracted for some productive purpose, it seems 
 fitting that the surplus earnings of such an enterprise should go to 
 debt payment, as this eventually enables a permanent lowering 
 of the cost of such services to the people. 
 
 > For a full account of the debt policy of the American commonwealths see my 
 monograph, Das Kreditwcscn dcr Staaten und Stiidte der N ordamerkanischen Union 
 in seiner historischen Enlwickelung, Jena, 1891.
 
 PART IV 
 FINANCIAL ADMINISTRATION 
 
 CHAPTER I 
 
 THE BUDGET; ADMINISTRATION OF EXPENDITURE; 
 CONTROL AND AUDIT 
 
 t 
 
 Section i. Matters of Form. — ^To the fourth and last 
 part of our subject belong the formal arrangements of the 
 public finances, — the preparation and ratification of the budget, 
 the care and preservation of the public funds, the administra- 
 tion and control of expenditures, and the collection of the reve- 
 nues. It was this side of the subject that first attracted atten- 
 tion and which occupied a large part of the writings of the 
 cameralists. Lorenz von Stein gives a very considerable por- 
 tion of his monumental work to these subjects, and the able 
 French writer, Stourm, has devoted to financial legislation a 
 volume entitled Le Budget. English and American economists 
 have generally left this field to the jurists and publicists, but 
 Bastable devotes the last three chapters of his book to some 
 of these topics. 
 
 In every well-regulated household and every business concern 
 the keeping of accurate accounts, the distribution of the funds 
 among different persons, and the control of expenses have an 
 importance second only to the broader questions of policy. 
 Equally important in the greater housekeeping of the State 
 are the formal arrangements for the enactment of fiscal laws, 
 for the keeping of accounts, and for insuring compliance with 
 the laws. 
 
 The general frame of the fiscal administration, the relation 
 between the various departments, the assignment of particular 
 
 376
 
 THE BUDGET; CONTROL AND AUDIT 377 
 
 powers and duties to the different officials or bodies, depends 
 entirely upon the general political organisation. How these 
 features differ from country to country it is the province of 
 political science to describe. But the frame of administration 
 has an effect on the finances ; and there are certain principles 
 demanded by sound finance which are followed by every country, 
 no matter what its frame of government. 
 
 Sec. 2. History of Fiscal Administration. — Of necessity 
 the methods of accounting and control do not assume a public 
 character until there is a pretty clearly recognised popular 
 interest in the affairs of the State. At one time the Roman 
 treasury' under the control of the Censors and in charge of the 
 QucBstors exhibited the features of public economy. But under 
 the Empire the public treasury and the private treasury of the 
 Caesars gradually merged into a single one, and the methods of 
 accounting became that of private rather than of civic house- 
 keeping. 
 
 The Middle Ages were essentially unpolitical, and in that 
 period no system of public treasuries proper was developed, 
 except in the free cities. As we have already seen, there were 
 no revenues collected in the monarchies for a distinctly public 
 purpose until the fifteenth and skteenth centuries, and con- 
 sequently there could be no public accounts or public control 
 over the funds. 
 
 Conflict Develops Legislative Control. — The constant struggle 
 between the representatives of the people and the officers of the 
 older absolute governments for the control of the purse led to 
 the development of distinct methods of accounting and control. 
 The most striking feature of the modern systems in European 
 countries is the establishment of the budget, and of the right 
 of the popular representatives to vote taxes and appropriations. 
 In America the right of the legislatures to control the finances 
 was clearly established at a very early date, and little or no 
 advance has been made beyond the crude methods first de- 
 veloped. Most European countries have advanced more 
 rapidly and perfected far better systems. This higher devel- 
 opment of the budget in European constitutional governments
 
 378 INTRODUCTION TO PUBLIC FINANCE 
 
 is explained by the constant conflict between the branches of the 
 government having interests which are theoretically opposed. 
 The modern budget is an outgrowth of the gradual assumption 
 of power by the legislatures, and the corresponding loss of power 
 by the executives. The latter have had to ask for funds, and 
 the former in granting them have insisted upon knowing what 
 they are to be used for, and upon having assurance that they 
 will not be appHed in any other way. In the United States, 
 however, both the federal and the commonwealth legislatures 
 suggest, or initiate, financial legislation as well as grant funds. 
 Both of these functions of initiation and of grant being in the 
 same hands, there is no conflict of interests such as has developed 
 the systems of financial statements and legislative control in 
 Europe. The only care in this country is to see that the funds 
 are not appropriated to private purposes, while in Europe there 
 is the desire to prevent the application of the funds to other 
 public purposes than the ones specified. 
 
 Sec. 3. The English Budget. — It has been claimed that the 
 English system served as a model for the other European coun- 
 tries. However that may be, and it is true only in part, the 
 English system will serve as a good illustration of the European 
 methods. The fiscal year begins April i and ends March 31. 
 Each department of the administration prepares a careful 
 statement, known as the " estimates," for the coming year. 
 These " estimates," each of which comprises a good-sized quarto 
 volume, are tediously exact and minute in the statement of what 
 it is expected will be needed for the forthcoming year. They 
 are called the " army estimates," the " navy estimates," the 
 " civil service estimates," etc. The Chancellor of the Exchequer, 
 in turn, bases his estimate of all that will be needed upon these 
 statements, and calculates the receipts from each source on the 
 basis of the revenues of the previous year. He then presents 
 all the documents to Parliament with a brief, clear statement 
 of what the expenditure will be, what it is expected the reve- 
 nues will be, what new taxes, if any, are needed, or what taxes 
 may be remitted or changed, in order to make the revenues 
 equal the expenditure. This statement is called the budget.
 
 THE BUDGET; CONTROL AND AUDIT 379 
 
 " Usually, but by no means always, the proposals of the Chan- 
 cellor of the Exchequer are accepted by the Commons, and even 
 when they are not in detail, it is seldom that the items of expendi- 
 ture are objected to. The House is supposed to go through 
 the ' estimates ' in detail ; it forms itself into a ' committee of 
 supply,' and sanctions every item in the three bulky volumes, 
 but its members have not, as a rule, knowledge enough of the 
 details to offer effective criticism, and the utmost the committee 
 can be said to do, on the average, is to render flagrant abuses 
 impossible. On the average, perhaps that is enough." ^ Parlia- 
 ment cannot directly or indirectly increase the appropriations 
 asked by the ministry in the name of the Crown, nor add new 
 appropriations. The estimates both of revenues and expendi- 
 ture are made with such great care that there is seldom either 
 a surplus or a deficit of any large amount at the end of the year. 
 According to Bastable the estimates of expenditure in England 
 for the three years April i, i88g, to March 31, 1892, as compared 
 with the results, show an error of only £137,000 in a total of 
 £264,000,000, or a little over is. per £100, or $1 in $2000. All 
 credits of disbursing officers expire, and their accounts close, 
 March 31. All appropriations lapse at that time, except 
 those apportioned for the consolidated fund. It requires a 
 special act of Parliament to spend any more money on last 
 year's account, even though the original appropriation may not 
 have been exhausted. 
 
 Congressional Financiering. — Tn the United States there is 
 no connection between the executive and legislative depart- 
 ments of the government that would allow of any such arrange- 
 ment as that of the budget in England. The reports of the 
 administrative officers, the President, and the Secretary of the 
 Treasury, are made to Congress and are often accompanied by 
 suggestions of various sorts. But the executive officers have no 
 real access to the ear of the House. Therefore, no formal 
 budget is presented to Congress. Two separate committees in 
 the House (where finance bills originate, although they may be 
 amended by the Senate) deal regularly with finances, — one with 
 
 ' Wilson, The National Budget, p. 147.
 
 380 INTRODUCTION TO PUBLIC FINANCE 
 
 taxation, the other with appropriations. These committees 
 are the " Committee on Ways and Means " and the " Com- 
 mittee on Appropriations." Bills involving expenditure or 
 taxation are regularly referred to these committees. The con- 
 trol of these committees rests >solely on convention, there being 
 no constitutional provision for such reference. Even after the 
 committee has presented an appropriation or revenue bill, 
 there is the greatest freedom of amendment, and theoretically 
 any member of the House could, if so inclined, present an entire 
 new set of such bills forming a budget. Appropriations may be 
 increased or decreased, or new ones introduced, without reference 
 to the committees. Practically the control of these committees 
 is very great, especially in the matter of suppressing appropria- 
 tion bills that may be referred to them for consideration. Cer- 
 tain lines of expenditure may be suggested by other committees, 
 and theoretically may be voted on without reference to these 
 controlling committees. For example, the navy and war de- 
 partments may receive appropriations suggested by the com- 
 mittees in charge of them. Many other committees, as, for 
 example, the ones on claims, on invalid pensions, pensions, etc., 
 regularly bring in bills involving expenditure. 
 
 Ever since the protective policy was fully established the 
 United States government has been in the possession of large 
 revenues, which are not determined in any way by the expendi- 
 tures. So that the consideration of revenue bills has always 
 been complicated by other than fiscal considerations, except 
 during the Civil War. This sundering of the functions of 
 spending and of obtaining revenues, and the general scattering 
 of appropriations, would apparently cause the utmost con- 
 fusion. But the result is not so bad as might be expected, 
 (i) because of the influence of the committees, (2) because, of 
 course, some attempt is made by the House itself to ascertain 
 whether funds are or will be available for the purposes sug- 
 gested, (3) because the tax system has not been a variable one, 
 and has yielded a fairly regular and gradually increasing revenue, 
 to spend which has sometimes taxed to the utmost the ingenuity 
 of Congress. But the system absolutely prevents any system-
 
 THE BUDGET; CONTROL AND AUDIT 381 
 
 atic oversight of the finances as a whole, and allows of no 
 measurement of the relative weight of each appropriation. 
 Credits to spending oflQcers do not expire at the end of the 
 fiscal year, July i, as in England, but generally continue in 
 force until the entire sum is consumed or the object is accom- 
 phshed. Congress thus loses one advantage for the control of 
 expenditure that Parliament enjoys. The American system, 
 however, has one great advantage over the English in that it 
 allows of a more critical investigation by the legislature of the 
 specific items of each appropriation. 
 
 The Fiscal Year. — The date at which the fiscal year expires 
 is generally set with reference to the convenience of officials in 
 rendering their reports and to the meetings of the legislatures. 
 The accounts presented are generally for gross income and 
 expenditure, so that the details of the cost of collecting reve- 
 nues and chance saving of expenditures can be controlled. 
 
 Deficiency Bills.' — There is theoretically no sanction for 
 expenditure of any kind beyond the amount appropriated by 
 the legislature. If any expenditure not so sanctioned is of 
 pressing necessity, the administrative officers may sometimes 
 assume the responsibility and make the appropriation, subject 
 to the ratification of the legislature when it next meets. This 
 discretionary power is exercised to a very limited extent in most 
 countries. In the United States, however, the disorder attend- 
 ant upon the appropriations involves the annual presentation 
 of a " deficiency bill." When any action involving expendi- 
 ture has been sanctioned by the legislature, and insufficient 
 funds have been appropriated, there is a moral obligation 
 resting on the legislature to make the requisite appropriation 
 afterward. 
 
 Sec. 4. English Control and Audit. — When the budget has 
 been prepared and voted, the next step is to see that the expendi- 
 ture is carried out as authorised and to prevent any misappropria- 
 tion of the funds. In England the funds are deposited with the 
 Bank of England, subject to the order of the comptroller and 
 auditor-general only. This officer's duties are a combination 
 of those of the old board of audit created by Pitt in 1785 with
 
 382 INTRODUCTION TO PUBLIC FINANCE 
 
 those of the Exchequer, and date from 1866. No payment is 
 made without (i) an act of Parhament, (2) a requisition by the 
 treasury ^ issued to the comptroller-general, (3) a grant of 
 credit for the amount authorised by the act good for one year, 
 (4) a treasury order directing the transfer of the money to the 
 paymaster-general of the service.- As the estimates have been 
 closely scrutinised, there is little opportunity for the misappli- 
 cation of funds. There is none whatever for overdraft. Again, 
 after the expenditure has been made, the accounts with vouchers 
 are passed through the comptroller's office for his approval, or 
 audit. The report of that officer is subjected to the final 
 revision of the parHamentary committee of public accounts. 
 Thus the whole process begins and ends with Parhament. It 
 will be seen that there are really two parts to the process. First, 
 the control over the " issues " to the disbursing officers, that is, 
 over the placing of the public moneys in their hands. Secondly, 
 the audit of the accounts after the expenditures have been made. 
 Sec. 5. History of Control and Audit in the United States. — 
 In the United States ^ the direct control of the money is in the 
 hands of the executive officers, subject to the statutes of Con- 
 gress. The safeguards consist in making the processes of ex- 
 penditure complicated and subjecting each item to the scrutiny 
 of several sets of executive officers. The idea of the original 
 plan in the United States was not to allow of issues to the regu- 
 lar disbursing officers, but to control expenditure by a careful 
 scrutiny of the accounts or claims rendered. The treasury was 
 to be reached only after the claims had been cut down to the 
 lowest possible figure. Claims against the government were 
 first passed upon by an auditor, then by a comptroller, either 
 of whom might reject them. Then the secretary drew a warrant 
 upon the treasurer, and that warrant was recorded by the 
 register and countersigned by the comptroller. Hamilton 
 found it necessary, for the sake of economy, to pay cash for 
 many things needed by the government, and hence this original 
 
 1 See Wilson, The State, pp. 696-698. 
 
 2 CI. Bastable, p. 705. 
 
 3 See Renick and Thompson, Political Science Quarterly, Vol. \l, pp. 248-281, 
 and Vol. VII, pp. 46S-482,
 
 THE BUDGET; CONTROL AND AUDIT 383 
 
 plan broke down. Issues were made to disbursing officers, 
 and the necessary warrants were drawn for each particular 
 item of expenditure, afterward, in order to legalise the transac- 
 tion. 
 
 For many years the United States had a very complicated 
 system of audit, control, and record. There were six auditors, 
 so called, and the " commissioner of the general land office," 
 who was auditor for the lands account. Then there were three 
 comptrollers, known as the first and second comptrollers, and 
 the commissioner of the customs. Lastly there was the register. 
 All of these were assisted by a large body of clerks. These 
 officers were organised into four coordinate branches, with 
 separate jurisdiction. Accounts were first examined and passed 
 upon by an auditor, then reexamined by a comptroller. Claims 
 disallowed by these officers could be pushed in the Court of 
 Claims, and appealed from there to the Supreme Court. The 
 assignment of accounts to the different auditors and comp- 
 trollers was almost arbitrary and with little system. The first 
 auditor looked over the general income and expense accounts 
 of the treasury, the special accounts of the customs receipts, 
 the expenditures for the legislative and executive departments, 
 special accounts of the treasury department, — as of the inter- 
 state commerce commission, of the public debt, of engraving 
 and printing, of the coast and geodetic survey, of the life-saving 
 service, of the lighthouse establishment, of the public buildings, 
 of the government of territories, of the District of Columbia, 
 of the central administrative departments of war, navy, the 
 interior, etc., of the departments of labour and of agriculture, 
 and all the expenditure for the judiciary. The second auditor 
 had the accounts from the Indian service and the army. The 
 third auditor had the pension account. The fourth had the 
 accounts of the navy. The fifth looked over the accounts of 
 the collector of the internal revenues. The sixth was for the 
 postal accounts. The first comptroller then revised the accounts 
 that were assigned to the first and fifth auditors, except the 
 customs account, for which the commissioner of the customs 
 was comptroller, and those of the commissioner of the general
 
 384 INTRODUCTION TO PUBLIC FINANCE 
 
 land office. The second comptroller had the accounts of the 
 second, third, and fourth auditors. 
 
 All of this was changed by " the act of July 31, 1894, making 
 appropriations for the legislative, executive, and judicial ex- 
 penses of the government for the fiscal year ending June 30, 
 1895. This act altered the accounting offices of the treasury 
 and changed materially the system of accounting. The detail re- 
 vision of accounts heretofore made by the first comptroller, as 
 well as by the second comptroller and the commissioner of cus- 
 toms, was abolished, as were the offices of the second comp- 
 troller and the commissioner of customs, the first comptroller 
 being made the sole comptroller of the treasury. A revision of 
 accounts under the new system is only made when either the 
 head of a department or the claimant is dissatisfied with the 
 settlement of an account by an auditor, or when the comptroller 
 himself has reason to believe that any particular account ought 
 to be subjected to a second revision. Much labour has been 
 saved by this system, and the adjustment of accounts has been 
 greatly expedited. It was one of the duties of the first comp- 
 troller to ' countersign all warrants drawn by the Secretary of 
 the Treasury which shall be warranted by law.' This duty was 
 continued with the comptroller of the treasury under the new 
 system. As the Secretary of the Treasury has the duty de- 
 volved upon him of originating warrants and as all such warrants 
 must be countersigned by the comptroller, no warrant finally 
 becomes effective without their concurrent action." 1 
 
 There are now six auditors : (i) for the treasury department, 
 (2) for the war, (3) for the interior, (4) for the navy, (5) for the 
 State and other departments, (6) for the post-office. The 
 accounts are still distributed in the old arbitrary unsystematic 
 fashion among the different auditors according to the illogical 
 scheme by which the different duties are divided among the 
 departments.2 It is hard to see how this can be bettered until 
 the work of the departments is rearranged. The recent change is 
 a great gain in the direction of simpHcity and speed. The 
 
 ' Finance Report, i8g4, pp. 836, 837. 
 * See Wilson, The Stale, pp. 567-570.
 
 THE BUDGET; CONTROL AND AUDIT 385 
 
 auditor's work stands unless appealed to the comptroller, and 
 is no longer necessarily gone over again by a comptroller. 
 
 The Register's Office. — The register keeps ledger accounts 
 with all appropriations made by Congress, and also keeps all 
 the personal disbursement and receipt accounts pertaining to 
 the customs, internal revenue, diplomatic, treasury, judiciary, 
 interior, civil services, and the public debt. General receipt 
 and expenditure ledgers have been kept running from the founda- 
 tion of the government. The register furnishes to the proper 
 accounting officers copies of all warrants covering proceeds of 
 government property, where the same may be necessary in the 
 settlement of accounts in their respective offices. He also 
 furnishes certificates of balances, advances, and repayments 
 to the offices of the first and fifth auditors, for settlements of 
 accounts, and certifies to the first comptroller, on requisitions 
 for advances, the net indebtedness of disbursing agents as shown 
 by the ledgers. ^ The treasury department itself exercises a 
 pretty extensive supervision over expenditures. 
 
 The system of disbursing officers, one connected with each 
 bureau, commission, department, or other branch of the gov- 
 ernment to which appropriations are granted, still continues 
 in the federal government. Each of these officers, under bond, 
 receives such advances from the treasury as may be necessary, 
 and pays the various claims that may come up against his 
 appropriation. He is responsible for the payments he makes 
 until released by the approval of the proper auditor and of the 
 comptroller. 
 
 In general it may be said that public audit is much the same 
 as private audit. It has for its object a certification, by some 
 properly constituted authority, that each collection and each 
 disbursement was made in accordance with law. The fact that 
 in public audit the connection between the collection of the 
 disbursement and the law has to be clearly established gives 
 to public audit a degree of formality that is not always observed 
 in private audit. Another difference is found in the fact that 
 the public auflil usually closes with a formal certification, 
 
 * Finance Report, 1894, p. 737.
 
 386 INTRODUCTION TO PUBLIC FINANCE 
 
 which reUeves the collecting or disbursing officer of further 
 responsibihty. Such certificates are either issued to the officers, 
 at stated intervals, or are appended to each voucher, whether 
 for collections or for disbursements. 
 
 Sec. 6. Recent Budget Movement in the United States. — 
 A strong movement is being made in the United States at the 
 present time to introduce a budget system both in the federal 
 government and in state and local governments. For reasons 
 stated above no real budget after the European plan can be 
 introduced without sacrificing the principle of separation of 
 the executive from the legislative powers, a most valued feature 
 of our government. Many current proposals overlook this. 
 It is fairly certain that any executive budget would fail of 
 recognition by the legislative branch. It seems clear, there- 
 fore, that the only possibihty is for Congress or the legislatures 
 to so reorganise their committees as to consider both revenues 
 and expenses in one committee. While it would be desirable 
 that such a committee should sit continuously or at least in the 
 interim between sessions, that does not seem feasible. The 
 next best suggestion among those feasible is a board after the 
 pattern of the recent State Boards of Control which shall 
 prepare data for submission to a joint expenditure and revenue, 
 or more broadly, budget committee of the lower house. To 
 insure that such a board have the proper data, it should be 
 given extensive power of pre-audit. The change could be made 
 in the federal government with facility by restoring to the 
 Comptroller the functions of control which, perhaps, his name 
 implies, and vesting him with a pre-audit and then imposing 
 upon him the duty of preparing for consideration of Congress a 
 budget. The advantage gained would be in having at hand a 
 systematic presentation of all the figures.
 
 CHAPTER II 
 
 COLLECTION OF THE REVENUES, CUSTODY OF THE FUNDS. 
 AND THE PUBLIC ACCOUNTS 
 
 Section i. Early Methods of Collecting Revenues. — 
 Under the early methods of collecting revenues, the tribute 
 due, the economic receipts, and the voluntary contributions 
 were delivered directly to the chief or leader. Many of the 
 early direct taxes were similarly treated. Indirect taxes upon 
 commodities and transactions could not be managed in this 
 way. The first crude method of dealing with these taxes was 
 that of the tax-farmer, the Roman publican. He purchased, 
 for a price, the privilege of collecting all of certain kinds of 
 taxes that he could obtain. The same method was extended 
 to other taxes where there was no similar necessity for it. This 
 farming of taxes was used through the imperial era of ancient 
 Rome, and, copied by France, it was extended into modern 
 times. The various direct contributions of the Middle Ages, 
 which were apportioned among the different cities or " estates," 
 were frequently delivered directly to the prince or his treasurer. 
 All of these crude methods were abandoned as soon as there 
 was a distinct recognition of the authority of the taxing power 
 over all the different parts of the country and over each con- 
 tributor individually. The apportionment system, as originally 
 used, was a more or less distinct recognition of the autonomy, 
 and possibly of the partial political independence, of the tax- 
 payers, be they provinces, cities, or classes of individuals. 
 
 Sec. 2. Collection of Customs Duties. — The collection of 
 the taxes is usually the duty of the regular fiscal officers of the 
 general administration, hut industrial and commercial receipts 
 are frequently collected by special boards in charge of them, 
 
 387
 
 388 INTRODUCTION TO PUBLIC FINANCE 
 
 who turn the money over to the treasury. Assessment and 
 collection are so closely connected that they can be studied 
 together. In the collection of customs duties there are two 
 things for the officials to care for. (i) They must look out for 
 the arrival of all the taxable commodities and prevent smug- 
 gling. (2) They must ascertain the value of the goods if the 
 taxes are ad valorem, and the number and size of the pieces if 
 specific. The invoices, supported by the usual certificates, 
 oaths, etc., are of the nature of a declaration by the owner, or 
 importer. They are then subjected to the scrutiny of official 
 appraisers, whose knowledge of the nature and value of the 
 goods is very accurate. The tax is then paid to the collector 
 at the place of importation or when it reaches the recipient in 
 the interior, but before it is delivered to him. In case the goods 
 are to be admitted into the interior of the country, or of the 
 customs district, before the tax is paid, as is the case when the 
 person to whom the goods are sent resides in the interior, the 
 package is sealed up, or " bonded," and the seals can only be 
 broken by an authorised collector after the payment of the tax. 
 In countries where there are no general tax-collectors in the 
 interior, this method is not feasible, and the goods are held in the 
 customhouse on the boundary until the tax is paid. With a 
 few exceptions this is the practice of the United States. But 
 in Germany, where there are regular fiscal officers of the central 
 government in almost every hamlet, goods are regularly shipped 
 to the consignee, and the tax paid in the interior. 
 
 Collection of Excises. — In the case of excises, the factories, 
 breweries, fields, and other places where the taxed goods are 
 produced are subject to regular inspections, and are more or 
 less under the constant supervision of the officials. The tax is 
 collected directly from the producer or by the sale of stamps 
 and licenses. 
 
 Sec. 3. Assessment of Direct Taxes. — In the case of direct 
 taxes, it is the assessment that is the most difficult part of the 
 process. The methods of assessing some of the taxes have 
 already been suggested. The work consists of two parts. 
 (i) It is necessary to ascertain the base — the persons, the
 
 COLLECTION OF THE REVENUES 389 
 
 property, or the revenues subject to taxation. (2) It is then 
 necessary to fix upon the valuation, or the rating of the base 
 in each particular case. The latter part of the process is " mak- 
 ing the assessment." In this the contributor may be called 
 upon to assist, or the officers of the government may proceed 
 entirely alone. Generally a declaration is requested, or may 
 be required, from the taxpayer, and the officials then investigate 
 the truth of that declaration. In Europe it is customary to 
 form assessment commissions consisting of representatives of 
 the taxpayers in the district, who are acquainted with the local 
 conditions and act with the officers of the government. These 
 commissions help the regular officers of the fiscus to make the 
 assessment, or sit as a sort of court to hear appeals from the 
 assessment made, or both. The final assessment, however, is 
 made by the fiscal officers. 
 
 In the American commonwealths the assessment of the 
 general property tax is usually made by a board of locally 
 elected assessors or an assessor. The assessor calls for declara- 
 tions from the different contributors. The law in most states 
 imposes severe penalties for failure to comply with the require- 
 ment of declaration or for false declaration. But, nevertheless, 
 there is, for the most part, the utmost laxity in enforcing the law 
 concerning declarations. Only the unusually conscientious, 
 who voluntarily come forward with complete statements, are 
 reached in this way. So general is the habit of neglecting this 
 duty that it is practically impossible for the assessor, no matter 
 how anxious he may be to have the law complied with, to 
 prosecute all the persons whom he knows are evading assess- 
 ment. The general practice is to default the declaration and 
 allow the assessor to find out, if he can, what taxable property 
 the contributor has. If this were done by only a few persons, 
 they could easily be brought to terms under the existing laws, 
 but when nine-tenths of the population refuse to comply, the 
 assessor is helpless, and the only effect that follows from the 
 declaration by the few is to make the existing inequalities of 
 the general property tax worse than ever. Real estate and 
 other visible property is easily assessed. The officer has at his
 
 390 INTRODUCTION TO PUBLIC FINANCE 
 
 command the records of titles, of deeds, etc., which he can in- 
 vestigate, and he ascertains the value of each piece from his 
 own personal observation of prevailing prices. As we have 
 seen, personal, intangible property escapes almost entirely. 
 It would seem that this difficulty of administration is insuper- 
 able. No merely severe methods of assessment will ever cure 
 the evil. 
 
 Equalisation. — ■ Above the assessor in the United States 
 there are generally two boards of equahsation, though some- 
 times only one. The first board is local, covering the same 
 district as the assessor. This hears appeals from the taxpayers 
 in regard to their assessment. It equalises between individuals. 
 The second board is for the whole commonwealth, and is known 
 as the state board of equalisation. This board is to adjust the 
 burden of state taxation equally between the different districts. 
 As has already been explained, a local assessor may make the 
 assessment in his district lower than that in the other districts. 
 This will not affect the burden of local taxation, for all that is 
 needed is to raise the rate. But it lessens, if the assessment 
 stands, the burden which the state taxes impose. These cen- 
 tral boards are of three kinds : (i) those with power to add to 
 or subtract from the assessment of each district, but in such a 
 way as not to change the total amount; (2) those with power 
 to change the assessment of any district, and which may and 
 generally do change the total assessment of the state ; and (3) 
 those with power to change the valuation not only of districts 
 as a whole, but of classes of property, or even of individuals 
 within any district. As these boards seldom have sufficient 
 powers, and never sufficient information as to the local condi- 
 tions, the effect of their action is not all that could be desired. 
 The only possible solution of this difficulty is the separation 
 of local taxation from that of the commonwealths, so that the 
 assessment can be made independently for each. 
 
 Sec. 4. Convenience of the Contributor to Be Consulted in 
 Collection. — After the assessment has been completed, it is 
 comparatively easy to make the collection. All that is needed 
 is a collecting agent of the treasury conveniently located, to
 
 COLLECTION OF THE REVENUES 391 
 
 whom the taxpayers may go, or a collector who goes to the 
 taxpayers. The burden of taxation may be seriously increased 
 if the convenience of the taxpayers is not consulted in this 
 matter. The size of the district over which a collector has 
 supervision will depend upon the density of the population. 
 If the collector is to be sought out by the contributors, it is best 
 that his office should be located in some business centre fre- 
 quently visited by the contributors. According to the principle 
 of " certainty and convenience," the taxes assessed upon the 
 same person should all be entered in a single bill and all be 
 payable to the same collector. The taxpayer should be in- 
 formed as early as possible of the total amount of taxes that 
 he has to pay, of the number of instalments in which they are 
 payable, and of the conditions of delinquency and its penalty. 
 Some of the American commonwealths disregard this rule 
 entirely. They add grievously to the burden of taxation, 
 especially in the country districts, where taxes are already 
 entirely out of proportion to the ability of the people, and in- 
 crease the irritation felt by the contributors, by inconvenient 
 location of the collector's office, and by requiring the payment 
 of state and county taxes to one set of collectors, while the 
 town and other municipal taxes are paid to a different set and 
 upon separate bills. The most economical and least irritat- 
 ing process is to have all the taxes collected by the same 
 person.^ 
 
 Sec. 5. Moving Public Funds. — The transfer of the public 
 funds from one part of the country to another is, in modern 
 times, attended with little risk. It is most conveniently done 
 by means of the banks or the post-office. If the country rs 
 sparsely populated and insecure, the collector's office should be 
 at or near the bank or vault in which the money is to be stored. 
 In large countries, as, for example, the United States, it is 
 convenient to have a number of branch treasuries scattered 
 about the country, at which collections can be made, and 
 
 1 The writer knows of an instance where a farmer has to trMvil I'ifty miles to pay 
 his state and county taxes, while the local taxes are collected within two miles of 
 his home. This is not an extreme case.
 
 392 INTRODUCTION TO PUBLIC FINANCE 
 
 through which money for expenditure can be distributed to 
 the disbursing officers.^ 
 
 Safe-keeping. — The storage or safe-keeping of the funds is 
 accomphshed in one of three ways, (i) As in England a great 
 State bank is made custodian of the funds which are sent to it 
 from the various collectors who deposit with its branches. 
 (2) As in France and the United States the treasury and the 
 subtreasuries are the chief custodians of the funds.- (3) As in 
 the commonwealths of the United States, where, except in a 
 few states, private or other banks are made the depositories of 
 the public moneys. When protected by proper safeguards, 
 such as the giving of personal bonds and collateral, the bank 
 depository system has proved itself far safer and more economi- 
 cal than the independent treasury, which is only to be defended 
 on political grounds, if at all. The experience of the United 
 States federal government in the early days with " pet banks " 
 points to the political difficulties of the bank depository system. 
 The bank deposit system prevents the periodic disturbance of 
 the circulation by the withdrawal or storage of money. If the 
 independent treasury system were used by all the departments 
 of government, this disturbance would possibly be serious 
 enough to affect prices.^ 
 
 Sec. 6. Bookkeeping. — The mere mechanical details of the 
 methods of bookkeeping and pubhc accounts cannot be de- 
 scribed here. About all that can be done is to make such ex- 
 planation as will enable the student to easily comprehend the 
 published accounts and statistics in their main features. 
 
 The revenue account is generally very simple. It contains 
 items named according to the sources from which they come. 
 Care must be taken in studying the reports of the fiscal officers 
 on the revenues to distinguish the receipts that represent in- 
 come from the receipts that are merely formal transfers and 
 
 1 Subtreasuries are at Baltimore, Boston, Chicago, Cincinnati, New Orleans, 
 New York, Philadelphia, St. Louis, and San Francisco. 
 
 2 According to law, the treasurer and disbursing officers of the United States 
 may make deposits in the national banks. 
 
 ^ Cf . Kinley's "Independent Treasury," and Buckley's "Custody of State 
 Funds," Annals of the American Academy, Vol. VI, 3, November, 1895.
 
 COLLECTION OF THE REVENUES 393 
 
 bookkeeping expedients. For example, the English finance 
 account of the United Kingdom for the year ending March 31, 
 1895, contains the following: Receipts — I. Balance in Ex- 
 chequer, April I, 1894, £5,977,118 185. gd.; II. Revenues 
 received into the Exchequer, viz. customs, excises, etc., £94,- 
 683,762 los. 2d.; total, £100,660,881 8s. lid. This was what 
 England had to draw on. But following that appear a number 
 of other " Exchequer receipts," among which are repayments 
 of advances ; as, (i) by the mint for the purchase of bullion for 
 coinage, £700,000, representing merely a return to the Ex- 
 chequer of money temporarily passed to the mint. The same 
 year the Exchequer advanced to the mint £615,000, which will 
 appear in 1896 as a receipt increased by the seigniorage. (2) 
 The Exchequer borrows money temporarily in anticipation of 
 the revenues. This appears, of course, as a receipt of £13,- 
 700,000, but is not revenue. (3) It renewed a number of out- 
 standing bills and bonds amounting to £14,123,400. These 
 appear as receipts, offset, of course, by an equal expenditure. 
 But (4) it created an additional debt of £760,000, for barracks 
 and telegraph. This sum may fairly be called revenue. So 
 that the total amount of money that came as actual income to 
 the treasury^ was £101,420,881 85. iid. But the total receipts 
 foot up £130,217,647 135. Sd. 
 
 On the expenditure side the issues or credits to disbursing 
 officials are first, the consolidated fund " services " ; that is, 
 the payments for (i) the " national debt services," (2) the 
 " other consolidated fund services," which consist of the civil 
 list, annuities and pensions, salaries and allowances, courts of 
 justice, miscellaneous " services," the Exchequer contributions 
 to Ireland, and the annuity under the Indian army pension 
 deficiency act of 1885. After the consolidated fund " services," 
 which foot up to £26,500,000, come the supply " services " 
 for the army, ordnance factories, navy, and miscellaneous civil 
 " services," for the collection of customs and inland revenue, 
 post-office, telegraph, and postal packet " services." These 
 two items, the consolidated fund and supply " services," con- 
 tain all that is strictly chargeable to the revenue. They
 
 394 INTRODUCTION TO PUBLIC FINANCE 
 
 amounted in 1895 to £93,918,420 185. ^d. In addition there 
 were special expenditures of £810,000, making a total of £94,- 
 728,420 185. 4d. But there were a large number of additional 
 issues: (i) bills and bonds paid off by receipts from new bills, 
 (2) temporary advances repaid, a part of which were for defi- 
 ciencies in the consolidated fund. These and one or two other 
 minor items, with a balance of £6,300,826 155. /[d., brought 
 the " issues " up to the receipts. 
 
 Public Accounts, United States. — In studying the accounts 
 published by the treasury department of the United States, we 
 have different difficulties to meet. There is generally a clear 
 statement, free from repetitions, or transfers, of the revenues 
 according to the sources, and of expenditures according to de- 
 partments, or objects. The only difficulties arise from the 
 peculiar and arbitrary grouping of the expenditures. This 
 comes from the illogical distribution of duties among the different 
 departments already referred to. Some of the peculiarities 
 are that the expenditure for the " civil establishment " includes 
 foreign intercourse, public buildings, collecting the revenues, 
 deficiency in postal revenues, rebate of tax on tobacco, refund- 
 ing of direct taxes, French spoliation claims, District of Colum- 
 bia, and similarly incongruous items. Those for the military 
 establishment included rivers and harbours, forts, arsenals, 
 and sea-coast defences ; for the naval establishment included 
 construction of new vessels, machinery, armament, equipment, 
 and improvement of navy yards. Expenses not otherwise 
 classified are generally listed as expenses of the treasury depart- 
 ment. 
 
 Sec. 7. The " Funds." — An interesting phase of public 
 bookkeeping is the separation of accounts into funds. ^ When 
 Parliament voted a tax, it was formerly for a definite purpose, 
 and the plan was to reserve the whole of it for the proposed 
 purpose. But the receipts and expenditures of these funds 
 never exactly balanced, and simplicity finally required that all 
 should be turned into the consolidated fund. This method of 
 
 1 A "fund" in this sense is practically an appropriation for a specified purpose 
 or group of purposes.
 
 COLLECTION OF THE REVENUES 395 
 
 bookkeeping is best exhibited to-day by the accounts of the 
 commonwealths in the United States, although also used in 
 national and municipal accounts to some extent. All the re- 
 ceipts are distributed among various so-called " funds," or 
 accounts, according to some prearranged plan. A separate 
 account is kept of all receipts and expenditures belonging to 
 each fund. With the exception of a few trust funds arranged 
 to keep certain sums inviolate, these funds are, in effect, mere 
 bookkeeping contrivances. With the exception of the general 
 fund, which receives all the money not otherwise appropriated 
 to special funds, each of these accounts generally bears the 
 name of the expenditure met thereby, sometimes of the rev- 
 enues supplying them. In some commonwealths the number 
 of these funds is very large. ^ The accounts are sometimes 
 complicated by transfers from one fund to another, in which 
 case they appear twice in the account, and frequently swell 
 the apparent receipts enormously. 
 
 Local Accounts. — Local budgets are necessarily determined 
 by the frame of local government and the number of functions 
 performed by each. Thus in England the public function to 
 be performed constitutes the basis of local organisation, and 
 until the recent reforrns each local governing body had only 
 one or two duties ; hence only one or two general accounts of 
 expenditures, and one or two sources of income. But in America 
 each local governing body generally has charge of all the local 
 functions affecting a certain area, and may have as many 
 expenditures and revenues as a comm_onwealth, or even more. 
 Here methods of accounting defy classification and frequently 
 defy sensible interpretation, even by the officials in charge. 
 There is a crying need for reform here in the direction of uni- 
 formity.^ 
 
 1' See Seligman, "Finance Statistics of the American Commonwealths," Pub. 
 Amer. Slatistical Assoc, December, i88g. 
 
 ^ See in this connection a form sugKCsted for published rcjjorts of municipalities 
 by Professor H. B. Gardner, in the Pub. of ihc Amer. Staiistical Assoc, June, 1889, 
 and adopted, in part, by the Eleventh Census of the United States, as the basis of 
 schedules and inquiries sent to the muriiri|)alitics The studies of local anil common- 
 wealth accounting made by the United States Census Bureau and published in the 
 volume on Wealth, Debt, and Taxation, 1907, are especially valuable. 
 
 \
 
 CHAPTER III 
 FINANCIAL ADMINISTRATION OF WAR 
 
 Section i. "Extra-ordinary" Expenses. — A serious war 
 usually imposes a sudden, new burden upon the treasury, the 
 exact, or even the approximate, size of which it is not possible 
 to estimate at the outset. Many of the expenses of war belong 
 to that class which financiers call " extra-ordinary " to dis- 
 tinguish them from the usual or current expenses of the govern- 
 ment. The amount by which the ordinary expenses are in- 
 creased in time of war depends upon many circumstances. 
 Obviously, the chief factor is the size of the forces engaged and 
 the duration of the struggle. Naturally, the chastisement of a 
 few dozen hostile Indian braves in the immediate vicinity of 
 the regular army posts involves practically no " extra-ordinary " 
 expenses. Allowance is usually made in the ordinary budget 
 for the expenses a war of that kind would occasion. But many 
 circumstances less obvious than the size of the forces engaged 
 enter into the determination of the amount of the " extra- 
 ordinary " expenditures. Thus, for example, a naval war, 
 unless it happens to become the occasion for the purchase of 
 new ships, involves comparatively little addition to the ordinary 
 expenses of maintaining the navy. A country which has a 
 large standing army incurs relatively less " extra-ordinary " 
 expense when engaging in war than a country which, like the 
 United States, has only a small regular army. 
 
 The ordinary expenses being provided for by the regular 
 budget, the financier's chief concern in time of war is the pro- 
 vision of the " extra-ordinary " funds. If the operations of 
 the war are likely to interfere with the ordinary revenues, he 
 must furthermore be prepared to treat a part of the ordinary 
 expenses as " extra-ordinary," at least to the extent of fur- 
 
 396
 
 FINANCIAL ADMINISTRATION OF WAR 397 
 
 nishing new means to meet them. It is not often possible, and 
 still less often expedient, to curtail the ordinary expenditures 
 in any way for the purpose of saving money to meet the new 
 expenses. How to increase the receipts of the treasury by an 
 amount sufficient to insure the efficient conduct of the war, 
 without too serious disturbance of the industries and commerce 
 of the people, upon which all the revenues depend, is the problem 
 for the finance minister to solve. The " extra-ordinary " 
 demands come thick and fast, especially at the beginning of 
 the war, and they must be met, and met at once. The amount 
 which may be needed at any given time is not ascertainable. 
 But in spite of that, sufficient funds must always be on hand. 
 Upon this more than upon any other one thing depends the fate 
 of war. The war financier can never plead that he has no 
 funds, nor can he ask for time in which to collect. He must 
 have the money when it is wanted and in the amounts required. 
 No degree of skill on the part of officers or bravery on the part 
 of the men, no degree of self-sacrifice at the front, can com- 
 pensate for failure on the part of the financier to provide the 
 ways and means. His powers are, therefore, of the greatest 
 and most unusual. 
 
 Sec. 2. Increased Rates for Old Taxes. — Possibly the most 
 natural source to turn to in time of war for the increased rev- 
 enues needed is the existing system of taxes. At first thought 
 it might seem proper to attempt to obtain new income by 
 raising the rates of the old taxes. To some extent this is pos- 
 sible. In every well-arranged tax system there should be some 
 taxes which can be made to yield an increased revenue by 
 simply raising the rates. One of the chief reasons for the 
 establishment and the retention of the British " property and 
 income tax," for example, is found in the elasticity of the re- 
 turns. But not all taxes can be treated in this way. Some- 
 times an increase in the rate of taxation will disturb industry 
 and commerce and do a greater injury to the welfare of the 
 people than is received from the damages of war. Again, an 
 increase in the rates of certain taxes will diminish the revenue 
 or even destroy it entirely. In not a few taxes the only way
 
 398 INTRODUCTION TO PUBLIC FINANCE 
 
 to increase the revenue is to lower the rates. This is the case 
 with most protective duties. Any change in the rate of such 
 taxes is bound to affect industry and commerce, and to affect 
 them unfavourably in the first instance, whatever the subsequent 
 effect may be. A war brings perplexities enough to business 
 without the creation of artificial ones, and the financier should 
 not interfere with these taxes. It added not a little to the 
 perplexities and dangers of the Civil War in the United States 
 that the industry and commerce of the people were repeatedly 
 disturbed during the war by changes in the tariff as well as by 
 the military and naval operations themselves. There are, 
 therefore, but a limited number of old taxes from which any 
 aid can be sought. 
 
 Sec. 3. New Taxes. — The next resource, naturally, is new 
 taxes. But the establishment of new taxes, or even the res- 
 toration of old taxes not in use at the time of the war, is a 
 matter requiring considerable time. Even if it were an easy 
 matter to decide upon the best form of taxation and to get the 
 necessary authority from the legislative branch of the govern- 
 ment, the organisation of the new administrative forces for the 
 collection of the taxes is a matter requiring time. No new 
 system of taxation reaches its normal revenue-yielding powers 
 within many months of its enactment. If the taxes are entirely 
 new, the time required is longer. But even if they are more 
 or less familiar to the people from use on some previous occa- 
 sion, a considerable lapse of time must intervene between the 
 beginning of war and the receipt of sufficient new revenues to 
 meet any considerable part of its expenses. Furthermore, the 
 expenses of war are now so enormous that any system of taxa- 
 tion which raised, or attempted to raise, the entire amount 
 needed during the probable duration of the war would be so 
 burdensome as to crush the people. It is, therefore, extremely 
 unwise, and practically impossible, to attempt to raise the en- 
 tire cost of the war by immediate taxation. The only other 
 resource is borrowing. 
 
 Sec. 4. The Use of Credit in Time of War. — The use of the 
 public credit in time of war is attended by many special difl&-
 
 FINANCIAL ADMIXISTIL^TION OF WAR 399 
 
 culties. The outcome of war is always more or less uncertain. 
 Even if defeat would not entirely cripple the nation's resources 
 and render the repayment of the loan uncertain, or affect the 
 payment of interest, yet there are many considerations which 
 make the lender hesitate. The fact that the duration of the 
 war, the extent to which other nations may become involved, 
 and many similar considerations affecting the size of the total 
 demand upon the public credit are unknown, vastly increases 
 the difficulty of placing a loan on favourable terms. But on 
 that very account it is particularly necessary for the successful 
 administration of the war that everything should be done to 
 strengthen and preserve the nation's credit. There may come 
 a time in the progress of the war when the only source from which 
 any funds can be had is the money market. If, therefore, the 
 financier has done anything to weaken the nation's credit at 
 the beginning of the war, he is apt to be helpless at the close. 
 Credit tends to weaken as debt increases. 
 
 It is for this reason that resort is frequently had in early war- 
 borrowings to the simplest and most primitive method of debt- 
 making ; namely, that which provides revenues for the payment 
 of the interest and the repayment of the principal at the very 
 time the debt is contracted. The creditor sees in the new 
 funds flowing into the treasury the security for his advances 
 and the guarantee of good faith on the part of the government. 
 So long as every new loan is accompanied by new taxes from 
 which its cost can be met, the public credit is practically secure. 
 But if, on the other hand, the government neglect this pre- 
 caution during the first stages of the war, any attempt to resort 
 to it at a later stage is apt to be regarded as the desperate 
 device of unsound financial management and the presage of 
 coming bankruptcy. . 
 
 Public credit is a plant of slow growth and extremely tender. 
 It withers in a day before a breath of doubt. 
 
 Inasmuch as a successful outcome cannot be hoped for in 
 modern warfare without the funds obtainable solely by public 
 borrowing, and the necessity for loans increases the longer the 
 war continues, it behooves the modern war financier to guard the
 
 400 INTRODUCTION TO PUBLIC FINANCE 
 
 nation's credit as his most precious treasure. No sacrifice is 
 too great which will strengthen it and preserve it intact for 
 the later stages of the war. 
 
 Sec. 5. During the World War. — The foregoing condensed 
 statement of principles received full confirmation in the financial 
 policies and practices of the different nations in the World War, 
 as we shall proceed to show. But before passing to the history 
 of government finances in the Great War there are several 
 questions largely of theory to be discussed. One is a question 
 raised by a number of economists chiefly in America which 
 requires special consideration. 
 
 Can War Be Financed by Taxation without Loans? — Just 
 before the United States entered the war, and just after that, 
 a very considerable number of able economists argued strongly 
 that it would be possible and was desirable to finance even a 
 great war entirely by taxation during the progress of the war 
 itself, and only to resort to borrowing to tide over the interval 
 between the receipts of taxes. The purpose of these suggestions 
 was to prevent, or counteract as nearly as might be, the inflation 
 of the circulating medium which has been an ever present 
 accompaniment of great wars in the past and was so severe in 
 this one. Inflation, which causes a rapid rise in prices, an 
 embarrassing advance in the cost of Hving, and of the cost of 
 waging war, is, in the opinion of these economists, largely at- 
 tributable to the use of credit by governments to finance the 
 war. There is no doubt that if a government finances a war 
 by the direct issue of fiat paper money which passes at once 
 into circulation inflation will result. It is, also, a generally 
 accepted view that other forms of credit used by government, 
 such as short-time notes and even long-time bonds, pass in one 
 way or another more or less fully into circulation and thus cause 
 inflation. This may be seen by following the course of such 
 credits. The government sells its bonds to the people. The 
 money so received it spends, usually by first depositing it in the 
 banks, then drawing checks against it and in that way passing 
 the credit at the bank to some contractor or other person who 
 sells something to the government. The contractor or other
 
 FINANCIAL ADMINISTRATION OF WAR 401 
 
 person uses it in turn to pay his bills and so it passes from hand 
 to hand and serves most of the purposes of money. In so doing 
 it acts much as any other increase in money would, although 
 it may be better to think of it as increased purchasing power, 
 rather than as strictly money. The increased purchasing power 
 thus put into circulation continues to pass from hand to hand, 
 the amount circulating diminishing slowly as the various holders 
 take out their profits on the transactions in which it is used, 
 and invest these profits in some form of non-circulating capital, 
 perhaps in part in the bonds themselves, handled as strictly 
 permanent investments. But this is not the whole story of the 
 inflation which the notes and bonds cause. Many of the lenders 
 to the government use these notes and bonds as collateral for 
 advances from the banks and thus put them indirectly into 
 circulation, while a few of the bonds and more of the notes will 
 actually pass from hand to hand as does money. The only 
 difference between bonds and notes so used and fiat money is 
 that the latter circulates more easily. Upon the point that 
 government credit used during war causes inflation there is no 
 material difference of opinion. 
 
 The Evils of Inflation. — ■ Nor is there any difference of 
 opinion upon the point that inflation is an evil. The new 
 purchasing power passes unevenly into circulation. Prices 
 rise irregularly, wages lag behind, salaries lag still more behind, 
 while interest contracts, which are of course contracts for the 
 payment of dollars, pounds, or other units of money, are un- 
 changed and never affected by the fact that the dollars, etc., 
 command less of other things, especially of commodities and 
 labor. So some are impoverished, while others appear to grow 
 rich and some actually do grow richer. Profiteering arises. 
 Profiteering is objectionable because it seems to measure how 
 much some get rich without giving a corresponding return — • 
 undeservedly as we feel. Inflation also tends to waste of 
 economic resources, the conservation of which is essential to 
 the conduct of war. For those who get rich quickly, or who 
 for the first time perhaps in their lives receive high wages, 
 steady employment, and large earnings arc prone to be lavish
 
 402 INTRODUCTION TO PUBLIC FINANCE 
 
 spenders and high Hvers. The coal miner who bought a dozen 
 pairs of silk stockings for his wife, explaining, " My wife's 
 going to walk in silk while the walking's good," expressed a 
 common human sentiment. * 
 
 Heavy taxation tends of course to restrict consumption. 
 Upon that point there is no dispute. If the increased purchas- 
 ing power which flows forth in time of war is largely taken 
 away from the people again in the form of taxes they certainly 
 cannot spend it. But we must not forget that at the same time 
 heavy taxation will cut down production. For if by taxation 
 the spending power of the people is curtailed, so is demand 
 curtailed, and it is of no use to produce things which will not 
 be sold. Those who advocate " all taxes, no bonds " as a mode 
 of war finance .sometimes answer this point as to curtailment 
 of production by saying that the labor so set free can be turned 
 into the making of war supplies or absorbed in the army. In 
 so far as the army is concerned this is true whether the army 
 be recruited by conscription or by universal volunteering, for 
 there a direct war service is rendered for considerations into 
 which the pay does not enter. But unless conscription of labor 
 for industry is resorted to the lure of high wages is the only 
 effective method available for getting war materials made. 
 Moreover, we may not forget that a large part of the lure of 
 high wages lies in the fact that they will buy something desired. 
 Our coal miner may have earned the money used to bedeck 
 his wife in silk stockings by hard work, or overtime, for high 
 wages. Would he have been as keen to work hard if the shops 
 contained only the coarse cotton stockings she had been ac- 
 customed to ? This is one very essential point on which we must 
 differ with our friends of " all taxes, no bonds." We are pre- 
 pared to admit that much might be said for conscription for 
 industry. For it does seem but right that he who stays home 
 and avoids the hardships and dangers of the trenches should 
 work as hard as he can without special reward. But the essential 
 thing is to get the work done, and quickly, and we know that 
 high wages with power to spend and enjoy them are a powerful 
 lure to work. Moreover, the other plan is an experiment and
 
 FINANCIAL AD^IINISTR.\TION OF WAR 403 
 
 war time is a poor time to be experimenting, when failure in the 
 experiment would spell disaster. The method we actually use 
 in war time is to let wages and prices go up, and so lure some 
 men into war industries while others get busy providing the lures. 
 The well-intentioned efforts to distinguish between essential 
 and non-essential industries and to prohibit or frown down 
 upon the non-essential came to disaster not merely because 
 of the inherent difficulty of seeing how silk stockings for a 
 coal miner's wife could " help win the war." It failed because 
 it diverted a goodly amount of intelligence and energy from 
 actual production into blundering efforts which only hampered 
 production. The meddlesome mischief makers who have no 
 business of their own save tending other folks' business often 
 flourish in time of war. 
 
 This is, however, no argument for deliberately creating 
 inflation. Inflation is an evil which nobody can deny. Some 
 of it is attendant upon every war. It is the large spending by 
 government for purposes non-economic which creates inflation. 
 Some inflation will come even under an all taxes system were 
 such a system possible. The point is that an all taxes system 
 would so hamper industry as practically to check it. It would 
 put brakes on the wheels of industry and dry up the sources 
 of capital, just at the time when all the power the machinery 
 of production can develop is needed to carry the heavy load of 
 war. Nor would it necessarily check high prices for it would 
 cause scarcity of goods. Of the two evils, dear but abundant 
 goods and dear and scarce goods, the former is clearly the lesser. 
 Inflation, while an evil, has some merit in that it does help 
 make men work. 
 
 " All Taxes, No Bonds " Impractical. — But the arguments 
 for " all taxes, no bonds " appealed not at afl either to the 
 practical statesman or to the practical business man. No 
 country tried the experiment. As we shall see all used bonds 
 and other modes of borrowing and limited taxation to what 
 was thought to be a wise amount. It was vain for the theorist 
 to argue that present production is the only possiljle source of 
 present expenditure, that the army cannot shoot a shell to-day
 
 404 INTRODUCTION TO PUBLIC FINANCE 
 
 which is to be made ten years hence, that borrowing postponed 
 no burden but merely shifted the burden about among the 
 people, mortgaging the future of some to the service of others. 
 The business man still felt sure that he could pay the costs of 
 the war more easily in instalments spread over many years 
 than he could in one lump sum down, and the statesmen and 
 parliaments agreed with him. Somehow the proposal did not 
 seem practical. When a theory is not practical it probably is 
 unsound. 
 
 Borrowing Does Draw upon the Future. — • The fallacy upon 
 which the " all taxes, no bonds " theory rests is the denial of 
 the possibility of counting upon the future. We cannot of 
 course eat wheat in January that is not to be harvested until 
 the next fall. But we can and do every January sell wheat 
 not even sown. That is, we sell wheat to be grown, and sell 
 it at a time when the land on which it is to be grown is still 
 frozen solid and covered with snow. With the proceeds of 
 that sale we can put men to work, or buy other goods for the 
 wheat. This is the reason for and the nature of credit, namely, 
 that it brings down to us out of the future the value of future 
 products, although not the products themselves. If this is 
 unreal, if credit is not real, all business is a mere dream, a fig- 
 ment of the brain. For there is no transaction and no economic 
 process that does not involve some passage of time. If the 
 interval between delivery and payment is short, we call the 
 transaction a cash transaction, if longer, a time transaction. 
 But so long as the sun rises and sets, so long as time must elapse 
 between the sowing of seed and the harvest, so long as men eat 
 three times daily throughout life and not once only for a whole 
 lifetime, so long will there be a need for credit, and so long will 
 credit be something real and be the powerful reality that it is. 
 As applied in the " all taxes, no bonds " arguments for war 
 finance the claim that we can use only present goods to wage 
 a present war assumes that we drop all production, use our 
 present stock of food and the like, and busy ourselves solely 
 with fighting. Instead of that some stay behind and " keep the 
 home fires burning," while the others fight. Nor can we draw
 
 FINANCIAL ADMINISTRATION OF WAR 405 
 
 very deeply on accumulated capital. Capital is continually 
 wasting and continually being replaced. Its upkeep is essential 
 for continued production and to keep an army fed and armed. 
 
 It is useless to deny that we can mortgage the future, make 
 the future pay for current war costs, for we do it, and have 
 done it repeatedly. It is useless to say " the future is not here 
 to bear burdens," that " the surplus of current (sic) income 
 must be the source (sole source) of funds for financing a present 
 war, and hence that borrowing " postpones no burden to the 
 future." The future is ours to use as we please, it will all too 
 soon be " here " ; " current income " is of no importance save 
 as " current " means " future," even a " present " war runs on 
 for a time, and since we can bear no burden that is past, we 
 can bear no burdens at all save in the future. The whole 
 argument reduces to a play on words. It is astonishing that 
 it had such currency and for a time bewildered so many people. 
 
 Dependence on Taxation Dangerous. — Taxation so excessive 
 as to discourage production by leaving the producers no profits 
 and the labourers no wages, or very small profits, and less than 
 a living wage, will lose a war very quickly, unless some other 
 incentives to industry are devised than profits and wages. The 
 other incentives would have to be found outside of the field of 
 finance. No one is able to deny that they can be found, but no 
 one has yet found them, so it is idle to discuss the possibility. 
 
 Practically then, and theoretically as well, it would be the 
 supreme height of folly to wage war depending solely on taxation. 
 When we have at hand so powerful a resource as credit we 
 should use it to make speed with the war. Relying on available 
 taxes only means slow war work. If your enemy follows the 
 other policy he may win. If one has a tractor he does not use 
 a horse to plow with. Credit is too powerful a war weapon to 
 be idly cast aside. 
 
 Sec. 6. Proportion of Taxes and Loans. — Upon the question 
 of how much of the cost of war should be borne by taxation and 
 how much by borrowing the sentiments and policy of different 
 countries differ. Germany says: none from taxation. Great 
 Britain aims at half and half. The United States has a theory
 
 4o6 INTRODUCTION TO PUBLIC FINANCE 
 
 of raising enough by new taxation to insure absolutely the pay- 
 ment of interest on the new borrowing and thus to sustain its 
 credit. While poor France, whose wars have been mainly on 
 her own soil, with one great and glorious exception, has been 
 without theory because without choice, and has been hard put 
 to it to get enough money from both sources without regard 
 to proportions. These theories are, however, vague, except 
 that of Germany, because any fraction of an unknown quantity 
 is itself unknown, and who can forecast the cost of war even 
 as of to-morrow? Whether Germany's theory rest on over- 
 confidence in winning and hence on expectation of plunder and 
 indemnities, or on the idea that war itself places strain and 
 burden enough on industry without the added burden of taxes, 
 it seems nevertheless unsound, or at least too full of risk. For 
 the confidence of the lender in the credit of the nation must 
 be insured and conserved, and that is best done by showing 
 him a stream of revenues coming into the treasury out of which 
 interest and principal as it falls due can be paid. 
 
 Sec. 7. The Marginal Lender Fixes the Credit of a Nation. — 
 The ultimate or marginal lender whose confidence must be 
 retained to the end, come what may, may be, perhaps, a servant 
 girl with a few hundreds in the bank, a small merchant who can 
 spare something from his funds, — httle people by the way 
 who can contribute in the aggregate much to loans but who 
 would be left out altogether on an " all taxes, no bonds " pro- 
 gram, — and others to whom safety of the loan is the prime 
 consideration. If they lose faith, savings banks, insurance 
 companies, and trust companies which handle other people's 
 investments cannot move, and in turn others, bankers and 
 capitalists, lose faith and the whole structure of government 
 credit collapses, or goes up as if in smoke. To this end a con- 
 tinuous flow in taxes must be assured. It can be assured only 
 by boosting taxes as fast as possible during the early stages of 
 the war, for when the strain of war grows too heavy it is hard 
 to get more taxes. 
 
 Popular Loans by "Drives." — ^This suggests the value of 
 the popular loan or subscription drive. If the government can
 
 FINANCIAL ADMINISTRATION OF WAR 407 
 
 go over the heads of the wholesalers and middlemen of finance 
 and reach down to the ultimate investors, the real savers, it may 
 at one and the same time unlock vast stores of loanable funds, 
 which recent experience has shown to be far larger than was 
 ever dreamed of, and create credit where little or none existed 
 before. Many a working man who in ordinary times finds it 
 hard to borrow money, even for perfectly commendable pur- 
 poses, discovered that if he had confidence enough in a govern- 
 ment bond to buy it out of his earnings there were plenty of 
 bankers and financiers who would help him to do so. He had 
 credit which he could use to aid his government. As a matter 
 of fact, and a very important fact too, the confidence of the 
 working man in the bonds of his government gave the banker 
 confidence, which otherwise the banker would never have had. 
 For the banker argued: "Here are hundreds of people who 
 buy bonds. Even if some of these I am helping to buy them 
 fail to pay back my advances I am safe because some one else 
 will buy them. Since all these people believe they are good 
 I certainly need not worry." The extent to which credit can 
 be developed in this way was strikingly exhibited in all countries 
 during the war. In Germany, even without the buttress of 
 new taxes, succeeding popular loans brought out more sub- 
 scribers and more money than preceding ones, and the facilities 
 of banking intermediate between the ordinary small investor 
 and the government developed correspondingly. It was the 
 same in other countries. It amounted to mobilizing every- 
 body's credit. 
 
 Two lessons about popular loans stand out in the experience 
 of the recent war. One is that there is danger of overdoing 
 the " drive," in depending too much on the patriotic fervor of 
 volunteer salesmen who in far too many instances through 
 excess of zeal used intimidation and duress to bring " our town " 
 up to its quota. As much harm can be done to the credit of 
 to-morrow by duress in selling a bond to-day as would result 
 from failure to sell. The other lesson is that too low interest 
 rates are false economy. The government financier naturally 
 prides him.sclf on getting his money cheap. Th(^re is danger
 
 4o8 INTRODUCTION TO PUBLIC FINANCE 
 
 in getting it too cheap. A discount or low market price on 
 the last issue hurts a new issue. Germany began its popular 
 loans at rather high interest rates. English financiers, who 
 began too low, gloated for a while. But Germany placed its 
 second, third, and fourth loans each at lower rates of interest — 
 that is more advantageously than the one before — while in 
 England the rate of interest had to go up. The United States 
 played " penny wise, pound foolish " right through the whole 
 series of bond sales, with the result that the subscriber saw 
 bonds for which he had not finished paying his instalments fall 
 in market price. Only the early close of the war saved the 
 United States from embarrassment. One thing to be aimed at 
 in popular loans is to put the bonds into the hands of investors 
 who will keep them, and by so doing keep them out of the 
 money markets and from '.-eing used as collateral, causing 
 inflation. But when the bonds are forced by intimidation and 
 duress into weak hands and when the interest rate is too low 
 to make them attractive investments for " the widow and the 
 fatherless " they are sure to come back on the market, and to 
 fall in price. All that not only adds to inflation but weakens 
 confidence, lessening credit for future loans. It is so easy to 
 refund after war is over, if the government's credit is still good, 
 and maintaining high credit is so vital to winning the war, that 
 the saving of a relatively small amount of interest at the cost 
 of credit is distinctly folly. 
 
 Sec. 8. Aggregate War Costs. — The total of war expen- 
 ditures during the Great War ran into enormous figures. The 
 estimated cost to date (1920), not including pensions and 
 similar unsettled items, is placed at $200,000,000,000, taking 
 the inflated and discounted currencies at the old parity with 
 dollars. It has left the belligerents with nominal debts amount- 
 ing to $240,000,000,000 against pre-war debts of $29,000,000,000. 
 The accounts are still in some confusion and the basis of con- 
 version cannot as yet be forecast owing to the instability of 
 the currencies, and in some countries, notably Russia, of the 
 government. It is impossible as yet to give statistical proof 
 as to the actual burden of these debts, but it appears to be true
 
 FINANCI.\L ADMINISTRATION OF WAR 409 
 
 that great as their debts now are both England and the United 
 States have in past generations borne a heavier burden of debt 
 than they are now carrying. The British debt at the beginning 
 of the nineteenth century was certainly a much heavier burden 
 than is her present debt, and so was that of the United States 
 after the Revolutionary War and after the Civil War. England 
 was enabled to carry her debt easily in the nineteenth century 
 by reason of the great increase in productive power following 
 the great inventions which caused the " industrial revolution." 
 The United States was relieved of her Revolutionary War debt 
 by the same forces but more materially by the development of 
 new lands and other natural resources, and carried her Civil 
 War debt with comparative ease by reason again of the opening 
 of new lands and ever richer natural resources. Whether the 
 great World War is to be followed by a correspondingly great 
 increase in production, facilitated by recent inventions, and the 
 exploitation of the resources of the less mechanically equipped 
 countries remains to be seen. The full effects of the explosion 
 engine, giving us trackless vehicles, and aeroplanes, lighter 
 fuel, and, also, the greater use of water power, the new foods, 
 better organisation of agricultural production and other ad- 
 vances in the technique of production and transportation cannot 
 yet be foreseen. But in face of all this and judging by the past 
 it does not appear that the war debts, enormous as they are, will 
 prove at all an unbearable burden. 
 
 We are, however, more directly interested in the technique 
 of war finance during the war itself and in discovering, if we 
 may, what principles guided. We shall confine our attention 
 to England, France, Germany, and the United States. The 
 opening of the war threw the whole mechanism of finance out 
 of gear. Panics, closure of the stock exchanges, moratoria, 
 violent fluctuations in the exchange rates or of foreign bills, 
 money shortage, and every other feature of financial chaos 
 prevailed, both among the belligerents and neutrals. The 
 strain on the banking and monetary organisation of the world 
 was relieved by drastic measures. Liciuidalions were post- 
 poned, redemption of notes in gold suspended, government
 
 4IO INTRODUCTION TO PUBLIC FINANCE 
 
 guarantees of private bills were granted, paper money issues 
 were resorted to, and the banks were combined all in the effort 
 to create new means of settlement and in belligerent countries 
 to provide the governments with the means of payment. 
 
 England 
 
 Sec. 9. The Last Pre-war Budget. — England's fiscal year 
 ends March 31st, and the budget for the next year is usually 
 settled shortly thereafter. In 19 14 the budget for the year was 
 approved in June, about a month before the war broke out. 
 That budget had provided for some new taxes. But a new 
 budget was introduced in the middle of November and for 
 several years England had a budget every sLx months. The 
 usual orderly procedure of " estimates " presented and " votes " 
 granted had to be abandoned in fact, though the form was 
 preserved and "dummy" estimates presented. During 1914, 
 until the second budget was approved, England financed the 
 war on votes of credit to the government, which then obtained 
 the funds granted by the discount through the banks of Ex- 
 chequer Bills. By various devices including the issue of what 
 was practically fiat money, by guarantee of bills of exchange 
 and the other measures the government made mobile the 
 reserves of the banks upon which it had to draw. 
 
 The First War Budget. — In November came the first war 
 budget and the income tax rates were doubled, and new duties 
 were imposed on beer and tea. Not until November was there 
 a funded loan. This consisted of £350,000,000, authorised 
 public stocks and bonds payable 1925-1928 and sold on prac- 
 tically a 4 per cent basis. A guarantee by the Bank of England 
 to lend on them up to 95 at any time within the next three years 
 helped the sale of what was thought of as a popular loan, al- 
 though not placed by the " drive " method. About the same 
 time five-year Exchequer bonds were resorted to and heavy 
 advances were obtained from the Bank of England. 
 
 The First Great Loans. — In 191 5-16 the expenses mounted 
 fast. The second war budget adopted in May was preceded 
 and followed by irregular " votes of credit." Resort was had
 
 FINANCIAL ADMINISTRATION OF WAR 411 
 
 to the continuous sale of Exchequer bills. But by June, 1915, 
 it became necessary to fund the great and growing mass of 
 floating debt. The interest rate on this loan was raised as 
 compared with that of the prior loan, but exemption from 
 income tax, which the first loan enjoyed, was not granted sub- 
 scribers to this loan. The loan had no fixed limit as to amount. 
 It was popularised by off'ering small denominations, by sales 
 through post-offices and through trades unions of small vouchers 
 redeemable in bonds. Holders of previous issues including 
 pre-war issues were allowed to exchange their holdings for 
 these bonds and there was a promise that if any subsequent 
 issues have a higher rate of interest, conversion would be per- 
 mitted. The bonds were callable in ten years and payable in 
 thirty years. The issue was a fair success although it did not 
 reach the great mass of possible small subscribers and so failed 
 to disclose in full the borrowing power and credit of the govern- 
 ment. Again the mass of Exchequer bills rolled up. The 
 failure of the government to go right down to the bottom and 
 place this loan with the ultimate subscriber hampered its next 
 effort, which was to borrow in the United States by issuing a 
 loan on the joint credit of England and France. An offering of 
 $1,000,000,000 found no market, and after some negotiations 
 one of half that amount was underwritten in New York con- 
 sisting of 5 per cent bonds due in five years at 98. 
 
 Even though backed by two great countries, and paying a 
 very high rate, the bonds had in large part to be used to pay 
 munition firms furnishing supplies. It seems probable that 
 had the strength of England's credit with her own people been 
 better shown in the preceding loan far better terms and an 
 easier sale of the New York loans would have been achieved. 
 
 New Taxation. — In September, 1915, new taxation was 
 resorted to with vigor. Mr. McKenna, at once the firmest and 
 boldest chancellor the British Exchequer ever has had, pre- 
 sented a budget which the London Economist described as: 
 " A plain unvarnished statement of unparalleled revenues, an 
 inconceivable expenditure, and an unimaginable deficit, fol- 
 lowed by a list of fresh taxation which imposed an un])recc-
 
 412 INTRODUCTION TO PUBLIC FINANCE 
 
 dented burden on the country." This fresh taxation redeemed 
 the waning credit and followed by similar drastic measures put 
 British war finance on a stable basis, until May, 191 7, when the 
 whirl of politics threw the Exchequer into the hands of Mr. 
 Bonar Law and disorder and weakness set in. The normal 
 income tax went to 35. 6d., or 17.5 per cent, the abatements 
 were reduced, the supertax was raised. A war or excess profits 
 tax was introduced with a 50 per cent rate. The customs and 
 excise duties were increased. Tea, cocoa, coffee, chiccory, dried 
 fruits, tobacco, and sugar, motor spirits and patent medicines, 
 cinema films, watches, musical instruments, and imported 
 motor cars were the chief contributors. The postal and tele- 
 graph rates were raised. The Chancellor set himself firmly 
 against a multitude of small taxes which would raise more 
 trouble than revenue and struck hard at things of wide con- 
 sumption, selecting those on which the cumulating expense of 
 frequent shifting would probably be the least. Despite all this 
 the debt rolled up, for the war expenses still grew apace. Full 
 three-fourths of the entire expenditures was being met by loans. 
 
 Still Heavier Taxation. — In 1916-17 the taxing chancellor, 
 Mr. McKenna, brought in a new budget in April. Once more 
 the income tax was raised, this time to 55., and the lower reaches 
 were also strengthened. The lowest rate was £1 per annum, 
 which fell on earned incomes of £131 per annum. Again taxa- 
 tion was driven downward to the great masses who, as Bis- 
 marck once remarked, " bring in the revenue." The result 
 exceeded estimates. The excess profits tax was raised to 60 
 per cent. Again were the customs and excises raised. New 
 taxes fell on table waters and other beverages. Amusements 
 were made to contribute. 
 
 Varied Assortment of Loans. — Still the debt rolled up. 
 Exchequer bonds were invented to supplement exchequer bills, 
 pubhc stocks, and bonds. The market became so glutted that 
 interest went to 6 per cent. Never was the investor offered 
 such a varied assortment of public notes and securities. The 
 Bank of England was again drawn upon. So many purchases 
 were being made in the United States that difficulty was en-
 
 FINANCIAL ADMINISTRATION OF WAR 413 
 
 countered in getting credits over into the United States in 
 quantities sufficient to make payments. The exports of Great 
 Britain were not sufficient to carry the flood of purchase money 
 needed. Negotiations were then entered into with Enghsh 
 holders of American securities to pass them over to the govern- 
 ment, by loan if not by sale. These securities were then either 
 sold in the United States or used as collateral for loans, and the 
 proceeds of both methods of handling them, turned into credits 
 in the United States, were used to pay the government's bill 
 with.i To force the holders to surrender their American 
 securities a penalty, called a tax, of 10 per cent on the income 
 therefrom was placed on holders. This device facilitated loans 
 in the United States, although the demonstration of England's 
 credit with her own people at home, which had come since the 
 first expedition to the New York money market, also helped. 
 A third great funded war loan came in January, 191 7. This 
 time a tax-free bond at 4 per cent sold at par, and a bond the 
 interest on which was subject to the income tax, but paying 
 5 per cent and sold at 95, were offered side by side. The people 
 bought the taxable bond. Whether this is evidence of the 
 falseness of the theory that the tax-free bond is used for tax 
 dodging, or whether the spread in price was too great, one can- 
 not say. About a billion pounds of this loan was sold to nearly 
 5,300,000 subscribers. It was a clear victory for the theory 
 that a fair rate of interest is potent. 
 
 The Darkest Days. — The last two years of the war, 191 7-19, 
 may be covered together. Under the administration of Mr, 
 Bonar Law the government lost control of the finances. It 
 settled down to a policy of merely meeting its most urgent 
 obhgations as they arose, drifted rudderless from one loan to 
 another, in short, it lived strictly from hand to mouth with no 
 thought or provision for the morrow. It was the darkest 
 period financially in the entire history of England. Two un- 
 fortunate expressions of incompetence flamaged England's 
 
 • This brief statement is correct only as to the princijjlcs followed. The details 
 varied so often that a full statement would take too much space. As to the 10 
 per cent penalty tax mcntionetl in the next sentence we have no real information 
 or understanding. As bald fact it seems to be correct, although mysterious.
 
 414 INTRODUCTION TO PUBLIC FINANCE 
 
 credit. One was to the effect that the government did not 
 want to be bothered with new taxes, it had not a force large 
 enough to collect them as it was ; and the other was that Eng- 
 land would have to depend upon advances from the United 
 States as her own resources were exhausted. In May, 191 7, an 
 increase was made in the tax on tobacco and the excess profits 
 tax was raised to 80 per cent. The next year the government, 
 forced by popular clamour, raised the income tax to 65. and 
 the supertax to 45. 6J., again raised the taxes on tobacco (to 
 Ss. 2d. a pound), on sugar (to 25^. Sd. per cental), doubled the 
 tax on spirits, beer, and matches, put a stamp duty on checks, 
 and raised postal rates, and finally established a complicated 
 luxury tax, a scheme of very uncertain value. 
 
 The Errors of British Finance. — Looking back we may say 
 that England started her tax poUcy too slowly, that by too heavy 
 leaning on the banks and failure to reach down to the ultimate 
 lender at an early stage of the war she hurt her credit. She 
 recovered and reached a sound condition under the bold, firm 
 hand of Mr. McKenna ; and the collapse during the last two 
 years was due not to anything in the difficulties of a military 
 character, for they were actually costing less, but to the failure 
 to observe the principles of steadily increasing taxation, and of 
 steadily drawing more and ever more from popular loans. 
 The taxpaying power of a great nation grows as its day of 
 need grows, and its lending power is inexhaustible, so long as 
 confidence is not abused, and the people are permitted direct 
 access to the loan bureau. The over-dependence on short 
 notes financed through the banks caused unnecessary inflation, 
 and an expense to the government itself through that inflation 
 far in excess of the interest which was saved by the low rates 
 of interest on bonds before the last years. The greatest menace 
 to the establishment and continuance of sound finance is that 
 most natural hope and expectation that the war will soon be 
 over, an expectation that discourages vigorous measures. 
 Surely it must be clear that too much taxation, too strong credit, 
 are impossibilities in face of a continued war and easily remedied 
 if need be when the war stops.
 
 FINANCI.\L ADMINISTRATION OF WAR 415 
 
 France 
 
 Sec. 10. France Had Past Deficits to Meet. — For many 
 years before the war France had been running behind financially. 
 Budget after budget resulted in a deficit. Just before the war 
 broke out France was engaged in floating a large loan to adjust 
 and fund the accumulated deficit. This loan, consisting of 
 3^ per cent twenty-five year bonds offered at 91, was not going 
 very well. The deep underlying reason for the lack of interest 
 in this loan was the tax system of France, which was composed 
 largely of customs and other indirect taxes and some anti- 
 quated direct taxes which tied the central revenues to the local 
 revenues, and the reluctance to levy new taxes. After years of 
 debate France had decided to le\^ an income tax, and such a 
 tax had been adopted in 1914, to take effect in 191 5. It was 
 hoped that it would support the new loan and ultimately do 
 away with the ever recurring deficits. The new tax was, how- 
 ever, a very Uttle one, with a 2 per cent rate and liberal exemp- 
 tions. For reasons difficult to understand France did not take 
 advantage of this new tax to obtain war revenues, at first. 
 Instead she postponed the levy from 1915 to 1916, and not until 
 19 1 7 did she raise the rates. 
 
 The War Caused Loss of Revenues. — The revenue situation 
 was also complicated and badly hampered by the operations of 
 the war itself. Trade was very seriously cut off. This reduced 
 the customs revenues, one of the mainstays of the government. 
 Some of the richest territory was invaded, and that halted the 
 direct taxes. In 1916 and 1917 taxation was taken seriously in 
 hand, and some reforms were made. Meanwhile the revenues 
 fell oil. If we may take 1913 as normal, the following figures 
 show the run of revenues in miUions of francs: 1913, 5000; 
 1914, 4000; 1915, 3800; 1916, 4800; 1917, 6300; 1918, 6500. 
 
 New Taxation. — Beginning in 1916 new taxation was im- 
 posed, increasing in severity each year. We list the new taxes 
 without reference to years. The most important were an 
 excess profits tax, and an increase in the rates of the income 
 tax. Then there were : a special tax on males of military age
 
 41 6 INTRODUCTION TO PUBLIC FINANCE 
 
 not called to the colours ; double rates on mines and on " con- 
 spicuous waste " in the form of clubs, carriages, horses, etc. ; 
 heavier taxes on amusements and beverages, securities, and 
 imports ; increased rates for postal, telegraph, and telephone 
 service ; a general tax on business profits and on gross receipts 
 of retail sales ; and many others including a tax on luxury. 
 The last-named tax is peculiar. Luxuries were defined as con- 
 sisting either of certain commodities, considered luxuries per se, 
 or of any commodity if regarded as high-priced. Thus jewelry 
 is defined as a luxury per se, and imitation jewelry was a luxury 
 when any item cost over ten francs. This tax proved very 
 burdensome, annoying, and unpopular, but was retained in 1919 
 after amendments. One cannot fail to be impressed with the 
 large intermixture of sentiment with sense in the new French 
 taxes. Thus, while the luxury tax serves better as an outlet 
 for feelings than an inlet of revenue, the income tax was kept 
 within the bounds of revenue rates, without the ornamental 
 high rates which other countries indulged in. 
 
 Inflation. — In raising her war funds France was distinctly 
 unsuccessful in avoiding those measures which lead directly 
 to inflation. She depended at first almost entirely on ad- 
 vances from the Bank of France and even to the end drew 
 largely on this source. As the French people do not use a 
 check system, these advances were in circulating bank notes 
 and the bank was from time to time authorised to raise the limit 
 of such issues until at the close of the war the limit reached 
 40,000,000,000 francs. Two other devices were bans de la 
 defense nationale and obligations de la defense nationale. The 
 hons were interest-bearing treasury notes for short terms, the 
 obligations much the same, but for longer terms. Both were 
 made very attractive to small investors, interest was paid in 
 advance, and they were in part non-taxable. As some of these 
 were used for direct payments to liquidate government debts, 
 they came dangerously near being circulating money. 
 
 The First Defence Loan. — The pre-war t,\ per cent loan 
 dragged along into the first part of the war and hampered the 
 floating of any new funded debt at higher rates. Finally as
 
 FINANCIAL ADMINISTRATION OF WAR 417 
 
 new funded debts became unavoidable to meet the rapidly 
 growing floating obligations, this old debt was allowed to be 
 converted into new issues, a proceeding which greatly clarified 
 the atmosphere. In November, 1915, nearly a year and a 
 half after the war began, came the first " National defence 
 loan." This was a 5 per cent rente perpetuelle sold at 88. This 
 meant nearly 6 per cent interest with a possible profit on a 
 rise in price after the war. It was so attractive that the loan 
 was a great success. In this, as in subsequent funded loans, 
 there was much difficulty in getting in any new money, for there 
 were so many outstanding bans, obligations, and other con- 
 vertible issues which could be turned in. A second war loan 
 of the perpetuelle type came in 1916. In 191 7 a twenty-five 
 year rente was used. But in 1918 the government returned to 
 a perpetuelle rente. These four loans were all the funded loans 
 that were issued while the war continued. 
 
 The Anglo-French Loan and Collateral Loans in the United 
 States. — France participated in the Anglo-French loan floated 
 in New York and described above. France, hke England, 
 made vast purchases of supplies in the United States. Since 
 there was no counter current of exports from France to the 
 United States, difficulty was experienced in getting hold of 
 credits in the United States in which to pay these bills. So 
 the government endeavoured to gather up securities which 
 could be sent over as collateral for loans. In gathering these 
 from her own people France pursued a different policy from that 
 of England. Instead of taxing them unless they were lent to 
 the government, France tried to lure them in by paying 25 per 
 cent extra on the income they yielded. The effort resulted in 
 some degree of success and some loans were secured in this 
 way. Finally France. received advances from the governments 
 of Great Britain and of the United States. 
 
 Debt Charges Exceed Revenues. — Toward the end of the 
 war the interest charges on the debt rolled up so fast and became 
 so large that they equalled the sum of all revenues. This was a 
 condition fraught with great danger and one very embarrassing 
 in straightening out the finances after the war.
 
 4l8 INTRODUCTION TO PUBLIC FINANCE 
 
 Germany 
 
 Sec. II. The Gold "War-Chest" and Other Financial 
 Preparedness. — From the days of Frederick the Great, Ger- 
 many has always had a " war-chest," consisting of a sum of 
 gold stored in the Julius Tower at Spandau. She has also had 
 a far greater " war-chest " in the form of carefully prearranged 
 plans for borrowing in the event of war. These plans include 
 arrangements for speedily mobilising all the financial resources 
 of the banks and of the people, reaching all the way down to the 
 peasants and the workers, who are provided means to pledge 
 any property or resources they may have if it be necessary so 
 that they may subscribe to the public loans. Finally, while 
 not ordinarily intending to increase her taxes during the war, 
 but to depend on loans primarily, Germany has sustained at 
 all times under the Prussian rule so large a military establish- 
 ment that " war taxes " were in fact always in force. In 1913 
 a special " Wehrbeitrag," or defence contribution, had been 
 levied, which may also be looked upon as a part of the " war- 
 chest." These measures, as part of her preparedness for war, 
 explain in large measure why she could be so apparently indif- 
 ferent to increased taxation during war. Whereas other 
 countries had to stop and create the financial machinery of war, 
 Germany had it all ready and had so had it in large part always. 
 Furthermore, as part of " preparedness " Germany had plans 
 whereby at the outbreak of war the so-called " civil budget " 
 was at once contracted, thus setting free funds for war pur- 
 poses. It is difficult to say how much of this contraction in 
 the civil budget is bookkeeping and how much is actual econ- 
 omy. For some of the saving is probably achieved by switch- 
 ing certain salaries and other expenses from the civil to the war 
 establishment. 
 
 The Loan Bureaus. — This prepared programme worked with 
 great smoothness. The banks, which are also included in the 
 prearranged system, made the first advances. These advances 
 were supported by their large gold reserves and by the transfer 
 of so much of the gold in the Julius Tower as was not at once
 
 FINANCIAL ADMINISTRATION OF WAR 419 
 
 spent, and by other measures increasing their lending ability. 
 Then " loan bureaus " opened up all over the country. These 
 operated under laws originating in 1848 and improved from 
 time to time. They made advances to the people, who in turn 
 lent the money to the government, upon securities, merchan- 
 dise, and later other collateral not ordinarily available for loans. 
 These loan bureaus freed the Reichsbank and other banks 
 under it from a large part of the strain of financing the people's 
 offerings, although of course the big banks had to support the 
 " loan bureaus." But their advances were secured. The 
 Reichsbank was thus in good shape to discount treasury notes 
 and furnished the government its early needs. 
 
 The Popular Loans. — The first funded loan came in Septem- 
 ber, 1914, and others followed at intervals of six months. It 
 was thrown open to popular subscription. The rate of interest 
 was high, 5 per cent on bonds sold at 97^, and the notes and 
 bonds were available in small denominations, as low as 100 
 marks. There were five-year notes and ten-year bonds. The 
 loan was a success. The short-term obligations then out- 
 standing were cleaned up, and there was nothing in the way of 
 embarrassing immediate claims arising for nearly six months. 
 In this first loan there was no insistence upon reaching the 
 ultimate subscriber and the banks and other financial institu- 
 tions took part directly as well as the people. We may now 
 summarise the subsequent funded issues. They were like the 
 first, but with dates of maturity strung along so as to avoid 
 embarrassing accumulations in any one year. The high in- 
 terest rate was maintained and there was no fall in the price 
 of issue. In fact, several of the loans brought a better price 
 even than the first. The number of subscribers increased, 
 although with considerable up and down fluctuation, being 
 somewhat affected by the situation of the banks and their 
 ability to take large sums. The March, 191 7, loan, the sixth 
 in order, reached 7,000,000 subscribers, which was the maxi- 
 mum ; the eighth, in March, 1918, reached 6,500,000. The 
 ninth, in September, 1918, however, fell off heavily, both in 
 number of subscribers and in amount.
 
 420 INTRODUCTION TO PUBLIC FINANCE 
 
 Financial Pyramiding. — This success with popular loans was 
 achieved by the Rcichsbank-Darlehnskassen or loan bureaus. 
 The workings of this system are described by Bogart, quoting 
 from a German newspaper, as follows : 
 
 " If you hold securities you will find it easier still to raise 
 money. It is not necessary to sell them ; you simply borrow 
 money against them at any Reichsbank-Darlehnskasse or at 
 any large bank, and as you will receive almost as much interest 
 on the war loan stock, or even more interest than you pay to 
 the lending bank, you will be nothing out of pocket. You 
 must, however, hand over to the bank the securities against 
 which the money is advanced to you, and the bank will return 
 them when the loan is paid. No loss can ensue from the above 
 mentioned procedure, or at the most, it could only be \ per 
 cent per annum in the interest, if as is the case with the ' Reichs- 
 Darlehnskassen ' you pay 5^ per cent interest on the borrowed 
 money whilst you receive 5 per cent on the war loan stock; 
 and even this possible loss will subsequently be made good in 
 view of the fact that you pay only 99 marks for each 100 
 marks of war loan stock, which 100 marks will be repaid in 
 full. 
 
 " If you have already subscribed to the first or second war 
 loan and paid in full for the same, you can at once participate 
 in the present issue. All you need to do is to take your stock — 
 or, if you have not yet received the stock, the receipt for the 
 amount paid — to a bank, which will advance you 75 per cent 
 of the nominal value, so that, if you have M400 ($100) old war 
 loan, you can subscribe M300 in the new issue without paying 
 a single pfennig, you can even subscribe four times this amount, 
 i.e. Mi6co ($400) if you will also leave with the bank the stock 
 that you take in the new loan, in which case you will have 
 given the bank as security M400 of the old war loan and Mi 200 
 of the new war loan, together Mi 600 against a loan of Mi 200." 
 
 This system involves a sort of pyramiding by turning gov- 
 ernment credit back into private credit. Germany floated one 
 small loan of $10,000,000 in the United States. Being de- 
 barred from purchasing abroad, she was under less necessity
 
 FINANCIAL ADMINISTRATION OF WAR 42 1 
 
 than were France and England of establisiiing credits in the 
 United States. 
 
 New Taxation. — But the German pre-war plan to depend 
 upon pre-war taxes was departed from. In 19 16 Germany- 
 could not resist the seductive war profits tax, and increased 
 some of her other taxes as well. In 191 7 the colossal costs 
 made still further new taxes necessary. But the new taxes 
 were slow to yield a return. Still further taxation was imposed 
 in 1918, by which time the imperial revenues were nearly 
 double those of 1916-17. Toward the end of the war the 
 interest charges were just about equal to the entire revenues. 
 
 United States 
 
 Sec. 12. The Unpreparedness. — Despite the fact that war 
 had been going on three and three-fourths years before she was 
 drawn into it, the United States had made no deliberate financial 
 preparation for war. Accident, not foresight, had placed in the 
 hands of the federal government an income tax. From 19 13 to 
 1916 this tax had remained a mere toy, a slight thorn in the 
 flesh to a few rich men, but as for revenue, negligible. There 
 had been no adequate machinery of assessment provided for 
 the tax, and few of the moot points of law involved had been 
 settled. In the absence of imports the customs system could 
 be relied upon for little help, except in so far as it might be 
 made the basis of consumption taxes, not protective in form. 
 A fairly well-developed excise tax system was all that the 
 country had in decent working order for revenues. Accident 
 again, not foresight, a chance turn of the political whirligig, 
 had led to an increase in the rates of the income tax in 191 6 
 and to the introduction of an estate tax. These series of acci- 
 dents should strengthen our belief in Divine Providence. 
 
 United States Finance Followed Correct Theory. — Yet once 
 she was in the war the United States lived up to her best theory. 
 (i) She borrowed at once on long-time bonds, (2) raised taxa- 
 tion to such a level that there could be no question of her abilitj' 
 to meet debt charges, and (3) used treasury certificates only to 
 fill in the gaps between the receipts of new taxes and the pro-
 
 422 INTRODUCTION TO PUBLIC FINANCE 
 
 ceeds of new funded loans. Mistakes there were and many, 
 but none of them were fatal. It was a mistake to borrow at 
 too low rates, as shown by the fact that after the close of the 
 war her bonds are heavily discounted, and subscribers who 
 had not finished paying their instalments saw bonds on which 
 they were still paying par salable only at a loss. That mis- 
 take necessitated the use of duress in selling bonds and placed 
 them in hands too weak to hold them. It was a mistake to 
 place or endeavour to place the great body of taxation on the 
 rich and moderately well to do and practically to exclude the 
 great mass of the people from participation in war taxes. It 
 was a harmless, but expensive, mistake to waste time and 
 energy on frivolous taxes aimed at conspicuous waste when 
 what was so urgently needed was only real revenue-producing 
 taxes. It was a mistake to place treasury certificates on the 
 market in such ways as were certain to increase inflation. 
 
 The Effects of Inflation. — Owing to war spending in the 
 United States by the belligerent governments, to the issue by 
 European governments of paper money and other forms of 
 circulating credit, to the flood of gold poured into the United 
 States, and to the decrease in the world's production, creating 
 great scarcity of commodities, the level of prices, when the 
 United States entered the war, was exceedingly high. This 
 worked both to the advantage and disadvantage of the govern- 
 ment in financing for war. It worked to the disadvantage of 
 the government in that it had to pay inordinate prices for every- 
 thing it bought. It worked to its advantage because there were 
 profits, some real, some on paper, which could be taxed. In- 
 dustrial activity was great, employment good, and there was a 
 flood of free funds in the hands of the people which could be 
 taxed or borrowed into the treasury. There was a general 
 fluidity of resources which helped exceedingly to finance the 
 war. 
 
 The Advantages of Having the Federal Reserve System. — 
 One great advantage which the United States had was the 
 recently organised Federal Reserve system which served in 
 two ways: first, as an agency for the placing of treasury
 
 FINANCIAL ADMINISTRATION OF WAR 423 
 
 certificates, and second, as the basis of mobilising all the banks 
 not only in support of general financial measures, but for the 
 great bond sale drives. Through the federal reserve system 
 the treasur>^ redeposited its funds in the banks, where, by reason 
 of the deposit credit system, they largely remained, although 
 passing from the government's account to those of contractors 
 and others to whom they were paid by the government. 
 
 New Taxation. — In view of what has been presented else- 
 where in this book, all we need do now is to present a summary 
 of the revenue measures and borrowings. A pre-war muni- 
 tions tax grew into the war and excess profits tax. The income 
 tax was steadily increased and the upper ranges of rates became 
 abnormally high. The old excise taxes were vastly increased, 
 especially on liquors and tobacco. Stamp taxes came in. 
 Transportation and communication was taxed, new excises in 
 the form of taxes on what was assumed to be " conspicuous 
 waste," or luxury spending, taxes on amusement and a mis- 
 cellaneous lot of others. Strikingly absent were any new 
 excise taxes on articles of wide consumption, which would fall 
 on the great masses of the people. 
 
 Summary. — The Secretary of the Treasury in his report 
 for the fiscal year ending June 30, 1919, gives the revenue 
 receipts as follows: April 6, 1917 to June 30, 1917, $567,000,- 
 000; fiscal year ending June 30, 1918, $3,664,000,000; fiscal 
 year ending June 30, 1919, $5,152,000,000; June 30 to October 
 31, 1919, $1,895,000,000; total of foregoing, $11,280,000,000, 
 But all these figures are subject to revision, and reallotment. 
 The disbursements of the corresponding periods were : April 6, 
 1917 to June 30, 1917, $1,216,000,000; fiscal year ending June 
 30, 1918, $12,697,000,000; fiscal year ending June 30, 1919, 
 $18,515,000,000; July I to October 31, 1919, $2,985,000,000, 
 total of foregoing, $35,413,000,000. These figures include 
 $9,406,000,000 advanced to foreign governments, leaving ex- 
 penditures by the United States during this period, $36,000,- 
 000,000. 
 
 The summary of debt outstanding October 31, 1919, was as 
 follows :
 
 424 INTRODUCTION TO PUBLIC FINANCE 
 
 Old debt interest and non-interest bearing ... . $1,120,000,000 
 
 First Liberty Loan 1,985,000,000 
 
 Second Liberty Loan 3,526,000,000 
 
 Third Liberty Loan 3,904,000,000 
 
 Fourth Liberty Loan 6,614,000,000 
 
 Victory Loan 4,414,000,000 
 
 Treasury certificates 3,736,000,000 
 
 War savings certificates (ex interest) 911,000,000 
 
 $26,210,000,000 
 
 Adjusting for cash on hand and other factors the net increase 
 in debt was $24,133,000,000, revenue receipts during the 
 war were $11,280,000,000, so that the total war disbursements 
 were $35,413,000,000. 
 
 Sec. 13. Post-War Financing. — What will be done after 
 the war to reorganize finances is an interesting subject of 
 speculation. The situation at first glance is appalling. The 
 peace time financial system lies in ruins which appear to be as 
 complete as those of a bombarded village. Debt charges 
 are in excess of revenues in some countries; new current ex- 
 penses as well as heavy debt charges are found in all countries. 
 The situation looks hopeless to the eyes of a people worn and 
 torn by war. We may, however, have confidence that the 
 structure will be restored, and perhaps, like burned-down cities 
 which, rid of their slums and antiquated buildings, rise more 
 beautiful from the ruins, so too the financial system is likely to 
 be purged of its dross and refined. 
 
 At first wild schemes will be suggested. Repudiation of 
 debt, confiscatory taxes, capital levies, and other extremes have 
 already been proposed. But eventually calmer councils will 
 prevail. The debts will be consolidated and converted until 
 the interest charge is reduced to a reasonable minimum. Taxes 
 will be found to increase in yield as the extraordinary rates 
 are reduced and as industry strikes its new stride. Since high 
 prices will prevail for a long time, the monetary expression of 
 taxes like that of wages and prices will be high, and by com- 
 parison the debt charges will be less formidable. The sheer 
 weight of taxation will compel to greater effort in industry 
 and greater economy in spending. Peoples who created in all
 
 FIXANCIAL ADMINISTR.\TION OF WAR 425 
 
 during five }-ears war goods and services amounting to $200,000,- 
 000,000 can do it over again if they will to do so in another five 
 years. There is little that is extraordinary or necessarily sur- 
 prising in the " great rapidity with which countries recover 
 from a state of devastation," says John Stuart Mill, " the 
 disappearance, in a short time, of all traces of the mischief done 
 by earthquakes, floods, hurricanes, and the ravages of war. 
 An enemy lays waste a country by fire and sword, and destroys 
 or carries away nearly all the movable wealth existing in it ; 
 all the inhabitants are ruined, and }'et, in a few years after, every- 
 thing is much as it was before. . . . With the same skill and 
 knowledge which they had before, with their land and its 
 permanent improvements undestroyed, . . . they have nearly 
 all the requisites for their former amount of production. . . . 
 They will in a short time have raised as great a produce, and 
 acquired collectively as great wealth and as great a capital, as 
 before; by the mere continuance of that ordinary amount of 
 exertion which they are accustomed to employ in their occupa- 
 tions." 1 
 
 Sec. 14. Financing a Small War. — The World War, as we 
 have seen, forced some departures from principle. A small 
 war may be financed more strictly according to rule. No 
 better illustration of the application of this can be found in 
 history than is afforded by the operation of the United States 
 treasury during the war with Spain. That history is worth 
 study in all its details. 
 
 The situation, as it confronted Secretary Gage when the 
 news of the destruction of the Maine reached Washington, 
 may be summarised somewhat as follows: The treasury had 
 a balance on hand of about $225,000,000. But, as we shall see 
 below, only about $25,000,000 of this was really available 
 for immediate use in the prosecution of the war. The ordinary 
 expenditures of the government, outside of those for the postal 
 system, which was nearly self-supporting, amounted in round 
 
 ' Principles, Bk. I, Chap. V, sec. 7. Of the " damn'dest finest ruins in the world," 
 of which San Francisco boasted in 1906, there was in three years scarce a scar re- 
 maining.
 
 426 INTRODUCTION TO PUBLIC FINANCE 
 
 numbers to $350,000,000 per annum. For Lhe first time in many 
 months these expenses were being nearly met by the revenues. 
 Indeed, it was estimated that at the ordinary rate of expendi- 
 tures there might be a sHght surplus at the end of the year. 
 The tariff was expected to yield about $200,000,000, the inter- 
 nal revenue taxes about $165,000,000, and there were about 
 $25,000,000 to be expected from miscellaneous sources. 
 
 The Tariff Could Not Be Changed. —The larger part of the 
 income, however, came from taxes which could not well be 
 tampered with. The tariff had been so long a subject of con- 
 troversy that there was little desire to alter its recent settle- 
 ment. For reasons already made clear, there were many parts 
 of the tariff which could not well be changed. Except in a very 
 few instances, the income to be obtained from it would not be 
 increased by raising the rates. In the great majority of in- 
 stances, to raise the rates would have been to lessen the receipts, 
 while to lower those rates for the purpose of increasing the in- 
 come by allowing larger importations would have been to re- 
 move the protection afforded by them. This was contrary to 
 the avowed policy of the administration. It would, moreover, 
 have served to disturb industry and to perplex its leaders at a 
 time already sufficiently disquieting, and might have proved 
 but an aggravation of the disturbance caused by the war. The 
 great body of the customs rates, of which there are thousands on 
 the tariff schedules, are not productive of much revenue and are 
 not intended to be. They are there to restrict importations. 
 These certainly could not well be changed. Of the bare dozen 
 or so of articles of importation which do yield a revenue, sugar, 
 one of the most important, was likely to be interfered with by 
 the war. At the existing rates, sugar imported should yield a 
 revenue of about $80,000,000 a year, but at least half of the 
 importation was jeopardised by the war itself, and it would 
 have been highly impolitic to have changed the rate at this 
 time. Iron, which was once a source of considerable revenue, 
 was, in consequence of the changes which have taken place in 
 that industry and of the protective features of the customs 
 law, not available to provide new revenues, as the importa-
 
 FINANCIAL ADMINISTRATION OF WAR 427 
 
 tions are at best small. Cotton goods, the tax upon which 
 yields considerable revenue, were protected ; so were manu- 
 factures of hemp, flax, and jute, of leather and of wool. Drugs, 
 medicines, and chemicals were already taxed up to the limit 
 of productiveness, from a revenue point of view. In short, 
 there were but four important articles imported w^hich might be 
 used to yield additional revenue. These were hides and skins, 
 raw silk, tea, and coffee. To tax hides and skins or raw silk 
 would, probably, under the prevailing theory of " compensa- 
 tor}- " duties, have involved an increase in the rates on the 
 products manufactured from them, to maintain the same degree 
 of protection that those products now enjoy. That would have 
 reopened the whole tariff controversy, and have rendered the 
 outcome of the war revenue measure extremely doubtful. 
 Clearly it were wisest, considering how recently the tariff issue 
 had been temporarily settled, to leave them alone. As a matter 
 of fact, then, there are only two articles in the whole list of 
 importations which might be considered by the Secretary of 
 the Treasury in his search for new income. These were tea 
 and coffee, which might, perhaps, have been made to yield 
 together'nearly $80,000,000 additional revenue. That was ap- 
 proximately all that could be expected from the tariff. 
 
 The Tax on Tea. — In the war revenue bill, as presented to 
 the House of Representatives by the committee on ways and 
 means, of which Mr. Dingley was chairman, there was no 
 suggestion of using the tariff in any way for obtaining additional 
 revenue. It was not until the very end of the long discussion 
 of the measure in the Senate that it was proposed to put a duty 
 of ten cents a pound on tea. That measure passed the Senate 
 and was accepted by the conference between the two Houses 
 and by the House of Representatives without any public dis- 
 cussion as to its merits. The reason for this duty, as for the 
 omission of coffee from the list, is therefore not clear. The 
 tax on tea was an important matter. The yield would have 
 been over $10,000,000 per annum. A similar tax on coffee, 
 which would have been at the rate of 8.5 cents per pound, would 
 have yielded about $70,000,000 more. It is, therefore, some-
 
 428 INTRODUCTION TO PUBLIC FINANCE 
 
 what surprising that it should have attracted so Httle atten- 
 tion from the members of Congress. 
 
 Internal Taxes. — Since the revenue from the tariff was not 
 to be increased, the only resource available was internal taxes. 
 That these internal taxes should have taken the same general 
 form as the taxes used during the Civil War, and consequently 
 more or less familiar to people and officers, was but natural. 
 Under the stress of war it is unwise to attempt to organise 
 entirely new taxes, such, for example, as an income tax. Though 
 an income tax had been used during the Civil War, that form 
 of taxation w^as under the shadow of an adverse decision from the 
 Supreme Court. Even if an income tax law which would have 
 been constitutional, according to the recent decision of the 
 court, could have been drawn, it is doubtful whether it could 
 have been made productive within any reasonable period of 
 time. Recourse might have been had to direct taxes, appor- 
 tioned among the states according to population. These taxes 
 could then have been raised in any manner which the state 
 authorities chose. But there are two fatal objections to this 
 plan. The apportionment of taxes according to population 
 is fundamentally unjust and unequal. What it amounts to 
 practically is a graduated poll-tax. The different common- 
 wealths vary so in wealth per capita that any per capita tax, 
 however raised, would be unfair. Although the census estimate 
 of wealth in 1890 was anything but satisfactory, yet the method 
 used in that estimate was uniform throughout the country ; and 
 such differences as that between South Carolina, with about 
 $350 per capita, and Nevada, with $4000 per capita, show how 
 utterly inadequate the constitutional method of raising direct 
 taxes has become. Then, again, the method of taxation by 
 which most of the states raise their revenues, and which they 
 would probably follow in raising their share of any apportioned 
 taxes, is the worst in use in any civilised country, and the in- 
 justice of the apportionment would have been enormously in- 
 creased by the injustice in collection. The second objection 
 to this method of raising direct taxes prescribed by the 
 Constitution is that it takes an inordinate length of time,
 
 FINANCIAL ADMINISTRATION OF WAR 429 
 
 and war taxes should begin to }'ield a revenue as early as 
 possible. 
 
 Description of the New Taxes. — The only available plan was, 
 therefore, to seek additional revenue from the existing, indirect, 
 internal taxes, the excises, or, as they are called in the United 
 States, the " internal revenue " taxes, and to supplement these 
 still further by new taxes of the same sort. Briefly summarised, 
 the revenue bill nearly doubled the existing rate of taxation 
 upon beer and other similar fermented liquors ; it imposed 
 special taxes on bankers, brokers, pawnbrokers, theatres, 
 circuses and other shows, bowling-alleys, and billiard rooms ; it 
 raised the rates on tobacco of all kinds ; and it placed stamp 
 taxes on stocks and bonds, commercial papers, legal docu- 
 ments, checks and drafts, proprietary medicines, toilet articles, 
 bills of lading, insurance policies, and a number of other things. 
 Special direct taxes were imposed on the oil trust and the sugar 
 trust, and on legacies and distributive shares of personal property. 
 
 Yield of New Taxes. — As the war revenue bill passed the 
 
 House, its probable yield was variously estimated at from 
 
 $90,000,000 to $105,000,000 per annum, the former being the 
 
 better estimate. As amended in the Senate and finally adopted, 
 
 it promised to yield at least $150,000,000 per annum. The 
 
 actual yield in addition to the regular revenue during the first 
 
 month was about $13,000,000.^ But the expenses of war during 
 
 the first few months, if not for a long time after that, would be, 
 
 it was estimated, at least double that sum and possibly more. 
 
 Therefore, unless the treasury had a considerable balance on 
 
 hand, there would have been no possibility of conducting the 
 
 war at all without immediate loans. The balance in the treasury 
 
 at the outbreak of the war was $225,000,000. Upon this were a 
 
 number of claims, some of which, however, were not immediate. 
 
 $100,000,000, known as the gold reserve, had to be held for 
 
 * It is not possible, and probably never will be possible, to state exactly how 
 much the new taxes increased the revenues. In the first place the reports do nut 
 segregate the income obtained from the new taxes from that obtained from the old ; 
 and in the second place, the changes in the rates and the existence of new taxes have 
 changed the yiekl of the older parts of the system by an amount which cannot even 
 be estimated. The total increase in Ulic revenues for the fiscal year 1899 over 1898 
 was about $115,000,000.
 
 430 INTRODUCTION TO PUBLIC FINANCE 
 
 the preservation of the parity of all parts of the circulation and 
 the avoidance of general financial ruin. Then there were $13,- 
 000,000 of fractional silver and minor coins, a large part of which 
 was worn and unavailable, while the rest was needed for currency 
 purposes throughout the country. $14,000,000 had been re- 
 ceived from the sale of the Pacific railroads ; but although this 
 sum was temporarily available, it would, if it were spent, be 
 necessary to raise an equivalent amount before January i to 
 meet the Pacific Railroad bonds which came due at that time. 
 $33,000,000 were held in trust for the redemption of the notes of 
 national banks which had failed or which were redeeming their 
 circulation. A part of this was temporarily available, but it 
 would be necessary to replenish that fund at an early date if 
 much were drawn from it. There were, then, out of the 
 $225,000,000, $160,000,000, of which a small part only was avail- 
 able, and that but for a short time. Anything drawn upon that 
 would have to be replaced by January i at latest. Of the 
 $65,000,000 remaining, $40,000,000 were necessary as the cash 
 on hand for the ordinary operations of the government. That 
 amount corresponds to the cash on hand which a merchant 
 keeps in the till to make change or to meet small bills. This 
 left but $25,000,000 for the initial expenses of the war, which 
 in the state of unpreparedness would naturally be above the 
 average. This $25,000,000 was all the unincumbered money 
 in the treasury to meet the appropriation of $50,000,000 made 
 by Congress before war was declared. It was clear that the 
 Secretary of the Treasury could not provide the sinews of war 
 without the power to borrow, both for a short time, to anticipate 
 the revenues expected from the new taxes, and for a long time, 
 to enable him to support any naval and military operations 
 which might become necessary, however extensive. 
 
 Authority to Borrow Granted. — After much discussion and 
 more or less unnecessar}^ and dangerous delay, especially in the 
 Senate, Congress authorised the borrowing, at the discretion 
 of the administration, of not more than $100,000,000 at one 
 time on treasury certificates and of an amount not to exceed 
 $400,000,000, on 10 — 20 bonds at 3 per cent. Nominally,
 
 FINANCIAL ADMINISTRATION OF WAR 431 
 
 therefore, the Secretary of the Treasury had in his hands for 
 the necessities of war during the first six months of its duration : 
 
 Surplus on hand $ 25,000,000 
 
 War revenues 75,000,000 
 
 Temporary loans 100,000,000 
 
 Bonds 400,000,000 
 
 Total $600,000,000 
 
 Practically, he was limited by the fact that all of this money 
 had not been appropriated, and it would have been folly to 
 raise more than he had authority to spend. Including the 
 $50,000,000, appropriated before the war broke out, the total 
 war appropriations made by Congress before it adjourned 
 amounted in all to $361,788,095.11. This sum covered the most 
 generous estimates of the probable cost of the war. But the 
 secretary did not deem it necessary to raise at once a sum equal 
 to the totai appropriations. It was estimated that the ex- 
 penses for the first six months would not exceed $175,000,000, or 
 about one-half of the appropriations. The new taxes would 
 probably yield about $75,000,000 toward these necessities, and a 
 loan of $100,000,000 would possibly have sufficed to meet all 
 the demands. But the treasury raised $200,000,000 by the sale 
 of 3 per cent 10 — 20 bonds, obtaining a total of $275,000,000, or 
 nearly $100,000,000 in excess of the probable actual expendi- 
 ture. The accumulation of this surplus was not in any sense an 
 extravagant or useless piece of financiering. As has already 
 been explained, the treasury must be prepared to meet any 
 demand that may arise, instantly and amply. That is the im- 
 perative necessity. As the early close of the war could not 
 have been foreseen, the fiscal preparations were necessarily 
 liberal. Indeed, the amplitude of the funds available was one 
 of the most potent causes of the success of the war. The excess 
 raised was no larger than was necessary to insure the instant 
 readiness of the treasury to meet all possible demands. Had the 
 war continued and the demands equalled the appropriations, 
 the treasury would have been obliged to use its power of borrow- 
 ing which the fortunate termination of the war rendered un- 
 necessary.
 
 432 INTRODUCTION TO PUBLIC FINANCE 
 
 Sec. 15. The Use of Credit. — It now remains to see how the 
 credit of the nation was protected and how it stood the strain. 
 At the end of April, 1898, the interest-bearing debt of the United 
 States amounted in round numbers to $847,000,000. $100,- 
 000,000 of this bore interest nominally at 5 per cent, the balance 
 at 4 per cent. The 4 per cent bonds, payable in 1925, were 
 quoted when the plans were being made for placing the new 
 loan at 117:^. At that rate they would yield the investor 3^ per 
 cent interest. There was, therefore, some surprise when it was 
 proposed to place the new loan at 3 per cent. It was urged that 
 nobody would buy the new bond at 3 per cent when he could 
 buy one of the old ones and get 3^^ per cent. Yet the outcome 
 showed the wisdom of the move. The bonds were subscribed to 
 seven times over, and in a short time rose to a premium of 103 
 and 105. In fact, the entire loan was easily placed on far 
 better terms than any nation has ever before been able to obtain 
 in time of war. This remarkable result was attained partly by 
 reason of the fact that the loan was offered for popular sub- 
 scriptions and the bonds were for small amounts, thus creating 
 and reaching a new market among investors of small means. 
 In part, too, it was due to the fact that the new bonds at par 
 really formed a better basis for the national bank-note circula- 
 tion than the old bonds at 117^, and very much better than the 
 old bonds at 123^, the price which was reached before the new 
 issue was completed. An investment by a national bank of 
 $100,000 in the old bonds at 117^ would yield a profit of $736.70 
 on the circulation, if interest is at 6 per cent ; while an invest- 
 ment of the same amount in the new bonds at par would yield 
 a profit on the circulation of $1302.02. The difference in favour 
 of the new bonds was $565.32, or over half of i per cent. The 
 advantage was still greater when the old 4's reached 127^, as 
 they did before the close of the war. None of these influences, 
 however, would have had any weight had it not been that 
 new revenues sufficient to meet all debt charges and part of the 
 war expenses had been provided. 
 
 A " Popular " Loan. — Much interest centres around the suc- 
 cessful attempt to make this a popular loan, and as this was one
 
 FINANCIAL ADMINISTRATION OF WAR 433 
 
 of the features which contributed to strengthen the credit of 
 the country at this time, we may examine it somewhat in detail. 
 Congress, after much discussion, finally provided that these 
 3 per cent bonds, " redeemable in coin at the pleasure of the 
 United States after ten years from the date of their issue, and 
 payable twenty years from that date," should " be first offered 
 at par as a popular loan under such regulations, prescribed by 
 the Secretary of the Treasury, as will give opportunity to the 
 citizens of the United States to participate in the subscriptions 
 to such loan, and in allotting such bonds the several subscrip- 
 tions of individuals shall be first accepted, and the subscriptions 
 for the lowest amounts shall be first allotted." Before the bill 
 was finally passed, offers had been made by various banking 
 houses to take the whole issue at a slight premium. Both 
 Congress and the administration, however, favoured the experi- 
 ment of interesting a large number of small property owners in 
 the loan, even at a loss to the government. It was thought 
 that such a measure would strengthen the national credit by 
 gi\dng expression to the faith of our own people in the integrity 
 of the government. Other considerations of a political character 
 also entered in, but with them we are not concerned. As a 
 financial measure for the strengthening and support of the public 
 credit it proved a phenomenal success. 
 
 The bonds were issued in denominations as low as $20. Sub- 
 scriptions were received through the post-office, and every 
 bona-fide subscription under $500 was immediately accepted. 
 More than half of the entire issue was taken by 230,000 of these 
 small subscriptions, and no subscription of more than $4500 
 was accepted. In all 320,000 persons offered or made sub- 
 scriptions, and the total amount tendered the government was 
 $1,400,000,000. This. rush for the new bonds was not merely 
 a matter of patriotism or sentiment. During the progress of 
 the subscriptions the price of the bonds advanced first to 102 
 and finally to 105 J-. They soon stood at about no. The 
 lucky individuals whose subscriptions were accepted made 
 from 3 per cent to 5 per cent in a few days. The pojiularity 
 of these bonds was greatly enhanced by the standing offers
 
 434 INTRODUCTION TO PUBLIC FINANCE 
 
 obtained by Secretary Gage from two syndicates to take the 
 entire loan or any part of it that was not covered by the popular 
 subscriptions. 
 
 This method of floating the loan cost the government a 
 considerable sum of money. In the first place a possible pre- 
 mium was lost. How much that premium would have been 
 cannot be estimated because the bonds were sold in a broader 
 market than would have otherwise existed. But it would have 
 been at least 2 per cent, for even at a higher rate the bonds 
 offer a favourable basis for national bank-note circulation. That 
 is, at least $4,000,000 was lost at the beginning. Then the cost 
 of handhng the loan, paying the interest, etc., is increased con- 
 siderably by the small size of the bonds and the large number 
 of holders. It is just as much trouble to pay the 15-cent coupon 
 of a $20 bond as it is to pay the $75 coupon of a $10,000 bond. 
 Yet in spite of all this, the placing of the $200,000,000 loan of 
 1898 was one of the most successful pieces of financiering ever 
 accomplished by the government. It demonstrated the perfect 
 solvency of the government; it gave the country a financial 
 prestige which went a long way toward hastening the end of the 
 war; and it so strengthened credit of the government that, 
 had the war unfortunately continued, it would have been able 
 to obtain funds to almost any amount on the most favourable 
 terms imaginable. With a 3 per cent bond seUing at 105 during 
 the actual continuance of military operations, a nation may 
 safely regard its credit as unimpaired. 
 
 The final test of the success of the financial administration 
 of a war is the preservation of the public credit.
 
 BRIEF BIBLIOGRAPHY FOR SUPPLEMENTARY 
 
 READING 
 
 Adams, H. C. Public Debts. N. ¥., 1887. 
 
 Adams, H. C. The Science of Finance. N. Y., i8q8. 
 
 Bastable, C. F. Public Finance. 3d ed., enl. The Macmillan Co., 
 
 1903. 
 BoGART, E. L. Direct and Indirect Costs of the Great World War. 
 
 N. Y., 1919. 
 Bullock, C. J., Editor. Selected Readings in Public Finance, 
 
 Boston, 1906. 
 CoBDEN Club Essays. Local Government and Taxation. London 
 
 and N. Y., 1875. 
 CoHN, G. System der Nationaloekonomie, 2ter Band, Finanz- 
 
 wissenschaft. Stuttgart, 1889. Partial Translation by Veblen, 
 
 T. B. Chicago, 1895. [Economic Studies of the University of 
 
 Chicago.] 
 CooLEY, T. M. Law of Taxation. 2d ed., enl. Chicago, 1886. 
 CosSA, L. Primi elemente di scienza delle finanze, 3d ed. Milan, 
 
 1882. Translation by Horace White, with notes. N. Y. and 
 
 London, 1891. 
 Daniels, W. M. The Elements of Pubhc Finance. N. Y., 1899. 
 DowELL, S. History of Taxation and Taxes in England. 4 Vols. 
 
 2d ed. London and N. Y., 1885. 
 Ely, R. T., and Finlfy, J. H. Taxation in American Slates and 
 
 Cities. N. Y., 1888. 
 GoscHEN, G. J. Reports and Speeches on Local Taxes. Mac- 
 millan and Co., 1872. 
 HoBSON, J. A. Taxation in the New State. N. Y., 1920. 
 Hock, C. F. von. Finanzen und die Finanzgeschichte der Verein 
 
 igten Staaten von Amcrika. Stuttgart, 1867. 
 Holmes, Geo. E. Federal Income Tax, War Profits and Excess 
 
 Profits Taxes. Indianapolis, 1920. 
 Leroy-Beaulieu, V. Traite de la Science des Finances. 61 h ed. 
 
 Paris, 1899. 
 Marzano, F. Comi)cndio di scienza dellc linanze. 2d ed. Turin, 
 
 1887. 
 
 435
 
 436 BRIEF BIBLIOGRAPHY 
 
 McCuLLOCH, J. R. Taxation and the Funding System. 3d ed. 
 London, 1863. 
 
 Montgomery, R. H. Income Tax Procedure. New York, 1920. 
 
 Plehn, C. C. Government Finance in the United States. Chicago, 
 1915- 
 
 DeParieu, F. E. Traite des impots. 5 tomes. Paris, 1862, 
 [First edition in five volumes better than the second in four, 
 1866-7.] 
 
 Rau, K. H. Grundsatze der Finanzwissenschaft. 3d ed. Heidel- 
 berg, 1850. 
 
 RoscHER, W. System der Finanzwissenschaft. 3ded.,enl. Stutt- 
 gart, 1886. 5th ed. revised by Gerlach, 1901. 
 
 Say, L., Editor. Dictionnaire des finances. Paris, 1889-94. 
 
 ScHONBERG, G., Editor. Handbuch der National Oekonomie, 
 3ter Band. Tubingen, 4th ed., 1897-98. 
 
 ScHANZ, G. Finanz Archiv, A periodical. Stuttgart, since 1884. 
 
 Schwab, J. C. History of the New York Property Tax. American 
 Economic Assoc, 1890. 
 
 Seligivian, E. R. A. Essays in Taxation. The Macmillan Co., 
 1895. 
 
 Seligman, E. R. a. Finance Statistics of the American Common- 
 wealths. Boston, American Statistical Assoc, 1889. 
 
 Seligman, E. R. A. The Income Tax. 2d. ed., 1914. The Mac- 
 millan Co. 
 
 Seligman, E. R. A. Progressive Taxation in Theory and Practice. 
 American Economic Assoc, 1894. Revised 1908. 
 
 Seligman, E. R. A. Shifting and Incidence of Taxation. 3d ed., 
 enl. The Macmillan Co., 1910. 
 
 Stamp, J. C. British Incomes and Property. London, 1916. 
 
 State and Local Taxation. Addresses and Proceedings of the 
 Conferences 1907 and yearly thereafter, held under the Auspices 
 of the National Tax Association. The Macmillan Co., New 
 York. 
 
 Stein, L. von. Lehrbuch der Finanzwissenschaft. 5te Auflage. 
 Leipzig, 1885. J 
 
 ViGNES, E. Traite des impots en France. 2 tomes. Paris, 1880. 
 
 Wagner, A. Finanzwissenschaft. Leipzig, Vol. I, 3d ed., 1883 ; 
 Vol. II, 2d ed., 1890; Vol. Ill, 1889; Erganzungsheft, 1896; 
 Vol. IV, 1899. 
 
 Wells. Theory and Practice of Taxation, N. Y., 1900. 
 
 West, M. The Inheritance Tax. Columbia University, 1908. 
 
 Wilson, A. J. The National Budget, the National Debt, Taxes 
 and Rates. English Citizen Series. Macmillan and Co., 1882.
 
 BRIEF BIBLIOGRAPHY 437 
 
 OTHER BIBLIOGRAPHIES 
 
 [Most of the larger treatises mentioned above contain numerous 
 references and many bibliographies. The following lists of books 
 are easily available for English and American students.] 
 White's translation of Cossa's Taxation. Pp. 181-193. 
 Bowker and lies. Readers' Guide in Economics, Social and Political 
 
 Science. Putnam, 1891. Pp. 66-73. 
 Seligman's Essays in Taxation. Pp. 62, 63, and 263, 264. 
 Stammhammer. Bibliographic der Finanzwissenschaft. Jena, 1903.
 
 INDEX 
 
 Abatements, 243, 253, 258. 
 
 Ability to pay taxes, g2. 
 
 Abnormal profits, 292. 
 
 Accidents, industrial, 47. 
 
 Accise, 103 n. 
 
 Accounts, local, 39s ; public, U. S., 394. 
 
 Adams, H. C, 5, 358. 
 
 Adams, T. S., 5, 132- 
 
 Adcisio, 103 n. 
 
 Administration, British income tax, 261 ; 
 
 fiscal, 377 ; war finance, 396. 
 Administrative expenditures, 26; fees, 
 
 330. 
 Ad valorem, 76; duties, 150. 
 Aide, 55, 105. 
 Aliens, 277. 
 All fools' day, 176. 
 Allied powers, debts of, 351-2. 
 American property tax, 163 fl. ; tax sys- 
 tem, 128. 
 Amortisation, 314. 
 Amusement taxes, England, 412 ; France, 
 
 416; United States, 423. 
 Andrews, E. B., 74 n. 
 Anglo-French Loan, war, 411, 417. 
 Annuities, 237 ; life, 361 ; under U. S. 
 
 income tax, 239 n. ; war, 369. 
 Anti-corn-law league, 153. 
 Apportioned tax, 77. 
 Appropriation, committee on, 380. 
 Aristotle, 11. 
 Armorial bearings, 135. 
 Army, cost of, 32. 
 Assessment: day, 176; defined, 81; 
 
 direct taxes, 388; income tax, 268, 
 
 284; property tax, 389; roll, 178; 
 
 special, 51, 332. 
 Athens, 15. 
 
 Audit and control, 381 S. 
 Auditors, U. S., 384. 
 Aujwandskuer , 134. 
 Austria, debt of, 341, 351, 352; export 
 
 duties, 145 ; public lands, 337 ; tobacco 
 
 monopoly, 143. 
 
 Back-tax commissions, 171. 
 
 Bad debts, 244, 274. 
 
 Bankers' Trust Co., 351. 
 
 Banks as custodians of public funds, 
 
 392; stock, 175. 
 Base, of tax, defined, 75. 
 Bastable, 5, 7 n., 13 n., 18, 70, 144, 203 n., 
 
 251, 334, 340, 343, 376, 379, 382 n. 
 Bedes, 55, loi. 
 
 Beer, tax on, 139, 141. See Excises. 
 Belgium, debt of, 341, 351-2. 
 Belligerents, debts of, 351-2. 
 Beneficiaries under inheritance tax, 211. 
 Benefit, common, 9; special, 9, 10; 
 
 theory, 64, 91. 
 Benevolences, 55, 108. 
 Bengal, taxes in, 317. 
 Berlin and Milan decrees, 158. 
 Besitz, 71. 
 
 Betterments, 51, 333. 
 Bibliography, 5 ; general, 435. 
 Bills, exchequer, or treasurj', 355. 
 Black, 270 n. 
 Blackstone, 64 n. 
 Boeckh, 15 n. 
 Boer war, 34, 371. 
 Bonds, 358; taxability, 362; United 
 
 States, 360; war, 403. See Debt. 
 Bans de la defense nalionale, 356 ff., 416. 
 Bookkeeping, public, 392. 
 Borrowing draws on future, 404. 
 Bounties, 47. 
 Bowring, 116. 
 Brackets, 299 n. 
 British debt, 342; excess profits duty, 
 
 296 fi. ; property and income tax, 
 
 250 ff. ; tax on annuities, 238 ; war 
 
 taxes, 411. 
 British income tax rates, 258. 
 Bryce, 107 n. 
 Budget, 376 fT.; English, 378; proposed, 
 
 U. S., 386; war, British, 410. 
 Buildings, public, 31; tax, 194. 
 Bulgaria, debt of, 341, 351-2. 
 
 439
 
 440 
 
 INDEX 
 
 Bullock, 4 n., 5, 67 n., 68 n., 264. 
 
 Burgess, 11 n., 137. 
 
 Burnell and Hopkins, 4 n. 
 
 Business affected by war, 308; taxes, 
 
 French, 125; National Tax Ass'n, 
 
 133- 
 
 Ca<fa5;re, defined, 83, 193. 5ee Land tax. 
 California, 30; definition of value, 180; 
 
 inheritance tax, 218, 219; mortgage 
 
 tax, 130, 183 ; tax commission, 185 ; 
 
 taxation of improvements, 181. 
 Cameralists, 2. 
 Canals, 36. 
 Candy, tax on, 323. 
 Canons of taxation, 3, 4. 
 Capital distinguished from income, 
 
 226 ff. ; invested, 301 ; levy, post 
 
 war, 200; taxation of, 197; waste in 
 
 war, 405. 
 Capitalisation of tax, 314. 
 Capitation tax, 220 ff. See Poll tax. 
 Carriages, tax on, 135. 
 Cemeteries exempt, 178. 
 Censors, 377. 
 
 Census Bureau, 60, 180, 395 n. 
 Central control of property tax, 133, 
 
 169; powers, debts of, 351-2; tax 
 
 commission, 390. 
 Certainty, canon of, 3. 
 Chancellor of Exchequer, on budget, 378. 
 Charities, 40 ff. See Poor relief. 
 China, debt of, 341. 
 Churches, exempt, 178; fees of, 331. 
 Cise, 103 n. 
 
 City finances, middle ages, 102. 
 Ci\dl list, 27. 
 Civil war, U. S., 34 ; debt, 409 ; income 
 
 tax, 266; sinking fund, 374; tariff, 
 
 158. 
 Claims, 353 ff. ; court of, 383. 
 Classification, 7. 
 Clocks, 135. 
 Coffee, war tax on, 427. 
 Cohn, 5, 7, 18, 71, 75, 88, 136, ISO n., 345, 
 
 357- 
 Colbert, 103. 
 Collateral, heirs, see Inheritance tax; 
 
 loans, war, 411, 417. 
 Collection, 387 ff. 
 Colleges, 37, 178. 
 Colonial taxation, no. 
 Commerce, expenditures for, 35, 36, 38. 
 Commercial fees, 332. 
 Commissions, back tax, 171 ; central 
 
 tax, 133, 169. 
 
 Commissioner, Internal Revenue. 284. 
 
 Committee on ways and means, 380. 
 
 Common benefit, 19. 
 
 Common-penny, loi. 
 
 Commonwealth sinking funds, 374. 
 
 Commutation poll tax, 221. 
 
 Compensation, workmen's, 46. 
 
 Compensatorj' theory, 95. 
 
 Comptroller, U. S., 383 ff. 
 
 Compulsion, 58. 
 
 Conflict of tax laws, 216. 
 
 Congress, 29; and budget, 379; powers 
 on income tax, 262 ff. 
 
 Connecticut, income tax, 288; pro- 
 prietors, 92. 
 
 Conrad, 150 n. 
 
 Consols, 360. 
 
 Conspicuous waste, war tax in France, 
 416. 
 
 Constitution of U. S. on income tax, 
 263 ff. ; i6th amendment, 265. 
 
 Constitutional government, expenditures, 
 
 17- 
 
 Constitutionalism, 56. 
 
 Constitutionality, of federal estate tax, 
 215 ; of income tax, U. S., 263. 
 
 Consular service, 28. 
 
 Consumption taxes, 135; France, 416. 
 
 Contribution des patents, 125. 
 
 Contributions to charities, 245. 
 
 Control and audit, 381 ff. ; of purse, 377 ; 
 state boards of, 386. 
 
 Convenience, canon of, 3 ; of contribu- 
 tor, 390. 
 
 Conversion of debt, 368. 
 
 Cooley, 6, 64 n., 91. 
 
 Corn-law, 152. 
 
 Corporations, income tax on, 246, 269, 
 282 ; personal service, 281 ; tax on 
 franchise, 186. 
 
 Corvees, 104. 
 
 Cost, increasing of govenmient, 24; of 
 living and excess profits tax, 304. 
 
 Costs, court, 329. 
 
 Court of claims, 383. 
 
 Courts, 50. 
 
 Credit, defined, 340 ff., 343 ; of U. S. in 
 Spanish war ; war general, 398 2. 
 
 Credits, 184; income tax, 274. 
 
 Criminals, 43. 
 
 Crop exemptions, 176. 
 
 Custody of funds, 391. 
 
 Customs, 81, 107, 134, 144 ff.; collec- 
 tions, 387 ; EngUsh, 151 ; in war, Eng- 
 land, 412; union, German, 154. See 
 Protection, Tariffs and Countries.
 
 INDEX 
 
 441 
 
 Danegeld, 105. 
 
 Daniels, 5, 184. 
 
 Date ot assessment, 176. 
 
 Dealers, incidence of tax on, 320. 
 
 Death duties, 202 ff. ; British, 205. Sec 
 
 Inheritance tax, Estate tax. 
 Debt, effect of, 340; floating, 356; 
 
 forms of, 353S. ; funded, 356, 35S; 
 
 perpetual, 350 ; public, 340 ff. ; size 
 
 of, 340 ; war, U. S., 424. See War, and 
 
 Countries. 
 Declaration, tax payers, 171, 389. See 
 
 Return, also British income tax. 
 Decrease in property value, 237. 
 Deductions under income tax, 274. 
 Defects of U. S. income tax, 285. 
 Defence, cost of, 31. 
 Defence loans, France, 416 ff. 
 Deficiency appropriations, 381. 
 Deficit financing, 343. 
 Degressive tax rate, 78, 245, 268. 
 Delaware income tax, 288; property 
 
 value, 179. 
 Denmark, debt of, 341. 
 Depletion, 245. 
 Depreciation, 237. 
 Derivative revenues, 61. 
 Dewey, 5. 
 Diagrams of tax rates, 78, 79, 80; of 
 
 U. S. income tax, 279. 
 Dimes, 103. 
 
 Dingley, tariff, 160; Chairman, 427. 
 Diplomatic service, 28. 
 Direct taxes, 67, 312. 
 Disbursing ofScers, U. S., 385. 
 Dividends under income tax, 247, 275 ; 
 
 mining, 239. 
 Dog tax, 135. 
 Dona, 55. 
 
 Doomsday book of land tax, 196. 
 Douglas, III n. 
 Dowell, 105, 151 n. 
 "Drive" for loans, 366, 406. 
 Duties, ad valorem, 150; specific, 150. 
 
 Early taxes, American, no. 
 
 Earned income, sec Income and Income 
 
 tax. 
 Economist, London, 411. 
 Economy, canon of, 4. 
 Edgcworth, 6, 65 n., 95 n. 
 Education, cost of, 36 ff. 
 Educational fees, 330. 
 Effects and incidence, 3 10 ff . 
 Ehcberg, 5. 
 Eisner w. Macombcr, 271 n. 
 
 Ely, 57 n. 
 
 Embargo and Non-intercourse Acts, 158. 
 
 England, early taxes, 105; excises, 139; 
 
 old age pensions, 42 ; tax reform, 127; 
 
 war debts, 341, 351-2; war finance, 
 
 410. 
 Equalisation, 169, 390. 
 Equality, canon of, 3. 
 Errors in British war finance, 414. 
 Erwerh, 71. 
 Estate, meaning of term, 204 ; tax, 202 ff . ; 
 
 unconstitutional, 215. 
 Estimates, English, 378. 
 Excess profits tax, 291 ff.; British, 
 
 296 ff., 412; U. S., 297. 
 Exchanges, 38. 
 Exchequer bills, 355. 
 E.xcise, 81, 103 n., 134 ff-, 141; British, 
 
 139; collection, 388; U. S., 140; war, 
 
 England, 412; war, U. S., 423, 426. 
 Exemptions, bonds, 362 ; income tax, 
 
 242, 275, 281 n. ; property tax, 177. 
 Exhaustion, 274. 
 Expansion of state, 12. 
 Expenditures, 17 ff.; administrative, 26; 
 
 early, 14; growth of, 22 ff.; net, 26. 
 Expenses, under income tax, 240, 243, 
 
 275- 
 Exports, tax on, 144. 
 Extraordinary expenses of war, 396. 
 
 Extravagance, 24. 
 
 Faculty theory, 65, 91. 
 
 Farmer, tax, 387. 
 
 Federalist, 373. 
 
 Federal Reserve system in War, 422. 
 
 Fees, 59, 71, 328 ff.; administrative, 72, 
 
 330; church, 331; commercial, 332; 
 
 educational, 330; legal, 71; postal, 
 
 334- 
 
 Feudal expenditures, 16; revenues, 99. 
 
 Field, Justice, 265. 
 
 Fifteenths, 107. 
 
 Fillebrown, 86. 
 
 Finance, defined, i. 
 
 Fines, 63. 
 
 Fisher, 226 n., 227. 
 
 Fiske, 81, 1O7 n. 
 
 Floating debts, 356. 
 
 Folwell, 147 n. 
 
 Foreigner pays tariff, 149. 
 
 Forests, 337. 
 
 France, debt of, 341, 351-2; frequent 
 deficits, 415; tariff, 155; taxes in, 
 102, 122; war finance, 415 ff.
 
 442 
 
 INDEX 
 
 Franchises, corporate, i86 fif. ; N. Y., 
 
 177. 
 Free trade, 49; countries, 147. 
 Fumage, 105. 
 
 Funded income, 233 ; debts, 356, 358. 
 Funds, public, moving, 391. 
 "Funds," the, 394. 
 
 Gabelle, 105, 137. 
 
 Gage, Secretary, 425, 434. 
 
 Gains as income, 234. 
 
 Gallatin, 373. 
 
 Gardner, 395 n. 
 
 Geffcken, 36. 
 
 General property tax, 163 ff., 189. 
 
 George, Henry, 85. 
 
 George, Lloyd, 195, 293. 
 
 Germany, debt of, 341, 351-2; war 
 
 finance, 405, 418. See Prussia. 
 Gifts, 63; under income tax, 272. 
 Gladstone, 233. 
 
 Glass, secretary of treasury, 308. 
 Gobelin, tapestry, 60, 338. 
 Gold mining, 298. 
 Goodnovv, 51. 
 Good will, 188. 
 Goschen, 6. 
 Gottlieb, 351. 
 Great Britain, debt of, 341, 351-2, 369; 
 
 war finance theory, 405. See British, 
 
 England. 
 Greece, debt of, 341, 351-2. 
 Gross income, 274. 
 Gross receipts, tax on, 324. 
 Gross sales, tax on, 327. 
 
 Hadley, 74 n. 
 
 Hague, 31. 
 
 Haig, 5. 
 
 Hair powder, 135. 
 
 Hall, 151 n. 
 
 Hamilton, A., 373, 382. 
 
 Hamilton, R., sinking fund, 371. 
 
 Hearth tax, 105. 
 
 Heirs under inheritance tax, 210. 
 
 Higgs, 67 n. 
 
 Hill, 248. 
 
 Hoffman, 7 n. 
 
 Holder, bonds payable to, 368. 
 
 Hollander, 5. 
 
 Holmes, 270 n. 
 
 Hospitals, 43 ; 
 
 Houses, 135. 
 
 Howe, 268 n. 
 
 Human welfare, 53. 
 
 Hungary, debt of. 341, 351- 
 
 poll tax for, 221. 
 
 Imports, tax on, 144. See Customs. 
 
 Impost defined, 81. 
 
 Impot des palentes, 123. 
 
 Impot fonder, 123, 192. 
 
 Improvements on real estate, 181. 
 
 Incidence defined, 81 ; general, 310 U. 
 
 Incisio, 103 n. 
 
 Incisura, 103 n. 
 
 Income, 69, 224 fl. ; earned, 233; gross, 
 242 ; funded, 233 ; incidence of tax 
 on, 320; net, 242; realized, 273; 
 types, 240. 
 
 Income tax, 223 ff. ; England: 79, 109, 
 240 ff., 412 ff. ; administration in, 
 261; commissioners, 262; France, 415; 
 Prussia, 80, 119, 248 ff. ; U. S. : history, 
 262 ff.; civil war, 267 ff. ; 1894, 269; 
 recent, 270; on corporations, 246. 
 
 Increment in property value, 235. 
 
 Increment value land tax, 87, 194. 
 
 Indebtedness, public, 340 ff. 
 
 India, export duties, 145. 
 
 Indiana, property tax in, 168. 
 
 Indirect taxes, 67; shifted, 311. 
 
 Individualism, 11. 
 
 Industrial accidents, 47. 
 
 Industrial earnings, 328 ff., 335, 338. 
 
 Industries, state, 52. 
 
 Inequalities of valuation, 181. 
 
 Inequality of excess profits tax, 306. 
 
 Infant industries, 48. 
 
 Inflation, 293, 303, 401 ; war, France, 
 416; U. S., 422. 
 
 Information at source, 283. 
 
 Inheritance taxes, 68, 202 ff. ; adminis- 
 tration, 217; arguments pro and con, 
 209; U. S., 207, 214 ff.; rates, 210. 
 
 Inquisitors, tax, 171. 
 
 Insane, 43. 
 
 Insurance, 42 ; against inheritance tax, 
 212 ; war, 45. 
 
 Intangibles, 184 ft". 
 
 Interest, taxes on, 70, 313; on loans, 
 plan of payment, 367 ; on loans, 363 ; 
 on war loans, 407. 
 
 Internal taxes, Spanish war, 428. 
 
 Interstate conflict of tax laws, 216. 
 
 Invested capital, 301. 
 
 Invested debts, 364. 
 
 Italy, debt of, 341, 351-2. 
 
 Japan, debt of, 341. 
 Johnson, 368. 
 Judicial fees, 329. 
 Judiciary expenses, 30. 
 Judson, 6.
 
 INDEX 
 
 443 
 
 Justice, administration of, 50; in taxa- 
 tion, 56, 8g. 
 
 Kandtorowicz, 150 n. 
 
 Kennan, 268 n. 
 
 Kerbe, 103 n. 
 
 Kidd, II n. 
 
 Kinley, 392. 
 
 Knies, 344. 
 
 Knowlton vs. Moore, 205, 215. 
 
 Land tax, 192; commissioners, British, 
 261. 
 
 Lands, public, 336. 
 
 Law, Bonar, 413. 
 
 Laws of Manu, 4 n. 
 
 League of Nations, 31. 
 
 Leave-them-as-you-find-them, 95. 
 
 Legacy duty, 206. 
 
 Legal fees, 329. 
 
 Legislative expenses, 29, 30; control of 
 purse, 377- 
 
 Legoyt, 116 n. 
 
 Lender, marginal, 406. 
 
 Leroy Beaulieu, 5, 123. 
 
 Levasseur, 156 n. 
 
 Levy, tax defined, 81. 
 
 Lev>', 152 n. 
 
 Lexis, 150 n. 
 
 License, 138. 
 
 Lighting, street, 25. 
 
 Liquor taxes, 139, 140. 
 
 List, F., 48. 
 
 List, tax, 82. 
 
 Loans, see Debt; bureau, Germany, 
 418; foreign and domestic, 349; 
 negotiation, 366; popular, 406; pro- 
 ductive, 364; secured, 363; Spanish 
 war, 430; vs. taxes for war, 400 fi.; 
 war, 351-2, 410. 
 
 Local taxation, English, 109. 
 
 Losses, 237, 244, 274. 
 
 Lottery loans, 361. 
 
 Luxury, 135 ; taxes, 416, 423. 
 
 McCuUoch, 5, 97, 152 n. 
 
 M'CuUoch vs. Md., 266. 
 
 McKenna, 411, 412, 414. 
 
 McKinley tariff, 159- 
 
 McLeod, 344. 
 
 Magna Carta, 64 n. 
 
 Maine, 55 n. 
 
 Maine, destruction of, 425. 
 
 Malchus, 7 n. 
 
 Malthus, 40. 
 
 Manu, maxim, 4, 223. 
 
 Markets, 38. 
 
 Marquardt, 15 n. 
 
 Marshall, Chief Justice, 266. 
 
 Marshall, 6, 74 n. 
 
 Maryland rental values, 179. 
 
 Masons, 178. 
 
 Massachusetts income tax, 288; tax on 
 
 annuities, 238. 
 Measure of taxation, 64. 
 Michigan, property tax in, 169. 
 Military, cost of, 32. 
 Milk, tax on, 324. 
 Mill, J. S., 42s. 
 Millis, 203 n. 
 Mineral rights duty, igs- 
 Mines, 337. 
 
 Mining dividends, 239. 
 Missouri income tax, 288. 
 Model tax system, N. T. A., 132, 
 Money, 184. 
 MonopoUes, public, 73. 
 Montgomery, 270 n., 271 n. 
 Moratoria, 409. 
 Morrill tariff, 158. 
 Mortgages, taxation of, 130, 182 ff., 
 
 198, 254. 
 Mothers' pensions, 41. 
 Munitions tax, U. S., 423. 
 
 National Tax Assn., 5 ; model tax sys- 
 tem, 132. 
 
 Navigation, 36. 
 
 Navy, cost of, 33. 
 
 Nebenius, 344. 
 
 Negotiating a loan, 366. 
 
 Nelson, 270 n. 
 
 Netherlands, debt of, 341. 
 
 New England, early taxes, 1 1 1 ; property 
 tax in, 167. 
 
 New Jersey, rental values, 179. 
 
 New Mexico, income tax, 288. 
 
 New York, income tax, 280, 289; prop- 
 erty tax in, 165, 181. 
 
 Nicholson, 7 n., 66 n. 
 
 Non-residents, 277. 
 
 Normal profits, 292, 302. 
 
 North Dakota income tax, 288. 
 
 Norway, debt of, 351. 
 
 Obligations de la defense nationale, 365, 
 
 416. 
 Obsolescence, 237, 244, 274. 
 Occasion, increment value tax, 196; 
 
 inheritance tax, 212. 
 Octrois, los, 138. 
 Odd EuUows, 178.
 
 444 
 
 INDEX 
 
 Ohio, tax inquisitors, 171. 
 Oklahoma, income tax, 288. 
 Old age pensions, 42. 
 Oleomargarine, 141. 
 Opium, tax on, 141. 
 Orphans, 41 ff. 
 
 Pacific Coast, property tax on, 172; 
 
 railroads, 430. 
 Panics, war, 4og. 
 Paper money, 353. 
 Parieu, de, 5, 104 n. 
 Parliament, 29; on budget, 378. 
 Payment of debts necessary, 369. 
 Payne tariff, 161. 
 Pennsylvania, rental values, 179. 
 Pensions, 42, 44; mothers', 41; as 
 
 annuities, 238. 
 Perpetual debts, 359. 
 Personal expenses, income tax, 275 ; 
 
 property, 130; service corporations, 
 
 281. 
 Personalty, 181. 
 Personnelle et mohiliere, 123. 
 Persons, taxes on, 69. 
 PelUiones, 55. 
 Philippines, 145. 
 Physiocrats, 67, 85. 
 Pitt, sinking funds, 370. 
 Plate, 135- 
 Playing cards, 141. 
 Plehn, 7 n., 197. 
 Poll tax, 220 ff., 312. 
 Poor-rate, English, 58. 
 Poor relief, 40 ff. 
 Popular loans, 366, 406; German, 419, 
 
 U. S. Spanish war, 432. See War and 
 
 Debts. 
 Porks etfe nitres, 123. 
 Portugal, debt of, 341. 
 Possessory claims, 176. 
 Post, L. F., 8s, 87. 
 Postal fees, 334. 
 Post office, 25. 
 Post war finance, 424. 
 Preparedness, financial, German, 418. 
 Price, sinking fund, 370. 
 Probate and account duty, 205. 
 Producers, incidence of tax on, 320. 
 Profiteering, 401. 
 
 Profits as income, 234; tax on, 292. 
 Progression, 4, 77, 96, 97, 245. 
 Property, 174, 176, 228 ff.; as capital, 
 
 228 ff. ; tax, 69, 163 ff. ; incidence of, 
 
 314 ff.; objections to, 189; types of, 
 
 166 ff.; regeneration of, 191. 
 
 Protection, 47, 146, 148. 
 
 Prussia income tax, 119, 246, 248 ff.; 
 
 railroads, 339; tax reforms, 118, 120; 
 
 tax system, 122. 
 Publican, Roman, 387. 
 Public industries, 335. 
 Purse, control of, 377. 
 Pyramiding, war loans, Germany, 420. 
 
 QucEslors, 377. 
 Quarantine, 44. 
 
 Railroads, 72 ff., 338. 
 
 Rates, defined, 60, 72, 76; income tax, 
 24s, 276; local, 109; U. S. war and 
 excess profits tax, 300. See other taxes. 
 
 Rau, 5, 27 n., 67, 344. 
 
 Receipts as income, 224. 
 
 Reconstruction, post war, 202. 
 
 Reforms in taxation, 117. 
 
 Register, U. S., 385. 
 
 Registered bonds, 368. 
 
 Regressive tax, 80. 
 
 Relief, British income tax, 253, 258. 
 
 Religion, 23. 
 
 Renick and Thompson, 382. 
 
 Rent, taxes on, 70, 313. 
 
 Rente, 360, 417. See Debts. 
 
 Repairs to property, 244. 
 
 Repudiation of debt, 424. 
 
 Reserves, cash, 343. 
 
 Retirement, pensions, 45. 
 
 Returns, 281 ; secrecy of, 283. 
 
 Revenues, classification, 58; public, 54 ff. 
 
 Reversion value duty, 195. 
 
 Revolution, U. S. debt of, 373, 409. 
 
 Rhode Island, property tax in, 168. 
 
 Ricardo, 5, 90. 
 
 Ripley, iii n., 112. 
 
 Rivers and harbours, 36. 
 
 Roads, cost of, 35. 
 
 Roll, tax, 82, 178. 
 
 Roman publican, 387. 
 
 Rome, 15. 
 
 Roscher, 5, 14 n. 
 
 Rosewater, 332, 333. 
 
 Ross, 370 n., 372. 
 
 Roumania, debt of, 341. 
 
 Russia, debt of, 341, 351-2, 368; export 
 duties, 145. 
 
 Saladin tithe, 106. 
 
 Sales tax, 327. 
 
 Salt tax, 105, 137, 141. 
 
 Say, 5. 
 
 Schonberg, 5, 67 n., 102 n.
 
 INDEX 
 
 445 
 
 Schools, 23, 36; poll tax, 221. 
 
 Schwab, 112 n. 
 
 Secrecj' of returns, 283. 
 
 Secured loans, war, England, 411; 
 France, 417. 
 
 Seeley, 118 n. 
 
 Seligman, 5, 7, 55, 59, 65 n., 68 n., 70, 
 74 n., 89 n., 97, III n., 136, 157, 191, 
 199, 203 n., 264, 268 n., 315, 395 n. 
 
 Senior, 74 n. 
 
 Servant girl as marginal lender, 406. 
 
 Servants, 135. 
 
 Servia, debt of, 341. 
 
 Sevres wares, 60, 338. 
 
 Shaw, 37 n. 
 
 Sherwood, 345 n. 
 
 Shifting defined, 81; discussed, 310 ff.; 
 depends on market conditions, 322. 
 
 Ship-geld, 105. 
 
 Sidgwick, 74 n. 
 
 Silk, duty on, 152; stockings help win 
 the war, 402. 
 
 Single tax, 84 ff. 
 
 Sinking funds, 370 ff.; American, 372. 
 
 Sixteenth Amendment, U. S. Constitu- 
 tion, 265. 
 
 Slaughter-houses, 38. 
 
 Smith, Adam, canons, 3, 70, 89, 357. 
 
 Smith, R. Mayo, 157. 
 
 Smuggling, 151. 
 
 Socialism, 11. 
 
 Sociahstic theory of justice, 95. 
 
 Southern states, property tax in, 170. 
 
 Spain, debt of, 341. 
 
 Spandau, Julius Tower, 418. 
 
 Spanish war, financing, 425. 
 
 Special assessments, 51, 72, 332. 
 
 Special benefits, 19. 
 
 Special franchises, N. Y., 177. 
 
 Specific duties, 150; tax, 76. 
 
 Spottiswood, III n. 
 
 Springer vs. U. S., 68. 
 
 Stamp, J. C, 6, 238, 251. 
 
 Stamp taxes, war, U. S., 423. 
 
 State, as organism, 11. 
 
 State Boards of Control, 386., 
 
 State income taxes, U. S., 287. 
 
 Stein, 62, 151, 376. 
 
 Sleuer, 55. 
 
 Stock-dividends, 236. 
 
 Stoppage at source, 199, 240, 256. 
 
 Stourm, 376. 
 
 Street Railway, tax on, 324. 
 
 Subtreasuries, U. S., 392 n. 
 
 Sugar, 152; war tax on, 426. 
 
 Sumner, 74 n., 157. 
 
 Sumptuary laws, 135. 
 
 Super taxes, 259, 412 ff. 
 
 Supreme court, U. S., 271 n.; on income 
 
 tax, 264 ff. 
 Surtaxes, 277. 
 Sweden, debt of, 341. 
 Switzerland, debt of, 341 ; export duties, 
 
 145- 
 Syndicates to buy loans, 367. 
 System, tax, 84 ff. 
 
 Taille, 103. 
 
 Tallage, 103 n.; of groats, 108. 
 
 Tariff, 144 ff.; commission, 162 ; France, 
 15s ; U. S. Historj-, 157 ; U. S. Spanish 
 war, 426. 
 
 Taussig, 157. 
 
 Tax, defined, 59; commission, 133, 169, 
 390; inquisitors, 171; system, 128, 
 129, 247; vs. loans, 400 ff. See more 
 specific terms. 
 
 Taxpayers, classes, 279. 
 
 Tea, war tax on, 427. 
 
 Telegraph, 73. 
 
 Telephone, 73. 
 
 Tenths, 107. 
 
 Tithe, Jewish, 223. 
 
 Tobacco monopoly, 142 ; tax, 140 ; 
 France, 73. 
 
 Toll, defined, 81. 
 
 Transfers in public accounts, 393. 
 
 Transit duties, 144. 
 
 Transportation taxes, war, U. S., 423. 
 
 Treasuries, branch, 391. 
 
 Treasury' bills, 355. 
 
 Turkey, 145; debt of, 341, 3S1-2; ex- 
 port duties, 145. 
 
 Types of property tax, 166. 
 
 Undeveloped land duty, 195. 
 
 Unfunded income, 233. 
 
 United Kingdom, debt of, 341. 
 
 United States control and audit, 382 ; 
 debt, 341, 342, 351-2; excise taxes, 
 140; income tax, 246, 262 ff. ; dia- 
 gram, 279; tariff, 157 S-; war finance 
 405, 421 ff. See more specific terms. 
 
 Universities, 37. 
 
 Unpreparedness, financial, for war, U. S. 
 421. 
 
 Vagrancy, 41. 
 
 Valuation, defined, 82, 179. 
 
 Value, full cash, 180. 
 
 Vcrhrauch, 71. 
 
 Vermont tax list, 93, 165.
 
 446 
 
 INDEX 
 
 Vignes, 103 n. 
 Vingliemes, 103. 
 Virginia, early taxes, 112. 
 Voluntary revenues, 55. 
 Von llociv, 268 n. 
 Votes of credit, war, 410. 
 
 Wages, taxes on, 70, 313. 
 
 Wagner, 5, 13 n., 67^ 71, loi n., 122 n., 
 248 n., 358. 
 
 Walker, iii n. 
 
 War and business, 398; chest, German, 
 418; cost of, 34, 408; credit during, 
 398 fif.; debts, 351-2, 424; 1812, debt, 
 373 ; finance, 396 ff., 425 B. ; in- 
 evitable, 31 ff. ; income tax {see) ; 
 profits taxes, 291 ff ., 297 ff. ; risk in- 
 surance, 45 ; taxes, 397, 411, 415, 421 ; 
 world, 34, 351 ff. 
 
 Warrants, 353. 
 
 Wasting assets, 296. 
 
 Watches, 135. 
 
 Water, supply, 51 ; works, 73. 
 
 Wehrbcilrag, 418. 
 
 Welfare, human, 53. 
 
 West, 203 n., 207 n. 
 
 West India Co., 112. 
 
 West Virginia income tax, 288. 
 
 Williams, 128 n., 255, 256, 257. 
 
 Wilson, 6, 34, 152 n., 251, 379, 382 n.; 
 
 Woodrow, 25, 384. 
 Wisconsin income tax, 287. 
 Withholding, 282. 
 Wood, 93 n. 
 Wool, duty on, 152. 
 Woolsey, 31. 
 
 Workmen's compensation, 46. 
 World war debts, 351-2; finance, 400; 
 
 England, 410; France, 415; Germany, 
 
 418; U. S., 421. 
 Writers on finance, 4, 5-6. 
 
 Year, fiscal, 381 ; tax, 285. 
 
 Zollverein, 116, 154, 
 
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