UNIVERSITY of CAUFORNU 
 
 AT 
 
 LOS ANGELES 
 
 UBRAKY
 
 PRINCIPLES OF 
 TAXATION 
 
 BY 
 
 HASTINGS LYON 
 
 Cmmselor-at-Law 
 
 Visiting Professor of Fitiance, The Tuck School 
 
 Dartmouth College 
 
 Author of '■^ Capitalization: a Book on 
 
 Corporation Finance " 
 
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 BOSTON NEW YORK CHICAGO 
 HOUGHTON MIFFLIN COMPANY 
 
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 COPYRIGHT, I914, BY W. HASTINGS LYON 
 ALL RIGHTS RESERVED 
 
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 PREFACE 
 
 As Counsel to Committees for the Investment 
 Bankers' Association of America it became my 
 duty to examine and report on many tax meas- 
 ures introduced in the various legislatures, and 
 occasionally to appear before a legislative com- 
 mittee on account of such measures. Facing the 
 problem of these bills, anticipating that of other 
 bills in future legislative sessions, and desiring, if 
 possible, to reach, on behalf of the investment 
 banking business, some definite conclusions as to 
 what is fair in the taxation of securities, the Tax 
 Committee of the Association requested me to 
 present to it a brief statement of principles of 
 taxation, to show the position which securities 
 occupy in a fair scheme of taxation, and to afford 
 a basis for working out practicable proposals as 
 to what should be done in the taxation of securi- 
 ties. The Honorable F. W. Rollins, of Boston, is 
 Chairman of the Committee, and the other mem- 
 bers are Messrs. George Baker, of Boston; A. B. 
 Leach, of New York; W. S. Hayden, of Cleve- 
 land; W. M. L. Fiske and J. J. O'Brien, of Chi- 
 cago; and JohnNickerson, Jr., of St. Louis. Since 
 such a report, in any event, involved writing 
 practically a little treatise on the general subject
 
 IV 
 
 PREFACE 
 
 of taxation, I decided to make it as nearly such 
 as its primary purpose permitted, and Messrs. 
 Houghton Mifflin Company undertook its pub- 
 lication. The reader should remember that the 
 report does not appear as expressing the opinion 
 of the Association, but simply as my personal 
 opinion. 
 
 I have tried to be as simple as possible in stat- 
 ing the principles. I should like to make a state- 
 ment so plain that every voter could understand 
 the meaning of every word, phrase, sentence, and 
 paragraph. Taxation is not, however, an easy 
 matter. As a pamphlet on the subject said, in 
 referring to a dinner of mayors who passed a 
 resolution on some phase of it, "Taxation is not 
 to be mastered between the caviare and the 
 coffee." Besides, an extremely simple statement 
 is not always consistent with brevity, and I was 
 writing primarily for men of affairs familiar with 
 economic concepts and capable of grasping their 
 import. Time is of the essence with them, and it 
 was necessary to be brief. I have been as simple 
 as I could be under the circumstances, and I be- 
 lieve the constant use of concrete illustrations will 
 make the matter understandable to those who 
 are not especially trained in economic thinking. 
 
 Some people, I am aware, will charge the work 
 with prejudice on account of its origin. I am 
 content to have them look on it as being as parti-
 
 PREFACE V 
 
 san as possible if they will really consider the 
 argument. So far as the discussion reaches results 
 in ideas on the taxation of intangibles, I believe 
 it is in substantial accord with all the recognized 
 authorities. They cannot be accused of ex-parte 
 argument. I would relieve them, however, from 
 all responsibility for the course of reasoning by 
 which I have reached my opinions. The work is 
 put out with full notice of the influence, if any, of 
 the "special interest" involved. As a matter of 
 fact, I painstakingly sought reasons for imposing 
 some taxation on intangibles. 
 
 I wish to express my appreciation of the kind- 
 ness of Mr. John Tatlock, president of the West- 
 chester Avenue Bank, New York City, and of 
 Professor Chester A. Phillips, of Dartmouth Col- 
 lege, for reading the manuscript and making 
 helpful suggestions. 
 
 Hastings Lyon. 
 
 New York, July 15, 1914.
 
 CONTENTS 
 
 I. What Is Taxation? i 
 
 II. What Shall Be Taxed? 12 
 
 III. Should all Property Be Taxed Alike? . 31 
 
 IV. Where Should Taxes Be Paid? ... 59 
 V. How Should Taxes Be Assessed? . . 90 
 
 VI. Should State and Local Taxation Be 
 
 Kept Apart? 96 
 
 VII. Are Corporations Taxed too Little? . 113 
 VIII. Single Tax, the Increment Tax, and 
 
 Local Option in Taxation . . . .120
 
 PRINCIPLES OF 
 TAXATION 
 
 CHAPTER I 
 
 WHAT IS TAXATION? 
 
 In answering our question we will consider why 
 we have taxes and what a tax is. 
 
 Elasticity of the public income 
 
 John Smith must adjust his expenditures to his 
 income or else come to grief. He must in the long 
 run live within his means. He can lower his scale 
 of living to meet the income he is receiving much 
 more readily than he can increase his income to 
 meet a desired scale of living. Economic and 
 social conditions and his own abilities hedge him 
 in. 
 
 Acting in an organized political capacity as the 
 nation, the state, the county, city, town, village, 
 school, or other taxing district, the community 
 reverses the process which its individual member, 
 John Smith, must go through, and first considers 
 expenditure, then income. Though in practice 
 the community often does take into account its
 
 2 PRINCIPLES OF TAXATION 
 
 past income when deciding on future expenditure, 
 if it wanted anything strongly enough it would 
 disregard its ordinary income and determine to 
 provide more. 
 
 The total production of wealth 
 
 Each year the community produces an aggre- 
 gate of new wealth which is its annual income. It 
 may choose to use this income, or any part of it, 
 through private or through public channels. 
 There is no distinction, in the nature of the activi- 
 ties themselves, between a private activity — 
 that is, one carried on by people acting in their 
 individual capacities — and a public activity 
 carried on by the community acting as a political 
 group. Whether a particular activity shall be 
 public or private depends simply on which the 
 community considers the more advantageous for 
 it. It can decide whether much or little of its 
 activities shall be public, whether much or little 
 of its total income shall be expended through 
 public channels. 
 
 Public income cannot be indefinitely extended 
 
 It is because public activities are only part of 
 the total activity of the community that it is pos- 
 sible in making estimates to plan the expendi- 
 tures first and provide afterwards an income to 
 match. If public activities should approach the
 
 WHAT IS TAXATION? 3 
 
 total of all activities of the community, we should 
 find the total community income even more 
 rigidly limited than John Smith's private in- 
 come. The public organization, the State or city, 
 would then, when estimating, have to set down 
 the amount of income first and make expendi- 
 tures match, just as John Smith must now do. 
 
 Present public activities 
 
 Communities at present generally regard it 
 expedient that the public organization, the com- 
 munity acting as a whole, should have charge of 
 certain matters. To protect life and limb and to 
 preserve the individual in the enjoyment of his 
 private property and rights, the community has 
 given the police power to its public organization, 
 the State, and relieved the individual from fight- 
 ing single-handed for his own against those who 
 may be disposed to molest him. It has extended 
 this power in many directions to guard against 
 other than direct attacks, and offers protection 
 to health, safety, and against fraud. 
 
 The army and the navy represent simply a 
 special form of police power. They are maintained 
 to protect the particular communal group from 
 molestation by another group. Fire departments 
 afford another special form of what is essentially 
 a police protection. Judicial systems are organized 
 for the protection of legally recognized rights.
 
 4 PRINCIPLES OF TAXATION 
 
 The community must appropriate some of its 
 wealth for the pubHc use to maintain this police 
 and judicial organization. Our familiarity with 
 this practice, and the fact that, outside of the 
 small group of anarchists, opinion in favor of it is 
 unanimous, makes us likely to consider it in the 
 nature of things rather than as the matter of 
 social expediency that it is. We are familiar, too, 
 with parks, sewers, streets, and sidewalks as 
 forms of public activity. 
 
 Opinion of social expediency shifts 
 
 Social activity also expresses itself in a pub- 
 licly organized form in the building and main- 
 tenance of highways and bridges. In this familiar 
 public undertaking we more readily recognize the 
 idea of expediency.' Some bridges used by the 
 community at large are still privately owned toll- 
 bridges. Our grandfathers knew privately owned 
 toll-roads. Perhaps a few, indeed, still exist. 
 Sometimes now the water-supply is a private, 
 sometimes a public, undertaking. A newly de- 
 vised form of highway, the railroad, developed as 
 private property. It universally remains private 
 property in the United States. In some communi- 
 ties it is wholly or partly public property. So it is 
 possible for a private activity to exist contempo- 
 raneously with a public activity in the same field. 
 The State may carry on a public activity partly
 
 WHAT IS TAXATION? 5 
 
 by private agencies. Privately owned and oper- 
 ated railroads carry the mail for the public post- 
 office. Community opinion may be that a given 
 activity need not necessarily be either exclusively 
 public or exclusively private. Our schools are 
 partly private, partly public. We recognize that 
 it is expedient that the State conduct some 
 schools, but do not consider it necessary that the 
 State should conduct all schools. 
 
 It is no part of our purpose here to go Into the 
 question of what activities should be public and 
 what private. The answer comes, in the end, 
 simply to a matter of enforcible opinion. At 
 present unenforcible opinions range all the way 
 from those of anarchists, who would have no 
 public undertaking whatever, to those of social- 
 ists, who would have all undertakings public. We 
 are, in this discussion, interested only in the fact 
 that certain activities are private and other activ- 
 ities are public. 
 
 Public organization may charge a price for 
 services 
 
 We are concerning ourselves now only with the 
 question that arises after it has been determined 
 that certain activities shall be public. How shall 
 the public organization meet the cost of carrying 
 them on? 
 
 The public may conduct its undertakings on
 
 6 PRINCIPLES OF TAXATION 
 
 the same basis as a private enterprise. It may 
 charge a price for whatever it furnishes. When a 
 community undertakes to supply electric light to 
 householders, it regularly meets the cost by 
 making a charge to each householder in propor- 
 tion to his use. When it supplies transportation 
 by street or steam railway, it likewise charges a 
 price based on the cost of furnishing the service. 
 For one reason, the force of example is strong. 
 These were recently private enterprises. When 
 the public takes them over, it naturally follows 
 the private practice. It is fairly easy to allocate 
 the cost to the user. It may be remarked that the 
 public organization has an unfortunate tendency, 
 when determining costs and charges, to overlook 
 the capital investment. The community fur- 
 nishes the capital and should make the charge 
 cover interest. 
 
 Special assessments may reimburse the public 
 organization 
 
 The community might follow the same course 
 of charging a price with such public undertakings 
 as the highways, streets, and sewers. Though 
 much more difficult, and therefore less desirable, 
 it would not be impossible. To a very consider- 
 able extent it does allocate the cost of streets, 
 sewers, and sidewalks by special assessment to 
 the abutting property-owner. It should be
 
 WHAT IS TAXATION? 7 
 
 noticed that this is an original allocation of the 
 capital cost instead of an advancing of the capital 
 and a subsequent collection of the capital charge. 
 This is equally true, whether the charge be met 
 by an immediate cash payment or by borrowing 
 through the issuance of special assessment bonds. 
 In this form of public undertaking, streets, 
 sidewalks, and sewers, it should be noted that the 
 initial capital cost is large, in proportion to the 
 cost of maintenance and operation, compared with 
 such undertakings as lighting and transportation. 
 The special assessment involves, too, less exact 
 justice in allocation of expense than charging a 
 price based on cost. In undertakings in which 
 the capital cost is met by special assessment 
 against the abutters, they, who are the principal 
 users, may not, and usually do not, defray the 
 cost of maintenance and operation, such as clean- 
 ing sewers and streets. Though the abutting 
 property-owners may be the principal benefici- 
 aries, they are not the only ones in the case of 
 streets and sidewalks. Thoroughfares are used 
 by people who have no concern with the abutting 
 Ijroperty. So we may consider that in a rough 
 way the public use of the thoroughfare offsets the 
 public cost of "operation." We will find a great 
 deal (A this ready approximation of justice as we 
 go on with the consideration of meeting the cost 
 of public undertakings.
 
 8 PRINCIPLES OF TAXATION 
 
 Fees meet the cost of some public services 
 
 The community meets the cost of a consider- 
 able variety of pubHc service by charges called 
 "fees.'^ These are distinguishable from the price 
 charged, say, for electric lighting, chiefly by the 
 nature of the service performed. Prices are 
 charged for what may be called economic services 
 wanted by the individual for his private benefit, 
 and fees for what may be called primarily social 
 services, or those performed for the benefit of the 
 community. The public organization charges a 
 fee for acting in its regulative capacity, charges 
 for marriage licenses, and for recording docu- 
 ments. That is, a fee is not charged because the 
 service benefits the individual against whom it is 
 charged. The service is for the benefit of the com- 
 munity as a whole. Fees and prices have been 
 distinguished on the ground that fees are com- 
 pulsory and prices contractual. But if the public 
 organization is the sole source of electric-light 
 supply, the price for electric light is just as com- 
 pulsory for one who wants it as the fee for a 
 license to a man who wants to get married. A 
 special assessment, however, is compulsory. One 
 may question the strict justice of charging to a 
 particular individual the expense of a service for 
 the general benefit. Why, for example, should 
 the cost of administering inspection laws for the
 
 WHAT IS TAXATION? 9 
 
 benefit of the community be charged, as it some- 
 times is, to men engaged in the business subject 
 to inspection? 
 
 It may be objected that a court fee is charged 
 for a service performed for the benefit of an indi- 
 vidual in pursuing his private litigation to enforce 
 his personal right. One reply might be given that 
 it is paid really to maintain the social instrument 
 of justice provided in the courts in order to secure 
 peace to the community and that a proportional 
 part of the judge's salary is not paid by the liti- 
 gant. Another reply might be that if the service 
 is looked on as an individual rather than as a 
 social benefit, the so-called fee is really a price. 
 In the actual administration of court fees, 
 whereby costs are charged to the unsuccessful 
 litigant, the fee is rather in the nature of a pen- 
 alty, either for having brought an unfounded 
 action or for not having met an obligation with- 
 out the compulsion of the courts. 
 
 Whenever the charge exceeds the cost of the ser- 
 vice, whether the ser\ace be individual or social in 
 its nature, the excess over cost becomes a tax. If the 
 service were performed by private instead of pub- 
 lic enterprise such a surcharge would be a profit. 
 
 What a tax is 
 
 Disregarding fines and penalties, as not being 
 imposed primarily for the sake of the public rev-
 
 lO PRINCIPLES OF TAXATION 
 
 enue, we come to that large part of the public 
 service in which it seems inexpedient for one 
 reason or another to attempt to allocate to indi- 
 viduals the cost of doing the service in strict pro- 
 portion to the amount of service performed for 
 the individual. 
 
 It may seem inexpedient for several reasons, 
 all of which may coexist in a given case. 
 
 (i) One reason may be the difficulty of making 
 the allocation. The salary of a legislator or a 
 governor or a mayor would illustrate this as well 
 as other difficulties. 
 
 (2) Another reason may be the difficulty of 
 collecting the charge. To endeavor to defray the 
 cost of maintaining and operating a busy thor- 
 oughfare by collecting a carefully allocated 
 charge would involve a heavy cost of collection 
 and such a hampering of traffic as to be very 
 burdensome, in addition to the great difficulty in 
 making the allocation. 
 
 (3) A third and very important reason lies in 
 the value to the community in having all its 
 members enjoy the benefit of a particular service. 
 In such cases the expense is defrayed in some way 
 so that no one may be deprived of the service 
 because of inability to pay the cost. It is impor- 
 tant that the public peace be maintained and that 
 the life, limb, and liberty of every member of the 
 community be protected. Besides the difficulty
 
 WHAT IS TAXATION? ii 
 
 of allocating the cost, this protection, in the 
 opinion of all people but anarchists, must be 
 given every one, and must be irrespective of 
 ability to pay. 
 
 Public schools afford the best example of this 
 third reason. It would not be especially difficult 
 either to allocate the cost or to collect it, yet the 
 community considers it so important that every 
 one have the advantage of a certain amount of 
 school training that it provides this training 
 through its public organization without paying 
 any attention to the matter of directly appor- 
 tioning the cost. 
 
 We shall consider this last part of the public 
 expenditure — that in which the community 
 makes no attempt at any precise allocation of the 
 cost, but appropriates part of the general priv- 
 ately owned wealth to meet the special public 
 expense. The proceeds of such an appropriation 
 constitute what is properly a tax. Our purpose is 
 to show in what way such an appropriation actu- 
 ally is made, the principles on which it should be 
 made, and to see if our present methods of appro- 
 priation accord with those principles.
 
 CHAPTER II 
 
 WHAT SHALL BE TAXED? 
 
 Since we have considered why taxes are, and 
 what they are, we can now go on to discuss at 
 what points that wealth which is acquired by 
 private undertakings shall be detached from its 
 private ownership for application to the general 
 public expenditure. Of course some person 
 always makes the actual payment of a tax. 
 Either the individuals making up a community 
 or the community acting in its organized public 
 capacity have the entire ownership of the wealth 
 of the community. Though the individuals may 
 organize themselves in the form of a partnership, 
 association, or corporation, they are the ulti- 
 mate real owners, and we must consider any 
 matter of taxation as affecting them. The com- 
 munity may, however, take the individual's pri- 
 vately owned wealth and transfer it to the public 
 ownership according to some aspect or relation- 
 ship of the individual. 
 
 It may tax the individual according to his in- 
 come, or according to the value of the property 
 he owns, or. according to the nature or volume of 
 the business he does, or according to whatever 
 else it might choose. In order to save time, and
 
 WHAT SHALL BE TAXED? 13 
 
 to speak in the common language, instead of us- 
 ing such an extended phrase as "taxing an indi- 
 vidual according to his property or according to 
 his income," we will ordinarily hereafter speak of 
 taxing income, or of taxing property, or of taxing 
 occupation, or whatever may be taken as the 
 measure of the tax. We have always to consider, 
 however, the effect of the tax on the individual 
 who pays it and on the public revenue. As a 
 matter of fact taxes are generally and largely 
 levied according to property. Let us consider 
 whether this is desirable. 
 
 Theories of taxation 
 
 There are two general theories by which the 
 community may impose taxes. It may tax 
 according to j,, general consideration of the ex- 
 pense which the individual imposes on the 
 Government, or it may tax according to a general 
 consideration of the individual's ability to pay. 
 In each case the theory must be stated as a gen- 
 eral consideration of cost or ability^ because, as 
 we shall see, it is impossible or impracticable to 
 apportion the tax with any degree of exactness 
 to cost or ability. 
 
 Cost to government theory 
 
 It seems preferable to state the theory first 
 mentioned as one of apportioning the tax accord-
 
 14 PRINCIPLES OF TAXATION 
 
 ing to the cost to the Government rather than to 
 state it as apportioning the tax according to the 
 benefit to the individuals. Cost and benefit do 
 not, to be sure, amount to the same thing. 
 The people who speak of benefit really are think- 
 ing most of cost. To consider benefit leads into 
 the amazingly difficult philosophical problem of 
 value. Cost involves a problem of accounting 
 easier to solve in the fiscal matter of taxation. ^ 
 
 Theory of ability to pay 
 
 People who write on the theory of taxation 
 to-day are likely to discard, or largely to disre- 
 gard, the principle of cost or benefit as unsat- 
 isfactory, and to place the entire emphasis on 
 ability to pay. I am unable to agree that the 
 theory of cost or benefit is either untenable as 
 
 1 Since economists will consider this statement of taxa- 
 tion theory rather casual, to say the least, and will attribute 
 it to ignorance, I will explain that I am aware of and have 
 considered the wide variety of theory discussed by such 
 American writers as Henry Carter Adams, The Science of 
 Finance; Edwin R. A. Seligman, Essays in Taxation; 
 David Ames Wells, The Theory and Practice of Taxation; 
 Carl C. Plehn, Introduction to Public Finance; Francis 
 Walker, Double Taxation in the United States; Stephen F. 
 Weston, Principles of Justice in Taxation; to say nothing 
 of the foreign writers on taxation. I have chosen to limit 
 the discussion to the two theories stated in the text as 
 those really significant and to avoid obscuring the argument 
 by a fuller discussion of the theory. I want to make my 
 argument as direct as I can.
 
 WHAT SHALL BE TAXED? 15 
 
 explaining present tax phenomena, or undesir- 
 able as a principle on which to base taxation 
 measures. It seems to me that neither the cost or 
 benefit theory, nor the theory of ability to pay, 
 alone adequately explains our present taxes or 
 alone makes a sufficient foundation for construc- 
 tive work. 
 
 Tax practice does not square with exclusive 
 theory of ability to pay 
 
 Though what constitutes ability to pay pre- 
 sents almost as difficult a problem as what 
 measures benefit, still it is fairly obvious that a 
 man earning $10,000 a year from the practice of a 
 profession is probably better able to pay a tax 
 than an invalid who receives a gross income of 
 $1000 a year from the ownership of real estate, 
 worth, let us say, $10,000, and has no other in- 
 come whatever. Yet the real estate owner, pay- 
 ing taxes at the rate of $1.50 per $100, would 
 have to pay $150 in taxes besides providing for 
 repairs and depreciation, atll of which would prob- 
 ably reduce the $1000 of gross, to $500 of net, 
 income. Here, then, is a situation existing in 
 most of the States,- a real estate owner paying 
 state and local taxes of $150 against a net income 
 of $500, and a professional man with a net income 
 of $10,000 who pays no state and local taxes and 
 no direct taxes at all, except the slight federal
 
 I6 PRINCIPLES OF TAXATION 
 
 income tax which is equally levied on income 
 from real estate. ^ 
 
 An income from labor does not indicate the same 
 ability as an equivalent income from property 
 
 On the other hand, compare the man who 
 receives a net income of $5000 because of his 
 ownership of property — or let us say capital, to 
 use the economic term — with the man who 
 receives a net income of $5000 for services, — or, 
 again to preserve the economic term, let us say 
 labor. Is the man who receives an income of 
 $5000 for labor able to pay as much into the pub- 
 lic revenue as the man who receives an income 
 of $5CXX) from capital? The $5000 income from 
 capital is presumably continuing. It will go on 
 irrespective of the health or age of the capitalist. 
 It may extend after his death for those whom he 
 may wish to benefit. Out of the $5000 income 
 from labor the man who receives it must provide 
 against sickness disqualifying for work. To put 
 him on an equal basis with the capitalist as to 
 
 * Wisconsin has an income tax which ranges from one 
 per cent to approaching six per cent. It should be pointed 
 out that even six per cent on income amounts to a tax of 
 only thirty cents on one hundred dollars of capital. This 
 statement, of course, assumes capitalizing the income on a 
 basis of five per cent. Some other States have income tax 
 laws. It is generally stated, however, that these are not 
 enforced. Southern States have occupation taxes.
 
 WHAT SHALL BE TAXED? 17 
 
 ability to pay, he must further set aside enough 
 of his income to amount to $100,000 by the time 
 he is no longer able to earn the income. At five 
 per cent this would continue the income of $5000 
 to death and to his heirs or next of kin or legatees. 
 Picturing the situation a little more clearly, 
 imagine our earner going to an insurance com- 
 pany and asking what premium it would charge 
 him for policies that would pay him at the rate of 
 $5000 during disability, no matter how long, from 
 sickness or accident or old age, and would pro- 
 vide $100,000 at death. This indicates only a few 
 of the differences between income from labor and 
 income from capital, but enough, I think, to show 
 that they are not at all the same thing. This is not, 
 of course, to say that income from labor does not 
 give ability to pay and ought not to be taxed at all. 
 
 Even net income from property does not afford a 
 true measure of ability 
 
 People often assume that the taxation of net 
 income would approximate a tax according to 
 ability more nearly than any other form of taxa- 
 ation. Let us inquire if this is true even of income 
 from capital. We are using the word "capital" as 
 if it were synonymous with "property." As we 
 shall see, this assumption is one of the ingrained 
 fallacies of taxation practice ; but the distinction 
 is not immediately material.
 
 i8 PRINCIPLES OF TAXATION 
 
 Assume that one man has $100,000 invested in 
 a manufacturing estabHshment in which he owns 
 a quarter interest and that he could sell his inter- 
 est for $100,000. From this ownership he derives 
 an income of $10,000 or ten per cent. Another 
 man has invested $100,000 in a street railway in 
 such a way that he derives an income of $5000 
 from his ownership, or five per cent. The fact 
 that the man having capital in the form of fac- 
 tory property derives an income of ten per cent, 
 while at the same time the man having capital 
 invested in street railway property derives an in- 
 come of only five per cent, indicates to any stu- 
 dent of economics that, in the opinion of the 
 community at least, the man who is getting ten 
 per cent is taking more risk than the man who is 
 getting only five per cent. Considering the ten 
 per cent man's liability to loss, he must set aside 
 five per cent as an insurance fund to place himself 
 on the same basis as to the probability of con- 
 tinued income as the five per cent man. As 
 pointed out in the discussion of the difference 
 between income derived from capital and income 
 derived from labor, the probable continuity of 
 income makes a great deal of difference in esti- 
 mating ability to pay.^ 
 
 ^ A provision in an income tax, such as appears in the 
 federal law, permitting the deduction of losses in a given 
 year from the income of that year for taxation, does a 
 little toward offsetting the taxation of risk. Since the tax
 
 WHAT SHALL BE TAXED? 19 
 
 Market price of property a fairer index than income 
 from it of ability to pay taxes on account of it 
 
 If income is not altogether a satisfactory means 
 for measuring ability to pay, what shall the meas- 
 
 may be paid on the risk for many years and the oflFset is only 
 for one year, it is entirely inadequate to meet the situation. 
 As the Federal Income Tax reads, there may be deducted 
 from gross income in computing net income," Fourth, losses 
 actually sustained during the year, incurred in trade or 
 arising from fires, storms, or shipwreck, and not compen- 
 sated for by insurance or otherwise; fifth, debts due to the 
 taxpayer actually ascertained to be worthless and charged 
 oS within the year." 
 
 Assume the case of a man who believes in investing in 
 seven per cent preferred stocks and purchasing those of a 
 number of corporations in order to distribute the risk. 
 Suppose he buys $140,000 of such stocks in ten companies. 
 His annual income amounts to $9800. Allowing him a de- 
 duction of $4000, he will have to pay an income tax on 
 $5800. On the assumption that a capital commitment 
 practically without risk, as in some high-grade, underlying 
 railroad bond, yields four per cent, then three per cent of 
 this man's seven per cent dividends represent risk. Of the 
 $9800 of his total income, $4200 represents risk. To be on 
 the same basis with the man who has invested in the "risk- 
 less" four per cent security, he should pay a tax on only 
 $600. Let us suppose he continues to pay a tax on $5800 for 
 ten years, when a corporation in which he owns $7000 of 
 stock becomes insolvent, and his stock worthless. In that 
 year he receives seven per cent from $133,000 of stock, or 
 an income of $9310. If he were not allowed to deduct his 
 loss, he would have to pay taxes on S5310. Since he may 
 deduct his $7000 loss in this year, he does not for this one 
 year have to pay a tax at all. That is, he has paid a tax on 
 $4200 of income representing risk for ten years, and has re- 
 mitted to him the tax on $5310 for one year.
 
 20 PRINCIPLES OF TAXATION 
 
 ure be? So far as the ability depends on income 
 derived from the ownership of land or capital, our 
 practice may be more nearly just than we some- 
 times suppose. The greater part of our taxes are 
 derived by lewing them on property according 
 to its value as measured by its market price. It is 
 true that the market price for the great mass of 
 property — at any rate of land and of capital 
 used in production — depends on the income 
 derivable from its use. That is quite as we would 
 have it. Market price, however, which is the 
 community appraisal of value, takes into consid- 
 eration such elements as risk and makes the 
 proper allowance for the probable continuance of 
 the income. So does the income itself, to be sure, 
 but does it by including the return for the risk. 
 Take a form of property in which the situation is 
 most readily apparent. Compare a corporation 
 bond selling to yield 4.5 per cent with a corpora- 
 tion bond selling to yield 7 per cent. The addi- 
 tional 2.5 per cent indicates risk. Market price 
 takes risk into consideration by discounting it. 
 Suppose two corporation bonds each state that 
 they pay interest at the rate of 5 per cent. One 
 sells for 100, the other at 95. The lower price has 
 discounted risk. This is just what we want to 
 arrive at for the purpose of taxation.
 
 WHAT SHALL BE TAXED? 21 
 
 Prices, fees, and special assessments are 
 applications of the principle of cost 
 
 Let us apply as a test of taxation a consider- 
 ation of the expense an individual imposes on the 
 Government. We have already considered cer- 
 tain public activities in which the entire cost can 
 be allocated to all the beneficiaries. This would 
 be the case of the public organization undertak- 
 ing private electric lighting. We have remarked 
 that the expense is not allocated in proportion to 
 the benefit received, but in proportion to the cost 
 of rendering the service. 
 
 The community also levies according to cost in 
 the case of special assessments for streets and 
 sidewalks in which the cost cannot be allocated 
 to all the beneficiaries; for those people who use 
 the street or sidewalk as a thoroughfare, and not 
 at all for access to any premises on the street, are 
 beneficiaries as well as the abutting owners them- 
 selves. In the case of fees for such things as 
 licenses, which the community requires for regu- 
 lation, it goes even so far as to charge the cost of 
 the service to the applicant, though not he but 
 the community gets the benefit. In the case of 
 prices and special assessments, and even of fees, 
 people do not generally object to, in fact they 
 generally approve of as fair, this method of ex- 
 acting payment according to cost. May not the
 
 22 PRINCIPLES OF TAXATION- 
 
 application of the principle be extended to taxa- 
 ation proper? 
 
 Extending to taxation the principle of payment 
 
 for cost 
 
 That one should in general pay for benefits 
 received seems a sound proposition. Individuals 
 conduct their business relations with each other 
 on that basis. Requiring payment has the social 
 advantage of helping to prevent waste. It leads 
 to a realization that the service or other bene- 
 fit has cost something, has required sacrifice. 
 Nothing else quite so effectively brings this home 
 to the individual receiving the result of the sacri- 
 fice as requiring him to pay, to make some sac- 
 rifice in return. Certainly it is not fair to impose 
 a sacrifice on those who receive none of the bene- 
 fits for the purpose primarily of freeing those 
 who do receive the benefits from giving a quid 
 pro quo. So it would seem fair to extend so far as 
 possible the principle of payment for the public 
 service in those cases in which that principle is 
 not overridden by considerations which the com- 
 munity counts more important. 
 
 If the community had not based its taxation on 
 this principle as well as on the principle of ability 
 to pay, it would have been obliged to adopt the 
 principle of progression in taxation to an extent 
 no one has dreamed of applying in practice. To
 
 WHAT SHALL BE TAXED? 23 
 
 hold that this is not so, it seems to me that the 
 term "ability" as applied to taxation must be 
 interpreted to mean something different from the 
 connotation generally understood. The force of 
 this principle of taxation according to cost of 
 service has, indeed, weighed much heavier, I 
 believe, than the force of the principle of taxa- 
 tion according to ability to pay. 
 
 What is ability to pay? 
 
 The question of what constitutes ability to pay 
 presents an ever-recurring difficulty of definition. 
 The phrase has elements almost as hard to sepa- 
 rate and define as the elements of "value," or of 
 "benefit." So such words as "value" and "bene- 
 fit," and phrases like "ability to pay," have a 
 vagueness which makes them puzzling in use. 
 Still, it is possible to come to some conclusions 
 about them. 
 
 Though we have already discussed some of the 
 difficulties of gauging ability by net income, and 
 the superiority of property values in forming an 
 estimate, we have not before raised the broad 
 question of whether ability to pay is in any way 
 proportionate either to amount of income re- 
 ceived or to the market value of property owned. 
 If it is proportional, can we state the proportion 
 in mathematical terms? Does the ability vary 
 directly as the income or does it vary, say, as the
 
 24 PRINCIPLES OF TAXATION 
 
 square of the income? On the test of a concrete 
 case it appears certain that ability increases 
 much more rapidly than income. Assume that 
 one dollar a day will meet the absolute require- 
 ments of an adult for subsistence. Then the man 
 who receives $365 a year has absolutely no ability 
 to pay taxes. If he should part with one per cent, 
 $3.65, to the State, on our assumption he would 
 starve. Assume his income increases one dollar 
 to $366. Then he could part with that dollar to 
 the State without starving. Compared with him, 
 however, a man receiving an income of $1365 is 
 able to part with $1000 to the State. It would 
 appear from this that a complete application of 
 the theory of ability to pay would involve estab- 
 lishing a certain minimum of income as exempt 
 from levy and taking everything in excess of that. 
 Let us in our assumed case try exempting $365 
 from taxation and taxing each 10 per cent on his 
 income in excess of that. One man would pay 10 
 cents and have 90 cents left ; the other would pay 
 $100, and have $900 left. Each has paid in a direct 
 proportion. Has each paid according to his abil- 
 ity? The principle of paying according to ability 
 is sometimes stated as one of equality of sacrifice. 
 These men have not made an equal sacrifice in 
 any sense. If the second man had paid only 10 
 cents into the public fund instead of $100, there 
 would in one sense have been an equality of sacri-
 
 WHAT SHALL BE TAXED? 25 
 
 iice. If the State had not taken the 10 cents, each 
 might have had a cigar with his dime. So each 
 may be thought of as having equally sacrificed a 
 ten-cent cigar. But I doubt if this is what people 
 mean when they say "equality of sacrifice." 
 
 Ability to pay sJwuld not be the only principle 
 
 oj taxation 
 
 However interesting it may be to speculate 
 over what constitutes ability to pay, as a matter 
 of fact it is not capable of such precise statement 
 as lends itself to anything like exact application. 
 To say that it means equality of sacrifice simply 
 substitutes one obscure phrase for another. Abil- 
 ity to pay does, as a term, convey a substantial 
 meaning to the minds of most people, and that 
 meaning involves something that a payment in 
 direct proportion to income or property, or even 
 any rate of progression ordinarily thought of, 
 does not satisfy. Our present taxation does not 
 square with the meaning the term conveys to 
 people, and I think that the community should 
 not now be guided by that principle alone in 
 levying taxes. 
 
 People of equal ability to pay taxes may impose 
 different costs 
 
 Let us return to a consideration of taxing to the 
 individual the cost of the benefit that the Gov-
 
 26 PRINCIPLES OF TAXATION 
 
 ernment confers on him. Does one person nor- 
 mally cost the Government more than another? 
 To state the question in fuller form, does one 
 person put the Government to greater expense 
 for the benefits that person receives from the 
 Government than another? I believe the answer 
 is "yes"; and that the cost of certain activities 
 of the Government for each person may be 
 apportioned in a very rough way in proportion 
 to the value of the person's property. 
 
 Special costs imposed by property 
 
 There is the cost of constructing and maintain- 
 ing the highways. We are not considering now 
 those streets which are built by special assess- 
 ment, but such thoroughfares as state, county, 
 and town roads, which the public organization 
 pays for from the proceeds of taxes. Such roads 
 are built as well as maintained out of the general 
 tax fund because no special persons are so pre- 
 ponderantly the beneficiaries as in the case of 
 streets built by general assessment. They do 
 benefit the owners of real and other tangible 
 property within their general area, however, 
 more than they benefit one who does not own 
 any property of that kind. Though the public 
 service diffuses itself throughout the community 
 in such a way that it is impossible to follow it 
 with a definite apportionment of the cost in-
 
 WHAT SHALL BE TAXED? 27 
 
 curred on account of each beneficlaty, it is, 
 nevertheless, possible to select the general class 
 especially benefited. In this case it is the real 
 and other tangible property owners. To appor- 
 tion the cost among the members of this class 
 according to the market value of their property 
 does not closely apply alone either the princi- 
 ple of apportionment according to the cost of 
 the service rendered to each member of the class 
 or the principle of levying the tax according to 
 ability to pay. Neither theory alone explains 
 the situation; both together cover it. It comes 
 as close as the community can get, under the 
 circumstances, to apportioning the cost of the 
 service rendered each beneficiary, and it seems 
 to me desirable that the community should do 
 that with its public undertakings so far as pos- 
 sible. When that becomes no longer possible, 
 or other considerations become more important, 
 then the public expense not so apportioned goes 
 into the common burden to be borne according 
 to ability. 
 
 In the same way the community incurs the 
 cost of police and fire protection largely on ac- 
 count of property, and the owners of property 
 should bear the burden so far as it is possible to 
 ascertain what part of it is on their account. 
 So far as the community furnishes the police and 
 fire protection for the preservation of life, limb,
 
 28 PRINCIPLES OF TAXATION 
 
 and liberty, the property owners benefit as much 
 as any other members of the community. Since 
 they benefit especially as property owners, it is 
 fitting that as such they should bear that part 
 of the expense of which they are the beneficiaries. 
 The cost of this protection does in general bear a 
 direct proportion to the market value of the 
 property. This may be to an astonishing degree 
 not so in particular instances, especially in the 
 matter of fire protection. Fire protection costs 
 nothing for vacant lots or, indeed, for any land 
 whatever, whether built on or not. It does not 
 cost as much for an office building of fireproof 
 construction worth several hundred thousands of 
 dollars as for a row of old shacks worth almost 
 nothing. Police protection costs relatively little 
 for vacant lots, or land as such, in general. It 
 does bear some direct, though by no means exact, 
 proportion to the value of buildings and other 
 property. Still, considering the whole situation, 
 we find that a tax in proportion to the value of 
 property relates itself to the cost of rendering the 
 service on account of the property. 
 
 One further reason for taxing according to the 
 value of property involves something besides all 
 the reasons given of the various costs to the com- 
 munity on account of property. It is the very 
 fact that the community maintains the institu- 
 tion of private property. Though it does so as a
 
 WHAT SHALL BE TAXED? 29 
 
 matter of social utility, because it believes the 
 private ownership of most property more advan- 
 tageous to the community than public ownership, 
 nevertheless, in maintaining private property as 
 an institution, it does especially benefit the 
 owners of the property. So for this general reason 
 it seems fitting that taxes should be levied largely 
 according to the value of property owned and, 
 incidentally, that the theory of ability meet with 
 some further limitation on this account. 
 
 Some public expendihires are not on account 
 of property 
 
 One of the largest of our public expenditures, 
 that for schools, does no direct service at all to 
 the property owner as such. Expenses for main- 
 taining the poor, for hospitals, for safeguarding 
 the public health have no direct relation to the 
 property owner. These public activities benefit 
 a man as a property owner only in indirect, 
 remote wavs, negligible for our purpose. More- 
 over, the sole consideration of the State in under- 
 taking the expense of education, for example, 
 is to free the direct beneficiary from bearing the 
 cost. If the direct beneficiary does not bear the 
 expense, who will? The community answers that 
 each member of the community shall bear it 
 according to his ability. 
 
 Why do we get this answer? It rests on a moral
 
 30 PRINCIPLES OF TAXATION 
 
 doctrine of altruism which says that each man 
 owes service to the community according to his 
 ability. This in turn rests on the basis that the 
 ultimate progress and happiness of the individual 
 is so intimately related to the progress and hap- 
 piness of the group, that each depends on the 
 other. In levying taxes according to ability the 
 community says it will, through its organization, 
 the State, exact this much from the individual. 
 Outside of this exaction it leaves the matter as 
 one of private morals. .
 
 CHAPTER III 
 
 SHOULD ALL PROPERTY BE TAXED ALIKE? 
 
 We have come, then, to the general conclusion 
 that the value of property aflfords a sound basis for 
 levying a large part of our taxes. So far in dis- 
 cussing our subject we have indicated as little as 
 possible that there are various classes of property. 
 
 Property and wealth not synonymous 
 
 Before going further we must recognize the 
 fact that the term "property" is a legal rather 
 than an economic term. Yet we are discussing 
 taxation primarily as an economic rather than as 
 a legal matter. Much of our practice in taxation 
 has confused the legal word "property" with the 
 economic word "wealth," and has gone ahead 
 as if they were synonymous. Much of the com- 
 mon misconception of taxation matters rises out 
 of an unconscious assumption that wealth in its 
 technical economic sense is the same thing as 
 wealth in popular meaning. 
 
 In order to facilitate our discussion we will not 
 attempt to stick to the economic distinction of 
 land and capital, except when considering some 
 such matter as the proposal to tax land exclu-
 
 32 PRINCIPLES OF TAXATION 
 
 sively or at a different rate from capital, which 
 requires us to recognize the distinction. Other- 
 wise we are discussing the taxation of wealth, 
 and from both the popular and accounting stand- 
 point, all wealth used in production, whether 
 capital in the economic sense or land, is capital, 
 and we shall speak of it as such. 
 
 The legal term "property" covers a great deal 
 that has nothing to do with the economic term 
 "wealth." In any precise sense, useful for 
 economic thinking, wealth means always some 
 material thing. Houses, lands, cattle, tools, 
 machinery, factories, jewels, paintings constitute 
 wealth. Ownership of all these things comes 
 within the term "property," but property covers 
 many things that are not wealth at all. If Smith 
 owes Jones $1000, Jones has a right against 
 Smith and Smith owes an obligation to Jones 
 that constitutes property. Jones owns this prop- 
 erty. The fact that Smith owes Jones does not 
 constitute wealth at all. Otherwise a group of 
 people, sitting in a room together, say, could 
 become wealthy far "beyond the dreams of 
 avarice" by solemnly making mutual promises to 
 each other. In this way a nation could increase 
 its wealth to any extent. Yet most of our tax 
 practice has gone on the assumption that such 
 promises create wealth, and has purported to 
 treat them just as if they were actual wealth.
 
 EQUALITY OF TAXATION 33 
 
 Different forms of property impose different 
 amounts oj public cost 
 
 If a man has a right to receive a sum of money, 
 is a creditor, he undoubtedly owns property in a 
 legal sense. Does any of our argument in the 
 preceding discussion about the cost of govern- 
 ment activities in relation to property apply to 
 this kind of property? If any of it applies, how 
 much? The construction and maintenance of 
 highways certainly has nothing to do with this 
 kind of property. A road has no effect on a debt. 
 Expenditures for fire protection do not benefit 
 a debt. The protection of policemen, whether in 
 uniform or in plain clothes, does not extend to 
 the debt itself. In each of these instances, of 
 course, I refer to the debt as such. These things 
 are done with regard to the tangible property 
 irrespective of whether or not it stands in any 
 way as security for the debt. They have no 
 reference to the debt itself. In a large measure 
 the evidence of a debt may be stolen without in- 
 juring the creditor's right, which is his property. 
 In the cost of police protection to the evidences 
 of these rights, their creation and ownership 
 does impose some expense on the Government. 
 Especially part of the cost of maintaining the 
 courts in which these rights may be enforced is 
 chargeable to them. So on the principle of
 
 34 PRINCIPLES OF TAXATION 
 
 taxing according to the cost of the pubhc service 
 performed, we find that something should be 
 taxed to the owners of riglits of this kind. Most 
 of the great public expenses incurred in connec- 
 tion with property we have seen have nothing 
 to do with this kind of property. 
 
 Do all forms of property equally give ability 
 to pay? 
 
 When we come to the test of ability to pay we 
 raise an issue impossible to discuss in so brief a 
 way. Certainly a man who receives an income of 
 $5000 from debts owing him is able to pay just 
 as much as the man who receives an income of 
 $5000 in rent from real estate which he owns. 
 Both receive an income, not dependent like earn- 
 ings, on a continuance of life and health. It seems 
 in all respects in which generally men should 
 bear the public burden according to their ability 
 that these men should pay taxes alike. On hasty 
 thought that seems the logical conclusion. 
 
 New considerations in taxation 
 
 Other considerations come in at this point to 
 make a change in the direction of our line of 
 thought. In fact, our discussion has already gone 
 far enough to show that the line of thought in 
 taxation is likely to be the result of more forces 
 than the most complex astronomical orbit. We
 
 EQUALITY OF TAXATION 35 
 
 said early in ourargument'that taxation consists 
 /^"taTohg a certain part of the privately owned 
 I wealth and transferring it to public ownership in 
 'i order that it may be used in the public undertak- 
 '; ings. ySince this is a continuous process, taxes 
 must come out of the economic income of the 
 community. There can be a continuous trans- 
 ference of wealth only as there is a continuous 
 creation of wealth. But a debt is not wealth and 
 does not create wealth. 
 
 A credit is neither la^id, labor, nor economic 
 
 capital 
 
 Land, labor, and capital economists state as 
 the elements entering into the production of 
 wealth. In the economic use of the word, "capi- 
 tal" consists of wealth, tangible things, buildings, 
 machinery, tools, food, clothing, used or con- 
 sumed in the process of the production or crea- 
 tion of wealth. These things, land, labor, and 
 capital together, produce all the "ability to pay" 
 there is. Though from an individual standpoint, 
 if Smith has an income of $5000 from interest on 
 debts due him, and Jones an income of $5000 from 
 the rent of land he owns, both are equally able to 
 pay; nevertheless, from the community stand- 
 point, to tax them both alike taxes the com- 
 munity as a whole on an absolutely fictitious 
 ability to pay. Suppose the value of the land
 
 36 PRINCIPLES OF TAXATION 
 
 and other tangible property of a community is 
 $2,000,000 and the citizens of that community 
 owe each other debts to the amount of $1,000,000. 
 Conceivably this entire debt might be liquidated 
 and the productive power of the community, its 
 ability to pay, not be diminished in the least. 
 The same amount of land, labor, and capital 
 would be there as before. All that would happen 
 would be that the legal titles to the land and 
 capital would be somewhat rearranged. 
 
 Taxing credits taxes a method of doing business 
 
 When a community taxes credits it does not 
 tax wealth at all, but a method of doing business. 
 It is taxing the method of conducting business on 
 credits. The community approves this form of 
 doing business by giving it the full benefit and 
 protection of its legal machinery. Apparently, 
 the community does not levy a tax on it in order 
 to discourage it by a penalty. 
 
 A form of business may add to productiveness 
 
 Though we have mentioned the possibility of 
 liquidating the indebtedness of a particular com- 
 munity without decreasing its productive power 
 in the least, presumably this is not true of all 
 indebtedness. Doing business by means of cred- 
 its is advocated as increasing somewhat the 
 productiveness of a community. It is stated that
 
 EQUALITY OF TAXATION 37 
 
 credits tend to place the capital of the community 
 in the control of those able to make the most 
 productive use of it. Certainly they do not aver 
 age to increase productiveness lOO per cent. A 
 defense of the taxation of credits at the same rate 
 as tangible property must make that assumption 
 in so far as the rate is based on any real ability 
 to pay. 
 
 Capital commands a uniform rate of return 
 
 A concrete example will show that the taxation 
 of credits taxes a form of doing business. Ability 
 to lend implies control over the use of capital. 
 Enough capital can be diverted from one use to 
 another, and the possible uses are so various at 
 any time that, leaving out of consideration the 
 matter of risk, the control of capital commands 
 a uniform rate of return. If Brown has $10,000 
 and can buy a house which he can rent to give 
 him a real net return of 4 per cent after making 
 a proper allowance for risk, depreciation, man- 
 agement, and everything else, he will not lend 
 that $10,000 to Robinson for a net return of less 
 than 4 per cent. If the community will tax 
 Brown 2 per cent on the debt Robinson will owe 
 him. Brown will charge Robinson 6 per cent for 
 the loan; but if the community will not levy any 
 tax at all, Brown will let Robinson have the loan 
 for 4 per cent.
 
 38 PRINCIPLES OF TAXATION 
 
 Illustration of taxing a business method 
 
 Suppose Robinson has $10,000 himself, and 
 wants to borrow the other $10,000 and buy a 
 $20,000 farm neighboring to a farm owned by 
 Jones, free and clear of all debt and worth 
 $20,000. Assume that Jones and Robinson are of 
 equal ability as farmers, and that each should 
 get a return of $1200 for his work as a farmer. 
 Since the farmers are of equal ability and the 
 farms of equal value, suppose each farm produces 
 a return of $2000. Jones then gets a capital return 
 of 4 per cent on his capital investment and $1206 
 for his ability as a farmer. Robinson must pay 
 $600 in interest. If we allow him 4 per cent on his 
 capital investment of $10,000, or $400, we leave 
 him only $1000 for his work as a farmer, or $200 
 less than Jones, a man of no greater ability. By 
 taxing credits we have taxed Jones's form of 
 doing business and heavily penalized him for 
 being a poor man. By seeming to tax the creditor 
 according to his apparent individual ability, the 
 community really taxes the debtor all out of 
 proportion to the debtor's ability. 
 
 So it appears that the community cannot fairly 
 tax according to property in the legal sense, but 
 must in any taxation of property tax substantially 
 according to wealth in the economic sense. Some 
 writers speak of this as a taxation of production.
 
 EQUALITY OF TAX.\TION 39 
 
 It does tax one element of production, capital. 
 Since taxes must be paid out of wealth, to bear 
 any relation to ability to pay they must in some 
 way relate to production. We should notice, how- 
 ever, that taxation of wealth extends to a some- 
 what broader area than taxation of capital, 
 which is wealth used in production. It covers 
 wealth not used in production, ornamental 
 jewels, pleasure vehicles, costly habitations, 
 ever>'thing not essential to our annual produc- 
 tion. In the taxation of unproductive wealth of 
 this kind, the nature of the tax really shifts from 
 a tax on production to a tax on consumption. 
 
 Incidence oj taxation of credits falls on the 
 debtor and stays on him 
 
 Through the shifting of the incidence of taxa- 
 tion, any tax which is evenly levied on the cap- 
 ital employed in a given line of production comes 
 out of the ultimate consumer of the product. If 
 all producers of a given product have to pay the 
 same amount of tax on the capital employed in 
 their business, they will simply add the tax to 
 the price charged for the product. The producer 
 can charge the tax to the consumer only when all 
 other producers of the same commodity pay a 
 tax at as high a rate as his. To test this, let us go 
 back to Jones, who owns a $20,000 farm clear 
 and free of debt, and Robinson, who owns a
 
 40 PRINCIPLES OF TAXATION 
 
 $20,000 farm with a $10,000 mortgage on it. 
 Because the community levies a tax of $200 on 
 the man who loans $10,000 to Robinson, the 
 lender must charge $200 more than he would if 
 he did not have to pay any tax. Robinson pays 
 directly the tax on his farm of the value of 
 $20,000, and indirectly the tax of 2 per cent on 
 the debt of $10,000. Suppose both Jones and 
 Robinson are taxed 2 per cent on a valuation of 
 $20,000 on their farms. Jones then pays a tax of 
 $400, but Robinson pays a tax, directly and in- 
 directly, of $600. Let us assume that both pro- 
 duce only milk, and that they supply all the 
 milk used in a near-by manufacturing town. 
 Obviously Robinson cannot charge more for his 
 milk than Jones, and cannot add his extra $200 
 of taxes to the price he charges the consumer. 
 
 Thirty thousand dollars property, hut only 
 twenty thousand dollars of wealth 
 
 Such a situation as Robinson's borrowing 
 $10,000 from Smith in order to buy a $20,000 
 farm comes down to the fact that Smith and 
 Robinson each have $10,000 of capital invested 
 in the same farming enterprise. This comprises 
 the total value of $20,000 of wealth to be taxed. 
 The business arrangement between the parties 
 as to who is to conduct the enterprise, in what 
 way the risk is to be borne, and the whole legal
 
 EQUALITY OF TAXATION 41 
 
 superstructure of title, mortgage, equity of 
 redemption, etc., around the transaction, have 
 nothing to do with taxation. Both own an equal 
 amount of wealth, impose equal costs on the 
 Government, and, assuming that this investment 
 represents the entire wealth that each owns, 
 each, so far as his wealth goes, has an equal 
 ability to pay. Jones, having an investment all 
 his own of $20,000 in a neighboring farm, costs 
 the Government as much as, and has an ability 
 to pay equal to, Robinson and Smith together. 
 If the same amount of taxes is paid out of the 
 products of each farm, all three have come out 
 square with the Government. 
 
 The corporate form of enterprise also creates 
 property representatives of wealth 
 
 Exactly the same economic situation arises 
 with capital invested in an enterprise conducted 
 under the corporate form. Robinson in buying a 
 farm by means of borrowing takes advantage of 
 a means society has devised for the mutual bene- 
 fit of both Robinson and the lender. Smith. 
 Without this means Robinson could not engage 
 in business on so large a scale and would not have 
 a chance to use his abilities to so great an advan- 
 tage. Smith would be obliged to put time and 
 energy into managing his own business, or, in any 
 event, if he employed a manager he would have
 
 42 PRINCIPLES OF TAXATION 
 
 to assume the risk of the enterprise, in order to 
 gain any income from the use of his wealth. The 
 corporate form of doing business is simply 
 another device of society to give the individual 
 a greater freedom of action. People use their 
 wealth in an economic way through the machin- 
 ery of this device. Obviously, if Jones, who owns 
 his $20,cxx) farm free and clear, decides to take 
 advantage of the opportunity the law affords 
 him of turning his business, now under his direct 
 personal ownership, into a corporation, and 
 organizes the Meadowbrook Dairy Company, to 
 which he turns over his farm and takes stock of 
 the par value of $20,000, he has not increased the 
 wealth of the community at all. Wealth to the 
 value of $20,000 is still there, and nothing more 
 whatever. If he decides to retire and disposes of 
 his corporate stock, $5000 each to Brown, John- 
 son, Davis, and Roe, he does not change in the 
 least the amount of wealth in the community. 
 There is just $20,000 worth of wealth invested 
 in dairying. 
 
 Ownership under the corporate form cannot shift 
 the incidence of taxation greater than taxation 
 of individual ownership 
 
 Now assume that the community taxes the 
 corporation for the value of its farm on $20,000 
 at the rate of 2 per cent and taxes each of the
 
 EQUALITY OF TAXATION 43 
 
 shareholders at the rate of 2 per cent on the value 
 of their corporate stock. The corporation pays 
 $400 in taxes and the shareholders pay $400 in 
 taxes, or a total payment of taxes which must 
 be made out of the earnings of the farm of 
 $800. 
 
 Following through the same argument as in 
 the case of the debtor and creditor, consider 
 Robinson, who, we will now assume, to simplify 
 the illustration, owns his $20,000 farm free from 
 debt. Let us have the corporation hire Jones as a 
 manager at a salary of $1200. Jones and Robin- 
 son, we remember, are men of the same ability as 
 farmers. Without taking out taxes or paying 
 Jones a salary, or allowing Robinson anything 
 for his labor, the product of each farm brings 
 $2500 net. Since Robinson has produced exactly 
 the same results as Jones, his labor is worth the 
 same as Jones's, or $1200. This reduces the 
 return from the farm to $1300. Robinson pays 
 $400 in taxes, and has left a return of $900 on his 
 capital investment, or 4.5 per cent. How do the 
 Meadowbrook Farm people come out? After 
 paying Jones's salary they have left $1300. The 
 corporation pays $400 in taxes and has $900 to 
 distribute in dividends to the shareholders. 
 They have to pay a total of $400 more in taxes, 
 leaving an actual return on capital of $500, or 
 2.5 per cent.
 
 44 PRINCIPLES OF TAXATION 
 
 Bank deposits and capital 
 
 So,inthesameway,taxingbankdepositsineffect 
 taxes bank loans and those people who take advan- 
 tage of such loans in financing their enterprises. 
 
 Since banks invest their capital in the same way 
 as they invest their loans, the same reasoning 
 applies. Of course, in so far as they invest in 
 land, building, or other forms of tangible prop- 
 erty, such property should be taxed the same as 
 any other property of like kind. 
 
 Our argument does not lead to the conclusion that 
 representative forms of property should not he 
 taxed at all 
 
 Our argument does not lead to the conclusion 
 that the community should not tax at all those 
 forms of property which represent wealth, but 
 are not themselves wealth in the ordinary use 
 of the word in economic discussion. Though the 
 community does not incur anything like the cost 
 on account of the representative that it incurs on 
 account of the property represented, it does, 
 nevertheless, undergo some extra expense on 
 account of enterprises which make use of those 
 business methods producing representative forms 
 of property as compared with those forms of 
 enterprise which do not make use of representa- 
 tive forms of property. It has all the expense im-
 
 EQUALITY OF TAXATION 45 
 
 posed by directly owned or other "unrepresented" 
 property, and such relatively slight expenses as 
 the addition of the representative form implies. 
 
 To tax these representative forms of property 
 inevitably taxes those enterprises which make 
 use of such representative forms. Capital always 
 has a choice between going into a loan and going 
 into the direct ownership of tangible property. 
 It always has the choice between going into 
 enterprises in the corporate form and those not 
 in the corporate form. These forms of enterprise 
 compete with each other for capital. After mak- 
 ing allowance for the estimate of risk, capital as 
 such has absolutely one price. Though this price 
 may vary from hour to hour, at any given 
 moment it is exactly uniform. To tax capital 
 because it goes into any particular machinery of 
 business, credits, the corporation, taxes that 
 particular form of conducting enterprise. Some 
 small expense for police protection of whatever 
 tangible form in the piece of paper that the 
 property takes, — note, bond, share of stock, or 
 whatever, — and a relatively larger part of the 
 expense of maintaining the courts in which the 
 rights are enforced, make the entire expense this 
 form of property imposes on the community. 
 
 We might not come to the conclusion, either, 
 that these small costs to the Government com- 
 prise absolutely the only amount which the com-
 
 46 PRINCIPLES OF TAXATION 
 
 munity may properly tax to the owner of intangi- 
 bles, and so, back to the enterprise which gives 
 rise to their issuance. Though a method of doing 
 business, as by the credit system or the corporate 
 form, is not capital in any sense, economic or 
 other, it may, nevertheless, enable a given indi- 
 vidual, or group of individuals, to produce more 
 than would be possible without it. We should not 
 jump to a hasty conclusion, however, from an 
 application to taxation of part of the theory of 
 trading on the equity, that is, of doing business 
 on borrowed money. 
 
 Most of the appareyit gains from borrowing 
 represent risk 
 
 Suppose Brown has a farm worth $10,000, from 
 which he is able to make $800, after allowing 
 himself $1200 for his labor, or he makes, say, 
 8 per cent on his capital. Assume further that he 
 borrows $10,000 at 6 per cent, and is able to 
 increase the net earnings from his farming opera- 
 tions by $QOO, so that they now total $1700 on a 
 capital invested in the enterprise of $20,000, or 
 8.5 per cent. Since he must pay interest of $600, 
 the net returns to him are $1100. Borrowing at 
 6 per cent and making a return of 8.5 per cent, 
 he is, we must presume, assuming a risk equiva- 
 lent to 2.5 per cent on the new capital, or $250, 
 and that he has thrust an additional risk of .5 per
 
 EQUALITY OF TAXATION 47 
 
 cent, or $50, on his old capital, a total of $300, 
 or all his seeming gains, he must count as pre- 
 mium for risk he has assumed. Though all this 
 reasoning is, of course, pure theory, it probably 
 comes very near the truth of the facts, which 
 in themselves are not absolutely establishable. 
 Apparently the credit form of doing business does 
 little for a man from an economic standpoint 
 but put him in a position to make some extra 
 advantage out of his business skill by being an 
 insurer of business risks, and so, in some measure, 
 increases his ability. 
 
 The corporate form may to some extent enable a 
 more profitable employment of capital because of 
 conducting business on a large scale 
 
 Doubtless some kinds of enterprise can be 
 carried on more profitably on a large than on a 
 small scale, and some kinds of enterprise can be 
 undertaken only on a large scale. From this 
 standpoint the corporate form, which especially 
 enables the aggregation of capital necessary for 
 the conduct of business on a large scale, may be 
 said also in some degree to increase ability to pay. 
 Obviously, this increase does not lend itself to 
 measurement as an actual fact or to theoretical 
 calculation. Certainly it seems an unsound basis 
 for any but slight taxation. 
 
 This consideration of possible greater profit-
 
 48 PRINCIPLES OF TAXATION 
 
 ableness of enterprise because of the use of some 
 representative form of property in carrying it 
 on is too conjectural a matter to afford a sound 
 basis for taxation of any consequence. It has 
 been mentioned simply to show that it has been 
 given consideration. Except for the case of the 
 magnitude of corporate enterprise, it is based on 
 special personal productive capacity, or business 
 skill, and is not fair unless other special personal 
 productive capacity is also taxed. 
 
 In so far as the machinery of indirect owner- 
 ship in its various forms may tend to bring the 
 management of wealth into more skilful hands, 
 we should rely, to reach that special ability to 
 pay taxes, on whatever means may be devised 
 for reaching the ability to pay, due to more 
 skilful management of directly owned wealth as 
 compared with the less skilful managment of 
 indirectly owned wealth. 
 
 In taxation of intangibles not forced to fall hack on 
 the principle of what the traffic will hear 
 
 People often discuss the matter of the taxation 
 of intangible property from the "practical" 
 viewpoint of experience without going into the 
 economic questions involved. They usually 
 advocate taxation at as low a rate as the traffic 
 will bear and produce a maximum of revenue. 
 Our multiplicity of taxing jurisdictions in the
 
 EQUALITY OF TAXATION 49 
 
 United States, with their diversity of laws, adds 
 to the difficulties of assessment and collection of 
 taxes on intangibles. It seems hardly necessary, 
 however, to fall back in this matter, without other 
 recourse, on a doctrine of expediency that dis- 
 regards any question of fairness. 
 
 In answering the question as to whether all 
 classes of property should be taxed at the same 
 rate, we have so far considered only the division 
 of property into tangible and intangible. What 
 has been said indicates that there seems no basis 
 for a difference betw^een privately created intangi- 
 bles such as credits and stocks. Whether the 
 public debt, municipal and state bonds, afford a 
 basis for a difference raises considerations that 
 we will not take up at length. Omitting from the 
 argument the fact of a multiplicity of taxing 
 jurisdictions, it would be absurd for a municipal- 
 ity, say, to tax its own bonds. Whether the fact 
 that a city's bonds are not necessarily all owned 
 by its citizens makes any difference, we will 
 leave for later discussion. Let us now consider 
 whether tangible property should be separated 
 into classes for purposes of taxation. 
 
 Should tangible property he classified for taxation 
 at different rates? 
 
 Should the community distinguish between 
 real and tangible personal property in taxation?
 
 50 PRINCIPLES OF TAXATION 
 
 In answering this question, let us consider one at 
 a time various classes of tangible personal prop- 
 erty. Though all kinds of wealth, excepting bare 
 space of the earth, is in the process of consump- 
 tion, some kinds are being consumed much more 
 rapidly than others. So it is possible to distin- 
 guish tangible personal property on this basis. 
 As a practical matter, accountants do classify it 
 this way as permanent assets and quick assets. 
 
 The difference between permanent assets in 
 the form of buildings and permanent assets in 
 the form of personal property — for example, a 
 harvesting machine — does not afford a ground 
 of distinction in taxation. On the test of cost 
 to the Government, both impose about equal 
 charges. Highways, police and fire protection, 
 the machinery of the courts contribute to both. 
 On the test of ability to pay both are on the same 
 basis. Each contributes to productive power, 
 and the market price of any particular piece of 
 property measures the value of that contribu- 
 tion. It is true that the harvester will probably 
 be consumed much sooner than the building. 
 The market price, however, takes that fact into 
 consideration. 
 
 The same argument applies to quick assets, 
 both on the test of cost to the Government and 
 on the test of ability to pay, and no difference 
 appears between goods in the course of manu-
 
 EQUALITY OF TAXATION 51 
 
 facture and goods otherwise on their way to con- 
 sumption. A merchant's stock of goods may seem 
 to call for special consideration. Such a stock, 
 however, is capital invested in the business of 
 creating time and place values in merchandise. 
 Such values are just as real and constitute a 
 production of wealth just as truly as the creation 
 of form values. No reason appears in the nature 
 of the property for treating stocks of trade differ- 
 ently from other forms of tangible property we 
 have been considering. 
 
 This consideration of whether tangible prop- 
 erty should be classified for taxation at difTercnt 
 rates is not intended to be exhaustive, but simply 
 to indicate some general principles. Special con- 
 siderations may arise in certain cases. Growing 
 timber, for example, cannot stand taxation at 
 the same rate as other real estate. ^ Automobiles, 
 
 1 It seems as if there must be a failure to realize how 
 heavily the regular rate of taxation, if enforced, counts 
 against the long-delayed returns of the timberland, or else 
 such property would be considered rather a liability than an 
 asset. To show the effect of an annual payment of a tax 
 without having an annual return to pay it out of, I have 
 worked out a problem. This problem simply shows how 
 much paid for taxes each year would amount to if invested 
 in something bringing a current income. The sum is offset 
 against the annual increase in the value of the property, 
 which is assumed to be the total increase in value divided 
 by the number of years to get the increase. A glance shows 
 in how few years the increase in value equals or exceeds the 
 compounded tax for the year. The problem states condi-
 
 52 PRINCIPLES OF TAXATION 
 
 which are imposing very heavy costs on account 
 of highways, might be taxed higher than other 
 forms of property, on the principle of taxing 
 according to cost imposed on the public organiza- 
 tion. 
 
 The taxation of wealth not used in production 
 
 Our argument so far has neglected wealth not 
 used in production. Ornaments, habitations 
 larger and more expensive than necessary for 
 health and comfort, automobiles and yachts 
 used for pleasure would come into this class of 
 property. On the test of cost to the State this 
 class of property should be taxed on the same 
 basis as any other. The test of ability to pay 
 does not apply. By the very definition of the class 
 it is wealth not used productively and not creat- 
 
 tions perhaps fairly typical for northern New England, ex- 
 cept that the tax rate is made, for the sake of even figures, 
 probably a little high. The statement is made to show the 
 principle rather than to reach an exact conclusion of profit 
 or loss. It should be noted that the results show only the 
 effect of taxation, and do not show the loss from compound- 
 ing the original investment. 
 
 Problem on timberland tax 
 
 Assume that one thousand acres of spruce seedling land 
 are bought at $3 an acre, and held for forty years, at which 
 time the land will cut a little over seven cords of pulp-wood 
 an acre, at a value of $6 a cord stumpage, or a value of, say, 
 $43 an acre. Assume that 2 per cent taxes are paid during 
 the forty years. Following is the statistical result: —
 
 EQUALITY OF TAXATION 
 
 53 
 
 ing ability to pay. Inasmuch as it is ordinarily a 
 source of private as well as of public expense, far 
 
 
 Value' 
 
 
 
 Term 
 
 Value of 
 tax com- 
 pounded at 
 6 per cent. 
 
 Year. 
 
 of 
 land. 
 
 Tax rate. 
 
 Tax. 
 
 to 
 run. 
 
 I 
 
 $3,000 
 
 2 per cent 
 
 $60 
 
 40 years 
 
 J617.14 
 
 2 
 
 4,000 
 
 *' 
 
 80 
 
 39 
 
 776.28 
 
 3 
 
 S.ooo 
 
 ** 
 
 100 
 
 38 
 
 915.42 
 
 4 
 
 6,000 
 
 '* 
 
 120 
 
 37 
 
 1,926.23 
 
 S 
 
 7,000 
 
 ** 
 
 140 
 
 36 
 
 1. 140.40 
 
 6 
 
 8,000 
 
 ** 
 
 160 
 
 35 
 
 1,229.77 
 
 7 
 
 9,000 
 
 41 
 
 180 
 
 34 
 
 1,305.18 
 
 18 
 
 10,000 
 
 ** 
 
 200 
 
 33 
 
 1,308.12 
 
 9 
 
 11,000 
 
 ** 
 
 220 
 
 32 
 
 1,429.74 
 
 fo 
 
 12,000 
 
 ** 
 
 240 
 
 31 
 
 1,461.14 
 
 II 
 
 13,000 
 
 ** 
 
 260 
 
 30 
 
 1.493 .3 1 
 
 12 
 
 14,000 
 
 ** 
 
 280 
 
 29 
 
 1, 518. IS 
 
 13 
 
 15,000 
 
 ** 
 
 300 
 
 28 
 
 1,533.51 
 
 14 
 
 16,000 
 
 ** 
 
 320 
 
 27 
 
 1. 543-13 
 
 IS 
 
 17,000 
 
 ** 
 
 340 
 
 26 
 
 1,546.79 
 
 i6 
 
 18,000 
 
 «« 
 
 360 
 
 25 
 
 1. 545.04 
 
 17 
 
 19,000 
 
 •* 
 
 380 
 
 24 
 
 1,538.58 
 
 l8 
 
 20,000 
 
 '* 
 
 400 
 
 23 
 
 1,527.88 
 
 19 
 
 21,000 
 
 *• 
 
 420 
 
 22 
 
 1,513.47 
 
 20 
 
 22,000 
 
 *• 
 
 440 
 
 21 
 
 1,495.78 
 
 21 
 
 23,000 
 
 •* 
 
 460 
 
 20 
 
 1,475-26 
 
 22 
 
 24,000 
 
 14 
 
 480 
 
 19 
 
 1,452-24 
 
 23 
 
 25.000 
 
 44 
 
 500 
 
 18 
 
 1,427.15 
 
 24 
 
 26,000 
 
 4« 
 
 520 
 
 17 
 
 1,400.22 
 
 25 
 
 27.000 
 
 41 
 
 540 
 
 16 
 
 1,371-76 
 
 26 
 
 28,000 
 
 44 
 
 560 
 
 IS 
 
 1,342-04 
 
 27 
 
 29,000 
 
 ** 
 
 580 
 
 14 
 
 1,311-32 
 
 23 
 
 30,000 
 
 '* 
 
 600 
 
 13 
 
 1,279.74 
 
 29 
 
 31,000 
 
 ** 
 
 620 
 
 12 
 
 1,247-SO 
 
 30 
 
 32,000 
 
 '* 
 
 O40 
 
 II 
 
 1,214.84 
 
 31 
 
 33,000 
 
 *• 
 
 660 
 
 10 
 
 1,181.92 
 
 32 
 
 34.000 
 
 '* 
 
 680 
 
 9 
 
 1. 148-79 
 
 33 
 
 35.000 
 
 *• 
 
 700 
 
 8 
 
 1,115-66 
 
 34 
 
 36.000 
 
 *• 
 
 720 
 
 7 
 
 1,082.59 
 
 35 
 
 37,000 
 
 ** 
 
 740 
 
 6 
 
 1,049.69 
 
 36 
 
 38,000 
 
 " 
 
 760 
 
 5 
 
 1,017-03 
 
 37 
 
 39.000 
 
 ** 
 
 780 
 
 4 
 
 984.67 
 
 38 
 
 40,000 
 
 ** 
 
 800 
 
 3 
 
 952.80 
 
 39 
 
 41,000 
 
 ** 
 
 820 
 
 2 
 
 92I.3S 
 
 40 
 
 42,000 
 
 
 840 
 
 I 
 
 890.40 
 
 Losses $11,333.95 
 
 Less gains 941-94 
 
 Total loss $10,392.01
 
 54 PRINCIPLES OF TAXATION 
 
 from increasing, it usually diminishes ability to 
 pay. Instead of using wealth unproductively, the 
 owner might, however, have chosen to use it 
 productively. It had potential productive power. 
 It might have created ability to pay. The fact 
 that its owner chose not to turn it into productive 
 channels does not afford any basis for relieving 
 him at all from taxation on account of it. If the 
 community were to attempt to regulate social 
 conditions through taxation, it might seem de- 
 sirable to tax especially that wealth not used 
 productively. For all wealth used unproduc- 
 tively diminishes the productive power of the 
 community, and beyond a fair average of that 
 which it is desirable that members of the com- 
 munity should use unproductively, such use con- 
 stitutes a special private advantage on which the 
 community might well see fit to lay an especial 
 burden. Obvious difficulties arise on contempla- 
 tion of such a program. How much of its current 
 production of wealth should the community 
 turn into unproductive forms for its pleasure, 
 and how much should it turn back as capital into 
 productive channels? If the community lives up 
 to its income, it cannot increase its capital fund, 
 but its economic progress largely depends on an 
 increase of its capital fund. On the other hand, 
 should the community in any generation defer 
 entirely all enjoyment of surplus income? To
 
 EQUALITY OF TAXATION 55 
 
 draw the line between productive and unproduc- 
 tive expenditure would be a matter of great diffi- 
 culty. Nevertheless, the community might, if it 
 chose, undertake to regulate expenditure, and 
 might use taxation for that purpose. 
 
 The community should not generally seek through 
 taxation to gain indirectly special social ends 
 unconnected with the direct purpose of taxation 
 
 Whenever at any point the community goes 
 outside of the principle of making a charge for a 
 public service that covers the cost of the service, 
 it must consider other than fiscal effects of taxa- 
 tion. That alone is a purely fiscal policy which 
 considers the cost of the public service as the only 
 correlative of the tax. As we have seen, we have a 
 real tax rather than a price or special assessment 
 largely because such an exact correlation is 
 impossible or inexpedient. Some people evi- 
 dently consider that a tax based on the idea of 
 "plucking the most feathers with the least 
 squawking" is based entirely on fiscal considera- 
 tions. To cause the least squawking as a correla- 
 tive to the public income is just as remote from a 
 purely fiscal consideration as any matter of social 
 reform would be. 
 
 Irrespective of the difficulties of apportioning 
 to the beneficiary and collecting from him the 
 cost of public service, whenever the community
 
 56 PRINCIPLES OF TAXATION 
 
 decides to render a public service on the express 
 basis of not charging the cost to the beneficiary, 
 — as in the case of the pubHc schools, — other than 
 purely fiscal considerations must enter . Apportion- 
 ing this burden on the basis of ability to bear it 
 rests on a moral and not really on a fiscal reason. 
 It seems undesirable to bring non-fiscal con- 
 siderations by way of social results, other than 
 ability to pay, much into taxation questions. To 
 bring them in confuses both issues, the raising 
 of revenue by taxation and the social end desired, 
 other than that for which the revenue is expressly 
 raised. Raising revenue by taxation according to 
 ability to pay for expenditure on schools does not 
 produce any confusion between the raising of 
 revenue and the social end sought in the public 
 schools. Permitting lotteries, for example, but 
 placing a heavy tax on them, partly for the rev- 
 enue and partly to discourage gambling, confuses 
 both the fiscal ideas connected with taxation and 
 the social or moral ideas connected with gam- 
 bling. It is hard enough to think clearly in eco- 
 nomic, moral, and social matters under the best 
 conditions for clear thinking. Creating and main- 
 taining conditions for clear thinking are in them- 
 selves highly important considerations in any 
 problem. They may be likened somewhat to the 
 keeping of correct books of account in a private 
 business enterprise.
 
 EQUALITY OF TAXATION 57 
 
 This makes one important argument against 
 such proposals as the single tax, which has as 
 its basis the idea of preventing the speculative 
 holding of land. Since this proposal has active 
 support we shall discuss it at greater length 
 elsewhere. A sumptuary tax, or a real tax on 
 consumption, designed to discourage the non- 
 productive use of wealth, would be open to the 
 objection of confusing social and fiscal considera- 
 tions. Any tax proposal which involves a double 
 purpose must meet this grave objection. If the 
 tax is correctly laid to provide a revenue neither 
 less nor greater than the expenditure required 
 for the public activities determined on, then it 
 accomplishes too little or too much for its social 
 purpose. Conversely, if laid to accomplish its 
 social purpose, the tax raises too little or too 
 much revenue. This objection applies with much 
 greater force to a whole scheme of taxation for 
 a social end — like a single tax on land or on 
 uneconomic consumption — than to a tax which 
 is only a minor part of a general scheme, like a 
 high license on the sale of intoxicating liquors. 
 
 A tariff for revenue on imports taxes consump- 
 tion, and in so far as it taxes luxuries at a higher 
 rate than necessities, it is a tax on uneconomic or 
 unproductive consumption. The idea of unpro- 
 ductive consumption affords a better basis for 
 the higher tax on luxuries than the idea that the
 
 58 PRINCIPLES OF TAXATION 
 
 consumption of luxuries gives an index of ability 
 to pay. As already seen, unproductive consump- 
 tion decreases ability to pay. Assuming that 
 labor will in the long run shift the incidence of a 
 tax on necessities from a tax on consumption to 
 a tax on production in the form of higher wages, 
 the consumption of necessities comes nearer 
 being an index of ability to pay than a tax on 
 luxuries.
 
 CHAPTER IV 
 
 WHERE SHOULD TAXES BE PAID? 
 
 The problem of the resident of one community who 
 owns wealth located in another community 
 
 So far our discussion has gone on the simple 
 assumption of a single community whose mem- 
 bers owned all the wealth in the community and 
 none outside of it. Though untrue in fact, the 
 assumption, I believe, has not so affected the 
 argument as to render any of our conclusions 
 unsound. We cannot go on further with the dis- 
 cussion without meeting existing facts squarely. 
 In any such purely ideal community probably 
 many of our taxation perplexities would not have 
 arisen. If one had existed and it had made the 
 market value of property the basis of its taxa- 
 tion, the distinction between tangible and intan- 
 gible property would not have led into any such 
 difficulties as have arisen. Such a community 
 would not have misled itself into an attempt to 
 tax all tangible property at its full market value 
 at a given rate and also to tax any intangible 
 property representing it at its full market value 
 at the same rate. The community would either 
 have taxed all tangible property at the same rate,
 
 6o PRINCIPLES OF TAXATION 
 
 and taxed any intangible representative at a 
 much lower rate, if at all, or it would have divided 
 the tax on a given property between the direct 
 and the representative ownership, or among the 
 various representative ownerships. 
 
 The confusion between property and wealth prob- 
 ably would have cleared away except for the non- 
 resident owner 
 
 To be sure that the situation is clear, let us 
 state it more concretely. In the ideal single com- 
 munity that we have assumed, suppose Smith 
 owns a $20,000 farm on which Brown owns a 
 $10,000 mortgage. Such a community would 
 not long have attempted to collect the same 
 taxes on these two property items as it collected 
 on an unencumbered farm worth $30,000. It 
 might have taxed Smith, the mortgagor, on 
 $20,000, and not taxed Brown, the mortgagee, 
 on anything at all, or have taxed him lightly, on 
 principles already explained. In that situation 
 Brown would have made his loan on a "free- 
 from-tax" interest rate and, with regard to 
 taxation, Smith would have been no worse off 
 than Robinson who owns his farm free and clear. 
 Or the community might have chosen to tax 
 Brown, the mortgagee, on his $10,000 mortgage, 
 and to tax Smith, the mortgagor, on his equity 
 of the value of $10,000. Brown would have
 
 WHERE SHOULD TAXES BE PAID? 6i 
 
 charged an interest rate based on the fact that 
 he must pay taxes on his mortgage, and Smith 
 would be no better and no worse off than be- 
 fore. 
 
 Suppose a corporation owning land, factory, 
 machinery, and goods to the market value of 
 $75,000. Each of five men owns $5000 of bonds 
 of the corporation, secured by a mortgage on 
 all the property of the corporation, a total of 
 $25,000 in bonds. Ten shareholders own all the 
 $50,000 of stock of the corporation, $5000 each. 
 The situation between the bondholders and the 
 corporation is just the same as the situation 
 between any individual property owner and his 
 mortgagee, and may be handled in the same way. 
 That still leaves us to consider the question of 
 taxation as between the corporation and the 
 shareholders. The community would either tax 
 the shareholders on the value of their shares, or 
 on $5000 each, or it would tax the corporation. 
 If the bondholders were taxed, the tax to the 
 corporation would be on $50,000, or, if they were 
 not taxed, it would be on $75,000. Observe that 
 the division of ownership between the stock- 
 holders and the bondholders does not, in itself, 
 give rise to any problem. The market value 
 of the stock takes into account the existence of 
 the bonds. If the community should tax the 
 shares, it would tax the bonds or else tax the
 
 62 PRINCIPLES OF TAXATION 
 
 coiporation on the value represented by the 
 be ids. 
 
 Under the actual conditions we do not always 
 have the mortgagor and the mortgagee living in 
 the community in which the tangible property is 
 located. We do not always find all the tangible 
 property of a corporation and all its bondholders 
 and stockholders in the same community. As 
 the machinery by which business is done becomes 
 more intricate, and social conditions generally 
 more complex, the residence of people who own 
 or have an interest in tangible property becomes 
 more and more likely to be in some place other 
 than that in which the property is located. 
 Where shall such non-resident owners pay their 
 taxes? 
 
 Different treatment of the direct and the indirect 
 owners of wealth 
 
 Let us take the simplest case. Suppose Brown, 
 who lives in Blackacre, has invested $10,000 in 
 buying a house in Whiteacre, in another State, 
 and rents it for $1000 a year. In actual practice 
 no difficulty has arisen over this situation. 
 Brown pays taxes in Blackacre on his real estate 
 there. The community of Blackacre feels satis- 
 fied that he should not pay any taxes there on 
 account of his investment in the Whiteacre 
 house. Jones, who lives in Blackacre, invests
 
 WHERE SHOULD TAXES BE PAID? 63 
 
 $10,000 in a mortgage on a lot and building in 
 Whiteacre. In this situation the community of 
 Blackacre does not feel satisfied unless Jones 
 pays a tax in Blackacre on account of his invest- 
 ment in the Whiteacre property. Both Brown 
 and Jones have $io,ooo invested in Whiteacre 
 real estate. Do the legal arrangements surround- 
 ing the two transactions, the agreements between 
 parties, the amount of risk that each accepts with 
 his investment, have anything to do with the 
 question of taxation? Our earlier argument went 
 to show that each should be treated alike in the 
 matter of taxation and also what constituted 
 equal treatment. No economic reason presents 
 itself for treating them differently when they 
 reside in one community and the real estate in 
 which they have invested lies in another. 
 
 To make the situation still more concrete, 
 suppose Brown and Jones live in Boston and the 
 real estate in each case is a farm in Oregon. The 
 jurisdiction making the tax laws for Boston, the 
 Commonwealth of Massachusetts, realizes that if 
 Boston taxes Brown say i .5 per cent on his invest- 
 ment in addition to a similar amount the Oregon 
 community taxes him, he will be paying the total 
 very heavy tax of say 3 per cent. It considers 
 that unfair to its citizen Brown. But why should 
 Massachusetts discriminate between this kind of 
 an investor beyond its borders, who accepts the
 
 64 PRINCIPLES OF TAXATION 
 
 risks of complete ownership for the sake of an 
 anticipated greater return, and an investor who, 
 refusing to accept so great a risk, insists on the 
 protection of an equity? 
 
 Is there any difTerence in the possibiHty of 
 shifting the incidence of taxation in these cases 
 that should make a difTerence in treatment? 
 Brown cannot charge any more for the produce 
 of his farm, to make up for the extra tax of 1.5 
 per cent he pays in Boston, than is charged by a 
 man who lives on his own farm in Oregon. We 
 have said, however, that if a community taxes 
 a creditor on his credits, he will shift the tax to 
 his debtor in the form of a higher interest rate. 
 That is true; and the fact that most taxing 
 jurisdictions tax mortgages, at least "foreign" 
 mortgages of this kind, means that the Oregon 
 borrower pays an interest rate higher by the 
 average of this taxation than he would if these 
 jurisdictions did not tax such mortgages. As 
 already seen, the Oregon borrower cannot shift 
 the burden of the tax by charging higher prices 
 than the Oregon farmer who owns his farm clear 
 and free. So the taxation of " foreign " mortgages 
 in Massachusetts and other taxing jurisdictions 
 works to the disadvantage of the Oregon bor- 
 rower. But why, the legislator asks, should 
 Massachusetts be concerned about that?
 
 WHERE SHOULD TAXES BE PAID? 65 
 
 Taxation piracy 
 
 It is true that many people consider each of 
 our States a poHtical ship chartered to sail not 
 under the best, but under the worst, ethics of the 
 market-place and to commit piracy by means of 
 the law. Just as a man acting in a representative 
 capacity as, say, a corporation director, will do 
 unprincipled things for the advantage of his 
 principal that he would be ashamed to do on his 
 own account, so a legislator, with a personal 
 responsibility much more diluted than that of a 
 corporate director, will vote on behalf of the 
 community for measures so bad ethically that he 
 would reject them if they were personal matters. 
 Stockholders and citizens approve of things done 
 by others on their behalf that they would be 
 ashamed to do on their own account. While the 
 director and the legislator free their consciences 
 for doing the deed with the thought that they 
 take no advantage from it, at the same time the 
 stockholder and the citizen free their consciences 
 for accepting the advantage with the thought 
 that they are not responsible for the deed. Seem- 
 ingly the ethical concept of representative acts 
 tends to grow better and to leave our evils in 
 these representative matters those of ignorance 
 rather than those of bad intent. Taxation has 
 appeared, however, to offer a chance to take
 
 66 PRINCIPLES OF TAXATION 
 
 plunder from other States on letters of marque 
 and reprisal. But does a State really profit so 
 much? 
 
 Lending and borrowing communities 
 
 What would happen if one State now taxing 
 foreign mortgages should give up taxing them, 
 but all other States now taxing them, should 
 continue this taxation? It would have an effect 
 on the interest rate of the Oregon borrower be- 
 cause, under financial, as well as under physical, 
 law, no force operates without a result; but the 
 effect may be as difficult to measure as the pull a 
 base-ball in the air has on the earth. For a State 
 to do away with the taxation of foreign mortgages 
 would remove the burden of that State's taxa- 
 tion not only from the Oregon borrower, but from 
 all other foreign mortgage borrowers, all of whom 
 are bidders for capital. The capital supply of 
 these foreign borrowers comes not from one 
 State alone, but from all lending States. The 
 surplus funds of one State available for foreign 
 mortgages is not sufficient for the foreign bor- 
 rowers, so they must bid enough to overcome the 
 taxation handicap on their borrowing in the other 
 States. 
 
 For the purpose of clarifying the argument by 
 being concrete, let us assume that if Massa- 
 chusetts should give up taxing foreign mortgages
 
 WHERE SHOULD TAXES BE PAID? 67 
 
 at a tax rate which averages (if paid) say i .5 per 
 cent, the interest rate to foreign borrowers would 
 drop .10 per cent. That is, if foreign mortgagees 
 now average to pay 6 per cent, they would then 
 average to be paying 5.90 per cent. Of course, it 
 is impossible to say what the result would be in 
 advance of the fact, and very likely it would be 
 impossible to say what the result was after the 
 fact. Many variables of the financial market 
 change so rapidly that at any given time the 
 result of a change of this kind might not be trace- 
 able. These figures do not represent even mere 
 conjectures, but simply serve as symbols in the 
 argument. Assume that this change has taken 
 place. What has happened? When the lender 
 paid a tax, he received |6o in interest on each 
 $1000 invested, paid the State $15 in taxes, and 
 had a net return of $45. Now that the State does 
 not exact any tax, the lender receives and keeps 
 as net $59 in interest on each $1000 invested. 
 The citizen has gained most of what the State 
 has lost. His gain reduces the real net loss to the 
 community to $l out of $60. 
 
 Massachusetts giving up its tax would impose 
 a like net loss on all other lending communities 
 and give a corresponding benefit to all other bor- 
 rowing communities. If all lending communities 
 should give up their tax, which, let us assume, 
 averages i .5 per cent, if would not follow that the
 
 68 PRINCIPLES OF TAXATION 
 
 interest rate to the borrowing community would 
 drop from 6 per cent to 4.5 per cent. Since the 
 taxing communities have no method of assessing 
 these foreign mortgages, other than the declara- 
 tion of the owner, presumably many such mort- 
 gages escape taxation. Every credit that does not 
 pay a tax tends to limit the effect of taxation on 
 the interest rate. As the interest rate fell off, the 
 demand for money would increase and prevent 
 the full decline in the interest rate. Therefore, if 
 the taxation averages 1.5 per cent and should 
 all be taken off, the decline in the interest rate 
 might be from 6 per cent to 5.5 per cent. 
 
 Our earlier discussion of the taxation of credits 
 and other intangibles assumed uniform tax laws 
 operating over the whole nation and the nation 
 as one community in interest. It assumed even 
 something more of an ideal and less of a reality 
 than this in assuming the nation as the only com- 
 munity. The nation as a community, however, 
 is so large that it has debtor and creditor sections, 
 and the division of the nation into States, each a 
 jurisdiction establishing tax laws, leads to one 
 section endeavoring to gain an advantage over 
 the other. To some extent the endeavor can be 
 successful. What would be the effect of the 
 debtor community taxing the mortgage? That 
 would very simply and directly, in the manner 
 shown in the earlier discussion of taxing credits,
 
 WHERE SHOULD TAXES BE PAID? 69 
 
 result in an increase of the interest rate to the 
 borrower to cover the tax on the lender. 
 
 Where taxes should be paid as tested by those taxes 
 due on account of service received 
 
 This leads directly to the question of where 
 taxes should be paid. We have taken as the basis 
 of taxation two principles, the cost of perform- 
 ing THE PUBLIC SERVICE TO PAY FOR WHICH THE 
 TAX IS LEVIED, AND ABILITY TO BEAR THE PUBLIC 
 
 BURDEN. Do they help in considering where 
 taxes should be paid as they have in considering 
 071 what taxes should be paid? 
 
 If a man owns real estate and lives in the com- 
 munity in which the real estate lies, no question 
 arises. Since his property and residence are in 
 the same place, he receives all his public benefits 
 there and owes all his public obligations there. 
 Our question does not arise till we have property 
 (we are speaking now of tangible property) in one 
 community and the owner residing in another. 
 Suppose the property is real estate: that Jones 
 owns a house in Hartford and lives in Worcester. 
 As a matter of fact he pays in Hartford all his 
 taxes on account of that property. The com- 
 munity in Worcester rests perfectly content at 
 this situation. Brown, who lives in Worcester, 
 has an investment in a mortgage in Hartford. 
 The people of Worcester are not satisfied to let
 
 70 PRINCIPLES OF TAXATION 
 
 Brown go without paying any taxes in the city of 
 his residence. Is there a substantial difference 
 between the situations of Brown and Jones to 
 justify this difference in feeling? Let us first 
 consider the case of Jones. 
 
 He lives in Worcester and owns a house in 
 Hartford. The community of Hartford bears all 
 the expense of the public activity for the benefit 
 of that house — highways, fire and police pro- 
 tection. Excepting for the practically negligible 
 fact that some action on account of it, say some 
 tort action, might be brought in the Massachu- 
 setts courts as having jurisdiction over the person 
 of the owner, the Worcester community bears no 
 expense of public activity because of Jones's 
 ownership of this Hartford property. 
 
 Where taxes should he paid as tested by those taxes 
 due on account of ability to pay 
 
 How about those public activities which do not 
 bear any relation to the private ownership of 
 wealth? Schools have been our typical example of 
 these. Let us assume that Jones is childless, and 
 therefore imposes no expense on the public 
 activity of Worcester in the matter of education. 
 Largely because of public activities of this kind, 
 as we have seen, the counterbalancing taxation 
 principle of payment according to ability arose. 
 As we have stated in our discussion of that prin-
 
 WHERE SHOULD TAXES BE PAID? 71 
 
 ciple, it represents part of a moral ideal, of an 
 altruistic obligation of the individual, which the 
 community impresses to the extent of offsetting 
 expenditures which it sees fit to make without 
 repayment from the beneficiar3^ Where does 
 Jones owe his obligation to pay taxes according 
 to his ability — in the community in which he 
 lives or in the community from which he derives 
 his income? 
 
 The community in which a man owning wealth 
 lives, though all the wealth lies in some other 
 community, generally feels that he should bear 
 some share of the public burden of his place of 
 residence and pay some taxes there. The feeling 
 seems reasonable. If a man chooses to live in a 
 community, his fellows in that community natu- 
 rally feel that he should identify himself with it, 
 that its interests should become his interests, and 
 his ability become available for its undertakings. 
 A man with wealth in one community, who 
 chooses to live in another, would himself prefer 
 to contribute to the community of his residence. 
 If he must make a certain total contribution for 
 community purposes out of his wealth, he would 
 prefer to make a considerable part of it, at least, 
 to the community in which he dwells. 
 
 On the other hand, his ability to pay arises in 
 the community in which his wealth is located. 
 Non-resident owners of wealth in that commun-
 
 72 PRINCIPLES OF TAXATION 
 
 ity feel conscious of this. Especially if they are 
 employers of labor there they feel a sense of 
 obligation. Members of the community feel that 
 the non-resident owner owes a duty there. It is 
 impossible to say that the claims of one commun- 
 ity so outbalance those of the other that the 
 claims of the other should not be recognized. I 
 feel that the community in which the wealth lies 
 has a much larger claim on the owner's ability 
 than the community of his residence. But in 
 whatever proportion, it seems evident that the 
 part of the tax he pays on account of his ability, 
 as opposed to that part he pays as his share of the 
 cost of public activities for the benefit of his 
 wealth, might properly be divided between the 
 two communities. 
 
 Jones, who lives in Worcester and has invested 
 in a house in Hartford, which he rents, does not, 
 as we have seen, pay any taxes in Worcester. 
 The community of his residence acquiesces, 
 under these circumstances, in the payment of all 
 his taxes in the community in which his wealth 
 lies. Now, let us take up the case of Brown, who 
 lives in Worcester and has invested in a mort- 
 gage in Hartford. In this case Worcester takes 
 the position that Brown owes all his tax obliga- 
 tion to the community of Worcester, treats him 
 as if his investment represented so much wealth 
 in Worcester. We have seen, however, that the
 
 WHERE SHOULD TAXES BE PAID? 73 
 
 public activities in Worcester do nothing for the 
 benefit of the wealth, the property in Hartford, 
 which is the real substance of Brown's capital. 
 Yet Worcester insists on taxing Brown on the 
 same basis as it would tax him if he had invested 
 in a house in Worcester and received his return on 
 his capital directly from the rental of that house, 
 instead of receiving his return on his capital indi- 
 rectly, as he does in the form of interest from the 
 rent of the Hartford house. Worcester seeks to 
 exact not only all that he should pay on the basis 
 of his ability to pay, but also an amount equiva- 
 lent to the cost of all those public activities by 
 which Hartford benefits the mortgaged property 
 — highways, fire and police protection. 
 
 Only one real economic difference distinguishes 
 Brown from Jones. Brown prefers to avoid risk 
 so far as possible and makes the necessary sacri- 
 fice of income for the sake of avoiding risk. Rob- 
 inson, let us say, owns the house in Hartford on 
 which Brown holds a mortgage. The house is 
 wealth representing the joint capital of Robinson 
 and Brown. They have stipulated as between 
 themselves that Robinson will assume the greater 
 risk on the chance of getting the greater income. 
 This agreement affects their legal relationship to 
 each other and to various other people. Many of 
 their relationships are different from what they 
 would be if they were joint owners; so far as the
 
 74 PRINCIPLES OF TAXATION 
 
 economic situation on which taxation should be 
 based is concerned they are in the position of 
 joint owners. It is immaterial that in the legal 
 situation Robinson may, by the machinery 
 through which the law works, or by private stip- 
 ulation with Brown, actually appear as if paying 
 the whole tax. As we have seen, that is immaterial 
 so far as Hartford is concerned. If Robinson pays 
 it, he deducts so much from the gross income of 
 Brown on account of the property.^ 
 
 1 Jurisdictions not taxing mortgages at all — whether 
 the real estate mortgage is in or out of the State: California, 
 Delaware, Idaho, Utah, Washington. 
 
 Alabama has a mortgage recording tax for mortgages on 
 realty in the State, but taxes mortgages on realty outside of 
 the State. 
 
 Connecticut does not tax mortgages on realty in the 
 State. Mortgages on realty outside the State may be re- 
 corded with the State Treasurer and a tax paid at the rate 
 of 4 mills per annum. Otherwise they are taxable at the 
 full general property rate. 
 
 Iowa taxes at 5 mills per annum, whether the property 
 mortgaged is in or out of the State. 
 
 Minnesota has a mortgage recording tax for mortgages 
 on realty in the State amounting to three tenths of a mill 
 per annum and taxes mortgages on realty outside the State 
 at 3 mills per annum. 
 
 Maryland taxes at the rate of something over 3 mills 
 per annum whether the mortgage is on realty in or out of 
 the State. 
 
 Michigan has a mortgage recording tax of 5 mills on 
 mortgages on realty in the State. The owner of a mortgage 
 on realty outside of the State may register it as free from 
 further taxation on the payment of a 5-mill tax. 
 
 New York has a mortgage recording tax of .5 per cent
 
 WHERE SHOULD T.\XES BE PAID? 75 
 
 Our discussion has shown that a taxation of 
 such representatives of property as mortgages, 
 
 for the life of the mortgage on realty in the State; mort- 
 gages on realty outside the State may be stamped under the 
 secured debts tax law free from further taxes on the pay- 
 ment of .5 per cent for the life of the mortgage. 
 
 Pennsylvania and Rhode Island tax mortgages 4 mills per 
 annum whether the property is in or out of the State. 
 
 Wisconsin has an income tax reaching income from mort- 
 gages whether on realty in or out of the State. 
 
 Assuming that 1.5 per cent represents an average rate of 
 taxation, it appears that these special rates tax mortgages 
 from one fifth to one third of the rate on tangible property. 
 Since taxable property is seldom assessed at its full value, 
 and these mortgages are, in the nature of the case, assessed 
 at 100 cents on the dollar invested, the proportional taxa- 
 tion of the mortgages is even higher. Considering the fact 
 that this form of property imposes only a slight cost on the 
 Government, and a tax on it in excess of that cost is essen- 
 tially not a tax on ability, but as it works out is rather a tax 
 on a form of doing business, even these reduced rates of 
 taxation seem rather high. On a mortgage running for three 
 years the New York rate amounts to 1.66 mills and on a 
 mortgage running five years to i mill per annum. This 
 actually works out to something lower from the practice of 
 "extending" the mortgage, i.e., renewing the debt without 
 changing the mortgage securing it, so that the mortgage 
 may run for several terms without a new recording. 
 
 The rate under this New York tax seems approximately 
 a fair rate under present circumstances. 
 
 Jurisdictions not taxing mortgages on realty in the State, 
 but taxing mortgages on realty outside the State are: — 
 
 Colorado, Louisiana, Maine, Massachusetts, Nebraska, 
 New Hampshire (provided the rate of interest on a mort- 
 gage in the State does not exceed 5 per cent). New Jersey, 
 Wyoming. 
 
 Jurisdictions taxing all mortgages, whether the realty 
 mortgaged is within or outside the State are: —
 
 76 PRINCIPLES OF TAXATION 
 
 bonds, and stocks in itself amounts to a taxation 
 of a form of doing business. The growth of this 
 class of property, and the amount of non-resident 
 ownership increasing coincidently with it, and 
 partly because of it, especially in its newer forms 
 of the corporation security, developed a feeling in 
 the community that a resident, of obvious ability 
 to pay on account of his ownership of non-local 
 wealth, ought to pay taxes in the community of 
 his residence. Non-resident direct owners con- 
 stitute a small class compared with these non- 
 resident investors through the forms of indirect 
 ownership furnished by such instruments as the 
 mortgage and the corporation security. It seems 
 fair as a premise that a resident in a community, 
 able to pay taxes, should pay them. It is not so 
 easy to see that the real wealth which actually 
 constitutes his ability pays taxes somewhere else. 
 Even when it is seen, the foreign payment of 
 taxes seems so entirely unsatisfactory from the 
 local viewpoint that the community of residence 
 
 Arizona, Arkansas, Florida, Georgia, Illinois, Indiana, 
 Kansas, Kentucky, Mississippi, Missouri (if the mortgage 
 is on realty outside the State, taxation depends on whether 
 the tangible thing, the note, evidencing the mortgage ever 
 was in the State), Montana, Nevada, New Mexico, North 
 Carolina, North Dakota, Ohio, Oklahoma (except that 
 mortgages held by a building and loan association in the 
 State, when given by a resident on realty in that State, 
 are exempt), Oregon, South Carolina, South Dakota, 
 Tennessee, Texas, Vermont, Virginia, West Virginia.
 
 WHERE SHOULD TAXES BE PAID? 77 
 
 insists that the resident pay taxes anyway, irre- 
 spective of what happens anywhere else. The 
 community of residence sees the unfairness most 
 clearly in the case of the direct ownership of non- 
 local property, — the situation of the man in 
 Worcester owning a house in Hartford. Except 
 in the rare instance of an income tax which is 
 enforced, the community makes no attempt to 
 tax a resident because of his ability on account of 
 his direct ownership of non-local property. So far 
 as the feeling that a resident who is rich on ac- 
 count of his ownership of non-local wealth should 
 not escape from a share of the community burden 
 results in a demand for taxing him, that demand 
 should extend to a resident who directly owns 
 wealth located outside of his place of residence as 
 well as to the resident who owns it through the 
 intervention of an intangible. 
 
 The inability of most citizens untrained in eco- 
 nomics to understand that a credit, though prop- 
 erty, is not wealth, creates a great difficulty in the 
 way of fair taxation in itself and largely adds to 
 the perplexing situation created by the non- 
 resident owner. The positions of the various 
 jurisdictions in taxation matters indicate clearly 
 the obstacles to correct thinking as well as other 
 difficulties in the way of fair results. Those juris- 
 dictions which tax all mortgages, both those on 
 realty within the State as well as those on realty
 
 78 PRINCIPLES OF TAXATION 
 
 outside the State, show a failure to appreciate the 
 distinction between the legal property of a credit 
 and the actual existence of economic wealth. 
 Jurisdictions which tax mortgages on property 
 outside the State, but do not tax mortgages on 
 property within the State, do appreciate the dis- 
 tinction between legal property and economic 
 wealth, but want to reach the ability of the resi- 
 dent who has invested outside the jurisdiction. 
 
 There is as real a conflict of interest among the 
 communities within a State as among the state 
 communities 
 
 As a matter of fact, those jurisdictions which 
 tax all mortgages, those on realty within the 
 State as well as those on realty outside the State, 
 have a practice nearly as easy to defend on prin- 
 ciple, except the principle of piracy on other 
 States, as the practice of those jurisdictions 
 which tax mortgages on realty outside the State, 
 but not those on realty within the State. The 
 community of Worcester fails just as much to 
 get at the "ability" of a resident who invests in 
 mortgages in Springfield, Massachusetts, as it 
 would if it could not tax the resident who invests 
 in mortgages in Hartford, Connecticut. 
 
 In Worcester, wealth in Springfield in the 
 same State is just as much non-local as wealth in 
 Hartford in another State. So taxing residents on
 
 WHERE SHOULD TAXES BE PAID? 79 
 
 their mortgages on property in other States 
 reaches only part of the problem. 
 
 Sometimes a jurisdiction appreciates the dis- 
 tinction between a legal property right and real 
 economic wealth in its application to the stock of 
 a corporation when it does not show an apprecia- 
 tion of the distinction in its application to a credit 
 in the form of a mortgage or a corporation bond. 
 Since the shifting of the incidence of the tax to 
 the borrower helps obscure the situation in the 
 case of a credit, the distinction is clearer in the 
 case of a stock. It is fairly easy to follow through 
 the process whereby the payment of a tax by a 
 corporation comes out of the pocket of the share- 
 holder.* 
 
 1 To illustrate the variations of method in taxing stock, 
 the taxation of the stock of manufacturing corporations is 
 given in this note. Since financial corporations, as banks 
 and insurance companies, and to some extent public seri'ice 
 corporations are treated differently by the States in taxation 
 from the stock of manufacturing corporations, it is not 
 possible to make a general statement about the taxation of 
 stock that would apply to the stock of all kinds of corpora- 
 tions. 
 
 All stock is taxable, whether the corporation is incorpor- 
 ated in the jurisdiction or not, in Oregon and Wyoming. 
 
 Stock is taxable, if the corporation is incorporated out- 
 side the jurisdiction, in Colorado, Florida, Georgia, Illinois, 
 Indiana, Louisiana, Massachusetts, Michigan, Mississippi, 
 North Carolina, North Dakota, Texas, and Virginia. 
 
 In Iowa, stock in a manufacturing corporation incorpor- 
 ated outside the jurisdiction is exempt if tangible property 
 of the corporation is located in the State; otherwise the
 
 80 PRINCIPLES OF TAXATION 
 
 Some jurisdictions tax the stock of corpora- 
 tions incorporated outside the jurisdiction, but 
 
 stock is taxed at the special rate of 5 mills on the dollar of 
 .assessed valuation. 
 
 In Maryland, it is taxed at the rate of 3 mills for the local 
 tax and i .5 mills for the State tax, or a total tax of 4.5 mills. 
 Stock of corporations incorporated in Maryland is taxed, 
 but the corporation pays the tax. 
 
 Stock of manufacturing corporations incorporated in the 
 jurisdiction is not taxed in: Arkansas, Colorado, Connecti- 
 cut, Delaware, District of Columbia, Florida, Georgia, 
 Illinois, Kansas, Kentucky, Louisiana, Massachusetts, 
 Michigan, Mississippi, Missouri, New Hampshire, New 
 Jersey, New York, North Carolina, North Dakota, Ohio, 
 Oklahoma, Tennessee, Texas, Virginia, Washington, and 
 Wisconsin. 
 
 Stock of manufacturing corporations incorporated in the 
 jurisdiction is not taxed if the corporation has its tangible 
 property in the States listed below. Whether or not all the 
 property must be in the State has not in every case been de- 
 cided: Arizona, California, Idaho, Indiana, Maine, Minne- 
 sota, Montana, Nebraska, Nevada, New Mexico, Rhode 
 Island, South Carolina, South Dakota, Utah, and West 
 Virginia. 
 
 Pennsylvania taxes the stock of manufacturing corpora- 
 tions incorporated in or out of the jurisdiction, in propor- 
 tion to the amount of property of the corporation located 
 in the State, at the rate of 5 mills. The corporation pays the 
 tax. Stock of a corporation incorporated in another State, 
 and not having any property in Pennsylvania, is taxed to 
 the holder at the rate of 4 mills. 
 
 Stock of corporations incorporated outside the jurisdic- 
 tion is not taxed if its tangible property is located in the 
 State (whether all its property must be in the State has 
 not in every case been decided) in: Arizona, Arkansas, 
 California, Idaho, Kansas, Kentucky, Maine, Minnesota, 
 Montana, Nebraska, Nevada, New Mexico, Oklahoma,
 
 WHERE SHOULD TAXES BE PAID? 8i 
 
 do not tax the stock of those incorporated in the 
 jurisdiction. They do not make any distinction 
 in the tax on the ground of the location of the 
 property. A distinction on the ground of the 
 place of incorporation has no basis except to 
 favor incorporation in the State. That is not a 
 proper purpose of taxation. So far as a State 
 wants to control those corporations doing busi- 
 ness within its borders, it has ample powers 
 irrespective of whether they are incorporated in 
 or out of the State. 
 
 Those jurisdictions which disregard the place 
 of incorporation and tax the stock of corporations 
 which have their tangible property outside the 
 State, but do not tax the stock of corporations 
 which have their tangible property in the State, 
 show the endeavor to reach the resident owner of 
 wealth in another jurisdiction. The same criti- 
 cism applies as to the taxation of mortgages on 
 realty in another State and the exemption of 
 those on realty within the State. If the stock- 
 holder lives in Worcester, and the corporation has 
 all its tangible property in Springfield, Worces- 
 ter has just as much reason for taxing him as 
 if the tangible property were in Hartford. A 
 
 Rhode Island, South Carolina, South Dakota, Tennessee, 
 Utah, and West Virginia. 
 
 In Ohio, if two thirds of the property of the corporatiou 
 is taxed in the State, the stock is not taxed.
 
 82 PRINCIPLES OF TAXATION 
 
 corporation may have its property in more than 
 one jurisdiction. An individual is taxed on each 
 piece of property. The stock of a corporation 
 represents all its property. If only part of the 
 corporation's property lies in the taxing jurisdic- 
 tion, shall its stock be freed from taxation? 
 Jurisdictions answer this question differently. 
 
 One would assume that the taxation of bonds, 
 certainly of mortgage bonds, would follow the 
 rule of taxation of the ordinary mortgage given 
 by an individual. The corporation mortgages its 
 property just as an individual does. Joint owner- 
 ship by bondholders of the corporation mortgage 
 does not affect the large principles involved. 
 The corporate form, however, has confused the 
 issue, and some jurisdictions treat a bond and an 
 individual mortgage differently. * 
 
 ' California, Colorado, Massachusetts, New Jersey, and 
 Wyoming exempt from taxation bonds secured on real es- 
 tate in the jurisdiction. 
 
 The following jurisdictions tax them, although they do 
 not tax individual mortgages on realty located in the juris- 
 diction: Idaho, Louisiana, Maine, Utah. 
 
 The following jurisdictions tax bonds secured by a mort- 
 gage on realty outside the State, but do not tax individual 
 mortgages on realty outside the State: California, Idaho, 
 Utah. 
 
 Rhode Island, oddly enough, appears to tax individual 
 mortgages on realty in the State at its classified rate, but to 
 exempt the bonds of coiporations having tangible property 
 in the State. 
 
 Iowa, Maryland, Minnesota, and Pennsylvania pursue a
 
 WHERE SHOULD TAXES BE PAID? 83 
 
 It is no part of our purpose at this point to dis- 
 cuss the taxation of the intangible values repre- 
 sented in the stock of a corporation. We will take 
 that up later in an express discussion of the 
 taxation of corporations. So far we are consider- 
 ing corporate securities as being, like mortgages, 
 representative of economic wealth. This seems 
 the proper place, however, to mention again the 
 taxation of credits other than those secured by 
 mortgage. The fact of a mortgage seems imma- 
 terial to the matter of taxation. The essential 
 thing is that most business credits represent cap- 
 ital invested in some tangible form of property. 
 
 policy of classification of all bonds, and Connecticut, New 
 York, and Michigan permit them to take advantage of a 
 registration law. In Connecticut this amounts to a 4-mill 
 annual tax. In New York and Michigan it is .5 per cent, 
 and exempts the security from further taxation during its 
 life. Missouri follows its practice in the case of a mortgage 
 and makes its taxation of the bonds of corporations, whose 
 property is outside the State, depend on the physical pres- 
 ence of the evidence of the security in the State. Since 
 this was written Massachusetts has enacted a statue (ap- 
 proved July 7, 1914) providing that a bond secured by 
 mortgage on tangible property situated within or without 
 the Commonwealth, which is subject to taxation wherever 
 situated, and which is there actually taxed, shall be ex- 
 empt from taxation for one year within the Commonwealth, 
 if the fact of the taxation of such property is determined 
 by the tax commissioner and the bond is registered by the 
 commissioner on receiving a fee of 30 cents on the $100 
 par value. This would amount to a 3-mill annual tax. 
 The constitutionality of this statue is yet to be tested.
 
 84 PRINCIPLES OF TAXATION 
 
 Since both realty and economic capital in the 
 form of chattels enter alike into the production 
 of wealth, and may be taken to have a value in 
 production represented by their market price, 
 there does not seem to be any sufficient reason 
 to distinguish in taxation between the represen- 
 tatives of realty and of chattels. The question of 
 the taxation by the community of residence seems 
 the same whether the investment was made di- 
 rectly or indirectly and whether it was made in 
 realty or in chattels. If there is no tangible 
 property back of the credit, available, that is, 
 through the various legal processes to satisfy the 
 debt, then the mere "legal" property imposes 
 very slight charges on the community and no- 
 where produces ability to pay. 
 
 A given tax, we have seen, may be regarded as 
 having two parts, one part levied according to 
 the cost of government activity for the benefit 
 of whatever the tax is levied on, the other levied 
 according to considerations of ability to pay. If 
 we could strike the line between these parts, and 
 with the help of the result again divide that tax 
 which should be paid on account of ability into 
 two parts, one that which should be paid in a 
 community on account of the physical presence 
 of wealth there, and the other that tax which 
 should be paid in a community on account of the 
 residence of the owner of wealth, we should reach
 
 WHERE SHOULD TAXES BE PAID? 85 
 
 a fair solution of the problem. Assuming that it 
 were possible to make these divisions, levying 
 taxes in accordance with them would still meet 
 with two great difficulties, the unwillingness of 
 the community of residence to let a resident off 
 from taxation at anything less than his full 
 ability, and the unwillingness of the community 
 in which the tangible property, the wealth, is 
 located to let the non-resident owner off with 
 anything less than his full ability on account of 
 that wealth. The community of residence of the 
 owner of wealth located in another community is 
 unwilling to make any allowance in the taxation 
 for the cost of the property to the community of 
 its location, and insists on taxing its resident 
 just as if his wealth were located at his place of 
 residence instead of elsewhere. 
 
 Though it would probably be impossible to 
 reach an agreement as to exactly what part of the 
 total tax levied on wealth should be paid on 
 account of the residence of the owner and what 
 on account of the location of the wealth, still it 
 would not seem impracticable to take these as 
 guiding principles in any plan of taxation. Our 
 argument would indicate that they are the right 
 principles and we can test the fairness of taxa- 
 tion by them. For example, we can see that to 
 tax representatives of wealth any considerable 
 amount taxes wealth held in a representative
 
 86 PRINCIPLES OF TAXATION 
 
 way disproportionately to wealth held directly. 
 This is true even after granting that to tax it 
 somewhat higher, on account of the slight ex- 
 pense the representative form imposes on the 
 Government, does not tax it disproportionately. 
 Unless we find some way to separate the tax 
 on directly owned property into that part which 
 should be paid on account of the residence of the 
 owner and that part which should be paid on 
 account of the location of the wealth, and of 
 levying it accordingly, and making it equal to 
 that levied on both accounts on wealth owned 
 representatively, we should not endeavor to give 
 the community of residence a large tax on 
 account of representatively owned wealth. For 
 the present, to attempt to tax a resident on 
 account of his direct ownership of wealth in 
 another community probably presents too novel 
 an idea to meet with any acceptance. Directly 
 owned wealth presents no peg to hang the tax 
 on. A mortgage, a bond, a share of stock have 
 become concepts in themselves apart from the 
 wealth they represent. A direct title to wealth 
 has not become formulated into any such con- 
 cept. Consider the case of a resident owning 
 wealth located in the community of his resi- 
 dence. For the community of his residence to 
 say that a part of his tax is paid there on account 
 of his residence, equivalent to a part which non-
 
 WHERE SHOULD TAXES BE PAID? 87 
 
 resident owners pay in the community of their 
 residence, would make the total tax that a 
 resident owner of local wealth pays in his com- 
 munity greater than the tax which a non-resident 
 owner pays there. It is almost impossible to 
 imagine a community at present enduring such a 
 situation. 
 
 Courts of the community of residence are open 
 for the enforcement of the property rights. 
 Since the owner of the property rights generally 
 keeps the evidence of them where he resides, the 
 community of residence bears whatever burden 
 of police protection there is. So it seems proper 
 that whatever taxation is levied on these repre- 
 sentatives of wealth should be levied by the 
 community of residence. So far as the tax ex- 
 ceeds the cost to the public on account of the 
 form of doing business, of owning the property, 
 we may consider it that part of the tax on wealth 
 to be paid in the community of residence rather 
 than in the community where the wealth is 
 located. Unless some equivalent of this excess 
 is levied on directly owned wealth, whether the 
 owner resides in the community where the wealth 
 is located or not, we shall have to consider the 
 tax as unequally levied, judged by any fair 
 principles of taxation. 
 
 No reason in principle appears for placing any 
 of these representatives of property in different
 
 88 PRINCIPLES OF TAXATION 
 
 classes in any classification of property for taxa- 
 tion. The same principles apply to all, notes, 
 mortgages, stocks, and bonds. The most reason- 
 able solution of the tax problems they present 
 seems to be for the community of the residence 
 of the owner to tax them all alike at some low 
 rate.i 
 
 A tax on wealth to cover that part of the total 
 tax which should be paid at the place of the loca- 
 tion of the wealth irrespective of the residence 
 of the owner, and a tax on income to cover that 
 part of the total tax which should be paid at 
 the place of residence of the owner, irrespective 
 of the location of the property, would be one 
 answer to the question of how to tax the resident 
 owning wealth in another community without 
 unduly favoring the direct owner of wealth as 
 against the man who owns it representatively 
 through mortgages, securities, etc. We have 
 already discussed the fact that a tax on incomes is 
 partly a tax on risk rather than on ability and 
 have seen some objections to it as compared 
 
 ^ The jurisdictions adopting this form, tax as we have 
 seen at from 3 to 5 mills per annum. Even the lower of 
 these is too high. Bringing all stock into the catagory of 
 taxables would in some jurisdictions help offset lowering 
 the tax on bonds. On principle, stock should be taxed on the 
 same basis as bonds. Not to tax stock and to tax bonds 
 tends to force investment funds into the channel of the more 
 speculative investments. This is not fair to the conserva- 
 tively inclined investors. .
 
 WHERE SHOULD TAXES BE PAID? 89 
 
 with a tax on wealth at its market value. It will 
 not be possible to solve the problem in this or 
 any other way until there is a general agreement 
 as to the proportion of the tax belonging to loca- 
 tion of wealth and the proportion belonging to 
 place of residence of the owner.
 
 CHAPTER V 
 
 HOW SHOULD TAXES BE ASSESSED? 
 
 Communities are coming to an understanding 
 of the weaknesses of the system of locally elected 
 assessors usual throughout the United States. 
 It is simply human for a man to desire to please 
 those who have elected him and those on whom 
 his continuance in ofhce depends, and the desire 
 to please may often work counter to that strict 
 justice with which assessments should be made. 
 This fact makes a special objection to elective 
 assessors in addition to the many general ob- 
 jections to elective administrative officers. The 
 value of experience is not greater in any occupa- 
 tion than in that of the assessor. 
 
 Boards of equalization 
 
 First efforts made to correct the evils of a sys- 
 tem of locally elected assessors take the form of 
 central boards of control, often called boards of 
 equalization. These state boards vary in power 
 from merely nominal authority to a large measure 
 of control. It takes the form of a right to correct 
 the findings of the local assessors and sometimes
 
 ASSESSMENT OF TAXES 91 
 
 to instruct them and to supervise their work. A 
 good board with real, authority can accomplish 
 a great deal. 
 
 Though giving such boards a right of review 
 over the findings of the local assessor, and some 
 measure of authority over him, lessens the evil 
 of the elective nature of the office, it does not do 
 away with it. It would seem desirable to abolish 
 the system of elective assessors and establish an 
 entirely central administration of all assessments 
 in the State and central appointment of all assess- 
 ors. In order to secure the benefit of a knowledge 
 of local values it would undoubtedly be desirable 
 to appoint local men. Such a man appointed by 
 a central authority and having a permanent 
 tenure of office would be in a vastly different 
 position from the same man elected for short 
 terms by his neighbors whom he is going to 
 assess. He might not be altogether removed from 
 the tendency, for example, to assess the property 
 of non-residents more heavily than that of his 
 resident neighbors, but that and other undesir- 
 able tendencies would be checked. (By way of 
 an aside it may not be inappropriate to remark 
 on the tendency of communities to be eager in 
 their invitation to foreign capital and inhospitable 
 to it after its coming.)
 
 92 PRINCIPLES OF TAXATION 
 
 Central administration more readily supplies 
 desirable special expert knowledge 
 
 In a centralized system of assessment it would 
 be easier to supply that expert knowledge neces- 
 sary for the proper appraisal of special classes of 
 property. No one man, or even several men, can 
 possibly have the knowledge necessary for mak- 
 ing a correct valuation of all the varieties of 
 wealth in modern economic communities. To 
 value land alone calls for a high degree of expert 
 skill. It is hardly possible that a man capable of 
 valuing land and making an approximate ap- 
 praisal of the value of the common structures 
 should have the skill necessary to value any of 
 the other common forms of property. A central 
 administration could supply the expert knowl- 
 edge necessary to assess factories, mines, timber- 
 lands, stocks of goods, securities, or whatever 
 property there might be in a community for 
 assessment. 
 
 We shall later discuss briefly the separation of 
 the sources of state and local revenue. It may be 
 stated here, however, that the system, even more 
 general formerly than it now is, of raising all or 
 most of a State's revenue by simply imposing in 
 one way or another the state tax on the local 
 assessment, leads to special endeavor on the 
 part of locally elected assessors to give their com-
 
 ASSESSMENT OF TAXES 93 
 
 munities a low total assessment. The lower the 
 assessment of a particular community the smaller 
 the state tax it would pay. So far as a State con- 
 tinues to raise its revenue by this method, the 
 central appointment and control of assessors 
 would remedy the evil. 
 
 Assessment should be at full value 
 
 With this brief mention of the administrative 
 machinery of taxation we may go on to a short 
 consideration of the assessment itself. Some 
 people consider that it is immaterial at what rate 
 property is assessed provided it is all assessed at 
 the same rate. They would say it makes no dif- 
 ference whether the property is assessed at fifty 
 per cent of its real value and taxed two per cent 
 on that value, or is assessed at one hundred per 
 cent of its value and taxed one per cent. I am 
 unable to agree that it makes no difference. 
 Anything that obscures the facts Is undesirable 
 just because it does obscure them. If a commun- 
 ity raises its public revenue by a tax on the value 
 of wealth, it is important to know just what 
 percentage of that wealth is taken each year. If 
 it is important to know that fact at all, anything 
 tending to make the fact more quickly and clearly 
 apparent is important. 
 
 An assessment at full value tends to a fairer 
 assessment than one at anything less than full
 
 94 PRINCIPLES OF TAXATION 
 
 value. If the assessments are at full value, In- 
 equalities become at once more apparent. 
 There is not the obscuring necessity of going 
 through a mathematical computation to see just 
 what the real situation is. Actual things are more 
 or less known things and current topics of remark. 
 They are not stated or thought of in terms of 
 half the value. If Smith's house and lot are 
 worth $10,000 and are assessed at that, while 
 Brown's house and lot, also worth $10,000, are 
 assessed at only $9000, Smith is more likely to 
 notice and object to the discrepancy than he 
 would be if his house was assessed at $5000 and 
 Brown's at $4500. As appears from this example, 
 the unfairness does not seem as important on the 
 fifty per cent assessment basis as it does on the 
 one hundred per cent basis. 
 
 Why securities should be assessed at market value 
 
 Securities should be assessed at their actual 
 market value just the same as any other prop- 
 erty. Ordinary real estate mortgages may fairly 
 be taken at par. They are regularly placed at 
 par, that is the mortgage is given to cover the 
 actual amount advanced and the interest rate is 
 adjusted to take care of the varying elements of 
 risk and the changing values of capital. Since 
 they run for relatively short terms they are 
 kept constantly adjusted to changing conditions.
 
 ASSESSMENT OF TAXES 95 
 
 Par always represents practically the market 
 price. The situation is very different with securi- 
 ties. Corporations often issue bonds below par, 
 and sometimes above par. During their life 
 conditions both within and without the corpora- 
 tion may change so much that the issue price 
 may have little to do with present value. This is 
 even more noticeable with stocks than with 
 bonds. Only an appraisal of value affords a fair 
 basis for taxation. Appraising the value of secu- 
 rities is no more difficult than appraising the 
 value of real estate. 
 
 The market should be the basis of estimating 
 value for assessment. Market value expresses 
 the consensus of opinion as to actual value. 
 Probably market value approximates real value 
 nearer than the opinion of any individual could 
 for a whole class of property. In many cases it is a 
 fact much easier to arrive at than an appraisal 
 based on an individual opinion, which must 
 ascertain many facts on which to base the 
 opinion. 
 
 Since our discussion is concerned mainly with 
 what constitutes fair taxation, we will not go 
 into these questions of administration further. 
 Difficulties of administration may sometimes 
 make what would be a fair tax inexpedient in 
 practice.
 
 CHAPTER VI 
 
 SHOULD STATE AND LOCAL TAXATION BE 
 KEPT APART? 
 
 Current theory and practice In taxation tend 
 to separate the sources of state and local revenue. 
 Two forces have worked to produce this tendency. 
 We have already referred to one. It is the unfor- 
 tunate effect on local assessments of superimpos- 
 ing the state tax on the same property and under 
 the same assessment as the local tax. This 
 method of raising the state revenues produces 
 a constant effort on the part of one community 
 to gain an advantage over another by means of 
 underassessments. Some States have sought to 
 reach this by limiting the tax rate a community 
 might impose. Even boards of equalization have 
 not in general been able wholly to remedy the 
 evil. So one way out of the difficulty, or, at least, 
 of lessening it, has been sought through having 
 the State reserve to itself certain subjects of 
 taxation. Centralizing tax administration would 
 seem the nearest means of meeting this situation. 
 The natural development of certain special taxes 
 and the growth of certain forms of wealth, which 
 do not lend themselves readily to local assess- 
 ment and taxation, has been the other force
 
 STATE AND LOCAL TAXATION 97 
 
 tending to the segregation of certain subjects 
 for state taxation. Centralizing administration 
 would partly, but only partly, overcome these 
 difficulties of assessment and taxation. Such 
 special taxes as those mentioned, as, for example, 
 a tax on motor vehicles, or the inheritance tax, 
 seem partly to have developed of themselves and 
 partly to have come from a desire to find subjects 
 for state taxation separate from the subjects of 
 local taxation.^ 
 
 ^ New York especially has gone far in the segregation of 
 subjects for state taxation and endeavors to raise the entire 
 revenues for the enormous state expenditures in this way. 
 In 1912 its sources of revenue were as follows: — 
 
 Corporation taxes, produced $10,349,164.76 
 
 Tax on organization of corporations 472,959.81 
 
 Inheritance tax produced 12,153,188.84 
 
 Stock transfer tax " 3,653,037.24 
 
 Secured debt tax " 1,41 1,567.60 
 
 Mortgage recording tax " 3,704,648.90 
 
 Tax on motor vehicles " 1,053,762.25 
 
 Bank tax " 4,528,705.85 
 
 $37-327,026.25 
 
 Other States conspicuous for the absence of a general 
 property tax for state purposes are New Jersey and Dela- 
 ware. 
 
 By way of indicating in part some of the segregation of 
 corporate property for state taxation, and in part the cen- 
 tral assessment of certain property, though the taxation is 
 partly for local purposes, the practice of several jurisdic- 
 tions with regard to certain classes of corporations is indi- 
 cated below : — 
 
 Maine: — State taxes gross receipts of palace car and
 
 98 PRINCIPLES OF TAXATION 
 
 Sofne subjects of taxation do not lend themselves to 
 local assessment 
 
 Some subjects certainly do not lend themselves 
 to local assessment. The absurdity of the assess- 
 express companies; State assesses railroads and street rail- 
 ways, telegraph and telephone companies, on basis of gross 
 receipts, retains part of the tax, and distributes the rest to 
 the local communities. 
 
 New Hampshire: — State assesses property of street 
 and steam railways, collects the tax, reserves part of it for 
 state purposes and distributes the rest locally. The State 
 taxes exclusively for state purposes the property of tele- 
 graph, telephone, express, and car companies, except that 
 their real estate not used in their ordinary business is taxed 
 locally. 
 
 Vermont: — Transportation and transmission compan- 
 ies, other than palace car and express companies, have the 
 option of being taxed on property or on gross earnings. The 
 taxation is for state purposes. Express companies are taxed 
 by the State for state purposes on the mileage of their route 
 and palace car companies on their capital used in the State. 
 
 Ohio: — All property of steam, street, suburban, and 
 interurban railroad companies, as assessed by the State Tax 
 Commission, is taxed locally for state and local purposes 
 under the general property tax. Real estate necessary for 
 the daily operation of the railroad is treated as personalty; 
 other real estate is taxed like that of individuals. In addi- 
 tion to the general property tax, railroads pay to the State 
 for state purposes a tax on gross earnings. The entire prop- 
 erty of express, telegraph, and telephone companies is as- 
 sessed by the State Tax Commission on the basis of the 
 market value of the capital stock. Then the proportional 
 value of the property within the State is determined on a 
 mileage basis and is taxed under the general property tax 
 for state and local purposes after deducting the value of the 
 real estate owned and, taxed in Ohio. Besides this general
 
 STATE AND LOCAL T.AXATION 99 
 
 ors in each local community making an assess- 
 ment of the property located in that community 
 of a railroad running through it is apparent. The 
 local assessors have no technical knowledge to 
 help them in estimating the value of a property. 
 However skilled they might be, they could not 
 value a piecemeal part of a whole system. Such 
 delicate questions arise as the taxation of cars 
 and locomotives constantly passing from one 
 community to another. Obviously the same diffi- 
 culties come up in the assessment of express com- 
 panies, telegraph and telephone companies, pipe 
 lines, or any other property that is not local in its 
 essential character. A fair assessment can be 
 made only by considering the property as a whole. 
 So it seems logical that here, if nowhere else, the 
 central authority should make the assessment 
 and, perhaps, collect the tax. How much of the 
 tax the State should keep might depend on the 
 
 property tax all these corporations pay a tax on gross earn- 
 ings to the State for state purposes. 
 
 Minnesota: — Steam railroads are taxed 4 per cent, 
 telephone companies at 3 per cent, express and freight line 
 companies at 6 per cent on gross earnings. These taxes are 
 regarded as taxes on property and are paid to the State 
 for state purposes. They are in lieu of all other taxes, ex- 
 cept the general property tax paid locally for state and 
 local purposes on property not used in the business. 
 
 Total state taxes and amounts contributed by certain 
 specified sources of taxation in New England, Middle Atlan- 
 tic and Eastern Central groups are: —
 
 lOO PRINCIPLES OF TAXATION 
 
 
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 STATE AND LOCAL TAXATION loi 
 
 State's need of revenue. The precise manner of 
 returning taxes to the local communities varies 
 and involves too many considerations for discus- 
 sion within the limits of this essay. ^ 
 
 ^ New Hampshire: — Taxes received from railroads are 
 distributed as follows: — 
 
 1. One fourth to the towns in which the railroad is lo- 
 cated to be prorated upon the basis of the amount ex- 
 pended by the railroad in each town for building and right 
 of way, as shown by a return from the railroad to the State 
 Treasurer. 
 
 2. Of the remainder (three fourths) each town receives a 
 part proportioned to the number of shares held by its resi- 
 dents. The selectmen of each town notify the State Trea- 
 surer of the names of such stockholders and the number of 
 shares held by each. The treasurer of each railroad also 
 transmits to the State Treasurer a similar list of stock- 
 holders by towns. 
 
 3. Usually an amount still remains, represented by the 
 stock held outside the State, and this remainder is retained 
 by the State for its own use. 
 
 Connecticut: — Steam railroads located in Connecticut 
 pay to the State, for state purposes, i per cent of the market 
 value, on a given date, of the capital stock and i per cent 
 of the par value of the railroad's funded and floating in- 
 debtedness, or if the indebtedness is less than par, then the 
 determined value of such indebtedness. Taxes locally paid 
 upon real estate not used for railroad purposes are deducted. 
 This payment is in lieu of all other taxes on the franchises- 
 funded and floating debt, and property of railroads in the 
 State. 
 
 New Jersey: — The State Board of Assessors annually 
 ascertains on the following basis the true value of all prop- 
 erty used for railroad or canal purposes, including fran- 
 chises: — 
 
 I. The length and value of the main stem of each rail-
 
 I02 PRINCIPLES OF TAXATION 
 
 It should be remarked in this connection that 
 care should be taken in the segregation of such 
 
 road, and of the waterway of each canal, and the length of 
 such in each taxing district. 
 
 2. The value of the other real estate used for railroad or 
 canal purposes in each taxing district, including the road- 
 bed (other than main stem), waterways, reservoirs, tracks, 
 buildings, waterworks, riparian rights, docks, wharves, 
 piers, and all other real estate, except lands not used for 
 railroad and canal purposes. 
 
 3. The value of all the tangible personal property of each 
 railroad and canal company. 
 
 4. The value of the remaining property, including the 
 franchise. 
 
 In 1906 the "main stem" was declared hereafter "to in- 
 clude the roadbed, not exceeding 100 feet in width, with 
 its rails and sleepers, and all structures erected thereon and 
 used in connection therewith, not including, however, any 
 passenger or freight building erected thereon." 
 
 The taxes on the property included in 2, and known as 
 "second-class" railroad property, are assessed and col- 
 lected by the State, but the entire amount is paid over to 
 the local taxing districts, giving each the tax derived from 
 such property situated therein. 
 
 Illinois: — All steam and electric railroads, except the 
 Illinois Central Railroad, are subject to the general prop- 
 erty tax for both State and local purposes. To the assessed 
 valuation of domestic roads is added the assessment of the 
 excess value of their capital stock, including franchise. 
 
 With respect to assessments, steam and electric railroad 
 property may be classified as — 
 
 1. Property (including "capital stock and franchise") 
 assessed by the State Board of Equalization; and 
 
 2. Property assessed locally. 
 Class I consists of — 
 
 (a) " Railroad track," which is taxed as real estate, and 
 embraces right of way, including all tracks, superstruc-
 
 STATE AND LOCAL TAXATION 103 
 
 properties as the railroads, telegraphs, etc., for 
 assessment and taxation by the State that this 
 property is treated on a level with property 
 locally assessed. Some jurisdictions endeavor in 
 a measure to take care of this by providing that 
 the rate of taxation shall be an average of the 
 local rates throughout the State. ^ This presents 
 
 tures, buildings, and improvements located thereon. The 
 value of buildings and the value per mile of main, second 
 main, and side tracks are separately assessed by the Board. 
 Distribution to counties through which the road passes 
 is made upon the basis of the length of various kinds of 
 track in each county, multiplied by their respective assessed 
 values per mile, plus the assessed value of buildings therein. 
 
 (6) "Rolling stock;" and 
 
 (c) "Capital stock, including franchise." 
 
 Both (b) and (c) are taxed as personal property and dis- 
 tributed in such proportion as the length of main track in 
 each county bears to the total length of main track in the 
 State. 
 
 Distributions by county officials to municipalities and 
 local districts are made on a basis similar to distributions 
 by the State Board to counties. 
 
 Class 2 consists of all property not included in Class i, 
 and is assessed locally. The information in this and other 
 footnotes in this chapter has been taken principally from 
 the reports of the Commissioner of Corporations on the 
 Taxation of Corporations. 
 
 ^ In Wisconsin, for example, the Tax Commission deter- 
 mines the average rate of taxation by dividing the aggre- 
 gate taxes levied on the general property in the State for 
 all purposes (except assessments for local improvements) 
 by the true cash value of such property as ascertained by 
 the Commission. The quotient thus oljtained constitutes 
 the average rate of taxation. It should be noted that as- 
 sessment is especially centralized in Wisconsin.
 
 I04 PRINCIPLES OF TAXATION 
 
 another reason for insisting that all assessments 
 be at the full value of the property, and shows 
 further advantages of a centralized administra- 
 tion of all assessments. 
 
 There hardly seems to be an adequate reason 
 for taxing railroad, telegraph and telephone, and 
 other properties that are not local more or less 
 than manufacturing and other properties that 
 are local. Even assuming that a railroad, say, 
 can shift the incidence of the tax and collect it 
 from passengers and shippers in the rates it 
 makes, there is no reason for making such a pub- 
 lic service corporation a medium for the collec- 
 tion of taxes, or for the users of transportation to 
 be especially taxed. Besides, the assumption that 
 the public service corporation can shift the inci- 
 dence of the tax is not necessarily true in view of 
 the fact of supervision of rates by the Interstate 
 Commerce Commission and other public service 
 commissions. The interests of clarity are served 
 by keeping the taxation of these properties on the 
 same level as the taxation of local property. ^ 
 
 1 The following indicates the method of assessment of 
 railroad property in a number of the States: — 
 
 Maine: — The State taxes gross receipts for state and 
 local purposes. 
 
 New Hampshire: — The State assesses on the value of 
 the property, collects the tax, and distributes proceeds to 
 local communities. 
 
 Vermont: — The State taxes property or gross earnings 
 (at the option of the railroad) for state purposes.
 
 STATE AND LOCAL TAXATION 105 
 
 Assessing corporations at market value 
 
 It is hard to see why market value should not 
 be taken as the basis of assessment of these state- 
 
 Massachusetts: — The State taxes only on corporate 
 excess for state purposes. 
 
 Rhode Island: — The railroads are taxed locally. 
 
 Connecticut: — The railroads pay the State one per 
 cent on the market value of stock and bonds for state pur- 
 poses. 
 
 New York: — Railroads are taxed locally on tangible 
 property; by the State on corporate excess and gross earn- 
 ings. 
 
 New Jersey: — The State taxes on value of property. 
 
 Pennsylvania: — The raihoads are taxed locally. The 
 State taxes them on capital stock and 8 per cent on gross 
 receipts for state purposes. 
 
 Delaware: — The railroads commute taxes to the 
 State by paying certain lump sums. The roadbed is exempt 
 from local taxation; all other realty is taxed locally. 
 
 Maryland: — The State taxes railroads on gross re- 
 ceipts; they are taxed locally on real and personal property. 
 
 Ohio: — The State assesses railroads on the value of 
 their property; the tax is collected locally. The State taxes 
 them for state purposes on intrastate gross earnings. 
 
 Indiana: — Railroads are assessed and taxed locally. 
 
 Illinois: — Railroads are assessed and the tax collected 
 by the State on value of property and on corporate excess. 
 The proceeds of the tax are distributed locally. 
 
 Michigan: — Railroads are assessed by the State on the 
 value of their property, including intangible values. The 
 tax is collected by the State and expended by it. 
 
 Wisconsin: — Railroads are assessed by the State on the 
 value of their property, including intangible values. The 
 tax is collected by the State and expended by it. 
 
 Minnesota: — Railroads are taxed exclusively by and 
 for the State on the basis of gross earnings.
 
 io6 PRINCIPLES OF TAXATION 
 
 wide properties as well as of local properties. 
 Certainly railways, telephone lines, and like 
 widely extended properties are not generally 
 bought and sold like houses and lots, at one com- 
 plete purchase price. But fractions of their value 
 are sold with great frequency in the form of sales 
 of shares of stocks and bonds. Those prices indi- 
 cate the consensus of opinion on the value of the 
 property. They are the market price of the prop- 
 erty. The fact that the property is so large and 
 its legal ownership in the corporate form such 
 that it does not have a market price in its entirety 
 should not obscure the essential situation. An 
 assessment based on the market value of stocks 
 and bonds probably comes much nearer to finding 
 the value in production of the property than any 
 other form of assessment can come. The relative 
 ease of making the assessment should recommend 
 
 North Dakota: — Railroads are assessed by the State 
 on the value of their property, including intangible values. 
 The tax is collected locally. 
 
 South Dakota: — The State assesses railroads on the 
 value of their property, including intangible values. The 
 tax is collected locally. 
 
 Iowa: — Railroads are assessed by the State and the tax 
 is collected locally. 
 
 Nebraska: — Railroads are assessed by the State. 
 The tax is collected locally. 
 
 Kansas: — Railroads are assessed by the State. The 
 tax is collected locally. 
 
 Missouri: — Railroads are assessed by the State. The 
 tax is collected locally.
 
 STATE AND LOCAL TAXATION 107 
 
 it. Whatever reasons there may be for making 
 elaborate physical valuations of public service 
 properties, for consideration in determining rates 
 by public service commissions, they have no 
 application to the matter of taxation. Value in 
 production to the individuals owning the prop- 
 erty depends very largely on the rates permitted. 
 To take such a value in production as a basis for 
 making the very rates which determine it would 
 be traveling in a circle and arriving nowhere. 
 Under an existing set of circumstances, however, 
 value in production is a definite thing, and the 
 estimate of it by the market price the best avail- 
 able for purposes of taxation. 
 
 Assessing on value of stock and bonds includes 
 intangible values on which an individual property 
 owner is not subject to taxation 
 Such an estimate does have a large element of 
 unfairness. It includes other things than the 
 value of the economic wealth, the tangible prop- 
 erty, used in production. It includes the so- 
 called intangible values, the special skill of a 
 particular management, the good-will of a busi- 
 ness. The securities of a corporation represent 
 more than their proportionate ownership of the 
 tangible property of the corporation ; they carry 
 also these intangible values. Market prices of 
 privately owned wealth represent only the value
 
 io8 PRINCIPLES OF TAXATION 
 
 in production of the tangible property. They 
 often do represent location values just as truly as 
 public service corporation franchises. There can 
 be only four corners to the intersection of Forty- 
 second Street and Fifth Avenue in New York. 
 They do not carry skill of management and good- 
 will. To this extent to value corporate property 
 on the market price of the corporate securities 
 may be to place too high a value on it as com- 
 pared with individually owned property. It may 
 be that the skill of management is not above the 
 average, and that there is no special good-will. 
 In that case the corporate property would not 
 be taxed more than private property. Manage- 
 ment might be below the average and the good- 
 will amount to nothing or be postively bad-will. 
 Then the market price of the securities would 
 give a value below the actual value of the tangible 
 property in the process of production. ^ 
 
 In our later consideration of the taxation of 
 corporations we shall discuss the special taxation 
 of intangible values in the so-called corporate 
 excess taxes. 
 
 State taxation of inheritances 
 
 We shall discuss only one of the many special 
 state taxes, the taxation of inheritances. This 
 
 ^ As indicated in an earlier footnote Connecticut follows 
 this method of assessing railroad corporations.
 
 STATE AND LOCAL TAXATION 109 
 
 has become so common and so important a form 
 of taxation that it calls for special comment. At 
 first thought it does not fit into either of the basic 
 theories of taxation, cost to the Government or 
 ability to pay. Though sustaining the legal right 
 to inherit does cost the Government something, 
 there is no inheritance tax that does not go beyond 
 this special charge. A given item of wealth is not 
 more valuable in production, that is, does not 
 essentially create more ability to pay, by virtue 
 of the process of passing from one ownership to 
 another because of death than by the transfer 
 from one ownership to another during the life 
 of the former owner. Looking at the tax from 
 the viewpoint of a longer period of time than the 
 annual one, however, makes it appear more in 
 accord with these basic theories. That body of 
 privately owned wealth which is continuous, the 
 capital fund, so to speak, must pass by inheri- 
 tance with the average frequency of the average 
 human life. From this viewpoint the inheri- 
 tance tax becomes simply an addition to the 
 regular annual tax on wealth. One might look 
 on it as a deferred tax, that is, a tax which 
 might have been imposed in annual installments 
 through the preceding term of years during which 
 any change of ownership was inter vivos. Or one 
 might look at it as an anticipatory tax, paid in 
 advance for the next term of years during which
 
 no PRINCIPLES OF TAXATION 
 
 transfers inter vivos would be the only changes of 
 ownership. Interesting as this may be as a mat- 
 ter of speculation, its bearing is on the amount 
 rather than on the nature of the tax. In any 
 event, the wealth is owned with the knowledge 
 that this tax will have to be paid. The tax is dis- 
 counted in the consideration of the value of the 
 property for private purposes. Of that total 
 value of the property in production a certain 
 part of the product will, in the long run, go to 
 public rather than to private purposes. 
 
 Looking at the tax in this way, it is immaterial 
 also from the viewpoint of the nature of the tax 
 whether it is considered a tax on the ability of the 
 preceding or of the succeeding owner. Though 
 the wealth may be inherited in the form of its 
 representative intangible property, which ordin- 
 arily is taxed at the domicile of the taxpayer, an 
 inheritance of such property is not taxed at the 
 domicile of the person inheriting. One amply 
 sufficient practical reason is that the jurisdic- 
 tion of the person inheriting has no such avail- 
 able means as the probating of the estate of the 
 testator or intestate to learn of the inheritance 
 and to enforce the tax. Though this may be 
 the practical reason, the result might be pointed 
 to as supporting an argument that the tax is a 
 deferred one. 
 
 By taking this longer view we can bring the
 
 STATE AND LOCAL TAXATION in 
 
 tax within the ordinary tax theories. The tax is 
 more popular than most. Perhaps both the per- 
 son leaving the inheritance and the person receiv- 
 ing it feel the same doubt we have mentioned as 
 to which is really paying the tax. At any rate, 
 the person leaving the inheritance is in no posi- 
 tion to object and the person receiving it is in no 
 mood to object. The tax is even more popular, 
 possibly, with those who have no connection 
 with it. The adventitious opportunity afforded 
 by inherited wealth is one of the very important 
 causes of the Socialist's objection to the social 
 utility of private property. The usual progressive 
 form of this taxation affords an instance of plac- 
 ing more stress on ability to pay than most forms 
 of taxation. This again extends the number of 
 those who approve the taxation. 
 
 In practice the tax has been given defects that 
 should be done away with. It is especially adapt- 
 able to piracy among the States in taxation. We 
 have already noticed the tendency. The piracy 
 takes the form of levying the tax on such intan- 
 gible property ^ f non-resident decedents as the 
 State can get any jurisdiction over to enforce the 
 tax. As we have seen, so far as intangibles are 
 taxed they should be taxed at the domicile of the 
 owner. Suppose the case of a testator whose 
 residence is in the State of A levying stock in a 
 corporal 'on of the State of B. The estate prop-
 
 112 PRINCIPLES OF TAXATION 
 
 erly pays a tax in the State of the testator's 
 domicile. But the State of incorporation often 
 steps in and claims a tax also on the ground that 
 if the tax is not paid the State can prevent the 
 transfer of the stock. In like manner States get 
 jurisdiction over the transfer of registered bonds, 
 or of the physical presence within the State of 
 the evidence of the intangible property as the 
 certificate for the stock. » 
 
 ^ Among the States taxing the intangibles of non-resi- 
 dents are: Colorado, Illinois, Iowa, Maine, Michigan, New 
 Hampshire, New Jersey, North Carolina, Oklahoma, and 
 Vermont. Among the States avoiding this double taxation 
 of inheritances are: Arkansas, Connecticut, Idaho, Ken- 
 tucky, Louisiana, Maryland, Massachusetts, Minnesota, 
 Missouri, Montana, Nebraska, New York, North Dakota, 
 Oregon, Pennsylvania, South Dakota, Tennessee, Texas, 
 Utah, Virginia,. Washington, West Virginia, and Wyoming.
 
 CHAPTER VII 
 
 ARE CORPORATIONS TAXED TOO LITTLE? 
 
 Though a few years ago people somewhat 
 more commonly believed than they do now that 
 corporations do not pay their proper share of 
 the taxes, the belief is still prevalent. If the facts 
 afford any foundation for this feeling, they do so 
 on account of assessments and not on account of 
 the taxes provided. So far as assessments may 
 have been defective, the fault has been due to the 
 lack of expert knowledge on the part of assessors 
 who have not known how to value the special 
 forms of property owned by corporations. The 
 briefest consideration will show that the various 
 special taxes commonly devised for corporations, 
 in addition to those the general laws impose on 
 them in direct and indirect ways, frequently pro- 
 vide for an overtaxation of the corporate form 
 of doing business as compared with individuals 
 directly owning property and conducting affairs. 
 We have already considered the matter of assess- 
 ments. The remedy for any failure of equality 
 on their account appears to lie in centralizing 
 their administration. This could provide the 
 necessary experts to make the proper valuations. 
 Let us consider now the taxation itself.
 
 114 PRINCIPLES OF TAXATION 
 
 We have already seen how the taxation of 
 corporate securities thrusts back an extra burden 
 of taxation on the corporate form of enterprise. 
 It is due to several things that the corporate 
 form of doing business has not suffered more on 
 account of this extra burden. So far as the taxa- 
 tion of borrowing is concerned, it is not peculiar 
 to corporations. Individual as well as corporate 
 borrowers suffer on account of it. But we have 
 seen that a considerable number of jurisdictions 
 tax the stock of corporations and add to corporate 
 business the burden of this taxation which indi- 
 vidual business does not have to bear. The fact 
 that this tax, if equal to the tax on tangible 
 property, is commonly evaded, of course, relieves 
 the corporate burden so much. In just the same 
 way the fact that mortgagees and bondholders 
 commonly evade any high rate of taxation tends 
 by so much to keep down the rate of interest 
 charged, and to that extent to relieve the indi- 
 vidual and the corporate borrower. This evasion 
 of taxes has enabled the corporate borrower to 
 procure loans at rates that would be impossible 
 if the tax against the loans were collected. If the 
 corporation has had sufficient security to offer, 
 and has been able to give its bonds general cur- 
 rency, it has been able in times of low money 
 rates to borrow at less than four per cent. If 
 lenders paid taxes at the average rate, approach-
 
 TAX.\TION OF CORPORATIONS 115 
 
 ing two per cent, they would not have loaned at 
 a rate to net them two per cent or less. In the 
 same way funds have more readily gone into cor- 
 porate enterprises by the purchase of stock 
 because the purchasers in those jurisdictions 
 which impose a tax on stock had no intention of 
 having their expected net return from the invest- 
 ment reduced by the amount of the tax. 
 
 Another reason why the corporate form has 
 not suffered more lies in the fact that a given 
 kind of business has largely either remained in 
 individual hands or has assumed the corporate 
 form. This development has largely come from 
 the advantage of conducting certain businesses 
 on a larger scale than individual ownership gen- 
 erally permits. So a corporation has not been 
 competing with individuals, but with other cor- 
 porations subject to the same tax burden. Then 
 there is always the fact that taxation is only one 
 among many economic forces at work in private 
 enterprise, and it may not be possible to trace 
 its effect in the resultant of them all. 
 
 The corporation meets extra tax burdens from 
 its very beginning. At its organization it must in 
 most jurisdictions pay a tax on its stock in 
 addition to the charge (generally in itself a tax) 
 for incorporation. Many jurisdictions levy an 
 annual capital stock tax. Though this is usually 
 not large in itself, considering the fact that it is
 
 ii6 PRINCIPLES OF TAXATION 
 
 superimposed on a full taxation on account of 
 property owned, it amounts to a considerable 
 exaction/ 
 
 Besides those States having a capital stock 
 tax of the kind just mentioned, several jurisdic- 
 tions have a tax on the so-called "corporate 
 excess" by which they aim to reach intangible 
 values expressed in the market value of the stock. 
 In general the "corporate excess" is taken to be 
 the assessed value of all the corporate securities 
 less the assessed value of the tangible property 
 of the corporation. To show the situation con- 
 cretely, suppose a corporation with $1,000,000 
 of bonds selling at par and $1,000,000 of capital 
 stock selling at 125. Assume that the tangible 
 property of the corporation is assessed where it is 
 
 ^ In Ohio, for example, the state capital stock tax levied 
 on all corporations except public service corporations, is 
 three twentieths of one per cent, that is, .15 per cent, on the 
 par value of the stock. If the general property tax amounts 
 to 1.50 per cent, this would make the tax on corporations 
 amount to 1.65 per cent as compared with a tax of 1.50 per 
 cent on individuals, assuming that the par of the stock just 
 represented the value of the corporate property. New York 
 has a tax on capital stock which it calls a franchise tax. 
 Domestic and foreign corporations pay to this State a tax 
 computed on the amount of capital stock employed in the 
 jurisdiction. It depends on the amount of dividends. Cor- 
 porations paying dividends of 6 per cent or more pay a tax 
 of one fourth mill for each one per cent of dividends. Spe- 
 cial provisions are made for those paying dividends of less 
 than 6 per cent.
 
 TAXATION OF CORPORATIONS 117 
 
 located at $2,000,000. The securities of the 
 corporation are worth $2,125,000. The State 
 calls the $125,000 the corporate excess and taxes 
 it substantially. 
 
 We have two possibilities here. The tangible 
 property in the locality where the corporate 
 property lies may not be assessed at its full value. 
 In that event the market value of the securities 
 expressed the full value of the tangible property 
 of the corporation. But in this case property 
 individually owned pays taxes only on the 
 assessed valuation, which is less than the actual 
 value, and the corporation is paying taxes on the 
 full actual value of its property. It would be as 
 fair to say, "We will assess individually owned 
 property at .66 per cent of its actual value, but 
 will assess corporately owned property at lOO 
 per cent of actual value." 
 
 The State professes to act on the other possi- 
 bility in levying the tax. It is that there are cer- 
 tain " intangible " values in the corporation which 
 a taxation of its tangible property does not reach. 
 There are no such values, however, which may 
 not equally be present in individually conducted 
 enterprises. The value of the securities in excess 
 of the value of the tangible property comes from 
 special skill in management or from good-will. 
 The State does not seek these out and tax them 
 in the case of individuals. Of course, both these
 
 ii8 PRINCIPLES OF TAXATION 
 
 possibilities may be present in the "excess" of a 
 corporation. It may represent partly the differ- 
 ence between assessed value and actual value of 
 tangible property, and partly intangible values 
 of skill in management and good -will/ 
 
 Is there sufficient reason for this extra taxation 
 of corporations? Taxes levied go way beyond 
 the cost of the corporate form to the States. It 
 increases ability to pay, if at all, only in indirect 
 ways, as in enabling capital to be massed for the 
 undertaking of enterprises so large as not gener- 
 ally to be possible for individuals. Let us apply 
 the benefit theory of taxation to see if we can on 
 any theory find a justification for this special 
 taxation of corporations. Does the State bestow 
 
 1 States employing the method of corporate excess in 
 taxing corporations are Massachusetts, Connecticut, In- 
 diana, Illinois. In Massachusetts the assessed value of the 
 tangible property is deducted from the market value of the 
 stock only. Bonds are not included in the securities valua- 
 tion. In the other States bonds are included with the stock 
 in arriving at the corporate excess. Massachusetts and 
 Connecticut take the market value of the securities in ar- 
 riving at corporate excess. Indiana and Illinois leave the 
 valuation of the securities to the judgment of the Tax Com- 
 missioner. Connecticut applies this tax only to railroads; 
 Indiana to practically all corporations except railroads; 
 Illinois applies it to domestic corporations; Massachusetts 
 to domestic and foreign corporations. Other States, Minne- 
 sota, North Dakota, South Dakota, and Kansas, have this 
 tax on their statute books, but apparently do not enforce it. 
 
 New York and Massachusetts also have a stock transfer 
 tax.
 
 TAXATION OF CORPORATIONS 119 
 
 any such special benefit on those who seek the 
 corporate form that it is justified in taxing them 
 on account of it? Limited HabiHty is the most 
 important gift of the State to a corporation. This 
 especially helps in that massing of capital we have 
 just spoken of. It is important to the State that 
 enterprises requiring large amounts of capital 
 should be undertaken. That might sufficiently 
 offset whatever special privilege is given to the 
 individuals forming the corporation. Limited 
 liability really imposes no disadvantage on people 
 in general. If they deal with a corporation, they 
 realize the limited liability and make terms 
 accordingly. Perpetuity and other characteristics 
 of a corporation are merely characteristics of a 
 business device, and do not afford any better 
 reason for taxation than the characteristics of 
 any other business device, such as a bill of lading 
 which has proved greatly useful in business prac- 
 tice and therefore may be said to confer a benefit 
 on the user. Doubtless if the State should tax 
 the use of a bill of lading, shippers would con- 
 tinue to use it and endure the burden because of 
 the convenience of the device. Such taxation, 
 however, depends on the idea of what the traffic 
 will bear and has no relation to any fair princi- 
 ples of taxation.
 
 CHAPTER VIII 
 
 SINGLE TAX, THE INCREMENT TAX, AND 
 LOCAL OPTION IN TAXATION 
 
 It is no part of our general purpose to discuss 
 special tax proposals, particularly those with a 
 primary purpose other than raising revenue. 
 Advocates of the " Single Tax "so actively agitate 
 for it, however, that it seems desirable to give it 
 a brief consideration. They present a plan of 
 taxation which provides for a tax on land only. 
 It would exclude from taxation that realty which 
 consists of improvements on land and all per- 
 sonalty. The proposal is founded on the assump- 
 tion that the existence of the community creates 
 land values, and that, therefore, the community 
 has a special right to appropriate those values to 
 its general use. Its advocates further base on this 
 assumption a program of social reform. They 
 declare that placing the entire burden of taxation 
 on land would "force it into use." That is, on 
 account of the heavy tax charges, presumably a 
 landowner would not be able to hold his land as 
 a speculation only. In order to meet the heavier 
 tax charges he would be obliged to " improve " it, 
 as the word is ; that is, to build on it or otherwise
 
 THE SINGLE TAX 121 
 
 use it in such a way as to derive a present revenue 
 from it, or immediately to sell it to some one 
 who would improve or make use of it. Land, the 
 single tax people say, is the only natural monop- 
 oly, the only factor of the economic trilogy of 
 land, labor, and capital which is limited in supply. 
 If no one is able to take undue personal advantage 
 of this natural monopoly, if it is forced into use, 
 every one will have an equal economic opportun- 
 ity. Those who advocate this policy are so high- 
 minded and earnest in their aims, and work so 
 vigorously to attain them, as to create a predispo- 
 sition in favor of their argument. 
 
 We cannot grant all their premises. To say 
 that land derives its value from the existence of 
 the community is to say that it is valuable 
 because people want it. Is it in that respect any 
 different from grain, cattle, and other things 
 which have value because people want them? 
 If it is objected that the community gives special 
 values to land, that an acre in New York City 
 has a vastly different value from an acre of 
 Texas range land, it is also true that a beef car- 
 cass is more valuable in New York City than on 
 the Texas range. 
 
 The truth is that the community has chosen to 
 establish private property in land, as well as in 
 other forms of wealth, as a matter of social utility. 
 It has become "capitalized." The attitude of
 
 122 PRINCIPLES OF TAXATION 
 
 the individual owner toward it is the same as his 
 attitude toward any other wealth. Just like any 
 wealth capable of use in production, it has become 
 capital. As such, the relationship it lies in, as 
 between the individual and the community, is 
 the same as that of any other form of wealth. 
 
 So long as there is any unoccupied land, or any 
 land capable of greater use in production than it 
 now has, it is not true that land is the limited 
 and labor and capital are the unlimited elements 
 of production. Though there is, for example, 
 abundant fertile land in the West, capable of 
 great productivity under irrigation, we lack 
 capital to irrigate and labor to work it. The appli- 
 cation of nitrogen would make fertile many acres 
 of land that are now barren. The use of capital 
 in the process would extract nitrogen from the 
 air. We have not the available capital to do it. 
 
 Whatever effect of forcing land into use the 
 single tax might have, it would not go very far in 
 affording that equality of opportunity its advo- 
 cates claim for it. Land is of only the slightest 
 use without capital. If the land were forced into 
 use and made somewhat more available, no cap- 
 ital would be immediately available to make use 
 of the land. Applying labor to land without 
 capital would produce only a slow growth of 
 additional capital. 
 
 Advocates of the single tax assume that hold-
 
 THE SINGLE TAX 123 
 
 ing land out of use brings only evil to the com- 
 munity, or at least more evil than good. This 
 may well be questioned. May the community not 
 gain very distinctly from having some of its land 
 held out of use? In a given community may it 
 not be desirable that some of its land remain for a 
 time entirely unimproved rather than having one 
 building put up which will shortly have to be 
 destroyed and replaced with a larger building to 
 keep pace with the growth of the community? 
 Holding some of the land out of use may well lead 
 to a conservation of capital. It would seem that 
 speculation in land has the same advantages to 
 the community in conserving and giving a proper 
 distribution to the land supply as speculation in 
 commodities in conserving and giving a proper 
 distribution to the supply of food and clothing. 
 Speculative opportunity, a rapid advance in land 
 values, would overcome the tendency of a tax to 
 force land into use. If an owner anticipated an 
 advance of 50 or 100 per cent, a tax of 5 or 10 
 per cent might not be a sufficient influence to 
 overcome speculation and compel improvement. 
 In an urban community the matter of land 
 supply is one of mere space, earth surface. Out- 
 side of an urban community land supply means 
 rather the content of the land — what is in it or 
 on it — than the matter of space. One acre that 
 has the chemical constituents in its soil to pro-
 
 124 PRINCIPLES OF TAXATION 
 
 duce thirty bushels of wheat is worth more than 
 two acres that will produce fifteen bushels of 
 wheat each. Timberland is valuable on account 
 of the timber on it, not because of being a certain 
 area on the surface of the earth. Speculating in 
 these lands is speculation in potential commodi- 
 ties and is conserving them against the needs of 
 an increasing population. To force such lands 
 into use, in so far as the capital supply permits 
 their use, would be to encourage the increase of 
 population by an immediate cheapening of prod- 
 uce and make the famine that is to come more 
 acute because there will be less available "land" 
 and a greater population. . 
 
 Since land has in fact become capitalized, it 
 seems unfair for the community to single out the 
 owners of that particular form of wealth for con- 
 tribution to supply community needs. This is 
 especially the case in view of the operation of 
 economic principles which tend immediately to 
 deduct from the market value of the property on 
 which it is levied so much of the capitalized value 
 of a tax expected to be permanent as cannot be 
 shifted. This has been a fact of experience too 
 often to be doubted. To levy the entire com- 
 munity burden on this form of wealth would be 
 either to take immediately large values from one 
 class in the community, that now owning land, 
 and bestow equivalent values on another class,
 
 INCREMENT TAX 125 
 
 those owning other property now taxable, or to 
 shift an extra burden of taxation over on tenants 
 or purchasers of land products. Very likely the 
 total effect would be taken out in both ways. It 
 is impossible to foretell just what would happen 
 until the event. 
 
 Denying a right to enjoy an increase in land 
 values because it is "unearned," the "unearned 
 increment," as it is called, ignores the element of 
 risk. One earns something by being an insurer 
 for the community. "Where were my ancestors," 
 asks Artemas Ward, or some other profound 
 jester, "when Manhattan was going for $19?" — 
 or whatever the historic price was. Whosoever's 
 ancestors, aside from those making the purchase, 
 were on the island at the time did not care to take 
 the risk. They preferred using their $19, or any 
 other number of dollars, in trading in skins to in- 
 vesting it in Manhattan real estate. Those who 
 speak of the "unearned increment" speak as if 
 there were always an increment, and never a 
 "decrement," if I may coin a word. Following 
 the thought of "Where are the snows of yester- 
 day?" one may ask, "Where are the descendants 
 of the Astors of ancient Troy or of Babylon or of 
 the wealthy seaport of Tyre?" Any landlord in 
 certain sections of Manhattan could testify that 
 one need not go so far back in history to find 
 examples of shifting realty values.
 
 126 PRINCIPLES OF TAXATION 
 
 This idea of the unearned increment leads 
 directly to a consideration of another tax pro- 
 posal already being tried in Europe, — the 
 increment tax. Like the single tax, this appar- 
 ently rests on the thought that an increase in land 
 values is a gift of the comrhunity, and therefore 
 especially subject to appropriation for the uses of 
 the community. This proposal would levy a tax 
 on increases in land values. Should not such a 
 proposal carry as a corollary some reimburse- 
 ment by the community for a decline in land 
 values? Suppose a piece of land increases in 
 value from $io,ooo to $15,000 and is taxed on the 
 $5000 increase, then declines to a value of $10,000. 
 The owner is no better off than he would have 
 been if the property had never increased in value. 
 He is "out" the "increment" tax he paid. 
 
 Why confine the taxing of increments to incre- 
 ments in the value of land? If a man buys cotton 
 in the fall at one price and in the spring it is 
 worth a higher price, why not tax him especially 
 on the increment? An income tax which taxes as 
 income all such profits when taken is fairer taxa- 
 tion than to confine the taxation of profit to the 
 increment of land. 
 
 In the case of a city about to make some local 
 improvement requiring the acquisition of land, 
 as the cutting through of a new street, or the raz- 
 ing of a block of buildings to create a park, there
 
 LOCAL OPTION IN TAXATION 127 
 
 does not arise in my mind any objection to giving 
 the city the right to acquire, by eminent domain, 
 if necessar>-, property adjacent to that actually 
 required for the street, or park, or whatever, in 
 order that the community may get the benefit of 
 the increase in values resulting from its special 
 expenditure.^ Indeed, it seems to me that this 
 should be done. It rests on a different principle 
 from the single tax, for here is a definite ex- 
 penditure of community money creating a specific 
 benefit to particular property. Since the prop- 
 erty is taken at a definite existing value, the 
 appropriation differs from an increment tax 
 on property from which the increment may 
 disappear. 
 
 We will mention one more tax proposal which 
 perhaps is not out of place when connected with a 
 mentioning of the single tax and the increment 
 tax, because it seems especially, though not exclu- 
 sively, to be pressed by advocates of the single 
 tax, on 6ne application of the principle of divide 
 et impera. This is the proposal for local option in 
 taxation. Since so many of our tax ills come from 
 the amount of local option already existing on 
 account of the multiplicity of jurisdictions having 
 authority in taxation, it seems rather mal a propos 
 to propose an overwhelming extension of the 
 
 1 This is already the European practice, and is authorized 
 in New York State at least.
 
 128 PRINCIPLES OF TAXATION 
 
 number of communities with power to say what 
 shall be taxed. Even though the power should be 
 strictly limited, it would bring great further con- 
 fusion into taxation matters. So far as the single- 
 tax people are back of this movement, their idea 
 seems to be that by concentrating their efforts on 
 a single community they are likely to get a trial 
 of their plan sooner than they can if they have 
 to persuade a whole State. With our constantly 
 increasing economic unity there is less need for 
 local diversity in taxation and it would create 
 greater confusion. Rather than grant more local 
 option leading to a greater diversity in taxation, 
 we need to work for such uniformity in taxation 
 as will make for justice.
 
 INDEX 
 
 Ability, levying tax with relation 
 to, 13; and cost, either alone in- 
 adequate as taxation basis, 15; 
 market price of property fairest 
 index of ability to pay on account 
 of property, 19; would require 
 greater progression in taxation 
 than ever suggested, 22; to pay, 
 vagueness of term, 23; theorj' of, 
 rests on doctrine of altruism, 29; 
 due to more skillful management 
 should all be reached alike, 48; 
 increases more rapidly than in- 
 come, 24; where taxes should be 
 paid, 70. 
 
 Alabama, taxation of mortgages 
 in, 74- 
 
 Allocation of cost, may be desira- 
 ble to have some members of 
 community enjoy benefit with- 
 out paying cost, 10: possible dif- 
 ficulty of, 10; possible difficulty 
 of collection, 10. 
 
 Arizona, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Arkansas, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Assessment, 90; central adminis- 
 tration of, 92; at full value, 93; 
 of mortgages, why it can be at 
 par, 94; of securities at market 
 value, 94; of railroad properties 
 in various jurisdictions, method 
 of, 104; of railroads by value of 
 securities, 106 
 
 Assessors, locally elected, weak- 
 ness of, 90. 
 
 Authors, American, on taxation, 
 14. 
 
 Automobiles, si- 
 
 Benefit, as basis of taxation raises 
 philosophical problem, 14. 
 
 Boards of equalization, 90. 
 
 Bonds, taxation of, 82. 
 
 Borrowing, gains from, represent 
 risk, 46. 
 
 Borrowing and lending commun- 
 ities, 66. 
 
 California, mortgage taxation, 74; 
 stock taxation, 76; bond taxa- 
 tion, 82. 
 
 Capital commands uniform return, 
 37. 
 
 Capital investment, tendency of 
 community to overlook where 
 making price for service, 6. 
 
 Capital stock tax, 115. 
 
 Central administration of assess- 
 ment, 90. 
 
 Communities within the State, con- 
 flict of interest among, 78. 
 
 Community of location of wealth, 
 what taxes should be paid in, 69. 
 
 Community of residence, what 
 taxes should be paid in, 69. 
 
 Connecticut, taxation of mort- 
 gages, 74; taxation of stock, 76; 
 taxation of bonds, 82; distri- 
 bution of railroad taxes, loi; 
 method of assessing railroads, 
 105; corporate excess tax, 118. 
 
 Corporate excess tax, 116; juris- 
 dictions applying, n8. 
 
 Corporate taxation, extra, lis. 
 
 Corporations, are they taxed too 
 little, 113. 
 
 Cost, and ability, either alone in- 
 adequate as taxation basis, 15. 
 
 Cost of service, levying tax accord- 
 ing to, 13; applied in making 
 prices, fees and special assess-
 
 I30 
 
 INDEX 
 
 ments, 21; extending to taxation, 
 22; where taxes should be paid 
 for, 69. 
 
 Cost to government, special, im- 
 ixjsed by property, 26. 
 
 Credits, taxing them taxes a 
 method of doing business, 36; 
 incidence of taxation of, falls 
 on the debtor, 39; effect of lend- 
 ing community not taxing, 67. 
 
 Debt, does not produce ability to 
 pay, 35 ; taxing it taxes a method 
 of doing business, 36. 
 
 Delaware, does not tax mortgages, 
 74; method of assessing rail- 
 roads, 105. 
 
 Direct and indirect owners of 
 wealth, different treatment of, 
 62 ; direct owner cannot shift in- 
 cidence of tax, 64. 
 
 Distribution of railroad taxes in 
 various jurisdictions, loi. 
 
 Double purpose in taxation con- 
 fusing, 56. 
 
 Economic activity of community 
 may be public or private, 2. 
 
 Equality of sacrifice, what is, 24. 
 
 Equalization, boards of, 90. 
 
 Expert knowledge in assessment, 
 92. 
 
 Fee, and price, distinction between, 
 8; meets the cost of some public 
 services, 8; of courts, in the na- 
 ture of a penalty, 9 ; in excess of 
 cost, a tax, 9. 
 
 Fire protection, cost of, not accord- 
 ing to value of property, 28. 
 
 Fiscal policy, what constitutes, 55. 
 
 Florida, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Full value in assessment, 93- 
 
 Georgia, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 83. 
 
 Holding land out of use, possible 
 gain from, 123. 
 
 Idaho, does not tax mortgages, 74. 
 
 Illinois, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82; distribution of railroad 
 taxes, 102; method of assessing 
 railroads, 105; corporate excess 
 tax, 118. 
 
 Incidence of taxation, of credits 
 falls on debtor, 39; on corpo- 
 rate form cannot be shifted, 
 42; direct and indirect owner, 
 64. 
 
 Income, from labor, not equiva- 
 lent to income from property, 
 16; even from property, not a 
 true test of ability, 18; from 
 property,includes return for risk, 
 18. 
 
 Income tax, problem of, 15; in 
 Wisconsin, 16; offsetting losses 
 may not compensate for taxes 
 paid on return for risk, 18. 
 
 Increment tax, 126. 
 
 Indiana, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82; method of assessing 
 railroads, 105; corporate excess 
 tax, 118. 
 
 Indirect and direct owners of 
 wealth, different treatment of, 
 62. 
 
 Indirect owner shifts incidence of 
 tax, 64. 
 
 Inheritance tax, 108; against whom 
 levied. 109; taxing intangibles 
 of non-residents, iii; jurisdic- 
 tions levying on intangibles of 
 non-residents, 112. 
 
 Intangible values, taxation of, 107. 
 
 Interest rate, without allowance 
 for risk, is uniform, 37. 
 
 Iowa, taxation of mortgages in, 74; 
 method of assessing railroads, 
 106. 
 
 Kansas, mortgage taxation, 76;
 
 INDEX 
 
 131 
 
 stock taxation, 79; bond taxa- 
 tion, 82; method of assessing 
 railroads, 106. 
 Kentucky, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Labor, income from, not equiva- 
 lent to income from property, 
 16. 
 
 Land, has become capitalized, 31; 
 held out of use, possible gain 
 from, 123; may be more than 
 earth surface, 123; risk in own- 
 ing, 125. 
 
 Lending and borrowing commun- 
 ities, 66. 
 
 Lending community, effect of not 
 taxing credits, 67. 
 
 Levying tax, according to income, 
 12; according to value of prop- 
 erty, 12; with relation to ability 
 to pay, 13; with relation to cost 
 of service, 13. 
 
 Local and state taxation, separa- 
 tion of, 96. 
 
 Local option in taxation, 127. 
 
 Locally elected assessors, weak- 
 ness of, 90. 
 
 Louisiana, mortgage taxation, 75; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Maine, mortgage taxation, 74; 
 stock taxation, 79; bond taxa- 
 tion, 82; corporate sources of 
 state revenue, 97 ; method of as- 
 sessing railroads, 104. 
 
 Management, more skillful, duo 
 to borrowing, ability on account 
 of, should be reached only in the 
 same way as any other more 
 skillful management, 48. 
 
 Market price, allows for risk, 19; 
 fairest index of ability to pay, 
 19; as basis of tax combines 
 theories of cost and ability, 27; 
 in assessing securities, 94. 
 
 Maryland, taxation of mortgages 
 
 in, 74; method of assessing rail- 
 roads, 105. 
 
 Massachusetts, mortgage taxation, 
 7S; stock taxation, 79; bond tax- 
 ation, 82; method of assessing 
 railroads, 105; corporate excess 
 tax, 118; stock transfer tax, 
 118. 
 
 Method of doing business, may 
 add to productiveness, 36; illus- 
 tration of taxing, 38. 
 
 Michigan, taxation of mortgages 
 in, 74; method of assessing rail- 
 roads, 105. 
 
 Minnesota, taxation of mortgages 
 in, 74; corporate sources of state 
 revenue, 99; method of assessing 
 railroads, 105. 
 
 Mississippi, mortgage taxation, 
 76; stock taxation, 79; bond tax- 
 ation, 82. 
 
 Missouri, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82; method of assessing 
 railroads, 106. 
 
 Montana, mortgage taxation. 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Mortgages, taxation of, in vari- 
 ous jurisdictions, 74; fair rate of 
 taxation, 75; why they can b« 
 assessed at par, 94. 
 
 Nebraska, mortgage taxation, 74; 
 stock taxation. 79; bond taxa- 
 tion, 82; method of assessing 
 railroads, 106. 
 
 Nevada, mortgage txxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 New Hampshire, mortgage taxa- 
 tion, 75 ; stock taxation, 79; 
 bond taxation, 82; corporate 
 sources of state revenue, 98; dis- 
 tribution of railroad taxes, loi; 
 method of assessing railroads, 
 104. 
 
 New Jersey, mortgage taxation, 
 75 ; stock taxation, 79; bond tax-
 
 132 
 
 INDEX 
 
 ation, 82; distribution of rail- 
 road taxes, 10 1. 
 
 New Mexico, mortgage taxation, 
 76; stock taxation, 79; bond tax- 
 ation, 82. 
 
 New York, taxation of mortgages, 
 74; sources of state revenue, 97; 
 method of assessing railroads, 
 capital stock tax, ir6; stock 
 transfer tax, 118. 
 
 North Carolina, mortgage tEixa- 
 tion, 76; stock taxation, 79; 
 bond taxation, 82. 
 
 North Dakota, mortgage taxation, 
 76; stock taxation, 79; bond tax- 
 ation, 82; method of assessing 
 railroads, 106. 
 
 Ohio, mortgage taxation, 76; stock 
 taxation, 79; bond taxation, 82; 
 corporate sources of state rev- 
 enue, 98; method of assessing 
 railroads, 105; capital stock tax, 
 116. 
 
 Oklahoma, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Oregon, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Pennsylvania, taxation of mort- 
 gages in, 7s; method of assessing 
 railroads, 105. 
 
 Piracy in taxation, 65. 
 
 Police power, a public activity, 3. 
 
 Price and fee, distinction between, 
 8. 
 
 Price for service may be charged 
 by public activity, 5- 
 
 Private property, fact of commu- 
 nity maintenance of, a basis for 
 taxation, 28; some public expen- 
 ditures not on account of, 29. 
 
 Production, taxing, 38. 
 
 Property, income from, not equi- 
 valent to income from labor, 16; 
 a legal term, 31 ; and wealth, not 
 synonymous, 31; different forms 
 
 of, impose different costs, 33; all 
 forms of, do not give the same 
 ability to pay, 34. 
 
 Public activities, what are, 3; and 
 private, no clear line between, 4; 
 and private, a matter of en- 
 forcible opinion, 5; may charge 
 price for service, s; special as- 
 sessment to cover cost of, 6; 
 fees meet the cost of some, 8. 
 
 Public expenditures, not on ac- 
 count of private property, to 
 be borne according to ability, 
 29. 
 
 Public income, not unlimited, 2. 
 
 Railroad taxes, distribution of, in 
 various jurisdictions, loi. 
 
 Rate of taxation, for railroads, 103; 
 for state-wide and interstate 
 properties, 104. 
 
 Real and tangible personal prop- 
 erty on same basis in taxation, 
 49. 
 
 Representatives of wealth created 
 by corporate form, 41. 
 
 Rhode Island, taxation of mort- 
 gages in, 7S; method of assessing 
 railroads, 105. 
 
 Risk, returns for, represents most 
 gains from borrowing, 46; in 
 land ownership, 125. 
 
 Securities, value of, in railroad as- 
 sessment, 106; taxation of, 
 thrusts burden on corporations, 
 114. 
 
 Sewers, streets, sidewalks, paid for 
 by special assessments, 6. 
 
 Sidewalks, streets, sewers, paid 
 for by special assessments, 6. 
 
 Single tax, 120. 
 
 Situs for taxation, where taxes 
 should be paid, 59. 
 
 Social ends, indirect, should not be 
 sought by taxation, 55- 
 
 Social expediency, shifting opinion 
 of, 4. 
 
 Sources of state revenue in New
 
 INDEX 
 
 133 
 
 England, Middle Atlantic, and 
 Eastern Central States, 99. 
 
 South Carolina, mortgage taxa- 
 tion, 76; stock taxation, 79; 
 bond taxation, 82. 
 
 South Dakota, mortgage taxation, 
 76; stock taxation, 79; bond tax- 
 ation, 82; method of assessing 
 railroads, 106. 
 
 Special assessments to cover cost 
 of public activity, 6. 
 
 State and local taxation, separa- 
 tion of, 96. 
 
 Stock of goods, SI- 
 
 Stock, taxation of, in various juris- 
 dictions, 79- 
 
 Streets, sewers, sidewalks, paid for 
 by special assessment, 6. 
 
 Tangible personal property and 
 real property on same basis in 
 taxation, 49. 
 
 Tax, what it is, 9. 1 1 ; a transfer of 
 wealth from private to public 
 ownership, 12. 
 
 Tennessee, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 
 Texas, mortgage taxation, 76; 
 
 stock taxation, 79; bond taxa- 
 tion, 82. 
 Timberland, 51. 
 
 Unproductive wealth, 52; taxing 
 
 of, is tax on consumption, 39. 
 Unsecured debts, taxation of, 83. 
 Utah, does not tax mortgages. 74. 
 
 Vermont, mortgage taxation, 76; 
 stock taxation, 79; bond taxa- 
 tion, 82; corporate sources of 
 state revenue, 98; method of 
 assessing railroads, 104. 
 
 Virginia, taxation of mortgages in, 
 76; of stock, 79; of bonds, 82. 
 
 Washington, does not tax mort- 
 gages, 74. 
 
 Wealth, an economic term, 31; and 
 property, not synonymous, 31; 
 in one community, owner in 
 another, 59. 
 
 Wealth not used in production, 
 problem of, 52- 
 
 Wisconsin, income tax, 16; taxa- 
 tion of mortgages in, 75; rate of 
 taxation for railroads, 103; me- 
 thod of assessing railroads, los-
 
 9 81
 
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