.\->^-' m Ski' /• - -''^''?i,> m. ^ ^' '"'■■^Ji'''^ ^mt ■i-^/-i H' '/ > »»;.^ - m/<< ' !-^!^'S ;-^'i\ ■i^-*, (. r/xc:^ : ll^^kX- t'^^Hj, THE THEORY AND PRACTICE OF TAXATION BY DAVID AMES WELLS, LL.D., D.C.L. Author of Recent Economic Changes, Etc. LATE MEMBRE CORRESPONDANT DE l'iNSTITUT DE FRANCE ; CORRESPONDEXTE REGIA ACCADEMIA DEI LINCEI, ITALIA ; HONORARY FELLOW ROYAL STATISTICAL SOCIETY, ETC. New York D. Appleton and Company 1900 Copyright, 1900. bt d. appleton and company. CO o TO MY FRIENDS CHAKLES NOKDHOFF AND GOEDOX LESTER FORD. 323G40 NOTE. Or Mr. Wells's writings on economic subjects nothing remains to be said. They have a position of their own, and have deservedly attracted much attention and high commendation at home and abroad. For many years he had in contemplation a work on taxation, which should contain the record of his own experience in practical con- tact with State and national tax systems, and of his studies and conclusions drawn from the history of taxation in other countries. Strong in critical ability and enjoying wide opportunities for obtaining material, he sifted the facts and theories with a view to combining the best of both into a volume which might serve as an account of existing tax methods and as an index or guide to a better system. Some of this material he used from time to time in connection with current discussion; but the greater part appears in these pages for the first time. It is unfor- tunate that he did not live to give the chapters their final form, but the work was practically complete when he laid down the pen. Certain matter was to be added to the historical section, and the criticism of national and State tax problems was to be extended, and new decisions of the vi THE THEORY AND PRACTICE OF TAXATION. courts incorporated. The last chapters, in which he de- veloped the law of the ditt'usion of taxes, were sketched by him, and embody the essence of the conclusion he had reached. Few changes have been made in the text, and for whatever errors have crept in the editor is responsible. WORTHINGTON ClIAUNCEY FOED. Boston, November 27, 1899. CONTENTS, CHAPTER PAGE Introduction 1 I. — Recent tax experiences of the Federal Govern- ment OF the United States 18 II. — The place of taxation in literature and history 62 III. — Greece and Rome . . 85 IV. — Taxation in the middle ages 100 V. — Taxation in France and Mexico . , . .117 VI. — Taxation in Egypt and Brazil 141 VII. — Taxation in British India 158 VIII. — Taxation in Switzerland 180 IX. — The definition, object, and sphere of taxation . 197 X. — Relation of taxation to the state .... 222 XI. — Limitation on the instrumentalities of taxation . 247 XII. — The sphere of taxation peculiar to the Federal Government of the United States . . . 268 XIII. — Rules or maxims essential to an administration OF RIGHTFUL TAXATION UNDER A CONSTITUTIONAL OR free government — Part I 284 XIV. — Rules or maxims essential to an administration of rightful taxation under a constitutional or FREE government — Part II 305 XV. — Nomenclature and forms of taxation — Part I . 330 XVI. — Nomenclature and forms of taxation — Part II . 357 XVII. — The existing methods of taxation — Part I . . 384 XVIII. — The existing methods of taxation — Part II . . 398 XIX. — The existing methods of taxation — Part III . . 418 vii viii THE THEORY AND PRACTICE OF TAXATION. CHAPTER PAOE XX. — Double taxation 438 XXI. — What is property? 460 XXII. — Taxation of choses in action 485 XXIII. — The case ok Kirtland vs. Hotcukiss . . . 493 XXIV. — Theory and practice of income taxation . . 514 XXV. — What should be taxed, and how it should be TAXED 556 XXVI. — The law of the diffusion of taxes , . . 569 XXVII. — The best methods of taxation — Part I . . 603 XXV'III. — The best methods of taxation— Part II . . 617 Index 643 THE THEORY AND PRACTICE OF TAXATION. INTRODUCTION. It is the purpose of the writer, in the chapters which follow, to discuss the principles of taxation from a broader basis and by different methods than have heretofore been attempted, special consideration being given to the experi- ence of the United States. Such a discussion primarily involves the inquiry, of how far the varied and curious experience of nations leads up through what may be regarded as a process of evolu- tion, to a recognition of the underlying and essential principles of a just and at the same time an efficient sys- tem of taxation. And it also necessitates, for the attain- ment of correct conclusions in the prosecution of such inquiry, that illustrations drawn from the world's great record of experience should take precedence of theory, especially in the way of example and exhibit of the many abuses of the power of taxation which the ignorance of legislators and the cupidity of designing men have mflicted upon nations. The subject is one of transcendent importance, per- haps more universally important than any other that can invite public attention. Its discussion opens questions of the widest possible range. There can be no civilization without government, and no government without an ade- quate supply of revenue obtained from the persons and property of the people governed. There can be no health in the body politic without sound finance, and no sound finance without a sound system of taxation. In fact, taxation is to our body politic what blood is to the body physical: if healthy, infusing life and warmth; but if un- 1 THE THEORY AND PRACTICE OF TAXATION. healthy, the agent for producing discontent, decrepitude, and paralysis. The absence or existence of limitations on the power of a government to make compulsory levies on the prop- erty or persons of its people for its use or support, con- stitutes the dividing line between a despotism and a free government — a fact most pertinent to legal, economic, and societary studies which has attracted little attention. The methods and scope of what is called taxation regulate more than all other agencies the distribution of wealth, which is really the great question of the future to all nations. Ever since Adam Smith wrote his para- mount work on the "Wealth of Nations the political econ- omists and students of social science have concerned them- selves mainly with the production of wealth. That prob- lem has been practically solved. Wealth is now produced with a rapidity that the world has never before supposed possible,* and the laws governing its production have be- come w^ell understood by those w^ho have made a special study of the subject. An inevitable result of this condition of affairs has been, that wealth produced under the greater control that man in general has obtained over the forces of Nature has aggregated itself, as it always will, in the hands of those whose faculties especially qualify them to obtain and manage it, and who, in common parlance, have received the name of " money-getters." These have be- come enormously rich, while the masses, whose material condition is also absolutely much better than at any former period of the w^orld's history, are, however, relatively poorer. Improved instruments for transportation have greatly facilitated intercommuni cation, f and the oppor- * Recent investigations indicate that the absolute effective force available to the American people for the production of Avealth is more than three times greater at the present time than it was in 1860. The outflow of 13ritish capital for inv-estment in foreign securities and negotiated in London alone, during the eight years next previous to 1890, has been estimated by those best qualified to express an opinion, to have amounted to the large sum of nearly or quite $700,000,000 per annum. And this estimate does not comprise all the British capital loaned to foreign countries, but only such as was subject to public cognizance. t The number of people annually transported on the railroads alone in the United States exceeds many times the total population DISTRIBUTION OF WEALTH. 3 tunity thus afforded for the observation of extreme con- trasts in individual conditions has operated as a very great factor in occasioning discontent among tlie masses, who, by reason of the never as yet fully tested experiment of univer- sal suffrage, have become, at least theoretically in the United States, the sole arbiters of the policy of their Gov- ernment and of the selection of the legislators who are to enact laws in conformity with such policy.* The problem of the acquisition of wealth having thus been solved, that of the proper distribution of wealth logically and necessarily follows, and the character of the measures which directly or indirectly involve what is called taxation for the attainment of such result, which seem to commend themselves to the people of the United States, is especially worthy of attention. These measures are indicated in part by the adoption of a pension system unlike anything of the kind ever known in history, and which necessitates an annual expenditure of money (raised by taxation) to meet the military expenses of the country — army, navy, and pensions — in excess of that entailed by the immense military establishment of any of the coun- tries of Europe, and the enactment of an income-tax statute whose primary object was not to raise revenue for the support of the Government, but an unmistakably po- of the country, the annual number for the New England States being more than sixteen times greater than their population. The widening of the sphere of one's surroundings, and a larger ac- quaintance with other men and pursuits, have long been recog- nised as not productive of content. Writing to his nephew more than one hundred years ago, Thomas Jefferson thus concisely ex- pressed the results of his own observation: "Travelling," he says. " makes men wiser, but less happy. When men of sober age travel they gather knowledge, but they are, after all, subject to recol- lections mixed with regret; their affections are weakened by being extended over more objects, and they learn new habits which can not be gratified when they return home." * " The great, the unanswerable argument in favour of uni- versal suffrage is, not that it insures a better or purer govern- ment, but that all must be contented with a government in which all have an equal voice. If it be deficient in this particular, if it fail to protect the poor against the oppression of the rich, or the rich against a destruction of their property by the poor, it is pro tanto a failure, and another method of representation should be adopted." — Address of Jvstice Broirri, THiitrd States Supreme Court, before the Law Department of Yale University, July, 1S95. 4 THE THEORY AND PRACTICE OF TAXATION. litical and socialistic measure, which threatened to annul the most important and exceptional feature of the Federal Constitiition. That the diminishing rate of returns, in way of interest or profits, by the force of laws Avhich no combination of capital can resist, is seriously impairing the relative value of wealth, and may eventually reach a minimum which will greatly diminish the inducement to individuals to economize or save it, although not generally recognised or appreciated, can not be denied.* And neither is it rec- ognised that the current rate of taxation on capital in all civilized countries even now approximates, and to an extent actually exceeds, the current rates of interest or profit on its use. Thus, for example, the rate of discount at the Bank of England during the greater portion of the years 1894 and 1895 has not been in excess of two per cent, and the discount (borrowing) rate for three months dur- ing this period was not infrequently less than a rate of three quarters per cent per annum. If taxes, according to popular theory, do not diffuse themselves, but remain a burden on the person, business, and property subject to their first incidence, there is a problem likely to come at no distant day before tax legislators, which up to the pres- ent time they have hardly thought of, and which is certain under a free government to be solved by human nature rather than by statute, f * The French economist, Paul Leroy-Beaulieu, treats fully of this subject in his Essai sur la Repartition des Richesses. f M. Leon Say, the distinguished French economist, in a recent discussion of the income tax, asserts that the public and private financial history of France has been one of incessant abolition of private and state debts, and in substantiation of such a con- clusion he shows that if a capital of 8,3.30 francs had been in- vested in national debt obliofations of France in 1522 and allowed to remain subject to the various changes in respect to capital and interest which the financial policy of the state has necessitated and required under its successive governments, the present value of the investment to the legitimate heirs of the first investor would be but 83 francs. The reduction of annual income to the holders of the national debts of Europe, contingent on the refunding of the same during the year 1894, is estimated at $24,000,000, reqviiring an addition of $960,000,000, with an earning capacity of two and a half per cent per annum, to the total of what is called capital, to make up for the subtraction of income from the individual holders of TAXATION AND MORALITY. 5 The scope and methods of raising revenue for the sup- port of a State are also some of the greatest, if not the very, greatest, determining factors of the morality of a people. " I insist," said an eminent lawyer and member of the / Constitutional Convention of the State of New York inf 1868, " that a people can not prosper whose officers work and tell lies. There is not an assessment roll now made out in this State that does not both tell and work lies." And no member of the convention, or any representative of the press, either then or subsequently, has challenged the assertion. The extent also to which the existing S3^s- tem of taxation in the United States has obliterated the sense of honesty in its people in their individual dealings with the Government, removed all repugnance to the act of perjury, and caused each one to justify himself to his conscience for making a false return in the matter of taxes, by the supposition that every one is doing the same, is also strikingly illustrated by the circumstance, that a high court in one of the States of the Federal Union has re- cently decided that " perjury in connection with a man's tax lists does not affect his general credibility under oath."^^ The idea that the proper relation of a State to its people is essentially of a paternal nature finds much of popular approval, and is without doubt j^opularly desired. Accepting this idea as correct, let us exemplify it in its application to the State. ^Suppose a father in dealing with his family, placed, so far as his children are con- cerned, a premium on lying and concealment, and vested with a heavy penalty all truthfulness and straightforward dealing, he would be regarded as a worthy inmate for the J States prison. But this is exactly what the Government I of the United States does, or proposed to do, in the casej of many of its so-called tax statutes. jThus in the recent income-tax statute it offered to its citizens considerations in money if they would forswear themselves, or practise such securities in the previous year. In the United States the shrinkage in the amount of annual dividends paid on the capital stock of its railroads between the years 1892 and l on the revenue and expenditure of the Chinese Empire. 80 THE THEORY AND PRACTICE OP TAXATION. 85,000,000 taels, or, taking the value of the haikwan or customs tael for 1896, $68,850,000 per annum, although the sum actually collected is probably much greater, the part that is unaccounted for being absorbed in the taking by the prominent officials. Under any circumstances, how- ever, the great mass of the people of China are not heavily taxed ; and their system of administration, except as it con- cerns the transit of foreign imports and exports, has few inquisitorial and annoying features ; and to the absence of these the permanency of the Chinese Government for so long a period, and the tranquility and contentment of the Chinese people may, in a great degree, be attributed. Taxation in Japan. — Another example of an ancient system of taxation, which until a recent period has been subjected to very little change, is to be found in the case of Japan. In this country, as in China, the system of taxa- tion is now, as it always has been, essentially a land tax, but greatly modified in recent years to conform to modern conditions. During the feudal period in Japan, taxes were for the most part paid in kind by the cultivators of the soil, and were in fact a form of rent due to the lord of the soil. Under the oldest regime, when the emperor was the real as well as the nominal head of the government, the land was divided into nine squares, the central one of which was cultivated by the holders of the other eight, for the use of the emperor, who thus received one ninth part of the total product of the soil. During the fifteenth cen- tury, when the military chieftains — the daimios or Sho- guns — had gradually usurped the real power of the em- peror, a much larger proportion of the produce of the land was exacted ; seldom less than four tenths of the total crop, and sometimes as much as two thirds. The staple food of the country being rice, the taxes were almost invariably collected in that commodity. The amount paid, however, was not fixed by any national measure, but varied from province to province, depending on local customs, the humor of the daimio, or other circumstances. Moreover, as the established policy of the ancient feudal government was to preserve and fix the status of all classes and con- ditions of men, it laid down a multitude of vexatious and arbitrary rules regulating every kind of production, which in turn prevented everything in the way of independent TAXATION IN JAPAN. 81 action and progress on the part of the producers. Thus, the Japanese farmer without government permission could neither increase nor decrease the amount of his cultivated land; nor could he change from the cultivation of rice re- quiring a wet or marshy soil to some other agricultural product requiring a drier soil. In short, all the conditions of land cultivation were so carefully prescribed that the farmer had nothing to do but follow a routine that devi- ated little from generation to generation. Under such a condition of things, especially under such a system of land tenure and taxation, population obviously could not, and in fact did not, increase either in wealth or numbers; and taken in connection with the circumstance that each of the many daimios or feudal lords maintained great retinues of wholly unproductive retainers, we find an explanation of the fact that Japan continued a poor country with a very slowly increasing population even in times of pro- found peace. During the century and a quarter from 1721 to 1846, the increase is reported by Japanese authorities to have not been in excess of five per cent.* After the restoration in 1873 of the authority of the emperor, and the abrogation of the daimio system or lord- ship, a radical change was made in Japan, not only in the general status of the farmer, but in the conditions under * According to a paper read by Professor Droppers before the Asiatic Society in Tokio, June, 1894, this period was a time of only measurably suppressed anarchy and lawlessness. It was two hundred and fifty years of armed truce. It was one large dance to death. Famines were frequent and dreadful. Having no rail- roads or steamships, and having, in their eagerness to shut out foreigners and keep in their own people, destroyed all sea-going ships, they had no water transportation except by means of wretched junks. Millions upon millions died of hunger. To this day, around the cremation houses of certain inland cities there are acres of heaps of human bones mixed with ashes, the awful witnesses to the might of famine, when hundreds of bodies were burned daily to prevent pestilence. Child murder and exposure were in some provinces so common that the question which neigh- bours would ask of a father, whether he intended to raise the newborn baby or not, was as proper as it was usual. It is esti- mated by medical men that fifty per cent of the people died of smallpox. Syphilis was almost a national disease. Disease, im- morality only partly suppressed, anarchy, famine, social and eco- nomical antagonisms, cramped Japan as in bands of iron. 82 THE THEORY AND PRACTICE OF TAXATION. which he cultivated the soil and paid his taxes. All the previous iron rules imposed upon him were abolished; he was given perfect liberty to buy and sell land or adopt new modes of cultivation. The system of payment in kind to each provincial lord was replaced by a national land tax paid in money. The value of every piece of cultivated land was appraised according to a complex and somewhat arbi- trary method of valuation, and on this capitalized value three per cent was imposed, in addition to a Government tax of one per cent for local purposes. In 1876 a decree was issued reducing the general tax to two and a half per cent, and the local tax to one half of one per cent. At the same time, with a view to supplement this reduction of local taxation and increase the national revenues, taxes were imposed on spirits and tobacco, on sales (at varying rates), on contracts, receipts, land transfers, petitions (through the agency of stamps), on some professions and mechanical pursuits, and on the ownership and use of ships, boats, and vehicles. The land taxes, however, contribute the largest amount of revenue to the national treasury, furnish- ing about seventy per cent of its receipts, exclusive of the local land taxes; and in many districts of Japan the total amount yielded by the farmer to the Government, national and local, was estimated in 1891 at even more than fifty per cent of his crop.* * " This statement, however, gives no indication of the true condition of the Japanese farmer. In this country, where the Government performs so many functions which in America are left to the individual, a high rate of taxation is not necessarily an indication of poverty or of a low standard of living. With a sufficiency of land and a variety of crops, even the Japanese farmer can live comfortably, especially if a good fraction of his land is dry field (luita) on which he generally raises two crops a year. Very few of the farmers of Japan, however, are in this condition of tolerable comfort. The amount of the cultivated land of the empire is so small (less than twelve per cent of the whole area) ami the population so large (over forty millions) that the land belonging to each family is absurdly insufficient. The average holding is less than two acres, subdivided into smaller parcels, which vary in size in different provinces, but average nearly one eighth of an acre each. Thus, to picture a typical Japanese farm, one must imagine a piece of land less than two acres, cut up into about fourteen pieces, or bits, each separated from the other by a raised path of earth. Even then the picture is incomplete, since the bits belonging to one farmer are not necessarily adjacent to TREATIES WITH JAPAN. 83 Very curiously, the responsibility for the existence and continuance of this extraordinary system of land taxation in Japan, which finds no parallel in any other country, and the incidence of which constitutes such a burden on the mass of its population, has until a very recent period rested with foreign nations rather than the Japanese Govern- ment, and in this wise : When treaties were first made by foreign nations with Japan, after the opening of its ports and the abandonment of its old-time system of non-inter- course with the rest of the world, it was assumed on the part of the former that the Government and people of Japan were in a semi-barbarous condition, and ought to be treated as such in all political and commercial negotia- tions ; and that in respect to trade and commerce the great- est advantage should be taken of the weaker nation that circumstances would permit. The leading nations of Eu- rope and the United States accordingly stipulated, in their treaties with Japan, that it should not impose any duties on exports or imports in excess of five per cent; and the receipts from customs being thus arbitrarily made insig- nificant, and those from such other sources as spirits, to- bacco, licenses, and the like being normally inadequate, the Government of Japan has been compelled to resort to the old feudal system of taxation as the only practical way of obtaining revenue to defray its necessary expenditures.* each other, but frequently many a rood apart. Such a beggarly amount of land, even under the most perfect system of cultivation, can not of course yield sufficient to bring up a family according to Western standards of comfort. The idea of wages, or remunera- tion for labour, scarcely enters the Japanese farmer's mind; he is content if, after paying his taxes, he can in some rough fashion merely make both ends meet. At any fair rate of wages, farming is carried on at a loss in Japan. The farmer seldom eats the rice he grows, generally using barley or millet as a cheaper means of subsistence. His expenditures are on an infinitesimal scale; the clothes of the family are often heirlooms handed down from gen- eration to generation; and as for saving anything from j'ear to year, the practice is so little known in this country as hardly to be considered a virtue." — Correspondence Neic York Nation, 1S9J. * Recent treaties (1894) have in a degree abrogated the dis- abilities which foreign nations imposed on Japan at the time of the abandonment of its policy of non-intercourse with the rest of the world, but a denial of the right of Japan exclusively to regulate its taxes (duties) on imports is still maintained. 84 THE THEORY AND PRACTICE OP TAXATION. But, notwithstanding this, the results that have fol- lowed the fall of feudalism in Japan in 1868 are in the highest degree interesting, and constitute an important contribution to the history of civilization. Between 1871 and 1893 the population increased eight millions, railways and steamers have annihilated famine, old epidemics have become rare, the severity of old criminal law has been greatly mitigated, while liberty has encouraged the people to a wonderful activity and progress. CHAPTER III. GREECE AND EOME. Taxation in Ancient Greece. — In Athens, according to Boeckh, the revenues of the state were derived from receipts from the public domains, including mines, partly from taxes analogous to our " customs " and " excise," and some taxes upon industry and persons which only extended to aliens and slaves; from fines and justice fees, from the proceeds of confiscated property, and from tribute from allied or subject states. All the exports and imports of Athens, at one period, were subject to a small duty of two per cent ; and in addition to this, foreign ships lying in the harbour paid a small fee, as did also aliens for the privilege of selling commodities, arriving by sea, in certain desig- nated market places. " A special tax was also levied upon the proprietors or occupants of houses, the doors or win- dows of which opened outward on the public footway. And, as throwing further light on the social system of an- cient Greece, we have the statement on good authority that the Greeks, having no pockets, used to leave valuable arti- cles in sealed packets, trusting to the laws which punished the violation of a seal. Direct taxes," according to Boeckh, " imposed upon the soil, upon industry, or upon persons, excepting in cases of emergency, were looked upon in Greece as despotic and arbitrary; it being considered as a necessary element of freedom ihat the property of a citi- zen, as well as his occvipation, should be exempt from all taxation, except when a free community taxed itself, which, however, is obviously an essential part of liberty." Poll taxes were exacted by the Athenian state, but as such taxes were considered ignominious and as implying subjugation, they were only assessed upon slaves or subjugated foreign- ers; and failure to pay was regarded in the light of a capital offence. 85 86 THE THEORY AND PRACTICE OF TAXATION. The income of Athens frorn fines appears to have been considerable, and to have constituted a singular and perma- nent feature of the fiscal policy of the state. Its method of assessment may be best illustrated by examples. Thus, if duly authorized officials did not hold certain assemblages, according to rule, or properly conduct the appointed busi- ness, they had each to pay a thousand drachmas ($200). If an orator conducted himself indecorously in a public assembly, he could be fined fifty drachmas (ten dollars) for each offence, which might be raised to a higher sum at the pleasure of the people. A woman conducting herself improperly in the streets paid a similar penalty. If a woman went to Eleusis in a carriage, she subjected herself to a fine of a talent ($1,180). In the case of wealthy or notable persons, fines for omissions or commissions in re- spect to conduct were made much greater, and so more pro- ductive of revenue; and there were very few notable or wealthy citizens of Athens who under the rule of dema- gogues, and through specious accusations of offences against the state or the gods, escaped the payment of heavy fines; the experiences of Miltiades, Themistocles, Aristides, De- mosthenes, Pericles, Cleon, and Timotheus being cases in point.* Every person who failed to pay a fine owing to * It was probably the contemplation of this state of things that led her great philosopher Aristotle to the conclusion, ex- pressed in his essay on Politics, that " the rule of an irresponsible majority can be just as despotic as that of a single tyrant." He defines this extreme democracy as that " in which the majority, and not the law, is supreme " — in other Avords, " when decrees of the people, and not the law, govern." By " law " is meant a fixed code of statutes, which can not be changed or repealed by the ordinary legislative power. The latter can pass only decrees in conformity to the fixed code, which thus corresponds to our written constitutions. Such absolute power, he says, makes the people a monarch, and finally a despot refusing to be subject to law; and " such a democracy is analogous to tyranny." Both have the same character, for " both exercise a slaveholder's rule over the better citizens." In one we have decrees, in the other edicts; in one demagogues are in authority, in the other flatterers. When a dispute arises, the cry always is, " The people must settle it," and everything is determined by the momentary will of the su- preme multitude. From this state of things the wisdom of our fathers has saved us, and the Supreme Court of the United States, as a rule, decides questions of constitutional law with far more wis- dom and dignity than its predecessor, the popular court of Athens, FINES AND LITURGIES. 87 the state was reckoned as a public debtor, and was subject to imprisonment and a practical denial of citizenship ; Mil- tiades, the victor at Marathon, for example, having been cast into prison (where he afterward died) through an inability to pay a fine assessed against him of fifty talents.* Another curious feature of the fiscal policy of Athens was an indirect augmentation of the public revenues, by diminishing the public expenditures through an institution which was essentially one of difi'erential exaction (mis- called taxation), and was known as " liturgies." They con- sisted in the conferring upon ambitious and wealthy citizens certain honorary public offices to which nothing of salary or compensation was attached, but which entailed large expenditures for the entertainment of the people or defence of the country. The acceptance of these offices was compul- sory; parsimony in expenditure on the part of the holder exposed him to public censure; and the institution un- doubtedly found favour with the masses as a method of dividing the property or consuming the incomes of the wealthy. The system of liturgies was not, however, pecul- iar or restricted to the Athenian state. It existed in the Greek cities of Asia Minor, and also to a certain extent in Eome, where the persons accepting the office of sedile, whose business it was to take care of public edifices and superintend public festivals, were expected to appropriate large sums from their private resources for the convenience and amusement of the people. The office of sedile in Eome, which was one of great honour, was thus only made acces- sible to the very wealthy. But as the office was, however, in the direct line of preferment to some lucrative office in the provinces, the expenditures of its occupant were probably regarded in the light of an investment, from which more than complete remuneration was to be expected in the future, f The principle involved in the liturgies would also seem to find recognition and exemplification in modern times, and under a different civilization, but in accordance with the same human nature; as, for example, in Great Britain, which, by requiring members of Parlia- ment to serve gratuitously, virtually restricts membership * Boeckh's Public Economy of Athens, vol. ii, pp. 105-118. t Boeckh, vol. ii, pp. 199 ^t seq. 88 THE THEORY AND PRACTICE OP TAXATION. in that body to wealthy citizens; and also in the United States, which, by paying her judges and most of her other great officers of state inconsiderable and inadequate sala- ries, practically reduces the cost of her Government, and virtually makes merchandise of her honours by entailing a part of the proper expenses of such offices upon every first-class incumbent of them.* The comparatively small expenditures of the Athenian state should also be considered in connection with their revenue requirements. Thus, Mr. Grote estimates the an- nual expenditure of Athens, in the time of Pericles, at one thousand talents, or $1,180,000; and, according to Mr. Boeckh, the revenues of the city never exceeded two thou- sand talents, or $2,360,000. The annual tax paid on the property of Demosthenes by his guardians amounted to only one fifth of one per cent of its valuation; and as, before the Peloponnesian war, the receipts from the silver mines owned by the state were so abundant that the sur- plus revenue was divided among the citizens of Athens, it is evident that for a time there was no necessity for taxation. Taxation in Eome. — Up to the time of Servius Tullius taxation in Rome consisted of a capitation assessment, arbi- trarily fixed, without regard to the means of the individ- ual.! After the termination of the last Punic war, and down to nearly the epoch of the Empire — a period of at least one hundred and twenty-five years — the people of Rome were exempt from all direct taxation. This was due to the circumstance that Rome had accumulated great wealth, and was in receipt of an annual revenue from her conquered provinces fully adequate to defray all the ex- penses of the government, including the military establish- ment of the state. A large revenue for a considerable period was also derived from the imperial silver mines in * It will not probably be disputed that the talent and experi- ence which ought to be prerequisite to the holding and proper discharge of the duties of many of the important offices of the Government of the United States — judges, cabinet ministers, for- eign ministers, consuls, etc. — will command in private life a much higher compensation or salary than is paid by the state. t Ortolan, History of Roman Jurisprudence, English edition, p. 257. TAXATION IN ROME. 89 Spain. Cicero, who lived before the empire, in one of his epistles to Atticus, laments the possibility of a resort to taxation by the state at some time in the future as some- thing ominous of evil. One of the first acts, however, of Augustus, after assum- ing the reins of government, was the gradual institution of an extensive system of taxation. He organized a land tax for the whole empire; and followed it up with what Gibbon terms " an artful assessment " on the real and per- sonal property of the Eoman citizens, who, as before shown, had been long exempted from any contributions for the support of the state. A tax of five per cent, or one twen- tieth, was also imposed on all legacies and successions, which did not apply to objects inherited of less than a specified value ("probably," says Gibbon, "of fifty or a hundred pieces of gold " ) ; nor was it exacted from the nearest of kin on the fathers side.* This tax, which appears to have been most productive, was one of the most permanent taxes of the empire, and its amount was increased by the successors of Augustus. Gibbon seems to have been in doubt as to the motive which prompted Augustus to incorporate these new fea- tures of taxation in the Eoman governmental policy, and suggests a desire to relieve the provinces from their burden of tribute, or to effect the impoverishment of the senate or the "equestrian" (knights) order. A more modern and probably a more correct view is, that Augustus recog- nised that, as Eome possessed all the known world that she considered worth possessing, the profitable results of fur- ther conquests, and the drain of accumulated wealth from subjugated nations, had practically come to an end ; that her army henceforth existed mainly for maintaining the integrity of the empire, or for defence ; and that for its support, in default of opportunities to plunder, an exten- sive and rigorous system of taxation had become necessary. * " Such a tax was most happily suited to the situation of the Romans, who could frame their arbitrary wills according to the dictates of reason or caprice, without any restraint from the modern fetters of entails and settlements. From various causes, the partiality of parental affection also often lost its influence over the dissolute nobles of the empire; and if the father be- queathed to his son a fourth part of his estate, he removed all grounds of legal complaint." — Gibbon, vol. i, p. 192. 7 90 THE THEORY AND PRACTICE OP TAXATION. Under the system of taxation established by Augustus and extended by his successors, most of the taxes known to modern times were anticipated by the Eomans. Apart from the taxes on hind, they had export and import taxes ; tolls for passage over bridges; a tax upon salt; a tax in kind upon corn (wheat), barley, wine, oil, meat, and wood ; a tax upon the value of manumitted slaves ; on sales ; and a capitation or poll tax. Of other notable and peculiar Eoman taxes was one on the wages of prostitutes ; and apart from his Avars with the Jews and the building of the Colos- seum, the Eoman Emperor Vespasian is best known in his- tory as the originator of a tax on urinals. Excepting possibly the land tax, there does not appear to have been any general and uniform system of taxation for the whole empire. The taxes on imports and exports were not uniform, and there were separate customs dis- tricts, each with a tariff of its own, and some with special immunities. Under the reign of Augustus and his suc- cessors, duties varying from an eighth to the fortieth part of the value of the commodity were imposed at Eome on every kind of merchandise, " which through a thousand channels flowed to the great centre of opulence and luxury ; and in whatsoever manner the law was expressed, it was the Eoman purchaser and not the provincial merchant that paid the tax." * A general tax (characterized by Gibbon as an excise), seldom exceeding one per cent, was also exacted at Eome on whatever "was sold in the market place, or by public auction, from the most considerable purchase of land and houses to those minute objects which can only derive a value from their infinite multitude and daily con- sumption." As exports were subject to Eoman taxation as well as imports, and as the average rates imposed in both cases were probably low, these forms of taxation ap- pear to have been in the nature of a payment for the privi- lege of conducting commerce; imposed for the purpose of revenue only, and without the slightest reference to any contingent influences on trade or industry. In fact, the idea of promoting (protecting) industry through taxes on * Gibbon, vol. i, p. 190, who in turn cites Tacitus, Annals, vol. xiii, p. 31, as authority. ROMAN TAX-GATHERERS. 91 exchanges appears to have found little place in Roman or any other ancient economic history or experience. In accordance with a practice on the part of the ancient Eomans of deifying abstractions — as war, love, navigation, thievery, and the like — we find mention of the Genius of the Custom House, or of Indirect Taxes {genius portorii puhlici), a divinity that seems to have survived to our own times; inasmuch as many of the curious phenomena that have occurred in connection with modern efforts to prevent free exchanges through the agencies of customs taxation, seem only capable of explanation on the assumption that some occult power has been more potential in shaping eco- nomic events in this department of government than any proper exercise of man's reasoning faculties; and that it is the part of wisdom that large sacrifices should be made by the people in order to propitiate this deity. Throughout the whole course of their history the prin- cipal taxes levied by the Romans appear to have been col- lected through the instrumentality of a class of officials known as " publicans," who paid the government for the privilege of so doing; and who, intrusted with extraordi- nary powers, were allowed, by way of compensation for their services, to collect and retain as much of additional revenue as they could force or extort from the taxpayers for their individual and private benefit. Such an adminis- tration of the publicans necessarily involved and required the employment of a large number of subcontractors and deputies, who, stationed at seaports, on public highways, at the gates of cities, and the market places, examined all goods exported, imported, or offered for sale, estimated their value, and collected the taxes to which they were legally liable, and as much more as they could extort with impunity, for the benefit of their masters or themselves — which last, in disorderly times and under the bad emperors, had a very wide latitude. This wretched system of " farm- ing " or discounting the revenues of the state, which ap- pears to have been a permanent feature of the government of Rome at all periods — under its kings, under the republic, and under the empire — has, moreover, a feature of general interest, as it clearly illustrates the exceeding limitation and narrowness of the general Roman policy in the sphere of civil administration. 92 THE THEORY AND PRACTICE OF TAXATION. Another fact pertinent to the general philosophy of taxation, which the historical study of Eoman polity has developed, is also especially worthy of notice in this con- nection. As has been previously stated, the Romans, for a period of at least one hundred and twenty-five years before the establishment of the empire under Ctesar, were enabled, through the great spoils of war obtained from subjugated nations, to relieve themselves from taxation for the support of their government ; and, in so doing, it appears that they first threw off their direct taxes, and at a later period those taxes that were indirect. But when under Caesar it became necessary to reimpose taxes, they established them in a reverse order — that is, the indirect taxes were renewed first and in preference to those which were direct; thus recognising and affirming in practice the idea that characterizes the fiscal policy of most modern governments — namely, that it is expedient to conceal as far as possible the burden of taxes from the people who are to pay them. The gross amount of annual revenue which the empire of Rome collected in its best day is estimated by Gibbon to have been about twenty million pounds sterling ($100,- 000,000) ; later authorities place it at a much higher figure, or $200,000,000. In defaiilt, however, of exact informa- tion as to the purchasing power of money at the time, it is obvious that neither of these estimates can give us any true idea of the real amount of the Roman revenue; but, taking the probable price of wheat in Rome at the close of the republic as an indication of the price of other com- modities, the purchasing power of Gibbon's twenty million pounds sterling ($100,000,000) must have represented a much greater sum, or at least $150,000,000. If the largest of these estimates of the revenue of imperial Rome should seem inadequate for the support of a government that ex- tended over the greater part of the then known surface of the earth, that included a population of at least 150,- 000,000, and maintained a military and naval establish- ment of 450,000 men, it should be remembered that, apart from the greater increased purchasing power of money that now prevails, the expenditure by the state for the sup- port of its military forces was comparatively small ('^the ratio of military draft upon society before the inception PROVINCIAL TAXATION OF ROME. 93 of Eome's decadence being but little more than one third as great as that of the seven principal states of present Eu- rope " *) ; that the present complexity and magnitude of expenditure in the form of taxes did not exist; and that a Koman national debt, with its burden of constantly accru- ing interest — the one thing most grievous to modern states — was entirely unknown. The taxes, or rather exactions, on the people of the con- quered provinces of Rome were always more numerous, dis- criminating, and onerous than those levied upon the popu- lation of the imperial city and its adjoining districts ; and from the time of the Emperor Diocletian they became more and more destructive of industry, and fell with special weight upon agriculture. According to Sir James Stephen, the land tax in Gaul rose to " the almost incredible amount of one third of the net produce of the land " ; but what is more singular and incredible, the present tax on the peasant agriculturist of Italy is, in some cases, equivalent to the value of an even larger share of his product. The provincial taxes which gave rise, however, to the greatest discontent were the poll tax and a tax upon funerals. These were easy to collect, and consequently in favour with the Eoman tax-gatherers; but being levied at fixed and undiscriminating rates, pressed with great and unequal severity upon the poor. The last-mentioned tax — i. e., upon funerals, which required payment before the burial of the dead — was said to have formed one of the principal causes of the revolt of the Iceni (Britons), under their famous warrior. Queen Boadicea. The decree men- tioned in St. Luke's Gospel, of Ca?sar Augustus, that all the world should be taxed, and in pursuance of which " every one went into his own city," unquestionably re- ferred to a poll-tax assessment, and to its required pay- ment in person by every adult at the Eoman tax-collector's office nearest to an established centre of Eoman authority, f In the province of Gaul the annual tribute exacted from every head under the reign of Constantine was reported to have been twenty-five pieces of gold. But the possibility * Baker, The Grandeur and Decadence of the Romans. D. Appleton & Co., 1894. t Luke, ii, 1. 94 THE THEORY AND PRACTICE OF TAXATION. of the payment of such a high capitation tax has been ex- plained by the circumstance that in all the provinces of the Eoman world the majority of the people were slaves, or peasants whose condition was little different from slavery; and that the rolls of tribute embraced only the names of citizens who possessed the means of an honourable or at least of a decent subsistence. The whole record of Roman experience in respect to revenue collection or taxation before the decadence of the empire, alike in the city of Eome and in her provinces, is, however, of no value, save from an historical point of view. It does not appear, as before noted, to have been based upon any well-devised and harmonious fiscal system, or to have had any influence whatever in originating or developing one; for, unlike other Roman customs and institutions, it everywhere fell into disuse when the authority of Rome was withdrawn. In one feature alone was Rome consistent in her views and harmonious in her practice in respect to taxation : she always levied taxes for the purpose of get- ting money into the public treasury and for no ulterior reason. The nearest approach on the part of the Romans to a recognition of the policy of stimulating a branch of industry through the instrumentality of bounties or sub- sidies seems to have occurred in connection with the distri- bution of wheat gratuitously, or at artificially low prices, among the poor and idle masses of the imperial city ; which practice, originally adopted under the republic, with a view of obviating popular discontent, and continued, with addi- tions of oil and meat under the empire, finally became a cause of great anxiety to the emperors lest anything should interfere with the movement of grain, which was mainly by sea from Africa and Sicily. To insure regularity and eflficient service, the state at first farmed out the right to transport the crops to certain wealthy individuals ; and this inducement to enterprise proving insufficient, the Emperor Claudius gave a bounty for each successful trip of the grain fleet. The construction of ships was also encouraged by subsidies, and in this way there grew up a class of wealthy shipowners, whose profits and incentive to business were obtained from the state, and who by organization into an association (analogous to the modern trust) under the name of " Naviculari," with branches in every city or town ROMAN CONTEMPT FOR LABOR. 95 in the provinces, and with wealtliy and influential sena- tors among its stockholders or patrons, attained to great prominence and influence in the third and fourth centuries. Taxation, in at least one notable instance, was also em- ployed by the Komans as an instrumentality for the correc- tion of a social evil — namely, a disinclination on the part of wealthy citizens, in the latter days of the republic and throughout the whole period of the empire, to contract mar- riages, with a view of avoiding the cares and burdens of a family. To counteract this tendency, a tax {" ces uxo- rium") was imposed on bachelors, with a limitation {"lex Julia et Papia Poppcea") on the transmission of property by will or gift by the unmarried and the childless.* The statesmen and administrators of Eome seem never to have given a thought to the desirability of encouraging industry, trade, or commerce among their own people, much less among the people they had subjugated. There was, throughout all their literature and laws, the contempt which brigands and barbarians entertain for honest in- dustry at least when that industry is not agricultural. To create wealth appeared to them sordid ; to take it was ad- mirable, or, as M. Blanqui has put it, the economic policy of the Roman state may be expressed in the following single sentence, " Les romains voulaient avant tout consoinmer sans produire.^' f * In the seventeenth and eip;hteenth centuries there was well- ni^h universal legislation of this kind, the most thoroughgoing specimens being a Spanish edict of 1623 and one of Louis XIV in 1666, which not only granted exemption from taxation, but posi- tive subsidies in cash, as an inducement to early marriages. That the idea involved in such legislation has also found favour at the present time is shown by the fact that Professor Richet, a Ger- man economist of repute, has recently proposed that in all systems of taxation the fathers of large families be favoured, and that corresponding burdens be laid on those who contumaciously refrain from marrying: ignoring the fact that old Rome adopted and carried out this policy by measures much more drastic than the spirit of the present times would tolerate, and that the result is generally believed to have been a failure. It is also worthy of note that at the present time, in the Canadian Province of Quebec, the fathers of the largest families receive bounties of public lands; the motive of which policy is unquestionably to bring the French Canadian element into the control of the Dominion Government. t See Blanqui, Histoire de I'Economie Politique en Europe. American translation by Emily J. Leonard. New York, 1880. 96 THE THEORY AND PRACTICE OF TAXATION. The genius of the Eoman government was military, not commercial. The Romans prohibited commerce to persons of rank and fortune; and no senator was allowed to own a vessel larger than a boat sufficient to carry his own food (grain) and fruit. They encouraged corn merchants to import provisions from Sicily, Africa, and Spain, because the cultivators of the soil of Italy, mainly slaves, did not produce a sufficient supply of food for the city of Eome. They seem, moreover, never to have had any conception of the impolicy of levying taxes in such a way as to dry up the channels of trade and enterprise; or of the fact, abundantly substantiated by all experience, that when gov- ernment takes from its people more than a fair share of the savings of capital and labour, then accumulation will cease and capital be destroyed ; and against social disorders thus engendered Rome was powerless. That the seeds of decay were thus planted in her governmental system, and that the fall of her empire was hence only a question of time and inevitable, is a point that historians seem very generally to have overlooked. During the years of the later empire, although its re- sources and population had greatly decreased, its expendi- tures enormously increased ; and the sequence of this was a system of grinding exactions, to which, more than any other one immediate cause, the utter decay and final com- plete downfall of the empire may be attributed. During the period intervening between the reign of Marcus Au- relius and Diocletian it has been estimated that a majority of the population of the empire, from Persia to Gaul, had died of the plague; and what the plague had been to the population, the " fiscus " or financial policy of the govern- ment was to industry. Under Constantius, a. d. 337, taxes were imposed on all trades and industries, and such was the comprehension and severity of the law. Gibbon tells us, that "the honourable merchant, the usurer who derived from the interest of money a silent and igno- minious profit, the ingenious manufacturer, the diligent mechanic, and even the obscure retailer of a sequestered village, and the public prostitutes," were all alike obliged to admit the officers of the revenue to a participation of their gains. Such, moreover, was the imperfect state of agriculture and of manufacturing processes that the net SEVERITY OF ASSESSMENTS. 9Y product of the individual was necessarily very small — so much so that it has been estimated that the labour of several individuals was required to supply even the necessary food of one inactive person. But as the people became exhausted, the demands of the government, contingent on the main- tenance of an extravagant court and a large standing army of soldiers and officials, became greater, the severity in the methods of exaction increased, and in no two provinces was the authority of the government (sovereign) exercised in the same manner.* With malignant ingenuity, and with a view of perfecting the control of the state over the in- dividual, and doubtless more especially for facilitating the operation of the officials charged with the duty of collect- ing taxes, every man's position was fixed for him by the conditions of his birth. The son of a cultivator of the soil was chained, as it were, to the lands tilled by his father. The workmen in all other departments of industry were bound to their position for life, and when they died their places were taken by their sons. " If any one of them deserted his work, he was sought out, even to the remotest provinces, and ruthlessly dragged back to his post." f If he failed to produce a prescribed result, the state inter- vened and forced its accomplishment. In making assess- ments for taxation, visible tangible property was enrolled with great minuteness by officers who corresponded to our modern assessors. The lands were measured by surveyors; their nature — whether arable or pasture, vineyards or woods — was distinctly reported ; and an estimate was made of their value from their average produce for five years. Every new purchaser of land contracted all the obligations of former proprietors. Slaves and cattle were counted separately, and carefully reported for assessment; and by the Theodosian Code, which for the time was an almost universal law, death and confiscation of estate was the * Alfred Rambaud, L'Empire Grec au Dixi&me Sieele. Paris, 1870. t By a law of the Emperor Theodosius, in 438 a. d., it was pro- vided that the fahricenses (meaning thereby the workmen engaged in the fabrication of arms) " shall be so closely bound to their appropriate duties that, worn out at last by their toil, they shall die in the profession to which they were born — both they and their children after them." — Codex Theod., ii, 9, 4- 98 THE THEORY AND PRACTICE OF TAXATION. punishment to which every farming proprietor was liable who should attempt to evade taxation. In respect to the assessment and collection of taxes on personal property, the accounts that have come down to us are most interesting, and ought to be full of instruction to legislators of the present day who believe in pattern- ing tax administration after old and vicious experiences, so far as the changed conditions and ideas of civilization in the nineteenth century will admit. The proprietor of such property was, in the first instance, questioned under oath; and every attempt to prevaricate or elude the inten- tions of the legislator was punishable as a capital crime, and was held to include the double guilt of treason and sacrilege. If the results of personal interrogation under oath were not satisfactory to the tax officials, they were empowered to administer torture; and when personal stoicism or absolute incapacity failed to effect the desired results, resort was had to other, most abhorrent, and un- natural methods for procuring the sum at which their property was assessed — " the faithful slave being tortured for evidence against his master, the wife to depose against her husband, and the son against his sire. Neither age nor sickness exempted from liability and personal inquisi- tion. In taking ages, they added to the years of children and subtracted from those of the elderly. When the num- ber of cattle fell off and the people died, the survivors were obliged to pay the assessments on the dead." Zosi- mus, a historian who wrote in the early part of the fifth century, says that the approach of the fatal period when the general tax upon industry was to be collected " was an- nounced by the tears and terrors of the citizens." That the result, so far as the execution of the law was concerned, was a success, can not be doubted ; nor that by the methods employed large amounts of revenue were col- lected that otherwise could not have been obtained. But what were the final results? First, a demonstration of an economic truth, which in sul)sequent years has over and over again been repeated, that the productiveness of a tax is not its first consideration; and that a blight contingent on the method of assessing and collecting a tax may ruin a harvest which it can not gather. Under the state of things, as described, that prevailed under the latter days DESTRUCTIVE TAXATION. 99 of the Eoman Empire, the agriculture of its provinces was gradually ruined. Long before the footsteps of the bar- barians had been seen in Italy, a large part of what had been its most fertile portion and the seat of " the delicious retirement of the citizens of Kome," had become unculti- vated and a desert. " The desire and possibility of ac- cumulation languished, and men produced only what would suffice for their immediate needs; for the government laid in wait for all savings. Capital vanished, the souls of men were palsied ; population fled from what was called civiliza- tion, and sought concealment and relief in barbarism and with barbarians. Men cried for social death, and invited the coming of savages ; and in the form of Goths and Van- dals, Huns and Heruli, Franks and Lombards, they came, and the empire of Eome and its degraded civilization went down in almost universal turmoil, bloodshed, robbery, and woe." There is also good reason for believing that the Turks were greatly indebted for their success in overthrow- ing the subsequent Byzantine or Greek Empire to their simple methods and policy in respect to taxation; and that the subjects of the empire were glad to change their mas- ters, because instead of multiplied, intricate, and vexatious taxes, the legacy of old Rome, they found themselves sub- ject to a simple tribute, easily collected and easily paid.* * The most available source of information on this subject is the historian Gibbon (Decline and Fall of the Roman Empire, edition with notes by Milman, Giiizot, and Smith ; New York, Harper's), who in turn specially cites as the authority for his statements the two collections of ancient laws designated by the names of the two Byzantine emperors iinder whom they were made, as the Codex Theodosianus and Codex Justinianus, and the writings of Zosimus, a Greek historian, who lived in the early part of the fifth century A. D., and whose history of the Roman Empire is still extant. " For an exceedingly graphic account of Roman experiences in attempting to tax personal property (from which quotations have here been made) see Roman Imperialism, in Lectures and Essays, by J. R. Seeley, London, 1870. CHAPTER IV. TAXATION IN THE MIDDLE AGES. With the termination of the Roman Empire of the West, which is regarded as having taken place a. d. 476, when Odoacer, chief of the Germanic tribe Heruli, cap- tured the city and assumed the title of King of Italy, a new and great element was introduced into European life, through the intermingling of the northern barbarians with the civilized, Christianized, and degraded Romans of the south. The following period, for at least five hundred years, was characterized, to an extent never before sur- passed in the world's history, by bloodshed, license, licen- tiousness, turmoil, robbery, and woe. Franks, Burgun- dians, Visigoths, Saxons, Slavs, Huns, Danes, and Nor- mans crowded upon and warred with each other. From such a period, when neither the agriculturist nor the ar- tificer could control to any great extent the fruits of his labour, and when the merchant " stole along the hedges, shrank from the eye of the passer, and stepped into rivers cautiously, seeking a ford, lest the man at the bridge should rob him," but little in the way of economic or fiscal principle could be deduced. In short, a new society, the foundation and precursor of what now exists, was in the process of evolution; but in order that evolution might commence, it would seem to have been necessary that all the elements of the old should be completely dissolved, in order that its atoms might move freely — a condition like that to which the chemist is compelled to bring earthy min- eral substances in order to effect their purification and crys- tallization. The period when the molecules of society seem to have begun to combine anew, is generally assigned by historians to the eleventh century, when feudalism had become sys- tematized into something analogous to general government, 100 GOD'S TRUCE. 101 and the power of the Church was especially manifesting itself; and was recognised to such an extent that it was able to establish throughout nearly all Europe a period known as " God's Truce," when warfare, plunder, and bloodshed were forbidden from sunset on Wednesday to sunrise on Monday ; and " during the Christmas holy days and Lent no new defences were to be erected, nor old ones repaired. But this was not all. The provisions made for the protection of the labourer and for the produce of labour were far more characteristic of the dawning of a new era. Peasants in hostile territories were not to be injured or confined ; the tools of agriculture, the hay and the grain stacks and the cattle, were all taken under the protection of the Church; and if seized, it must be for use and not for destruction. He that violated this truce was placed under censure of ecclesiastical power." From this period, therefore, it is only practicable to take up anew the thread of history, and attempt to resume the relation of some of the most instructive incidents that have since character- ized the attempts of governments to defray their expendi- tures by levies upon the persons and property of their sub- jects or citizens. Before, however, so doing, the following historical facts may properly find a place. Hovi^ THE Druids collected Revenue. — An annual payment in the nature of a tax was exacted by the ancient Druids from every family for the benefit of the priests of the temple in the district in which the family lived. The families were obliged, under penalty of an ecclesiastical curse, to extinguish their fires on the last evening of Octo- ber, and attend at the temple with a prescribed annual payment. This being made, they were entitled to receive, on the first day of November, some of the sacred fire from the altar, to rekindle the fires of their houses ; and their neighbours were also forbidden, under a similar penalty, in any way to assist them. The result was, that delinquent taxpayers found them.selves not only interdicted from the society of their fellow-men and from justice, the usual sequence of ecclesiastical excommunication, but also from the use of fire during the approaching winter.* This * Toland's Critical History of the Celtic Religion and Learning, containing an Account of the Druids, p. 105. 102 THE THEORY AND PRACTICE OP TAXATION. expedient for collecting a revenue was referred to by the British Chancellor of the Exchequer, in a speech in Par- liament in 1871, in connection with a proposal to tax matches ; and the motto, Ex luce lucellum, was proposed to be inscribed on match boxes in case the tax was enacted.* Medieval System of Land Tenure. — Among the nations that succeeded to the sovereignty of Rome, the title and ownership of land were regarded, as they are to-day in China, and in England and other European countries, as inhering primarily to the sovereign or chief of the state; and when partitioned among his nobles or chiefs, were held by them as it was termed on " tenure " ; that is, on condi- tion of performing certain services — mainly military, or the payment of a tribute — in the nature of rent. These conditions were ratified by oath; and the chiefs could only sublet, to their serfs or inferiors, on terms consistent with their own tenure. Largo domains were also set apart for the exclusive use of the sovereign f — both in his public and private ca- pacity — ^the state and the sovereign being one and the same; and from the revenues thus accruing, and various fees and feudal incidents, the monarch, or feudal lord, was expected to defray all the expenses of the state, both public and private. Thus, the annual revenue of William the Conqueror is estimated to have been £400,000 ; which, tak- ing into consideration that the pound at that time con- tained three times the weight of silver that it now does, and that silver had a comparatively great purchasing power, must have been equivalent to at least four or five millions of present money; and of the public expenditures of these ages it is important to note that there were very few that * Dowell, History of Taxation in England, vol. ii, p. 367. t The royal demesne (right of ownership) under the Norman kings was at one time of vast extent, comprising, according to Domesday Book, no less than fourteen hundred and twenty-two manors or lordships, besides farms and lands. It Avas divided into (1) forest; (2) land held by rural tenants; (3) royal cities, burghs, and towns. Tlie first formed the king's hunting ground, and afforded supplies of venison, etc., for the royal table; the second supplied the king's table in other respects; the third was mainly the source of contributions for the discharge of the king's debts. KEVENUE FROM DOMAINS. 103 represented the bulk of the expenditures of modern govern- ments. Thus, for example, education was mainly confined to the clergy and the Church; and was efficiently supported by the produce of their own estates, or by tithes levied on the estates of others. There were few roads, and the labour of the serfs or peasants for a few days, before or after harvest, sufficed to keep in passable condition such as were needed to meet the demands of a very limited intercourse and commerce between different sections of the country. The administration of justice was held to be the perquisite of the lords or chiefs holding their estates direct from the crown, and, in place of being an expense, became through abuse and corruption a source of emolument. The stand- ing army, which more than any one agency has tended to the impoverishment of modern Europe, could hardly be said to have then existed; the tenants in chief of the crown supporting the sovereign whenever he took the field with a body of retainers, armed and maintained in a large degree at their own expense. The necessity of taxes in the ordinary sense was, therefore, by these conditions entirely superseded; and if at any time there was a deficiency of revenue from the crown estates and fees, other sources of revenue were resorted to in prefer- ence to anything that could by any possibility be regarded as taxes. Numerous old-time writers of authority — Montesquieu among the number — might be cited in support of what was then regarded as an eminently sound principle, that gov- ernments ought to be supported from revenues derived from the public domains, and that taxation should be re- sorted to as rarely as possible ; because, as one of them expressed it, " one enters into civil society to protect one's property, and not to have it taken away from him." It is also interesting to note in this connection the tendency at the present time to go back to this old doctrine, and for states and municipalities to derive their revenues from other sources than taxation — as from the granting of franchises for railways, telegraphs, telephones, gas supply, lotteries, etc., on condition of participation in profits on gross receipts. Thus, the present net profit on the German state railways is understood to pay one third of the interest 104 THE THEORY AND PRACTICE OP TAXATION. on the public debt of Germany. Nearly all the Continental states of Europe derive a considerable portion of their needed revenues from the profits of their domains and forests — Prussia to the extent of about $11,000,000 per annum; France, $5,500,000; Hungary, $3,000,000, and the like. The city of Paris derives about twenty per cent of its revenue from participation in the operation of fran- chises and income from productive property. In Berlin eighteen per cent of all the municipal expenses are reported as derived from the public gas supply. In Illinois the State expenses are mainly defrayed from the State's share of the annual profits of the Illinois Central Railroad; and in Louisiana also, the State formerly and until recently has participated in the profits of an authorized State lot- tery. If the ideas of Mr. Henry George, of a single tax on land, should prevail, and if such a tax does not diffuse itself, then the entire land of the country would in the course of time become the property of the state exclusively ; and the old principle that a state should be supported from its own landed resources and property would be reasserted and established. The following were some of the sources of revenue, other than what were assumed to be taxes, that were resorted to in mediaeval times to make good any deficiency of income which the crown, as representing the state, derived from its special properties and privileges; and a reference to which is important, by reason of the flood of light they shed upon the concurrent social condition of the masses, and the utter disregard of their rulers of anything akin to justice in their administration of government. One of the most notable of these sources was the Jews, who dur- ing the middle ages had no rights of citizenship in Chris- tianized Europe, and were held, in respect to their persons, goods, wives and children, at the absolute disposal of the chief of the state, to be taxed and despoiled by him at his pleasure. This utilization of the Jews as sources of revenue was far more thoroughly and systematically carried out in England than in any other country. " They were, in fact, the private property of the king ; living instruments of his revenue; carefully protected by his government, unless in cases where exceptional necessity on his part or obstinacy on theirs made it expedient to bear upon them with un- PLUNDER OF THE JEWS. 105 usual weight ; * not serfs bound to the soil, but slaves of the highest value, to whom to allow free action in the acquisition of wealth was the needful condition of reap- ing the fruit of their labour. There is a writ of Henry III in which, in payment of a debt to his brother Kichard of Cornwall, he assigns and makes over to him " all my Jews of England." f William Rufus (William II of England) actually for- bade the conversion of a Jew to the Christian faith. " It was a poor exchange," he said, " that would rid him of a valuable property and give him only a subject." Under Edward I of England the Jews were plundered and amerced to such an extent that it is estimated that they paid over one tenth of the entire revenue of the crown. An explanation of the apparently anomalous circum- stance that the Jews, although deprived of all civil rights and debarred from following most occupations, were able to be plundered to such an extent, is found in the fact that they were the " royal usurers," and under the king's protection spoliated through extreme usurious interest the ISTorman barons, who were always in want of money, and were not the men to readily tolerate " benevolences," or any other form of direct taxation for supplying the king with money necessary for the support of the government. So that when the king plundered the Jewish money lenders, he in reality obtained indirectly the money he needed from his barons, with far less odium and more profit than if he had proceeded against them indirectly. Very curiously, this mediaeval idea of regarding the Jews as a permanent, legitimate, and desirable source of revenue for the state, continued to find favour in England as recently as the reign of William and Mary, or in 1689 ; when, money being needed to prosecute the war with France, it was seriously proposed to exact, under the sem- * Such a case of urgent necessity or inexcusable obstinacy must have been assumed as existing by King John, of whom it is re- lated that on one occasion he demanded the sum of ten thousand marks (thirty thousand dollars) of a Jew at Bristol, and on his refusal to pay, ordered one of his teeth to be drawn every day until he should comply. The Jew, it is chronicled, lost seven teeth and then paid the sum required of him. t Oxford Essays. By J. Bridges, Fellow of Oriel. 106 THE THEORY AND PRACTICE OF TAXATION. blance of taxation, a hundred thousand pounds from the Jews, and the proposition was at first favourably received by the House of Commons. " The Jews, however, presented a petition to Parliament in which they declared that they could not afford to pay such a sum, and that they would rather leave the kingdom than stay there and be ruined ; and after some discussion the Jew tax was abandoned." For, as Macaulay expresses it, " Enlightened politicians could not but perceive that special taxation, laid on a small class which happens to be rich, unpopular, and defence- less, is really confiscation, and must ultimately impoverish rather than enrich the state." * It is hardly necessary to point out that ill treatment of the Jews has not been confined to English rulers and people. In every country or state of Christendom they have been subjected to arbitrary, unequal, and unjust exactions, deprived of ordinary political privileges, and driven as homeless wanderers from cities which their presence and their purses had enriched. And that this race antagonism continues to be perpetuated to the present day, is demon- strated by their recent and virtual expulsion from Eussia ; and even in the United States (where it might least be expected) by a vulgar and brutal denunciation by a mem- ber of the Federal Senate of the chief executive officials of the country, for the assumed reason that they had entered into a fiscal correspondence with an Englishman of Jew- ish descent, whom England had admitted to a seat in her Parliament, and whose whole life had been characterized by strict integrity, courtesy to all, and large benevolence. Another extraordinary source of revenue to the crown in feudal times was the forfeiture of lands and estates for offences ; and of the immense sums thus obtained, some idea may be formed from the circumstance, that up to the time of Elizabeth it has been estimated that nearly all the land ^n England had at some time fallen to the crown under \ the law of forfeitures. Other devices for the raising of A revenue which were very productive, were fines for the alienation (legal conveyance) of land, which were exacted oftentimes to the extent of one third of their yearly value, whenever the tenant found it necessary to make over his * Macaulay's History of England, vol, iii, chap. xv. RIGHT OF ROYAL FISH. 107 land to another; and from the sale of titles, which even as late as 1626, under Charles I, afforded considerable reve- nues. The right of marriage was subject (at least in the case of nobles and gentry) to the consent of the crown; and in some instances large sums were paid for the privi- lege; Simon de Montfort paying Henry III a sum, equiva- lent to five hundred thousand dollars at present, for per- mission to control the marriage of the heir of Gilbert d'Unfrankville. Mr. Dowell, in his History of Taxation in England, quotes the following as among one of the " fiscal curiosities " to be found on the Eolls of the Exchequer during the early Norman period : " Ralph Bardolph fines in five marks for leave to arise from his infirmity. The Bishop of Winchester owes a tonell of good wine for not reminding the king (John) about a girdle for the Countess of Albemarle; and Robert de Vaux fines in five of the best palfreys, that the same king would hold his tongue about the wife of Henry Pinel." * Another branch of the ancient revenues of the English crown worthy of special notice from its singular recog- nition within a comparatively recent period, was the right to " royal fish," meaning thereby the whale and the stur- geon, when the same were either cast ashore or caught near the coast ; and which were originally acquired by the crown on the assumption that the sovereign guarded and protected the seas from pirates and robbers. This perquisite had so long been in abeyance that its sanction by law was hardly recognised in 1850, when the Duke of Wellington, as Lord Warden of the Cinque Ports, claimed and exacted the price — fifty pounds— of the carcass of a whale brought ashore and sold by certain boatmen on the coast of Kent. A point of contention was made by the boatmen, that, since the law was enacted, natural science had proved that the whale was not a fish; but the duke insisted upon his right under the letter of the law of compact with his office of warden — i. e., to protect the seas — as representative of the sovereign, and maintained it. He, however, subse- quently practically admitted the lack of any moral founda- tion for his claim by dividing the price, after it had been formally paid him, with the boatmen. * Dowell, vol. i, p. 28. 108 THE THEORY AND PRACTICE OP TAXATION. Taxation in England. — Previous to the reign of Henry II of England (1154), the "tenure" or holding of hinds from the crown required the personal attendance, at his own expense, of every tenant — knight or baron — with a certain number of retainers, upon the king in arms, for a period of forty days in each year; and failure to attend, or render the quota of men required by the tenure, would have involved a forfeiture of the tenant's lands for nonperformance of duty. Such a military system, how- ever sufficient for home protection or border warfare, proved ill adapted to foreign wars, which in the case of France were for a long period almost continuous ; inasmuch as in those days of slow travelling a forty days' service upon a distant expedition would have been of little account. For what could be more inconvenient for the leader of an army than to be under the necessity, on the expiration of the forty days, either to cut short the campaign, or purchase, by payments or promises, the continued service of his best soldiers? To overcome this difficulty a new system was arranged, it is said, by Thomas a Becket, which marked an important era in English taxation; whereby the king, in lieu of personal service by his barons and their retainers, agreed to substitute a tax called " scutage," or shield tax ; which, as levied at the rate of ten marks (£1 6s. 8fi.) on every estate held by tenure, of the annual value of twenty pounds, was a land tax, payable in money, which before that period had not been definitely recognised. And thus it was that the king practically disarmed the feudal power by accepting money from the knights in place of armed service, and at the same time greatly strengthened his own power; as with the money thus raised he created a per- manent and subservient army of mercenaries — a process which Michelet, the French historian, has characterized as a provision by the nobles of a bit and bridle for their own restraint.* * The reicrn of this English king — Henry II — is also signalized by an organization of the royal (state) revenue system which in some of its features has continued to the present time. Under it the management and general superintendence of the royal . revenues were intrusted to certain officers of the king's household, who con- stituted the " Court of the Exchequer," so called from the checkered cloth laid upon the table upon which the tax collectors or treas- ORIGIN OF PARLIAMENTS. 109 Historians can find no evidence that the right of the Englisli kings to levy taxes was in any case made contingent on any formal grant of any national council until toward the close of the reign of Kichard II (1190) ; * and we have a statement from the historian Hallam that, previous to that time, the system of extortion practised by the Nor- man kings upon their English subjects was " what we should expect to find among Eastern slaves." Progressive civilization and the necessity for larger revenues than the domains and perquisites of the crown could supply to meet the expenditures of continued wars and the maintenance of standing armies, gradually, how- ever, broke down (as has been before pointed out) the feudal system for defraying the expenses of the govern- ment; and the sovereigns were compelled to petition their tenants in chief, or the representatives of the great estates of their realms, to meet in assembly and co-operate with the crown in raising revenue by a more or less general sys- tem of forced contributions upon the persons and property of the people. And in this necessity is to be found the origin of the modern parliaments or states general; and also the inception of the modern system of taxation through iirers told out the king's money: and the chief financial officer of the British Government at the present time is designated by the title of " Chancellor of the Exchequer." The payments when made were entered into an account book, and from this transferred to a strip of parchment; which last was sent through a pipelike open- ing into a room specially provided, and called a "tally count," where a " tally " was made of it. This tally was a piece of dry wood on which " the cutter of the tallies " had to cut notches corresponding to the sum paid, while the " writer of the tally " wrote the sum down on both sides of the wood in figures. Ac- cording to the length of the incision, one notch denoted £1.000: another £100: £20: 20s.; Is.; and so on. The chamberlain then split the notched stick down the middle in such a manner that each half contained the written sums and the incised notches. The two matching parts thus split asunder were called " tally " and "counter tally," or "tally" and "foil" (folium). The one was retained by the chamberlain, the other was kept by the payer as a receipt and proof to be produced to the account department of the exchequer. This curious system of receipts was maintained in force until 17S3: and it was through the burning, with a view to getting rid of an accumulation of these tally sticks, that the old House of Parliament in London was burned in 1834. * Stubbs, Constitutional History of England, vol. i, p. 577. 110 THE THEORY AND PRACTICE OF TAXATION. the representatives of the people. And the manner in which the great principle that representation should ac- company taxation began to find a place in English legal or economic experience, through what was clearly a process of evolution, was undoubtedly as follows : Under the Saxon and, for a lengthened period, also under the Norman kings, the revenues of the crown (as before shown) were mainly derived from taxes on land, which were paid in kind (produce), and what, as the hold- ers of land were regarded as tenants of the crown, were in the nature of rents.* But when, in order to enlarge the basis of revenue, personal property, in the form of mov- ables or income, was brought under contribution, the situ- ation became different; inasmuch as the titles of all such property not being primarily derived from the king, the consent of its owners to an official inquisition, necessary for proper valuation and assessment, was implied, and naturally was not willingly granted. And the great re- ligious houses and orders, who in the main were the prin- cipal owners at this time of such property and were all- powerful, especially insisted that this consent should be recognised as a prerequisite to assessment; and, in at least one instance, re-enforced their position by an interdict from the Pope. The successive steps, also, by which this great principle became recognised and incorporated into general practice have also been clearly worked out by historians. Thus, in 1181, under the reign of Henry II, each freeman was required to equip himself (for war) according to his means; and to determine what his means were, or his liability for taxation in respect to other than landed property — namely, chattels and income — four or six lawful men of his parish were chosen to determine and declare under oath the extent of his personal liability. In the next reign, that of Richard * Rents (taxes) paid in kind eontinued in force in England after the Conquest, and certainly down to the reign of Henry I. In- deed, by reason of the scarcity of money, there was practically no other method of payment. But at the same time the collectors of the king's revenue, in the settlements of their accounts, were accustomed to reckon the value of produce in money at an estab- lished ratio: as, an ox at l.s. ; a sheep at 4d. ; so many measures of corn at so much, and the like. TAXES AND ENGLISH LIBERTY. HI I, this new principle of jury assessment was applied in a general way to the assessment of lands as well as chattels ; and from thence the representative principle in taxation begins to ascend through successive stages, until it becomes established and recognised as the highest function of the British and all other essentially free governments.* The abandonment, furthermore, of the right on the part of the sovereign to make arbitrary exactions in respect to personal property, and the assumption by a class of privileged subordinates — i. e., legislators — of the right to vote, or deny supplies to the king or state, and for the attainment of which results the English clergy of the thir- teenth century led the way, marks also the dawn of con- stitutional or free government. All authorities are agreed, that on the clause in the Magna Charta of 1215 respecting the taxing power, is based all that has since been achieved in respect to English liberty. By it the king (John) was allowed to reserve for himself iDut three feudal aids, or rights, for extraordinary money allowances from the state, which very curiously have never been alienated from the English crown by any subsequent legislative enactment: * It is, however, worthy of note that the only time when this siibjeot appears to have prominently attracted the attention of the British Parliament and occasioned debate was in connection with the imposition of taxes, without representation, on the British colonies in North America, and which assumption of right on the part of the crown to thus act, subsequently led to the American Revolution. The question at issue before Parliament was, Had the state the right of taxing the colonies under existing circumstances, in default of representation of the taxpayers? The colonists did not deny the right of Great Britain to tax them; but they did hold that for the people of Great Britain to appropriate any part of the property without their consent was neither reasonable nor consistent with the British Constitution. And in the great debate in Parliament on this subject, in 1764, Mr. Pitt sustained the position of the colonists; and Lord Camden, who followed, said that " taxation and representation were inseparable," and that a blade of grass growing in the most obscure part of the kingdom could not rightfully be taxed without the consent of its proprietor. Recent historical investigations have, however, shown (as be- fore pointed out, chapter ii) that the grievance alleged and com- plained of by the American colonists was not peculiar to them, but was shared by the people of the mother country to such an extent that at the time of the colonial revolt not one tenth of them were allowed to participate by vote in the election of mem- bers of Parliament. 112 THE THEORY AND PRACTICE OP TAXATION. namely, to ransom the king in the case of his capture by an enemy; to defray the expenses of the knighthood of his eldest son; and third, on account of expenses incident to the marriage of his eldest daughter. In all other respects the charter provides that " no scutage " — by which is under- stood a land tax in commutation for personal military service — " or aid shall be imposed in our realm, save by the Common Council of our realm" ; and this provision of the Great Charter was more explicitly reaffirmed and embodied in the form of law by a Parliament in 1297, which enacted that no tax should be levied by the king without the consent of the knights, burgesses, and citizens in Parliament assembled. Again, in the earlier periods of English history, and probably also in the history of the other states of Europe, when the revenues from the property, fees, and perquisites of the crown, supplemented as they were from time to time by special parliamentary grants, benevolences, and sub- sidies, and the plunder of special classes — as the Jews — were found inconvenient and unreliable, and were replaced by more regular systems of contribution, the idea of taxa- tion' was, as centuries before in Eome, simply to obtain the necessary revenue, without much regard to the incidence of the tax or the interest of the producer, consumer, or trader. The end was alone considered, and not the means ; and this policy, pervading all schemes and experiences of taxation, was then, as it ever has been, the most fertile source of bad taxes. The objects from which contributions at the period under consideration could be obtained were almost exclusively tangible and readily visible, as lands, hearths (representing houses), cattle, slaves or serfs, and the crudest of agricultural products. But as trade, or the business of exchanging, increased, it soon came to be looked vipon as a proper subject for exaction. Customs, or taxes upon trade, were accordingly very early established, and at first were probably confined to domestic or internal trade. But with the rise and growth of foreign commerce the practice very naturally extended to foreign trade, and the terms " customs " and " duties," which had an antecedent origin and meaning, eventually became restricted in their application to " taxes " or " exactions " on exports and im- ports. But yet so slowly did the customs in this sense CUSTOMS AND TOLLS. 113 become an important source of English revenue, that the entire amount collected in 1603 was but £127,000, or but little in excess of $630,000. Such taxes at the outset were furthermore held to be the king's private or personal dues, to be levied by him independently of any statute, according to his discretion, or, rather, according to his necessities; and it was not until the reign of Edward I that Parlia- ment undertook to interfere with what had been considered an hereditary right of the crown, by providing in 1275 that for the purpose of correcting irregular seizures and exac- tions, a limitation should be established on the amount of duty that the king might take on the exports of wool and leather; and the duties thus regulated by statute on these two articles are regarded as the first legal foundation of the English customs revenue. But before the close of the reign of Edward III, or in 1353, the exclusive right of Parliament to authorize or control every form of indirect taxation was fully established, and for the time fully exer- cised; and the right thus achieved by the representatives of the people of participating in the levy of indirect or cus- toms taxation, also necessarily drew with it the right to participate in general legislation, or upon all subjects which Parliament might deem proper. It is also interesting to recall in connection with this subject, that when the old English kings began to levy tolls on ships entering into harbours, in common with tolls on transportation by roads and navigable streams, the tax was on the ship directly, and not specifically upon its contents. And in early charters instances occur of grants to individ- uals or monasteries of an exemption from toll for one ship of burden ; and in the event of the destruction of the par- ticular ship, the privilege was extended to another ship. But with such tolls or taxes once established, the idea soon developed that like forms of exaction might be made to serve a commercial purpose as well as produce revenue; and, as might have been expected, they therefore early be- came instrumentalities for fiscal oppression; and, with a view of advancing the interests of English merchants, or of protecting native industries, they were especially directed against the commerce of foreigners. And whjle the crown, as early as 1275, was deprived of much of its arbitrary power of levying customs for revenue, its prerogative of 114 THE THEORY AND PRACTICE OP TAXATION. restraining trade and imposing onerous burdens on ex- changes with foreigners remained not only undisturbed but undisputed. Foreign merchants, or trading companies, frequently purchased immunity from such exactions; but yet, according to Mr. Hall, in his History of the English " Customs," " to the ' custos ' of the ports, to the riverside baron, to the wayside outlaw and the town apprentice, the Lombard or Flemish peddler or merchant appeared as fair game for violence and extortion of every kind." And in the earlier records of England's customs experience, their oppressive features are of higher interest than tlieir reve- nue or fiscal characteristics. English producers and traders, furthermore, having secured immunity from arbitrary taxa- tion themselves, were quite willing to see this instrument of restraint and oppression turned against their foreign competitors; and, accordingly, during the whole of the sixteenth, seventeenth, and eighteenth centuries, and the first quarter of the nineteenth century, the whole commer- cial policy of England was based on the theory of the so- called " mercantile system " ; the fundamental principle of which was that commerce could benefit one country only to the extent that it injured another; and that it was the part of wisdom always to secure a favourable balance of trade by selling as much and buying as little as possible, and receiving pay for what was sold, not in other useful products, but in gold. But notwithstanding the early restrictions imposed by Parliament on the power of the crown to appropriate the property of the people for its support, arbitrary exactions in the name of taxation continued to characterize the rule of all the English monarchs down to the time of Charles I, when the claim of the king to a divine right to take taxes from subjects, with or without their consent, was settled by the dethronement and execution of the monarch ' and the establishment of the Commonwealth; and ever since then the grants of an annual Parliament have been a prerequisite to any lawful expenditure for the main- tenance of the English state. To the necessities of the Long Parliament, during its contest with the crown, and when the receipts of revenue from former sources were interrupted, we owe the perma- nent incorporation of the so-called excise taxes into the LAND TAX AND AMERICA. 115 tax system of England. Another most novel contrivance V of this period for the raising of revenue was the so-called weekly impost of a single meal ; every citizen being required to retrench one meal per week and pay an amount repre- senting the saving, in the form of money, into the public treasury ; a tax that yielded in six years £608,400, or more than $3,000,000 ; an aggregate that represented a far larger purchasing power than the same amount would at present. 5;^ During the nineteen years that elapsed from the begin- ning of the English Revolution to the restoration of the monarchy under Charles II, the average annual expendi- tures of the Commonwealth were about seven times greater than those of the preceding royal Government ; and as un- lawful taxation was the prime cause of the establishment of the Commonwealth, so excessive taxation furnished the prime cause of popular rejoicing when the Commonwealth was got rid of. A circumstance of no little importance, but which som^^ historians have overlooked, is, that the revolt of the Ameri- can colonies and their separation from Great Britain were in the first instance due to an effort on the part of the t^ landholders of Great Britain to transfer from themselves "^ to the people an ever-increasing portion of the expenses n of the Government. But such was the fact. In 1767 the "^,1^ ,,•> British Parliament, which was mainly composed of land- ^XS^ holders, reduced the previously existing land tax to the " ^' extent of about half a million pounds per annum; and '^t/;Q was for the purpose of making up a resulting deficiency" "\ of receipts to the British treasury, that the Chancellor of the Exchequer of George III resorted to the taxation of ,. '^ tea, glass, and other articles imported into the American! j\ _ C^ colonies, as well as the requirement for the use of stamps! ^7^ ^ on the paper instrumentalities used by the Americans, and x^ the payment for which the colonists resisted. Finally, a feature of special importance in connection with the history of English tax experiences, one often over- looked in historical essays and discussions, but which ought to command the attention of all interested in the origin of the structure and diversities of governments, is the demon- stration it affords of the close connection between taxa- tion and popular liberty. Take up the history of any people, state, or nation that has fought its way, like Eng- 116 THE THEORY AND PRACTICE OP TAXATION. .• land, out of despotism into liberty, and what are the trans- Y actions that most significantly mark and constitute its y^y*^ progress? The story is substantially the same in every -KT ^ case. First, a government of might supported by arbitrary [y exactions from persons and property — tribute, taille, . ^. scutage, gabelle, corvee, escheats, octroi, vingtieme, customs j\ Jr^ r^-^ duties, subsidies, benevolences, and the like — levied at the '-> ^' ■■ vr]i\ Qj. caprice of an absolute and despotic chief or mon- arch, and without any consultation with or assent of the governed. Then, in some hour of royal adversity or need, the monarch appeals for aid to the more powerful of his 'Vr subjects — lords and nobles — who, in turn, taking advan- \y v^^tage of the situation, vote or grant it, in consideration of ^t/^ V*"* the concession of some " Magna Charta," limiting in a Y ^^ measure the sphere of exactions on the part of the mon- ^ arch, or at least securing to a few of his privileged subordi- ^ nates a voice in regulating and legalizing the same. Later comes the struggle between the privileged few and the unprivileged many, and sooner or later, by peaceful political progress, or by violence and revolution, the privileged class ceases to be a separate potential element of the state, and thence passes to the people the sole right to determine, through their chosen representatives, what grants of sup- plies shall be made for the support of the state, and how the burden of taxation which they entail shall be dis- tributed. And then, if fiirther progress is to be achieved, to the end that in exercising the great power of appro- priating private property for defraying the expenses of government, no more be taken than is necessary ; that none shall be assessed unequally ; that the greatest freedom may be secured for production and distribution, and the greatest restrictions placed on monopolies, there must be, through study and investigation, such an improvement and remodel- ling of all existing systems of taxation as will completely eliminate from them all practices that rest upon no better basis than old prejudices and narrow, selfish interests, and make them conformable to principles and conditions which, when presented abstractly, will command almost universal assent. CHAPTER V. TAXATION IN FRANCE AND MEXICO. No chapter in history is more replete with interest and instruction than that which exhibits the system for exact- ing contributions for the support of the state which char- acterized the fiscal policy and administration of France during the seventeenth and eighteenth centuries, and which is now acknowledged to have been mainly instrumental in bringing on the memorable Revolution in the closing years of the latter century. Feudalism in France, previous to 1789, had come to find its expression almost exclusively in the claims on the part of the various and multiplied representatives of au- thority — nobility and clergy — to regulate taxation, in re- spect to both imposition and exemption. The kingdom was divided into departments, with an officer called an " intendant " or "farmer-general" {fer- mier general\ at the head of each, into whose hands the whole power of the crown in respect to revenue matters was delegated. Each department was then subdivided, and at the head of each of these subdivisions a deputy was appointed by the intendant. The rolls or lists of the vari- ous crown taxes, for polls, service, incomes, " proportions," and the like, were distrilDuted by the intendants to their deputies, who had the power to exempt, change, add to, or diminish the list at their pleasure. It must be obvious, that the friends of the intendant and of all his deputies, and the friends of their friends, might be favoured at the expense of the helpless masses; and that great noblemen in favour at the court, to whom the intendant himself would naturally look for protection, would especially find little difficulty in transferring most or all of the burden of tribute rightfully due from them 117 118 THE THEORY AND PRACTICE OF TAXATION. to the state, to others who had no such influence. The result was that taxation in France at the period mentioned had become in the highest degree arbitrary, and a scarcely disguised form of plunder; and the methods of assessment were so crude and defective that it is probable that the state never received fifty per cent of the amount collected, and in many cases no more than forty or thirty per cent. The expenditures of the revenues received were, moreover, char- acterized by so little system as to render it difficult to exer- cise any efficient check upon them, or to ascertain accurately at any one time (as was especially the case during the latter third of the eighteenth century) the true state of the national exchequer ; all of which fostered indefensible waste and extravagance. At the death of Louis XV in 1774, the annual expenditure of the king and his household probably amounted to one eighth of the entire revenue of the state,* and the total indebtedness of the state in 1789, the year of the commencement of the Revolution, was estimated as being in excess of $1,000,000,000, carrying an annual in- terest of $206,000,000; and it is to be remembered that these figures must be at least doubled to represent the cor- responding sums of the present day. All this indebtedness, and all that was subsequently incurred through the issue of irredeemable assignats " (paper or fiat money), was ' ultimately, through one means or another, entirely repu- diated. / In the collection of levies the inquisitorial, infinitesimal /assessment and dooming penalty system, the like of which / still finds favour in Massachusetts, was carried out to per- — fection; and the only rule of practice which in different districts could prefer any claim to uniformity, was the rule of inequality of assessment, and harshness and cruelty in collection. Arthur Young, an English gentleman of culture and keen powers of observation, who travelled in France in 1787-'89, states, in recording the above experi- ences, that " he shuddered at the oppression of which he became cognizant." One of the chief sources of revenue to the state was * There were seventy-five officers connected with the king's chapel alone; forty-eight physicians, surgeons, and apothecaries attached to his person ; and three hundred and eighty-three men and one hundred and thirty-three boys employed for his table. THE TAILLE IN FRANCE. 119 from an exaction known as the taille* which was mainly in the nature of a direct tax on land, though in some prov- inces it was a levy on both polls and land. The history of this exaction has been carefully investigated and is not a little interesting. It originated in the early feudal period, and was imposed on persons originally bondsmen, or on persons who held in " farm,'' or lease, #or resided on the lands of a noble or suzerain, and from which the proprie- tors or suzerains of the land were exempt. And as no vassal could at will divest himself of servitude or allegiance to his lord or suzerain, so the obligation to pay tribute (taxes?) always remained upon him as a personal servitude, wherever he might be. In other words, the condition of the masses in France during the middle ages was not un- like the condition of the slaves in the United States previous to emancipation. These had property in their possession, and spoke of themselves as owners of property, but in reality their property followed the condition of the servi- tude of their persons, and both persons and property be- longed equally to the masters. The taille, furthermore, as a badge of servitude, was supposed to dishonour whoever was subject to it, and degrade him not only below the rank of a gentleman, but of that of a " burgher," or inhabitant of a borough or town ; " and no gentleman, or even any burgher," writes Adam Smith in 1775, " will submit to this degradation." f The hardship and injustice of the practical working of the taille may be thus illustrated : " In all cases the nobility and the clergy were exempt from its payment, as were also the holders of a multitude of minor Government offices, which, however, did not carry with them any patent of * The taille was the equivalent of the English " tallage." But the discretionary power of levying the impost was taken away from the English crown and nobility by the provisions of Magna Charta. t Repulsive and barbarous as was the taille, it is curious to note that the principle involved in it still survives and finds recog nition and practice in States claiming a high civilization ; example, in Massachusetts and Connecticut, where pers erty is held to owe a servitude to the State and to be „ ^ taxation by it in virtue of the citizenship or personal domicile of I (^J^ ^^^ its owner, although the propei'ty itself may be located beyond I ^^ the territory and jurisdiction of the taxing power. is curious to nd finds recog-t p. zation ; as, fori L personal prop-l/^j I be subject to I ^^'%: lal domicile of I foJ ^^^ 120 THE THEORY AND PRACTICE OF TAXATION. nobility. These exempt classes, which in the time of Louis XIV are believed to have numbered some 300,000 out of a total estimated ])opulatiou of 25,000,000 in the king- dom, owned about one half of the whole soil of France; so that the burden of the taille, amounting in 1789 to 110,000,000 livres (francs), fell exclusively on the rural classes ; especially^ upon the agricultural interests, which it would have been sound policy on the part of the state to favour. " But the mode in which the taille was levied still fur- ther illustrates its iniquity. The Comptroller-General of the Finances, in the first instance, decreed that a certain aggregate sum was to be raised, and then two subordinate officials and the local landlords in each province and parish were left to decide among themselves how the prescribed amount was to be exacted from the taxpayers. The com- bined forces of jobbery and absolute authority rendered its incidence grossly unfair, the poorer localities generally paying the larger share, while the richer ones escaped lightly. Thus there was brought about a condition of things in which the most miserable sections of the com- munity were made to feel their inferiority in every relation of life. They were humbled in all their feelings, and they could not but loathe those whom birth or favouritism had placed above them." * Besides the taille, two other forms of direct exaction were included in the fiscal policy of France at the period under consideration — namely, a so-called capitation tax, which was a kind of graduated tax on capital, and from the incidence of which there was theoretically no exemp- tion; and the vingtieme (one twentieth), instituted by Col- bert, which was an income tax, and supposed to be levied on every class. Owing, however, to inefficient administra- tion, and to the circumstance that the clergy occasionally bought exemption for themselves for a term of years by the payment of a lump sum, the revenue derived from these sources was always much less than it ought to have been, the privileged class to a large extent evading assessments. The almost complete exemption of the clergy of France * The Financial Causes of the French Revolution. By Ferdi- nand Rothschild, INDIRECT TAXES AND GABELLE. 121 during the ante-revolutionary period from taxation, where- by those who were supposed to preach and practise charity were so intent upon securing worldly vantage as to have thrown nearly all their duties and responsibilities to the state upon the poor, constitutes one of those striking con- tradictions which so often confront us in history. The indirect taxes were very numero«s ; comprising the customs, the octroi, the excise, and special taxes on wines, cards, tobacco, salt, and on a great variety of manufactured, products ; and in their collection the arbitrary, inquisitorial, infinitesimal, and penalty system was carried out to perfec- tion. It was this class of taxes which undoubtedly pressed most heavily on the French poor, and from the direct in- cidence of which the Church and nobility managed in a great degree to escape. Very curiously, also, they consti- tuted an inducement to the peasantry to seem poorer than perhaps they actually were, and to live in low, thatched cottages, without floors or glass in the windows, inasmuch as any improvement of their dwellings meant an increase of their taxes. Custom duties were levied, not only at frontiers of the kingdom, but between every province of France. The taille was exacted with military severity. " Carriages and carts were stopped on the highway and searched by the tax collectors ; no private house was safe from them by day or by night; and on the slightest sus- picion they used the power of arrest that was vested in them. Prosecutions for unpaid taxes were carried on with the utmost rigor. The clothes of the poor were seized, and even their last measure of flour, and the latches on their doors. Collectors, accompanied by locksmiths, forced open doors and carried away and sold furniture for one quarter of its value, the expenses exceeding the amount of the tax." — Taine. The most vexatious, arbitrary, and extraordinary tax of this period was that imposed on salt, and known as the " gaheUe " ; and to one who now acquaints himself with its history and details it must seem almost inconceivable that any country claiming to be civilized ever could have had such an experience. In order to effectually secure at the outset the payment of this tax, the right to produce and sell salt was vested exclusively in the state. By an ordinance in 1780, every person over seven years of age was 9 122 THE THEORY AND PRACTICE OP TAXATION. required to purchase, not at conveBience, but on one stated day of each year, seven pounds of salt, which in a peasant's family of four, according to Taine, entailed an expense equal to the average wage receipts of nineteen days' work. It was forbidden also to divert a single ounce of the seven obligatory pounds to any use but the " pot and the salt cellar." If any one failed in these observances he was fined ; and he was also fined if he purchased a smaller quantity than the law prescribed. To supplement the use of salt with water from the ocean, or from saline springs, or to water cattle in marshes or other places containing salt, was forbidden under severe penalties. In certain departments of France it was also made incumbent on officials periodical- ly to destroy, often by defilement, all deposits of salt which were formed naturally. No retail dealing in salt was per- mitted, but Government warehouses were established, often at places at considerable distances from towns and villages, where their inhabitants were compelled to make their purchases. According to a report made by the comptroller- general in 1787, the salt tax at that time annually occa- sioned " four thousand domiciliary seizures, three thou- sand four hundred imprisonments, and five hundred sen- tences to flogging, exile, and the galleys." *. But in addition to the so-called national S3'stem, which imposed a great variety of taxes upon all persons and prop- erty in France which could not through favour procure exemption, which exemption embraced practically all the nobility, clergy, and gentry, there were a great number of taxes peculiar to separate estates or seigniories, but at the same time more or less general. Thus, all the various op- erations involved in production and consumption were made, as far as possible, the occasion for tax assessments. The tenants, or vassals, were bound to grind their corn at the mill of the seigneur only; to bake their bread exclu- sively at his ovens; to press their grapes and apples exclu- sively at his presses; and for every such industrial conver- sion a toll or tithe was collected. One of the memoirs touching the condition of the Tiers Etat, as the common people were called, published about the time of the meet- ing of the National Convention, expresses a hope that pos- * Taine, Ancient Regime, pp. 358-362. TAXES ON TRANSFERS. 123 terity may be ignorant that feudal tyranny in Brittany, armed with judicial power, did not blush at breaking hand mills and selling annually to the miserable people the privi- lege of bruising between two stones a measure of buck- wheat or barley. Movements of persons or property from one town or parish to another always involved taxation. If a farmer or labourer moved from one parish to another, it was held that he could not separate himself from a residence once adopted, but remained there for taxation, although he might actually and permanently have left it and be pay- ing taxes in another place. All movements of property and persons were discouraged ; and it not infrequently happened that there was grievous famine in some departments of France, and a surplus of food at the same time in others not very far distant, because of the inability of producers in the latter to dispose of an abundant harvest for lack of any remunerative market or demand. Every sale or trans- fer of property also carried in it a payment to the seignior, or lord of the manor, to the extent of one eighth and some- ' times one sixth of the entire equivalent received in consid- eration. And it is interesting here to note that this exac- tion was recognised and enforced in French Canada until the abolition of seigniorial tenure, forty years ago. Arthur Young states that at the time he travelled in France, 1787-'89, the very terms used to designate the taxes im- posed on the peasantry were in many instances untrans- latable into English; and from a long list of such terms as he recorded, very few can be found and defined in any ordinary French lexicon.* In order, however, in some degree to satisfy curiosity as to the nature of these abomina- tions, it may be mentioned that one of the local taxes in Brittany, which remained in force down to 1789, and was known as the " silence des grenouilles" was a money pay- * Of such terms Mr. Young mentions the following as expressive of the tortures of the peasantry in Bretagne (Brittany), without attempting to define their exact meaning: " Chevaudies, qiiintalnes, sonle, sant de poison, baiser de mariees, chansons, transporte d'cpiif vn charette, silence des (jrcnouilles, corvee a misericorde, milods, leide, conponage, cartelage, harof/e, fonafje, marechanss^, hnnvin, han d'a6vt, trovsses, pelinafje, civerafje, taillabilite, ving- tain, sterlage, hordelage, minage, han de vendanges, droit d'ac- capte," etc. 124 THE THEORY AND PRACTICE OF TAXATION. ment in lieu of an ancient feudal obligation incumbent on the residents of marshy districts to keep the frogs still, by beating the waters, that the lady of the seigneur might not be disturbed " when she lies in " ; while another exaction, still more outrageous, which was not repealed until the French revolutionary convention in 179U swept it from the statute book, was a tax known as cuissage, or " droit du seigneur," which was paid to the seignior as a substi- tute for his ancient and formerly undisputed right to the possession before marriage of the person of every female, the daughter of any of his serfs or more dependent vassals.* Another relic of old feudalism which prevailed in France down to the period of the Revolution, and which, indirectly a tax, was most oppressive and impoverishing to the French rural population, was an obligation termed the corvee, imposed upon them to keep the main roads of the kingdom in repair without being remunerated for their labour or for the services of their animals. They were thus frequently forced away with their teams from their fields, at the demand of any travelling noble or important per- sonage in either church or state, and often at a time of sowing or harvesting, when they could be least spared ; and were occasionally required to travel long distances in order to reach their allotted work. While they were thus com- pelled to keep the main roads of the kingdom in repair, which were generally of little use to them, the local or parish roads, on which they were dependent for their com- munication with adjacent towns or villages, were allowed by the Government to remain neglected, f For many 3^ears * This exaction, the reality of which has been called in ques- tion, would seem to be a necessary incidence or outcome of slavery or serfdom, inasmuch as the condition of slavery implies no rights on the part of a slave that the master is bound to respect. Mr. Thorokl Rogers is authority for the fact that this droit (hi seir/neiir was recognised under various names, as jnmhfif/e, mrrchctn, and mantrif/iiini. in France in the thirteenth and fifteenth centuries, and that fines in recognition and in lieu of this ancient manorial right were probably paid in England almost as late as the admin- istration of Cromwell. t This practice or institution of the conre was undoubtedly of ancient Eastern origin, and until recently existed in Egypt; a very considerable part of the labour employed in constructing the Suez Canal having been performed, in accordance with the orders of the then ruling Khedive, under its conditions. VAUBAN'S DIXME ROYALE. 125 previous to the Eevolution, the institution of the corvee undoubtedly meant to the French peasantry a period every year of from twelve to fifteen days of forced labour for the construction and repair of roads, for which the nobility, clergy, and town merchants contributed not a sou, or an hour of work. And now comes an exceedingly interesting but little- known chapter in French history. There were men of large hearts and great intelligence in France during the reign of Louis XIV (1643-1715) who were not only keenly ap- preciative of the oppressions and sufferings of the French people by reason of their horrible system of taxation, but also of the certain destructive influence of this system on the industry, society, and government of the kingdom.* Among these was the celebrated Marshal Yauban, who, although a soldier by profession, and holding one of the highest offices among the privileged nobility, had made a study of the misery of his countrymen, and had discerned in a great degree its cause and was seeking for its remedy. The knowledge that his office as Marshal of France gave him of the necessity for great expenditures — the country being almost always at war — and the little hope he had that the king would retrench in matters of splendour and amusement, left him no other alternative but to try to find some method by which the burden of the multitudinous taxes imposed for defraying these expenditures might not be enormously and unnecessarily augmented by their method of taking. He accordingly proposed what was in effect a single tax — namely, that the king should annually take by one act or payment a royal tithe of a twentieth, or not more than a tenth (dixme royale) of all the property of each community, or of each person in the kingdom ; and that this simple and sole tax, which would suffice for all, and which would pass directly into the coffers of the king, should be the means by which every other form of tax or exaction from the people, with all its complicated, inquisi- torial machinery for collection, should be abolished, f * During the eighteenth century famine periodically decimated the rural population of France, and forty million acres went out of cultivation. t Vauban proposed to maintain a tax on salt, customs duties on imports, and registry duties. 126 THE THEORY AND PRACTICE OF TAXATION. About the same time a lieutenant-general of France — one Boisguillebert, of Eouen — took up the investigation of the same subject, and published a really learned and pro- found book; in which he also proposed a new system of taxation, which he claimed would at once relieve the people of many taxes, and the state of the necessity of great ex- penditure, by providing that the proceeds of every tax should go at once into the treasury of the king, instead of enriching first the farmers-general, the finance minis- ters, and their deputies. The system of Boisguillebert was analogous to that proposed* by Vauban, with the exception that the former advocated the continuance of some taxes on foreign com- merce and upon foods, and the latter desired especially to abolish most of such forms of taxation. Admirable in many respects as were these proposed reforms ; clearly based as they undoubtedly were upon what are now recognised as sound economic principles, they had one great defect: they prescribed a course which, if fol- lowed, would have taken away the means of livelihood of a very large number of officials. It would have compelled them to live at their own expense, instead of at the ex- pense of the public. This was enough to insure their fail- ure. All the people whose interests, fortunes, and emolu- ments were threatened arrayed themselves in opposition; for they reasoned truly that place, power, wealth, and social position would fly from their grasp if the counsels of Vau- ban were to be followed. It is not to be wondered, then, that the king listened to the advice of the multitude who were privileged to talk with him, rather than to his one clear-headed, unselfish, faithful servitor ; or that when Mar- shal Yauban presented him with a book embodying and explaining his fiscal views and system, he received it with a very ill grace. His ministers also, even if they were con- trarily disposed, which is not probable, could not do other- wise than follow the views of the king, and from that moment the splendid services of the marshal, his military genius, his virtues, the former affection the king had had for him — all were forgotten. He stood in the position of one courting the favour of the people, and contemning and weakening lawful authority. The circulation of his book was forbidden, and all the copies which the state could BOISGUILLEBERT AND DESMARETS. 127 reach were destroyed; while the unhappy marshal, unable to survive the loss of the king's favour, or stand up against the enmities he had created, soon died of a broken heart. His friend Boisguillebert, whom these events ought to have made prudent, could not restrain himself, but pub- lished a book vindicating Vauban, and answering one of the principal objections to his system — namely, the imprac- ticability of making any radical changes during a great war — by asking if it was necessary to wait for peace before abolishing great abuses. This was a more offensive con- temning of authority than Vauban had committed; and Boisguillebert was stripped of his functions, severely repri- manded, and sent into exile. For this he was in a degree recompensed by the acclamations and approbation of the people wherever he went. The system and abuses which Vauban and Boisguille- bert endeavoured to reform accordingly continued; but as years went on, and the misfortunes of France accumu- lated and culminated in the total defeat of her armies by Marlborough, the necessity of larger revenues to meet larger expenditures became most urgent; but how to pro- vide them was a problem which brought no little embar- rassment to Louis XIV's ministers. At last Desmarets, who was Comptroller-General of the Finances, proposed to the Council of State, as a way out of their difficulties, that they should, in addition to all existing numerous and abominable taxes, establish or take on the system of a royal tenth, which had been proposed by Vauban and Boisguille- bert as a substitute for all other taxes; with all the new machinery, officials, and valuations which such a system entailed. The proposition, after a brief consideration, was approved by the Council, and Desmarets was authorized to present it to the king; who, although long accustomed to various and extravagant exactions, is related at first to have been greatly terrified, and to have exhibited for some eight or ten days a profound melancholy. At the expira- tion of this period he regained his usual calmness, and gave the following explanation of the cause of his trouble : He said that he had been much tormented that the ex- tremity of his affairs required him to take so much of the wealth of his subjects ; and that at last he unbosomed him- self to the Pere Letellier (his confessor), who after a few 128 THE THEORY AND PRACTICE OF TAXATION. X^ . clays returned and reported that lie had laid the matter * ^ before the most eminent doctors (theologians) of the Sor- Qy/ J bonne, by whom it was decided ihat all the ivealth of his ^ J. subjects -was the ]iing''s, and that ivhen he took of it he onlij r^jT' I took ivJiat belonged to him. The king added that this de- ^ ^ cision had taken away all his scruples, and had restored to him all the calm and cheerfulness that he had lost. After ' 0^"^ ^^^^ king had been thus satisfied by his confessor, no time was lost in establishing the tax. The effect upon the masses was one of great sadness, but there was no revolt. Many of the property holders in the kingdom endeavoured to con- vince the state officials that under the former condition of affairs they did not enjoy a tenth part of their income, and representatives of the province of Languedoc offered to give up its entire wealth to the crown, if they might be allowed to enjoy, free of every tax, the tenth part of it. All these remonstrances and propositions were not only not listened to, but their presentation was regarded in the light of insubordination. The product of this new tax was not nearly so much as had been expected; and its most marked result was, that it enabled the king to augment all his infantry to the ex- tent of five men per company. In this record of tax experience, which, commencing at least as far back as 1667, under Louis XIV, continued with increasing popular oppression and misery until 1789, we find the origin and the horrors of the French Eevolution which began in the latter year. During its continuance six thousand persons, mostly of the ranks of the nol)ility, clergy, and gentry, are said to have perished under the hands of public executioners and upon the scaffold. But when one calls to mind the multitudes that, for many suc- cessive generations, were starved and tortured out of exist- ence by a system of exactions under the name of taxation, and for which system the king, the nobility, the clergy, and the influential classes of France were responsible, the wonder is that the masses of a brutalized and infuriated people should have shown so much clemency and restraint in the hour of their vengeance and of triumph.* * On this point Arthur Young, whose observations on the con- dition of the French people were made before the great Revolution had culminated, or in 1789, writes: "It is impossible to justify THE FRENCH REVOLUTION", 129 It is interesting also to note in this connection that against no one class, when the revolutionary element be- came ascendant in France, was popular hatred more intense than to the farmers-general, to whom the collection of taxes in the different provinces of the kingdom was farmed out or contracted. The extravagant expenditure which, as a rule, characterized their living, was regarded by the masses as all-sufficient evidence of the enormous profits unjustly accruing to them from these contracts; and the power continually exercised by their agents to make domi- ciliary visits, seize goods, inflict fines, and take other meas- ures of an arbitrary, obnoxious character to enforce com- pliance with extortions, all contributed to make them ob- jects of execration by nearly the entire people. And this animosity under the revolutionary government speedily manifested itself, by sending thirty-two out of the whole number — sixty — of these high officials to the guillotine; among whom were undoubtedly some honest and conscien- the excesses erf the people on their taking up arms. They were certainly guilty of cruelties. But is it really the people to whom we are to impute the whole, or to their oppressors, who had kept them so long in a state of bondage? He who chooses to be served by slaves, and by ill-treated slaves, must know that he holds both his property and life by a tenure far different from those who prefer the service of well-treated freemen; and he who dines to the music of groaning sufferers must not, in the moment of insurrection, complain that his daughters are ravished and then destroyed, and that his sons' throats are cut. When such evils happen they surely are more imputable to the tyranny of the master than to the cruelty of the servant. The analogy holds witli the French peasants. The murder of a seigneur, or a chfiteau in flames, is recorded in every newspaper. The rank of the person who suffers attracts notice. But where do we find the register of that seigneur's oppressions of his peasantry, and his exactions of feudal service from those whose children were dying around them for want of bread? Where do we find the minutes that as- signed these starving wretches to be fleeced by impositions, and a mockery of justice in the seigneural court? Who gives us the awards of the intendant and his sub-deleguCs, which took off the taxes from the man of fashion, and laid them with accumulated weight on the poor who were so unfortunate as to be his neigh- bours? Who has dwelt sufficiently on explaining all the ramifica- tions of despotism, regal, aristocratical, and ecclesiastical, pervad- ing the whole mass of the people, reaching like a circulating fluid the most distant capillary tubes of poverty and wretchedness?" — Young's Travels in France, p. 323. 130 THE THEORY AND PRACTICE OF TAXATION. tious financiers and otherwise distinguished men, such as Lavoisier, the father of modern chemistry. One of the great results of the French Kevolution, which ought to be duly weighed in reckoning up the good and evil of that mighty popular convulsion, is that it swept away the feudal land laws of old France and made land- owners of several millions of men who were formerly serfs. Fully one half of the land of France at the present time is owned by small farmers or peasants ; and in their hands has been demonstrated afresh what Arthur Young called the magic power of property to turn sand to gold. Regions which he visited in 1788, and found barren and deserted, a hundred years later were clothed with vines and gardens under the tillage of peasant proprietors. From the foregoing consideration of France in the last century, experiencing through the abuse of taxation the most awful revolution in history, let us turn to a country of our own time and continent, and observe methods of taxation yet surviving the rigor and barbarism of the mediaeval period. Taxation in Mexico. — Until recently, a^d to a great extent at present, the system of taxation operative in Mexico, the origin or evolution of which may in no small part be attributed to a sparseness of population, lack of accumulated wealth or capital, limited wants, and low civilization of the masses, is especially worthy of notice, and most instructive from the circumstance that nothing like it exists in any other country. The duties levied on imports into Mexico are so exces- sive that the average rate of the Mexican tariff is probably greater than that adopted by any other country claiming to be civilized, with the possible exception of Eussia. The favourite modern idea of making the tariff subserve two purposes — namely, the raising of revenue and the regula- tion of trade — does not appear as yet to have greatly in- terested either the people or Government of Mexico, as revenue, through the necessities of the state, is the su- preme consideration; and for securing this no other rule seems to have been recognised and followed in imposing duties on imports than that the higher the duty (or tax) the greater will be the accruing revenue. But with this general characterization of the Mexican TAXATION IN MEXICO. 131 tariff there comes in the following other most anomalous feature: Thus, in all commercial countries, save those which permit the levy by certain municipalities of the so-called octroi taxes, when foreign articles or merchandise have once satisfied all customs requirements at a port, or place of entry, and have been permitted to pass the frontier, they are exempted from any further taxation as imports so long as they retain such a distinctive character. In the United States, for example, it is held that the right to import car- ries with it a right to sell (i. e., in the original packages) without further restrictions. And the Supreme Court of the United States has decided that a license tax imposed by a State of the Federal Union, as a prerequisite to the right to sell an imported article, is equivalent to a duty on imports, and in violation of the provision of the Federal Constitution which prohibits the States from imposing import duties; and this decision has been carefully recog- nised by the authorities of the several States in dealing with imported liquors under local license, or other re- strictive laws.* But, in Mexico, each State of the republic has, until recently, had practically its own custom-house system, and levies taxes on all goods — domestic and foreign — passing into its territory for the purpose of use or consumption ; and then, in turn, the several towns of the States again assess all goods entering their respective precincts. The rate of State taxation, being determined by the several State Legislatures, varies, and varies continually, with each State. In the Federal District — i. e., the city of Mexico * " An importer of foreign goods, in his capacity as such, is not the subject of State taxation, and can not be required to pay a license fee as importer; and his sales are exempt from State taxation, because he purchases, by the payment of the duty, a right to dispose of the merchandise as well as to bring it into the country; and the tax, if it were admissible, would intercept the import, as an import, in the way to become incorporated with the genei-al mass of pi'operty, and would deny it the privilege of be- coming so incorporated until it should have contributed to the revenue of the State. But when the importer has sold the im- ported package, or has otherwise mixed the goods with the gen- eral property of the State by breaking up the package, a State tax which then finds the articles already incorporated with the mass of property by the act of the importer is not a tax upon commerce." — Cooley, The Law of Taxation, p. 68. 132 THE THEORY AND PEACTICE OP TAXATION. — the rate was recently two per cent of the national tariff ; but in the adjoining State of Hidalgo it was ten per cent, and in others it has been as high as sixteen per cent. The rate levied by the towns is said to be about nine per cent of what the State has exacted; but in this there is no common rvile. jSTor is this all. For the transit of every territorial boundary necessitates inspection, assessment, the preparation of bills of charges, and permits for entry ; and all these transactions and papers involve the payment of fees, or the purchase and affixing of stamps. Thus, by section 377 of the tariff law of December, 1884, it is or- dained that " the custom house shall give to every individ- ual who makes any importation, upon the payment of duties, a certificate of the sum paid, which certificate, on being presented to the administrator of the stamp office in the place of importation, shall be changed for an equal amount in custom-house stamps. For this operation the interested party shall pay, to the administrator of whom he received the stamps, two per cent in money (coin) of the total value of the stamps." All imports into Mexico are liable, therefore, to these multiple assessments; and the extent to which they act as a prohibition on trade may be best illustrated by a practical example. In 1885 an American gentleman, residing in the city of Mexico as the representative of certain New England business interests, with a view of increasing his personal comfort, induced the landlady of the hotel where he resided (who, although by birth a Mexican, was of Scotch par- entage) to order from St. Louis an American cooking stove, with its customary adjuncts of pipes, kettles, pans, etc. In due time the stove arrived; and the following is an exact transcript of the bills contingent, which were ren- dered and paid upon its delivery : Original Invoice: 1 stove weight 282 pounds. 1 box pipe " 60 " 1 box stove furniture " 86 " Total 437 pounds, or 199.3 kilos. Cost in St. Louis, United States currency $26 50 Excliange at 20 per cent 5 30 Total $31 80 MEXICAN CUSTOMS DUTIES. 133 Original Invoice (continued): Freight from St. Louis to city of Mexico (rail), at $3.15 per 100 pounds ,$1.5 75 Mexican consular fee at El Paso 4 85 Stamps at El Paso 45 Cartage and labour on boxes examined by custom house at El Paso 50 Forwarding commission, El Paso 2 00 Exchange 16| per cent on $7.64 freight advanced by Mexican Central Railroad 1 25 $5G CO Import Duties: 1 box, 128 kilos (stove), iron, without brass or copper ornaments, at 19 cents per kilo $24 42 1 box, 31.3 kilos, iron pipe, at 24 cents jjer kilo. . 7 51 1 box iron pots, with brass handles, at 24 cents per kilo 9 48 $41 41 Add 4 per cent as per tariff 1 05 $43 06 Package duty, 50 cents per 100 kilos 1 00 $44 00 Add 5 per cent as per tariff 2 20 $46 26 Add 2 per cent municipal duty 93 $47 19 Add 5 per cent consumption duty 2 36 $49 55 Despatch of goods at Buena Vista station, city of Mexico 38 Stamps for permit 50 $50 43 $107 03 Cartage in City of Mexico 75 Total $107 78 Resume : Original cost of stove, with exchange -$31 80 Freight, consular fees, and forwarding 24 80 Import duties 50 43 Cartage 75 Total $107 78 134 THE THEORY AND PRACTICE OF TAXATION. Under such a system articles of the most common use in the United States are from their increase of price neces- sarily made articles of luxury. Again, the Mexican tariff provides that the effects of immigrants shall be admitted free. " But this is rendered practically a dead letter, from the fact that the interior duties are levied on everything the immigrant has before he gets settled; and these are so heavy that immigration has been greatly discouraged. A carpenter, or other me- chanic, who desires to get employment in Mexico, has such heavy duties levied on his tools on passing the na- tional or State frontiers that few are willing or able to pay them. Hence, few American mechanics find their way into the country, unless in accordance with special con- tract." The existence in a state of the New World of a system of taxation so antagonistic to all modern ideas, and so de- structive of all commercial freedom, is certainly very curi- ous, and prompts to the following reflections: First, how great were the wisdom and foresight of the framers of the Constitution of the United States in providing, at the very commencement of the Federal Union, that no power to tax in this manner, and for their own use or benefit, should ever be permitted to the States that might com- pose it (Article I, section 10). Second, how did such a system come to be ingrafted on Mexico? for it is not a mod- ern contrivance. All are agreed that it is an old-time practice and a legacy of Spanish domination. But, fur- ther than this, may it not be another of those numerous relics of European medifevalism which, having utterly disappeared in the countries of their origin, seem to have become embalmed, as it were, in what were the old Span- ish provinces of America — a system filtered down through Spanish traditions from the times when the imposition of taxes and the regulation of local trade were regarded by cities and communities in the light of an affirmation of their right to self-government, and as a barrier against feudal interference and tyranny; and when the idea of protecting industry through like devices was not limited as now, to international commerce, but was made appli- cable to the commercial intercourse of cities and communi- ties of the same country, and even to separate trades or INTERNAL TAXES OF MEXICO. 135 " guilds " of the same city ? Whether such speculations have any warrant in fact or not, it is at least certain that we have in the Mexico of to-day a perfect example of what was common in Europe in the middle ages; namely, of protection to separate interests (through taxation) car- ried out to its fullest and logical extent, and also of its commercial and industrial consequences. So much for the tariff system of Mexico and its ad- juncts. The " excise " or " internal revenue " system of the country is no less extraordinary. It is essentially a tax on sales, collected in great part through the agency of stamps, and is a repetition of the old " alcavala " tax of Spain, even to the extent of retaining its name slightly modified from alcavala to " alcabala " ; and which Adam Smith, in his Wealth of Nations, describes as one of the worst forms of taxation that could be inflicted upon a country, and as largely responsible for the decay of Span- ish manufactures and agriculture. Thus a Federal statute of Mexico, enacted in 1885, imposed a tax of " one half of one per cent upon the value in excess of twenty dollars of transactions of buying or selling of every kind of mer- chandise, whether at wholesale or retail, in whatever place throughout the whole republic." Also, one half of one per cent " on all sales and resales of country or city property ; upon all exchanges of movable or immovable property; on mortgages, transfers, or gifts, collateral or bequeathed inheritances; on bonds, rents of farms, when the rent ex- ceeds two thousand dollars annually ; and on all contracts with the Federal, State, or municipal governments." Every inhabitant of the republic who sells goods to the value of over twenty dollars must give to the buyer " an invoice, note, or other document accrediting the purchase," and affix to the same, and cancel, a stamp corresponding to the value of the sale. Sales at retail are exempt from this tax ; and retail sales are defined to be " sales made with a single buyer, whose value does not exceed twenty dollars. The union, in a single invoice, of various parcels, one of which does not amount to twenty dollars, but which in the aggregate exceed that quantity," remains subject to the tax. Eetail sales in the public markets, or by ambulatory sellers, or licensed establishments whose capital does not exceed three hundred dollars, are also exempt. Tickets 136 THE THEORY AND PRACTICE OP TAXATION. of all descriptions — ;railroad, theatre, etc. — must have a stamp, as must each page of the reports of meetings, each leaf of a merchant's ledger, day or cash hook, and every cigar sold singly, which must be delivered to the buyer in a stamped wrapper. Sales of imported spirits pay eight per cent on the duties levied on their importation, and a half of one per cent in addition when retailed. Domestic spirits pay three per cent when sold by producers or dealers at wholesale, and a half of one per cent additional when sold at retail. Gross receipts of city railroads pay four per cent ; public amusements, two per cent upon the amount paid for entrance; playing cards, fifty per cent — paid in stamps — on the retail price; and manufactured tobacco a variety of taxes, proportioned to quality and value. Mercantile drafts are taxed at a dollar on every hundred. Farms, haciendas, and town estates are required to be taxed at the rate of three dollars per each thousand dollars of the valuation, but such is the influence of the landowners that the valuation is almost nominal. In Vera Cruz the rate is reported at about two mills on the dollar for the most productive portions of country estates; while in the Pacific State of Colima the rate is said to be one and a half per cent. Land and buildings not actually produc- ing income are exempt from taxation, notwithstanding they may be continually enhancing in value. This sys- tem of exempting unoccupied realty from taxation also prevails in Portugal; and the Mexican usage was probably derived from that country, where the theory in justifica- tion of the practice is, that the use of a thing defines its measure of value, and that to tax unused property is con- fiscation. A recent Mexican statute for the taxation of land con- tains forty-seven different sections, each providing the ways and means of enforcing the tax and prescribing penal- ties for its infraction. In the towns and cities of Mexico this system of infinitesimal taxation is indefinitely re- peated, the towns acting as collectors of revenue for the Federal and State governments, as well as for their own municipal requirements. All industries pay a monthly fee : As tanneries, fifty cents ; soap factories, one dollar. So also all shops for the sale of goods pay according to HINDRANCES TO TRADE. I37 their class, from a few dollars down to a few cents per month. Each beef animal, on leaving a town, pays fifty cents; each fat pig, twenty-five cents; each sheep, twelve cents; each load of corn, fruit, vegetables, or charcoal, six cents (as a supposed road tax), and so on; and, on entering another town, all these exactions are repeated. A miller, in Mexico, it is said, is obliged to pay thirty- two separate taxes on his wheat before he can get it from the field and offer it, in the form of flour, on the market for consumption. As a matter of necessity, furthermore, every centre of population — small and big, city, town, or hamlet — swarms with petty officials, who are paid to see that not an item of agricultural produce, of manufactured goods, or an operation of trade or commerce or even a social event, like a fandango, a christening, a marriage, or a funeral, escapes the payment of tribute. In fact, trade has been so hampered by this system of taxation that one can readily understand and accept the assertion that has been made, that people with capital in Mexico really dread to enter into business, and prefer to hoard their wealth, or restrict their investments to land (which, as before pointed out, is practically exempt from taxation), rather than subject themselves to the never- ending inquisitions and annoyances which are attendant upon almost every active employment of persons and capi- tal, even were all other conditions favourable. Mexico, from the influence of this system of taxation alone, must, therefore, remain poor and undeveloped ; and no argu- ment to the contrary can in any degree weaken this asser- tion. Doubtless there are many intelligent people in Mexico who recognise the gravity of the situation, and are most anxious that something should be done in the way of reform. But what can be done ? If autocratic powers were to be given to a trained financier, thoroughly versed in all the principles of taxation and of economic sciences, and conversant with the results of actual experience, the prob- lem of making things speedily and radically better in this department of the Mexican state is so difficult that he might well shrink from grappling with it. In the first place, the great mass of the Mexican people have little or no visible tangible property which is capable of direct assessment. 10 138 THE THEORY AND PRACTICE OF TAXATION Again, in any permanent system of taxation, taxes in every country or community, in common with all the ele- ments of the cost of production and subsistence — wages, profits, interest, depreciation, and materials — must be sub- stantially drawn from each year's product. Now, the annual product of Mexico is comparatively very small. For example, the annual product of one of the least devel- oped States of the Federal Union — South Carolina — was in 1888 absolutely two and a half times — or, proportionally to area, twenty-five times — as valuable as the then an- nual product of the entire northern half of Mexico; and the Argentine Eepublic of South America, with only one third the population of Mexico, has a revenue twenty per cent greater, and double the amount of foreign commerce. Product being small, consumption must of necessity be also small. " The average cost of living (food and drink) to a labouring man in the city of Mexico is about twenty- five cents per day; in the country, from twelve and a half to eighteen cents. The average annual cost of a man's dress is probably not over five dollars; that of a woman, double that sum, with an undetermined margin for gew- gaws and cheap jewelry." Mr. Lambert, United States consul at San Bias, reported under date of May, 1884: " The average labourer and mechanic of this country may be fortunate enough, if luck be not too uncharitable toward him, to get a suit of tanned goatskin, costing him about six dollars, which will last him as many years." Of house- hold goods the mass of the Mexican people are almost destitute. A few untanned hides are used for beds, and dressed goat or sheep skins serve for mattress and cov- ering. The food of the masses consists mainly of agricultural products — corn (tortillas), beans (frijoles), and fruits — which are for the most part the direct results of the labour of the consumer, and not obtained through any mechanism of purchase or exchange. Persons conversant with the foreign commerce of Mex- ico are also of the opinion that not more than five per cent of its population buy at the present time any imported article whatever, and that for all purposes of trade in American or European manufactures the consuming popu- lation is not much in excess of half a million. Revenue in LAND OWNERSHIP IN MEXICO. 139 Mexico from any tariff on imports must therefore be lim- ited, and this limitation is rendered much greater than it need be by absurdly high duties, which (as notably is the case of cheap cotton fabrics) enrich the smuggler and a few mill proprietors to the great detriment of the national ex- chequer. It is clear, therefore, that the basis available to the Government for obtaining revenue through the taxation of articles of domestic consumption, either in the pro- cesses of production or through the machinery of dis- tribution, is of necessity very narrow ; and that if the state is to get anything, either directly or indirectly, from this source, there would really seem to be hardly any method open to it other than that of an infinitesimal, inquisitorial system of assessment and obstruction akin to what is al- ready in existence. But the greatest obstacle in the way of tax reform in Mexico is to be found in the fact that a comparatively few people — not six thousand out of a possible ten million — own all the land and constitute in the main the govern- ing class of the country, and the influence of this class has thus far been sufficiently potent practically to exempt land from taxation. So long as this condition of things pre- vails it is difficult to see how there is ever going to be a middle class (as there is none now worthy of mention) occupying a position intermediate between the rich and a vast ignorant lower class that take no interest in public affairs, and is only kept from turbulence through mili- tary restraint. Such a class in every truly civilized and progressive country is numerically the largest, and com- prising the great body of producers, consumers, and tax- payers, is the one most interested in the promotion and maintenance of good government. A tax policy, however, which would compel the landowners to cut up and sell their immense holdings, especially if they are unwilling to develop them, would be the first step toward the creation of such a middle class. But it is not unlikely that Mexico would have to go through one more revolution, worse than any she has yet experienced, before any such result could be accomplished. At present, furthermore, there is no evidence that the mass of the Mexican people, who would be most benefited by any wise scheme for the par- 14:0 THE THEORY AND PRACTICE OP TAXATION. tition of the great estates and for tax reform, feel any interest whatever in the matter or would vigorously sup- port any leader of the upper class who might desire to take the initiative in promoting such changes; and herein is the greatest discouragement to every one who wishes well for the country. In 1892, the present enlightened President of the Eepublic of Mexico, Porfirio Diaz, fully recognising the great obstruction to trade and commerce which the com- plicated system of internal taxation entailed upon the country, created a commission to report what was neces- sary to institute a better fiscal system. As a result of the labours of this commission the Federal Constitu- tion was amended so as to provide for the total repeal of the internal taxes on trade, the alcavalas, and this radical change was accomplished July 1, 1896. The States, deprived by this measure of their income from merchan- dise coming into or passing through their territory, modi- fied their tax systems, substituting for the abolished duties direct taxes. In January, 1898, the Secretary of the Treasury, Jose Ives Limantour, reviewing the financial operations of the year, stated that the receipts from these direct taxes had been very satisfactory, considering the difficulties generally encountered in the collection of a new tax. As the contributions from the States to the Federal Treasury had been intimately connected with the alca- valas, it was expected some heavy decrease would occur; but this deficiency amounted to less than thirty thousand dollars in the first year, and the prospect of further deficits was not encouraged. The abolition of the vexatious alca- ralas has resulted in a greater commercial activity. CHAPTER VI. TAXATION IN EGYPT AND BRAZIL. Taxation in Egypt. — Herodotus, the Father of His- tory, in writing more than two thousand years ago ahout Egypt, characterized it as a land of wonders, " contain- ing more marvellous things than any other country," and in this opinion the judgment of succeeding ages, finding an all-sufficient warrant in primeval, stupendous, and mys- terious monuments, has been compelled, as it were, fully to acquiesce. At this latter day, however, there has been added to Egyptian history what may be rightfully termed another wonder, namely, the most interesting and instruc- tive experience in taxation in the world's history. In- teresting and instructive because it affords striking and almost unprecedented illustrations' of the results contin- gent on an arbitrary and unintelligent treatment of a heavy annual requirement of revenue for the support of a state, as contrasted with the results which have been the sequence of a wise and practical policy for a like purpose in the same country and under similar conditions. Previous to the military occupation of Egypt by the British forces in 1882, consequent upon the suppression of the rebellion under the lead of Arabi Pasha, the condi- tion of the country was wretched almost beyond concep- tion. Its revenue system, in accordance with Asiatic ideas, comprehended nearly every form of iniquitous extortion. The principal source of revenue was essentially in the nature of a land tax ; and for the dusky fellah, who repre- sents the bulk of the Egyptian population, and who, with a grimy white shirt girded about his loins, ploughs, sows, and reaps to-day as his forefathers have done before him for thousands and thousands of years, this tax meant that his houses, his cattle, and his lands " were but so much food placed before the lips of our lord (the Khedive) that he might eat thereof and have his fill." 141 142 THE THEORY AND PRACTICE OF TAXATION. " The seed was often barely sown for the coming crop before the tax-gatherer appeared with the usurer as his familiar spirit at his heels, claiming not only heavy tithes of the treasury, but the many tithes of those tithes which never reached the treasury, waylaid on the road along the steep ascending gradients of a predatory hierarchy. For what purposes or to what amount he could be mulcted the fellah had no means of knowing. The only record he kept was the number of strokes from the koorbash which had wrung from him his last piastre. The only certainty he acquired by long and bitter experience was that, let his harvest be good or bad, only so much would be left to him as would barely suffice to keep body and soul together. Every year brought fresh imposts, and every new tax became in the hands of a corrupt administration a fresh pretext for unlawful exactions. To satisfy them the land was made to yield more frequent and more valuable but also more exhausting crops, until the soil itself caught the contagion of universal impoverishment. Still, the arrears of taxa- tion grew, and with them arrears of private indebtedness," until at last whole villages not infrequently petitioned the pasha " to accept the fee simple of their lands on condition merely that they should be allowed to rent them from him at an annual rental greater than the land tax itself, but still vastly less than the total amount of illegiti- mate imposts grafted on to the land tax." Extortion for the purpose of obtaining revenue for the state, and plunder for the officials intrusted with its collec- tion, was not the only form of oppression to which the miserable Egyptian peasantry were subjected. By an an- cient Asiatic institution called the corvee, the fellah was liable at any moment to be seized and dragged perhaps off to some distant part of the country to work under con- stant dread of the taskmaster's whip at any task suggested by the caprice of the Khedive or some powerful pasha; and it was under this system of compulsory, unpaid, severe, unfed labour, and with great attendant sacrifice of the lives of his subjects, that the then Khedive, Ismail Pasha, mainly built the Suez Canal. In addition there was a system of " military conscription invested with the terrors of the press-gang; there was the water supply for irriga- tion, generally inadequate and often dependent upon the REBELLIONS IN EGYPT. 143 caprice of some local magistrate or corrupt official; there was the greed of unjust judges ; there was the whole hungry bureaucracy, feeding upon those beneath it in order that it might in turn feed those above it." Such, then, was the life that the fellah " lived in the days of the oppression "; not in the dim twilight of the past, but less than twenty years ago; not in remotely hid- den corners of Egypt, but throughout its entire length and breadth. In 1879 the exactions in Egypt, nominally for revenue, had become so oppressive, that the population refused to pay them, and, rising in revolt, drove Ismail Pasha from power and installed his son, Mohammed Tewfik, in his place. The new pasha found the finances of the country in such confusion that he was obliged to invoke the aid of European Governments in order to obtain the means necessary to pay the interest on the public debt; and in this way the British and French Governments, as repre- senting a large majority of the creditors, or holders of the debt, were practically given control of all the Egyptian sources of revenue. This condition of affairs was, how- ever, in turn so repugnant to the people that in the spring of 1882 a revolt broke out, headed by Arabi Pasha, the then Minister of War, which, with a popular cry of " Egypt for Egyptians ! " seemed for a time likely to be successful. But with the utter defeat of Arabi at the battle of Tel-el-Kebir, in September, 1882, the rebellion collapsed; Tewfik Pasha was restored to power, while the British forces, for the purpose mainly of maintaining the situation and insuring peace, practically retained possession of the country. It was under such circumstances that a reconstruction of the antiquated, arbitrary, and unequal Egyptian system of col- lecting revenue was entered upon as an immediate and imperative necessity for the establishment of a new and better national fiscal policy, and the attainment thereby of some degree of national prosperity.* * Notwithstanding the adverse criticism that has been made on the action and policy of Great Britain, under the then existing circumstances, subsequent experience has proved that it saved Egypt from barbarism and anarchy, and all the nations interested in that country " from incalculable losses in blood and treasure, to say nothing of the deep dishonour which these losses, foreseen 14:4: THE THEORY AND PRACTICE OF TAXATION. The career of Ismail Pasha, who as Khedive ruled over Egypt from 1863 to 1879, was a remarkable one. He was " as fine a type of the spendthrift as can well be found, whether in history or fiction. No equally reckless prodigal ever possessed equally unlimited control of equally vast resources. He came to the throne at a moment when there seemed to be no limit to the potential wealth of Egypt. The whole land was his, to do what he liked with it. The world was ready to lend money to develop it." The results of his government may be rightfully characterized from almost every point of view as appalling. When he commenced to rule in 1863 "the debt of Egypt was a little over £3,000,000 sterling ($15,000,000). The an- nual revenue of the country was amply sufficient to meet all needful expenditure. Yet at the end of 1876 the debt had risen to £89,000,000 ($445,000,000). A country of six million inhabitants and only five million acres of cul- tivated land had added to its burdens at the rate of £7,- 000,000 ($35,000,000) a year. At the same time the taxa- tion of land had been increased by something like fifty per cent. There is nothing in the fiscal history of any country, from the remotest ages to the present time, equal to this carnival of extravagance and oppression." The revenue annually collected under Ismail Pasha is probably not accurately known, and has been reported as high as £15,000,000 "($75,000,000), from an estimated population in 1872 of 5,203,000. But, whatever the amount, it is certain that a very considerable portion of what was wrung from the miserable peasantry never found its way into any official ledger, or reached the national treasury. Of a great loan of £32,000,000 effected by the Khedive in 1873, only £20,700,000 reached the Egyptian treasury. The total amount sunk by the Government in the Suez Canal is estimated at £16,075,000 ($80,375,000). Yet Egypt has no share in the vast profits of the under- taking. It was not, however, the amount of taxation, crushing as it was in many cases, which worked the great- est mischief. " It was, above all, the cruel and arbitrary and yet unhindered, would have brought on civilized mankind. The Arabist movement possessed great destructive force, but it had not within itself the elements necessary for the construction of anything enduring." — England in Egypt, Sir Alfred Milncr. REFORM OF EGYPT'S TAXES. 145 manner in which the taxes were collected. The fellah was seldom sure of the amount that would be demanded of him. He was never sure of the moment when the demand would be made. The moment might, as likely as not, be the very one in which he was least able to pay. Called upon to find ready money while his crops were still in the ground, he was simply driven into the arms of the money-lender. His choice lay between so many blows of the l-oorhash and the acceptance of the usurer's terms, however onerous. Under these circumstances money was borrowed at as much as sixty per cent per annum. Worse than that, it was often obtained by the sale of the growing crops, which were estimated for the purpose of the ad- vance at half or less than half their value. This state of things was bad enough, and it was pretty general, but the ruin of the cultivator was consummated in many in- stances by positive collusion with the usurer on the hint of corrupt officials. The latter would demand the pay- ment of taxes by the peasant, who was already in debt, at the very time when the interest on his debt was due. If he had any cash at all the authorities were bound to get it. When the usurer came after them, there was nothing left to the fellah but to surrender his land and cattle, or re- new his bond on still more ruinous terms. He was, in fact, entirely at the mercy of the lender." That some betterment of such a condition of affairs was imperative if civilization was to be maintained and the substantial dissolution of Egyptian society prevented, seemed evident, and to effect it most rationally and speed- ily an experiment was instituted that, as respects its nature and results, finds no parallel in the world's history. This in brief was the creation of a fiscal commission, by Sir Evelyn Baring, then British agent and consul general in Egypt (but now Lord Cromer, minister plenipotentiary), the members of which were selected solely by reason of their recognised qualifications for the work in hand and invested with almost autocratic powers. To this commis- sion was intrusted the task of examining and reconstruct- ing a revenue system of long duration and fortified by the precedents, customs, and prejudices of an entire country, with a not inconsiderable population. The commission when organized in 1884— "85 entered upon its work under 146 THE THEORY AND PRACTICE OF TAXATION. exceedingly unfavourable circumstances. The financial pressure was most acute. The magnitude of the national debt was apparently overwhelming; and the prices of the leading agricultural staples of the country, depressed in an extraordinary degree by world-wide competition, con- sequent upon improved conditions of production and transportation, seemed to preclude all possibility of obtain- ing any increased revenues from the masses by a continu- ance of the old, or even by any new methods of extor- tion. The first step taken was to abolish as rapidly and as far as possible all unnecessary and unproductive ex- penditures; and for this there was large opportunity. A diminution was made in the pension list, and in the num- ber of superfluous and highly paid officials. By the con- current action of the great powers of Europe the rate of interest on the funded debt of Egypt was also somewhat reduced. The next important measure that claimed the attention of the commission was the grievance of the corvee, or sys- tem of enforced labour on the part of the peasantry on the public works ; which, if entitled to be called taxation, was taxation of the worst and most wasteful kind, entailing sacrifices upon the people out of all proportion to the money which it saved to the state. It was not, however, found practical at the outset to abolish it altogether. The old practice by which the fellahs might be dragged away from their villages at any moment for anv purpose, public or private, upon which the Khedive might choose to em- ploy them, was at once totally abrogated. On the other hand, the agriculture of Egypt, the main source of support of her people, depends upon the water of the Nile, dis- tributed through irrigating ditches or canals ; and in order that these should fulfil their purpose, it is neces- sary to keep them clear of the mud which the Nile at the period of its annual overflow brings down in large quan- tities; : and to effect this, no other labour than that of the fellahs is available. Finding that this indispensable work could be done bv contract and paid labour, for about £400.000 ($2,000,000) per annum, the commission ap- propriated, from the funds made available from loans and the reduced expenses of the Government, the sum of £250,000, to be paid annually as compensation for such ABOLITION OF TAX BURDENS. 147 service, and thereby at once reduced by more than fifty per cent the number of men formerly called out and com- pelled to perform service, without payment. In addition, the employment of skilled engineers and the introduction of improved machinery for dredging and excavating, still further reduced both the necessity for the labour of in- dividuals and the general aggregate of former expendi- tures. Whatever of the obligation of the corvee is still incumbent on the fellah, as, for example, when he is called in any sudden emergency to prevent breaks in embank- ments in time of flood, or keep clear the irrigation of his own land, is therefore largely in his own interest, and even this will probably at no distant day be abolished. But, be this as it may, it is certain that what of the corvee the commission has felt compelled to retain does not repre- sent one tithe of the awful incubus which the old corvee represented " in the days of the oppression." The use of the koorbash, or lash, which was the former invariable ac- companiment of unpaid labour in Egypt, has also been absolutely prohibited. Of other forms of relief to the people of Egypt, effected by the English fiscal commission, the following may be mentioned: An abandonment of a tax on sheep, goats, and camels, which was very obnoxious to the agriculturists; a tax on weighing and measuring; octroi taxes on rice, oil, and other commodities; and a tax on all trades and crafts, in the nature of licenses on business and professions, which was collected in innumerable small sums from the poor- est of the people. The price of salt, the supply and sale of which was a monopoly of the state, has been reduced to the extent of forty per cent, while large abatements have been made in judicial fees, postal and telegraph rates, and in railway rates and fares. As formerly, the tax on land is yet the corner stone of Egyptian finance, and can not be rapidly or radically dis- turbed ; but large measures of relief have nevertheless been instituted. A vexatious diversity of rates at which land has been assessed in different parts of the country has been simplified to the extent that a former total number of fourteen hundred different rates has been brought down to two hundred. The value of land varies greatly, accord- ing to its proximity to the ISTile, and the extent to which 148 THE THEORY AND PRACTICE OF TAXATION. it can be profitably supplied with water for irrigating pur- poses — land devoted to growing rice crops requiring con- stant watering, but must never be inundated. " From time immemorial Egyptian law has recognised an intimate con- nection between the land tax and water supply. The land which, in any given year, gets no water, is for that year legally exempt from all taxation whatever. As soon as it gets water its liability is established. But it is evident that the mere fact of receiving some water, though it may set up the liability of the cultivator to pay, does not insure his capacity to do so. In order to insure that, he must get his water in proper quantities and at the proper times. But this is just what, in thousands of instances, he could not get, as long as the irrigation system remained in the state of unutterable neglect and confusion into which it had fallen in the period previous to the British occupation of the country." Arrears of land taxes through- out the whole country to the amount of about $5,000,000 have been remitted altogether by the commission, while lands incapable of cultivation, but heretofore made sub- ject to taxation, have to a great extent been relieved.* * " A considerable class of lands, called mazroof, sold many years ago by the Government at a quitrent which in the course of time had come to be looked upon as a specially high rate of land tax, has also been assimilated to the surrounding dis- tricts. " Another measure of great importance for the future has been the adoption of more liberal fiscal regulations with regard to land brought for the first time under cultivation. Formerly the first attempt to reclaim a piece of uncultivated land brought down the tax-gatherer, who at once subjected it to the full burden of the land tax. Now it remains untaxed until it yields the first remunerative crop, and then for two years it pays only half the normal rate. In the same broad spirit, facilities have been granted to people who are found without proper title in possession of land belonging to the Government, but on which they have spent labour and money in developing. Such occupiers can nowadays be con- firmed in possession on very easy terms, in which full account is taken of all improvements. Finally, a scheme has been devised, and has been already applied with considerable success, for se- curing relief, withoiit having to enter upon a general reassess- ment, in those no longer very numerous cases where the existing land tax is really excessive. Instead of allowing, as hitherto, arrears to accumulate which have ultimately to be remitted, the defaulting land is seized and put up for sale, but on such terms as to facilitate the re-entrv of the owner on a lighter rating LAND TAX OP EGYPT. 149 The area of land under cultivation in Egypt in 1894 was about five million acres; and in the least prosperous part of the country the tax on the same has been re- duced, since the creation of the commission, to an extent of at least thirty per cent. The revenue from the taxation of land, which is at present estimated as not exceeding on an average £1 ($5) per acre, constitutes fully one half of the total receipts of the Egyptian treasury. In 1886, before the reduction in this tax had been made, its revenue product was £5,116,000 ($25,580,000 — the Egyptian pound being about £1 Os. 6d.). In 1891 its product, after the large reductions noted, was £5,098,000 ($25,190,000) ; a result constituting a new and striking illustration of a little regarded principle of taxation, that v^low or moderate taxes are as a rule more prolific of reve- nue than comparatively high taxes. It is also worthy of note that the land taxes of Egypt under the reduced rates are collected with greater facility and much less expense than under the old system. Viewed, as it should be, rather as a rent than as a tax, the present Egyptian tax on land can hardly be regarded as oppressive. The number of land proprietors in Egypt, according to the revenue returns for 1893, was 1,025,000. In only 8,569 cases were the fiscal officers obliged to seize crops in payment of the land tax. In three out of four of such cases the mere seizure acted as a sufficient threat to induce payment, and in only 2,158 cases was it necessary actually to sell the defaulters' crops. As for the seizure and forced sale of the land itself, there were only 1,865 cases of seizure and less than one in nine of actual sale — viz., 204. The number of expropriations for failure to pay the land tax had therefore been reduced to the infinitesimal proportion of one in five thousand. The total revenue receipts of the Egyptian treasury during the year 1886, after the commission had begun to exert an influence on the fiscal affairs of the country, was wherever the arrears are shown to be due to a prohibitive assess- ment in the past. "Thus, not only the huge accumulation of arrears and the many smaller obstacles have been removed which blocked the ap- proaches to the land tax, but the land tax itself has been cleared of its most mischievous excrescences." 150 THE THEORY AND PRACTICE OF TAXATION. £7,337,000 ($36,685,000). In 1890 thev had increased to £8,040,000 ($40,200,000), and in 1891 to £8,366,000 ($41,830,000). To the extent of about one third, this augmentation was due to heavier taxes on tobacco, and a few new taxes, as a tax on house occupancy, from which all foreigners previous to 1887 were exempt. In general, the increase in revenue receipts consequent upon new taxes imposed since 1885 has been about £570,000 ($2,850,000) ; but the reductions of taxation have at the same time been notably in excess of this amount. The public debt of Egypt,^ which was nearly £99,000,000 ($495,000,000) in 1880, has been increased in recent years to the extent of between two and three millions; but this increase has been mainly devoted to the redemption of pensions and to re- productive public works. The general results that have been attained in Egypt under the fiscal and administrative policy of the British commission are, therefore, worthy at least of being char- acterized as extraordinary. They can not, moreover, be properly exemplified by any mere exhibit of figures. The benefit that has accrued to the Egyptian people can not be properly measured by a reduction of their taxes, but rather by the increase in their means of bearing the burden that remains. " The greatest vice of all in their old system of government was that, while the demands made upon the people were constantly increasing, their capacity to meet those demands was being steadily impaired. The Gov- ernment took from them twice as much as it was entitled to take, and did not give them in return what it was bound to give; while the cofPers of the state and the pockets of its servants were being filled by the plunderer of the peas- antry. The soil was deteriorating from the neglect of those great public works upon which its fertility de- pended." All this abuse has now been entirely abrogated. For the first time since the days of the Roman administration, order and prosperity reign in the valley of the Xile. At no previoiis period since Egypt began to have a name has the fellah lived under a government so careful to protect his rights. For the first time he is allowed to control the fruits of his labour. To-day, under British domination, every Egyptian peasant knows exactly the RESULTS OP ENGLISH OCCUPATION. 151 amount of taxes he has to pay and when he has to pay them; and that when he has once paid the legal amount, no official, big or small, has the power to extort from him one single piastre beyond it.* He knows, too, that he can not at any moment be seized and dragged off as formerly, perhaps to some different part of the country, to work under constant dread of the whip, at any task suggested by the caprice of the Khedive or of some powerful pasha. Under such circumstances Egypt has never, certainly not within a recent period, enjoyed so large a measure of prosperity. Notwithstanding the recent universal decline in price of agricultural staples, the Egyptian products and exports of cotton, sugar, tobacco, wheat, etc., have rapidly increased, and at present are much greater than at any for- mer period. The annual increase in the great staple product of Egyptian agriculture — cotton — from the average of 188-i-'89 to that of 1893-94 was nearly a hundred per cent, whereby the cultivator was not only able to pay his taxes more easily, but has more money left for his own needs. When England first occupied the. country the four-per- cent Egyptian debt securities were quoted at about 50, and not long before had been quoted as low as 27. To-day their quotation is over 100, with a reduction of their originally stipulated interest. One of the most recent results of the British occupa- tion of Egypt has been a practical abolition of human slavery. Under existing regulations every slave in Egypt (the former great market for enslaved people of Africa) may demand his manumission if he chooses ; and if the Soudan be retaken by Egyptian troops under British leader- ship, it will be equivalent to opening the prison doors to hundreds of thousands of captives. f * " The poorest peasant in the country is now annually fur- nished with a tax-paper, irifd, as it is called, which shows him exactly what he has to pay to the Government, and at what seasons the instalments are due. The dates of these instalments, moreover, which vary in different provinces, have been arranired so as to correspond as nearly as possible with the seasons when the cultivator realizes his produce, and is therefore in the best position to discharge his debt to the state. The necessity no longer exists of resorting to bribery as a protection against the extortion of sums not due on the part of the tax-gatherer." t This has now been accomplished (1898). 152 THE THEORY AND PRACTICE OP TAXATION. In 1876 the district known as the " Fayoum," on the west side of the Nile, southwest of Cairo, was, according to a correspondent of the London Times, " reduced by mis- rule to the greatest depths of misery probably ever experi- enced in modern times in Egypt. The burden of taxation and oppression had produced an amount of want which almost bordered on starvation. At the present time (1894) it is one of the most prosperous and contented of provinces, and bids fair to become in the future the very garden of Egypt." A further striking proof of the prosperity of Egypt under British administration is afforded by the financial report for 1895, made by Lord Cromer, the British diplo- matic agent, which shows a revenue in excess of all ex- penditures for that year of £1,088,000 ($5,440,000), per- mitting a relief to the taxpayer to that extent. This has been accomplished in the face of liberal reductions in taxes. Certain of these concessions should be recorded if only to show the enlightened policy pursued by the foreign ruler of Egypt. Since 1890 the remission of taxation has been as follows : Corvee £400.000 = $2,000,000 Land tax 574.000 = 2,870.000 Professional tax 180.000 = 900,000 Sheep and goat tax 40.000 = 200.000 Weighing tax 28.090 = 140.000 Sundries. 53,000 = 265,000 Total £1,275,000 = $6,375,000 N"or is this all. Arrears of the land tax to the amount of $5,000,000 have been remitted ; the salt tax has been reduced forty per cent ; a beginning has been made toward the total abolition of tolls paid by boats on the Nile, a step toward making the navigation of that river entirely free; the construction of bridges over the canals, thus relieving the people of the cost of ferries, and the repeal of the tax on carriages, horses, mules, and donkeys in Cairo, a tax paid only by the natives. " With its abolition the last remnant of European fiscal privilege disappears." That the continued prosperity and development of Egypt are dependent on the continued administration of the country by the British Government seems too clear to WELFARE OF THE PEOPLE. 153 admit of questioning; and it is also not less evident that if Egypt should now be abandoned by it, all that has been done for it would be speedily undone.* Finally, in considering the recent and remari^able fiscal experience of Egypt, one point of great economic in- terest should not be overlooked — namely, the lesson it teaches of the closeness of the relations of the finances of a state to the welfare of its people; and that these rela- tions, which are apt to be obscured, or even wholly lost sight of, under conditions of high and complex civiliza- tion, speedily make themselves apparent, and are therefore more easily traced and studied in a country of limited area and simple conditions of living on the part of its people. This experience historically groups itself under three sepa- rate and distinct periods : First, the period of reckless prodigality under the reign of Ismail Pasha, from 1863 to 1879, of sixteen years. Second, a period of sudden retri- bution fraught with widespread misery, from 1879 to 1886. Third, a period of recovery from utter collapse, from 1886 to the present time, the result of intelligent fiscal admin- istration so signal and complete as to be without precedent in history. An illustration of how history in Egypt has seemingly repeated itself in respect to taxation is here pertinent to the subject. Prior to the nineteenth century a key to the hieroglyphic writing of Egypt or of the so-called " de- motic," which was a short-hand or abridged form of the true hieroglyphics, had not been discovered, and there was little probability that it ever would be. In 1799, however, during the French occupation of Egypt, a large slab of black granite (now in the British Museum), which originally had been a monument in some * In a recent debate (1896) in the British House of Commons, Mr. Chamberlain, the Secretary of State for the Colonial Depart- ment, said: "It would be impossible to pass judgement upon the policy of the Government unless the Government first made up its mind definitely in regard to the immediate evacuation of Egypt. Nothing in recent history could be looked back to with more pride and satisfaction than the peaceful revolution in Egyptian affairs which had been accomplished with a handful of men and a British civil administration. If Egypt should be abandoned, all this would be undone. Egypt must be defended if her prosperity was to continue." 11 154 THE THEORY AND PRACTICE OF TAXATION. public edifice, was discovered in excavating for military purposes near the village of Eosetta, a place in Lower Egypt not far distant from Alexandria and the western mouth of the Nile. The slab had on it three inscriptions — the first in hieroglyphic text, the second in the demotic character, and the third in Greek letters; and a study and comparison of them, mainly by Champollion, a French scholar, led to a solution of the problem of deciphering the hieroglyphic writing, which previously had almost com- pletely baffled analysis. It was then found that the tri- lingual inscriptions were in the main a copy of a decree in honour of Ptolemy V, Epiphines, King of Egypt, who, about 193 B. c, had conferred great benefit on his country and its people by remitting certain taxes and reducing others, and read as follows : " Considering that the King Ptolemy, ever living, the well-beloved of Phtah, most gracious son of the King Ptol- emy and of the Queen Arsinoe — gods philopatores (father- loving) — has done all kinds of good; . . . that he has not neglected any of the means within his power to perform acts of humanity; that in order that in his kingdom the people and in general all the citizens should be in pros- perity, he has suppressed altogether some of the taxes and imposts established in Egypt, and has diminished the onus of others : ... It has therefore pleased the priests of all the temples of the land to decree that all the honours belonging to the king shall be considerably augmented ; that his statue shall be erected in the most conspicuous spot in each temple ; that the priests shall perform three times each day religious service to these statues ; and that in all great solemnities all the honours due to other deities shall be paid them. . . ." More than two thousand years have elapsed since the service rendered by Ptolemy to Egypt and its people by the remission and readjustment of taxes was thus commemo- rated. King, priests, and people have long since passed away; but if they could return, their gratitude to the Eng- lish tax commission for the service rendered to their country and to their descendants would certainly again be recognised and fitly commemorated. Another point of historical and fiscal interest in con- nection with Egypt is worthy of notice. Of the conquest TAXATION IN BRAZIL. 155 and occupation of Egypt by the French, 1798-1801, the masses of its people have but little knowledge; but the name of General Kleber, to whom the government of the country was intrusted by Napoleon on his return to France, is still held in grateful remembrance, coupled with the highest title that the Arabs could bestow upon him — name- ly, " The Just " — because under his rule, as popular ex- pression has it, " he levied taxes only once." * Taxation in Brazil. — A most striking and instruc- tive example of the strangulation of the commerce of a country, and its consequent impoverishment by reason of a vicious system for the collection of revenues, is to be found in the recent experience of the South American state of Brazil. Its Government derives its support mainly from export and import duties, and every province, whether maritime or interior, collects a separate duty of generally about four or five per cent on its exports, to which in some instances a municipal tax is added. In the case of Ama- zonas, where the rubber industry has been greatly devel- oped, nine tenths of its revenue is derived from the export duty on rubber. There is no taxation upon either real or personal property; but when a piece of real estate is sold, the purchaser is required to pay a fee to the Government of five per cent on the selling price. All stores are obliged to obtain a license, for which a fee is exacted, the amount varying with the kind of trade. The duties on imports are extremely heavy, and on many articles, especially foods, are in excess of their original cost at their place of produc- tion. On some of the principal articles of export the duties have been as high as twenty-three per cent ad valorem, on rubber and cocoa fourteen per cent, and thirteen per cent * For the material which has furnished the basis for the fore- going narrative of the recent fiscal (tax) experience of Egypt, the writer has been mainly indebted to a book, England in Egypt, London, 1804, by Sir AlJfred INIilner, formerly a member of the Egyptian Fiscal Commission, and now chairman of the British Board of Inland Eevenue; to a series of letters published in the London Times in 1894; to various official documents, and inter- views with those personally conversant with the subject under consideration. Lord Cromer each year submits to Parliament an elaborate detail of the finances, administration, and condition of Egypt, and his reports are remarkable for their ability and treat- ment of public questions. 156 THE THEORY AND PRACTICE OF TAXATION. on coffee. Few countries have greater commercial and industrial possibilities than Brazil; but Nature's prodigal efforts have been rendered futile by a vicious system of taxation, which has so restricted the development of her resources that the increase of exports in recent years has been mainly confined to the single article of India rubber, for the supply of which the country has practically a mo- nopoly. What is raised in Brazil is taxed; what is bought by her is taxed; while taxes are levied on her product of labour and on the payments for such products. The gen- eral result, therefore, has been that the world can buy com- paratively little of the Brazilian, and the Brazilian has comparatively little with which to buy of the world. No better system has been followed in the internal taxes of the country, and discriminating duties, levied upon foreigners and foreign corporations, have been im- posed, in spite of the opinion that such duties are uncon- stitutional. Resort to extraordinary taxes is made be- cause of the inability to obtain much more revenue from imports, exports (gold and gunpowder), and the few inter- nal imposts. " The Constitution lays down narrow limits within which the Federal Government may impose taxa- tion, such important sources of revenue as land and house taxes, taxes on transfer of property, and on professions and industries, and export duties, being reserved to the governments of the States ; nor can the Federal Treasury draw on the resources of the States, most of which are able to show a respectable surplus. . . . The very vastness of the territory of Brazil, and the lack of certain and easy communications, render many taxes impossible or unprofitable, through the high cost and uncertainty of col- lecting them." The finances of Brazil have never been well managed. Under the empire, from 1822 to 1886, the accumulated deficits amounted to more than $310,000,000. It may be urged that the greater part of this expense had been placed in the construction of railways, ports, and other useful objects by which the national wealth has been in- creased. Under the republic, or since 1886, the deficits have amounted to $95,000,000, or nearly $10,000,000 a year, and the large sums borrowed during this period have been spent in making good deficits, in paying for the ex- LARGE DEBT OF BRAZIL. 157 travagance of the administration, and in unprofitable ex- penditures, such as that caused by the naval revolt and the Eio Grande revolution. The immense sums of paper money issued and its depreciation have disorganized foreign commerce, and imposed a tax upon its foreign financial duties, in connection with its loans, that grows heavier each year. " The Government has annually to find a sum of more than £5,000,000 sterling to meet its gold obligations. The ordinary receipts being almost exclusively in paper, and exchange having fallen from 27§d. in 1889 to 7rf. in December, 1897, the difficulty of finding gold for these re- mittances has yearly increased, until the burden of foreign debt has become almost unbearable. At the latter rate the loss incurred in purchase of gold for remittances, esti- mated for 1898 at £5,029,877, would amount to 127,742,903 milreis. At 6d., a rate reached three months later, the loss would be 156,485,067 milreis — nearly half the entire estimated revenue." * As the revenues are decreasing, and existing taxes have reached their limit of productiveness, it is proposed to resort to an income tax. * Report of Mr. Beaumont, second secretary of H. B. M. legation at Rio de Janeiro, 1898. CHAPTER VII. TAXATIOX r.V BRITISH INDIA, The Tax Experiences of India. — In contrast with the record of tax experiences in Egypt, that of India under like (British) influences, though equally singular and in- structive, is not equally satisfactory. The elements of the problem of raising sufficient revenue to defray the expenses of the state since India passed under British rule and in- fluence are substantially as follows: A vast area of territory — 1,609,151 square miles — with a population comprising more than one fifth of the human race — 288,159,692 in 1891 — and increasing at the rate of at least 30,000,000 for every decade, a number about equal to the present population of England and Wales; without homogeneity, but divided and subdivided, as is the case in no other country, by diversity of race, religion, caste, and language.* Of the population of India, 217,000,000, according to the census of 1881, were unable to read or write; while as respects property, the testimony of recog- nised authorities in 1877 was, that the value of the total yield of the land of India from all sources, including the produce of mines and the annual value of manufactures, would not average more than forty shillings (ten dollars) per head for the entire population, f As compared with Egypt, the situation in India has this marked difference, * In the Statistical Abstract relating to British India, annually published by the home Government, eighty-eight different lan- guages, distinctively Asiatic or non-European, are recognised as characteristic of the population. In lSS4-'8o, out of a then total population of 253.S91.o36, only 202.920 were reported as using English in the sense of a mother-tongue; and only 1,862,626 that admitted of classification as " Christians." t Resources of Modern Coiintries. A. J. W^l='^n. Lonemans, London, 1S78, vol. i, p. 57. Taxation in India. Shoshee Chunder Dutt, Justice of the Peace, Calcutta. 158 ALLEGED POVERTY IN INDIA. 159 namely, that whereas in the former country the extreme poverty of its rural population — the fellahs — has not been due to any lack of fertile land, or any incapacity on their part for obtaining from it a comfortable subsistence with continued betterments in condition, but owing to the fact that they have from time immemorial been deprived of the control of the fruits of their labours; while in India the population is increasing so rapidly — especially under the conditions of peace which have been attendant on Brit- ish rule — and so disproportionately to the amount of new and fertile soil that can be appropriated, as to leave but little margin, under existing methods of cultivation, for increasing the means of subsistence for the people. In fact, the " Malthusian theory " is completely exemplify- ing itself in India, which is densely populated, destitute in a great degree of roads and of the knowledge and use of machinery.* In a debate in the British House of Commons on the Indian budget, in August, 1894, Mr. Seymour Keay, an ex-official of the Indian Government, stated that in 1893 " he had a census taken of five villages in the presidency of Bombay. The population was 236. These five villages farmed 1,400 acres, the gross crop of which was valued at £193. If a starvation support of 14 shilHngs a year were allowed to each of the 236 persons and 11 shillings a year for each pair of bullocks kept to till the farm, the net produce of the five villages amounted to £5 for the year. Yet in the same year they paid to the inland revenue £73, and the village books showed that it was done by borrowing from the usurers at twenty-four per cent." * Under the old-time system of native rulers, frequent wars, consequent on foreign invasions and internal race antagonisms, with accompanying famines and epidemic diseases, materially re- stricted the growth of the population of India. But under the conditions of peace that have been attendant during the last half century of British rule, the population of India has increased so rapidly that the limits of the agricultural capacity of the country, and the consequent means of subsistence for its people, seem to be approaching exhaustion; and one extraordinary drain upon the revenues of the Government in later years has been due to the wise creation of a national famine fund, to be used in cases of peri- odical emergencies due to failure of the crops, for the relief of multitudes who would otherwise perish by starvation. 160 THE THEORY AND PRACTICE OP TAXATION. Mr. Keay further stated that '' about seven years ago the Director-General of Statistics for all India published a book in which he stated that 40,000,000 of the people of India habitually went through life on an insufficiency of food. The Government of India wanted to be able to deny the statement, and they sent a confidential circular to the heads of departments and governors, in which they asked whether it was wholly or partially true, not that 40,000,000, but that the greater proportion of the popula- tion of India suffered from an insufficiency of food; and they directed that men of ' experience and judgment ' should be set to make the inquiries. The replies were contained in five confidential Blue-books. In the district of Eampoor twelve scattered villages were taken, with a total population of 3,000. Of these, 1,600 were cultiva- tors, and the remaining 400 were labourers, artisans, etc. It was found that, after deducting rent and the cost of cultivation, the cultivators had available for their support during the year sixteen rupees (= £1) each, while the la- bourers had seventeen shillings a year each as the whole means of their subsistence. In another case it was shown that in a district having a population of over 1,000,000 souls, 173 persons had only thirteen shillings a year each to live upon. In another district the official reports which were contained in Blue-books marked ' confidential ' showed that in a large district nearly all the inhabitants had to live upon from three eighths to three quarters of the amount of grain which was ascertained to be the minimum that would support a healthy condition of life." * In the debate that ensued, Sir Richard Temple, an- other ex-official of India, stated that " the calculations re- ferred to by Mr. Keay were not worth the paper they were written on or the breath with which they were uttered. The data upon which they were founded were suppositi- tious, and the deductions drawn from them were impos- sible. If they were true, the people of India would not be living at all, and the land would be of no market value. Yet, in another breath they were told that large sums of monev were being advanced by local banks on security of the land." * Hansard, Fourth Series, vol. xxviii, pp. 1115-1120. LIGHT TAXATION IN INDIA. 161 Mr. Keay said that he had quoted facts, and not opinions. Sir E. Temple retorted that " the supposed facts were no facts at all. All that these gentlemen could possibly know was that there were so many people on the ground, and that there were so many acres. The calculations men- tioned were snares and delusions. He would rather take certain general facts which could be tested. He could not undertake to say how a particular peasant family lived, but he knew what the general statistics were. He knew what the area under cultivation was, what the ratio of the increase of population was, what the expansion of trade, and what the exportation of food stuffs amounted to. It was said that the people of India were starving, although th^y were exporting grain to such an extent to England that they were seriously disturbing the prospects of Brit- ish agriculture. It was said that the people of India were sinking into poverty, although during the last decade they had shown the greatest increase of population recorded in the annals of the human race, the population having in- creased by 30,000,000 within ten years. . . . No doubt the taxable capacity of the people was low, but, then, the taxa- tion was light. The poorer classes of the Indian people were the lightest taxed people in the world. He did not know exactly what the value of a peasant's produce might be, but he certainly knew what was the rate of wages among the poor, and it might be assumed that no man df any industrial capacity would make less than the cur- rent rate of wages. The poorest man in India could earn five rupees in a month, or sixty rupees in a year, and could any one say a poor man in India had to pay more than two rupees out of the sixty in taxation? ... A farm labourer in England earned, say, £35 a year. Would anybody say that he paid less or more than about £2 a year in taxation? That being so, the poor man in England paid one seven- teenth of his income in taxation, while the poor man in India paid only one thirtieth of his. As to the general condition of the poor of India, how could any of those who were exporting food stuffs to such an enormous extent, and increasing the population so fast that one scarcely knew what would become of them all, be said to be dying of star- vation? This was the answer to be given to the specu- 162 THE THEORY AND PRACTICE OP TAXATION. lations of Indian officials, and to the haphazard calcula- tions of amateur statisticians." * It was evident, therefore, from the outset that the natural conditions of India were as antagonistic to the adoption of what may be termed the civilized forms of taxation, as they were to the adoption of the Christian religion or English habits and language; and the problem to the new rulers for obtaining revenue for the support of * Hansard, Fourth Series, vol. xxviii, pp. 1121-1123. I have been asked if there is any explanation of the remark- able difl'erence in opinion respecting the material condition of the people of India, recently expressed in the British House of Com- mons (and quoted) by two of its members, Mr. J. S. Keay and Sir Richard Temple. The explanation is probably to be found in the old storjj, of the two knights who differed and quarrelled about the mottoes on a suspended shield, by reason of exclusively viewing it from opposite sides. India is a vast country, about half as large in land area (square miles) as the United States, exclusive of Alaska, and with a population of 287,000,000, so widely separated by caste, language, and religions that districts and villages that have been in close contiguity for long periods practically do not know or have intercourse with each other. In those portions of the country where the inhabitants are fairly intelligent, have learned to avail themselves of modern methods of agriculture, and have irrigation and transportation facilities, the production of foods and other commodities is so far in excess of any domestic demand, as to adniit of such a large and constant export of grain stuff's as to threaten disturbance to the markets of Europe and the United States, besides textiles, fibres, dyestuflTs, opium, oils and oil steds, hardware, sugar, etc. In other districts of large population whq§e the people still plough Avith crooked sticks, do not even recog- nise the value of manures or other fertilizers, are almost entirely lacking in facilities for transportation, and are so bound down by caste that it is difficult to induce them to emigrate to districts — like the Assam tea-producing sections — where labour is in good demand at comparatively high wages — in such districts the in- crease of population so presses on its ordinary food supplies that, in case of any deficiency in the average crops, famine always ensues, and is only mitigated by the aid that comes through the extraordinary pension fund established and distributed by the British Colonial Government. The Duke of Argyll, who has been Secretary of State for India, tells us that " those only who have had any share in the government of India can know what the anxiety is arising out of such conditions of population"; and extensive emigration is now advocated as the best remedial action that can be taken. Making allowance for different standpoints of observation, Mr. Keay and Sir Richard Temple were, therefore, both right in their conclusions. THE INDIAN BUDGET. 163 their Government, without resort to the old forms of arbi- trary exactions or plunder, has accordingly always been one of great difficulty and delicacy; and the record of their experience in attempting to solve it constitutes an exceed- ingly novel and important chapter in economic history. Practically the only guide to them for the determina- tion and collection of taxes has been that of expediency. The imperial revenue of British India for 1893-94, stated in tens of rupees, was 60,193,000, making no allowance for the depreciation of silver. The value of ten rupees is very nearly equivalent to the British pound sterling, or five dollars gold coin of the United States. The ordinary revenue of India for the fiscal year 1893-'9-l was, therefore, about $300,968,000. The expenditures exceeded the re- ceipts of revenue to the extent of about $30,000,000, and represented an annual deficit to that extent.* The sources of revenue in India are mainly seven, but all of them, using the term in its ordinary signification, can not be characterized as " taxation." The first and most important of them is the taxation of land, with which the Asiatic people have been familiar from a most remote period, and the justice of which is least questioned by them. In fact, reliance upon land revenue was a feature of the Indian governments long before Eng- land had any control over India. The native rulers main- tained themselves for centuries by exacting shares of crops and cash contributions from cultivators of the soil. Tax- ation of land in India has therefore been retained, and not instituted by the present (British) Government. The en- tire land of India was nationalized centuries ago, and now as formerly (and as is the case "in China) the primary title to all land inheres in the state or Government, and the cultivators of land pay a certain rent in respect to their tenancy. * " The gross revenue and the gross expenditure of Inrlin are very different things from the real revenue and real expenditure. In the gross revenue is included the entire receipts, and in the gross expenditure is included the entire expenditure of the whole railway system of India, the whole of the canal system, and of the irrigation works." — Speech of Mr. H. Fnirlrr. Secretary of State for India, introducing into Parliament the Budget for India, August 15, 1S94. 164 THE THEORY AND PRACTICE OP TAXATION. There are two methods of land assessment in India, which involve a somewhat curious history. A hundred years ago, under the administration of Lord Cornwallis, an arrangement or treaty was made, which then and for- ever fixed the rate which the tenants of land in the gov- ernment of Bengal — representing about one fourth of the present area of British India — should pay the state for their occupancy, and which then was regarded as a fair rental; and although since that arrangement was made, the land in question, owing to increased population, new industries, and state expenditures on roads and railroads, has greatly increased in value, and yields to the represent- atives of the primary lessees threefold or more rental, the British Government has to this day strictly respected its treaty and fulfilled its agreement. The fortunate con- trollers of the land thus rented — the zemindars, or native capitalists — having, however, improved their opportunities to oppress (rackrent) their subtenants, the Indian Govern- ment, since 1885, has undertaken to remedy this evil, and with a considerable degree of success. Land throughout India is divided into provinces, and the provinces them- selves are divided and subdivided in such way that taxa- tion in each locality is under the direction of an officer familiar with all the matters that must be taken into con- sideration in taxing justly. A multiplicity of rights in the nature of land tenures are recognised in the assess- ments, and heed is also paid to the character of the lands and the purposes to which they are devoted. No increase of rent is ever allowed upon improvements made by the tenant himself, or upon improvements arising from the expenditure of public money ; so that, in the opinion of those who have given personal attention and study to this subject, the English officials have finally established a land revenue system in India on a just basis. The expense of collecting the land tax is heavy. In the so-called " village assessments " the collection is made by the local authorities. In other cases the large pro- prietors and notables pay the Government levies and re- coup themselves by including their payments in the rents charged to their subtenants — the ryots, or peasantry. While the revenues from this source are very reliable, they are not regarded as capable of much further expansion. THE INDIAN TAX ON SALT. 165 The gross receipts — imperial, provincial, and local — from the annual rental of tax on land in all India was officially returned for 1893-'94 at 25,589,600 Rx. (or about $123,- 000,000), representing an average rent or tax of $1.53 per acre. About nine tenths of the entire population of India belong to the agricultural class. Second in order of importance of the sources of Indian revenue is the tax on salt, which, since its discontinuance in France in 1789, has ceased to be an excise or internal tax in European countries, with the exception of Italy, and which finds its warrant and Justification at the pres- ent time in India in the fact that, apart from the land tax, there is no other method so practical and economic of compelling the masses of its people to directly con- tribute anything for the support of the Government, in- asmuch as the consumption of salt is a necessity for every individual. A very large proportion of the salt required for Indian consumption is imported — chiefly from Eng- land — and the total amount on which taxes are collected is about 500,000 tons, or 3,000,000 barrels. The rate of tax is two and a half silver rupees (nominally $1) per maund of 82.28 pounds. Previous to 1879-'80 the Gov- ernment maintained, at great expense and popular annoy- ance, a customs line twenty-five hundred miles in length, to keep salt produced in the states under native rule from entering into British territory without the payment of a heavy duty. This barbarous system, necessitating the con- stant employment of a large force of native constables, known as chuprassies, invested with inquisitorial powers, was abolished at the time above named, by entering into treaties with the native states possessing salt sources, in virtue of which British officials are permitted to supervise their salt works and tax their product before it left them. But this could be only accomplished by paying the states concerned a satisfactory compensation for this concession. The receipts of the imperial (Indian) revenue from the salt tax for 1894 were 8,228,000 Rx. (tens of rupees), or nominally about $41,000,000. The present average annual consumption of tax-paid salt by the people of India has been officially estimated at about ten and three fourths pounds per head, and the average annual burden of the tax on each Indian family of five persons at one rupee and a quar- 166 THE THEORY AND PRACTICE OF TAXATION. ter, or od. (ten cents); and in considering this tax it is desirable to bear in mind that there is no direct taxation in India either on tobacco or sugar, so that the salt tax is the only direct tax that the Indian peasant need pay, unless he indulges in alcohol or narcotics — the land assess- ment being regarded as in the nature of rent. As the price of salt, by reason of the tax, is somewhat higher in India than in most other countries, the ques- tion as to its effect upon its population is one of high social and sanitary interest, in respect to which authorities differ. By some * it is contended that the consumption of this prime necessity is thereby greatly restricted, and that much disease, both of men and animals, is thereby engendered; and the trade in salt fish, which might sup- ply a cheap and abundant article of food, is greatly ham- pered. Others assert that " the poorer classes do not feel aggrieved or complain about it "; that " as a rule the peas- antry do not stint themselves on account of it " ; and that " no one has ever taken exception to the tax as it stands but the European grievance-monger in the country." But, be this as it may, all are agreed that it would be very diffi- cult to raise a revenue equivalent to that derived from the taxation of salt by any other method. The third largest source of imperial revenue in India is from the Government monopoly of the production and sale of opium; and the annual receipts from which, al- though at one time in excess of $40,000,000, have of late years greatly diminished, and were officiallv reported in 1894 as 6,627,571 Ex. ($33,137,855). As the opium prod- uct of India is sold mainly to China and the Straits Set- tlements, and as the export taxes embodied in its price are collected from the people of these countries, they can not, therefore, be regarded as a fiscal burden upon the people of India. The method of collecting the revenue from opium is substantially as follows: No person in British India may cultivate the poppy, from which the drug is derived, with- out a license from the Government; and every cultivator is bound to sell the crude product of his crop to the Gov- * Wilson's Resources of Modern Countries. London, Long- mans, 1878. OPIUM AND EXCISE IN INDIA. 167 ernment at certain factories, where it is manufactured into the opium of commerce. A portion of the manufactured opium is retained for consumption in India, and distrib- uted through venders licensed by the excise department. The remainder is sold monthly by auction to merchants, who export it; and on this exportation a duty is levied, from which the imperial revenue from this source mainly accrues. Opium produced in the native states of India pays the export duties when it passes into British territory. The Government prescribes rules for the cultivation of the poppy, and the manufacture, possession, transport, im- port (from native states) or export, and sale of opium; and any contravention of such rules is subject to stringent pen- alties. The product of the poppy illegally cultivated and opium made the subject of an offence against the law are liable to confiscation, together with the vessels and pack- ages in which it is found and the animals and conveyances used in transporting it. Notwithstanding all these pre- cautions, the price of opium consumed in the country — about one-eleventh part of the whole — is more or less in- fluenced by illicit supplies; so that the Government monop- oly of this article is fully effective only in respect to the export trade. But even under such conditions, opium is the most valuable of all the native exports of India ; and the annual value of the poppy crop, including the poppy seeds and the poppy oil produced from them (neither of which yield opium), or the annual money return, apart from the Government revenue, that the people of India get out of the crop, is estimated at about $70,000,000. The fourth source in order of importance of the In- dian revenue is from the so-called excise, which embraces licenses and distillery fees, licenses for the sale of liquors and drugs, and rent of "Toddy" trees— 364,624 Ex. ($1,722,120) in 1894; duty on opium consumed in India — 732,200 Ex. ($3,661,000) in 1894; fines, confiscations, and miscellaneous; total excise revenue for 1894, 5,388,573 Ex. ($26,942,865). The incidence of this form of taxation falls mainly upon Europeans and " Eurasians " (a modern name given to persons of mixed European and Indian blood). In this connection, the Imperial Secretary for India, in his budget speech (1894), stated that, "whereas in England there was a licensed shop to sell intoxicating 168 THE THEORY AND PRACTICE OF TAXATION. liquors to every 106 of the population, in India there was only one for selling liquor and opium to every 2,148 of the population." Fifth. The stamp system of taxation in India yielded a revenue in 1894 of 4,509,355 Ex., or $33,546,665. Al- though somewhat heavy in the aggregate, the system is not unpopular, for the reason that it is practically un- known to the mass of the people; the largest items of col- lection being returned, in 1894, under the heads of " court fee stamps" ($15,317,315) and "commercial and other stamps " ($5,841,995). Sixth. " Provincial rates." Under this title are in- cluded a variety of levies, differing in name, character, and rate in different places, and for the furtherance of special objects — as for paying the expenses of hospitals, schools, and police service; for the maintenance and con- struction of roads and irrigating facilities, the adminis- tration of wards' estates, and the like. The revenue re- ported from this source in 1894 was 3,514,571 Ex. ($17,- 573,855). Seventh. Until within a very recent period (1894) the customs system of India — taxes on imports and exports — was one of the simplest in the world. No other coun- try than the United Kingdom imposed duties on so few descriptions of merchandise — mainly on alcoholic liquors, salt, mineral oils, arms, ammunition, and a few spe- cial articles of food and drink. Export duties were also levied on rice and some other forms of grain. The ag- gregate receipts from customs fees, wharf rents, etc., in 1894, were 1,683,373 Ex. ($8,411,865). In March, 1894— the commencement of the Indian fiscal year — the Council of India, acting under the constraint of financial exigen- cies, imposed duties on almost all kinds of imports, cotton yarns and piece goods — constituting about one third in value of the entire imports by sea — excepted. Subse- quently a uniform duty, equivalent to three and a half per cent ad valorem, was imposed on all imported cotton goods, and a corresponding excise tax on all the competing prod- ucts of Indian mills — yarns and other cotton fabrics, the product of Indian hand labour, being exempted. " Ex- cept the weaving of fancy and highly elaborated clothing, which is largely conducted in and around Benares and in INCOME TAX IN INDIA. 169 a few other districts, the handloom manufacture of cotton in India is mainly a spare-time industry, and is not pro- fessional." Other important sources of internal revenue in India are the receipts from the sale of the products of the for- ests owned or managed by the Government — in the form of timber, firewood and charcoal, bamboos, sandalwood, grass, and other products — the total of which for 1894 was 1,723,022 Rx. ($8,615,110). An annual tribute or contribution from a large num- ber of native and mainly petty states of India toward the support of the Imperial Government v/as reported for 1894 at 774,337 Rx. ($3,871,685). On the other hand, the Imperial Government grants annual allowances, or pen- sions, to the native hereditary rulers of such states or their families, the aggregate of which for the fiscal year 1894 was 508,443 Rx. ($2,542,215).* Income Tax. — The experience of the (British) Indian Government in attempting to raise revenue from the tax- ation of incomes, or by an income tax, is exceedingly in- teresting, and ought to be most instructive to the people of other countries. As a rule, the annual revenues of the Government of India do not and for a lengthened period have not equalled its annual expenditures, and the in- crease in the public debt of the country in recent years has accordingly been very considerable, f The major part of this debt, however, has been incurred for the construc- tion of ordinary roads and railways, which in turn have not been unremunerative, and have made possible a large export sale of wheat and other commodities, which before their construction was impossible. The debt, or expendi- tures resulting in debt, has therefore contributed greatly * The British Government has respected the possessions of the native chiefs of India, and about one third of the country still nominally remains in the hands of its hereditary rulers. These, in return for their maintenance and protection by the Imperial Gov- ernment of India, contribute annually from their resources a com- paratively small simi for its support. The independent gross an- nual revenue of these so-called " feudatory " states is reported to amount to about £6,000,000 ($30,000,000), and their permanent military forces at " something like 300,000." t For the year which closed on March 31, 1896, there was an estimated surplus of about 9,500,000 rupees. 13 170 THE THEORY AND PRACTICE OF TAXATION. to the welfare of the people of India. At the same time the demand and necessity for constantly increasing ex- penditures, continually confront the Government with the most difficult problem of how to increase its revenue — a problem that very recently has been threatened with in- creasing embarrassment, owing to the position of not a few people in England, who, with more of sentiment than discretion or knowledge, have opposed the continuance of the present governmental monopoly of the production and sale of opium. A large increase of taxation in any form is regarded as not feasible in India; not so much because of an unwillingness on the part of the people to pay — for they are accustomed to pay all dues which they regard as fairly claimable by the sovereign power, and more espe- cially when the demand is accompanied •with, control of force — but by reason of the extreme poverty and conse- quent actual inability of the masses of the people to pay. Experience has, moreover, shown that the natives of India are particularly opposed to all forms of direct taxation, other than on land, and more especially to taxes on houses, vehicles, and trades; and so extreme are their prejudices in this respect that any new levies of such character are only imposed by the Government with the greatest caution. Something in the way of an income tax, exempting all incomes derived from agriculture, was probably imposed by some of the old-time native rulers of India. But the first attempt on the part of the British Legislative Council of India to revive such a form of direct taxation w^as made in 1860. What followed is thus forcibly set forth in a speech by Mr. Hope, before the Council, in January, 1886 : " Instead of a native model for direct taxation, soft- ened and adapted to our circumstances, we unfortunately set up that of the income tax as it was in force in England. To get direct taxation into good working order, even after a suitable model, would have been a work of time and care, in the absence of any record of the names and resources of householders. But what, except failure, could attend a sudden call on relatively ignorant and unlettered mil- lions, at short notice, to assess themselves, or prove right of exemption, to send in elaborate returns and calculations, and to understand and watch their own interests under the system of notices, surcharges, claims, abatements, in- INCOME-TAX ASSESSMENTS. 171 stalments, penalties, and what not, consequent thereon? Necessarily there followed a long train of evils. An army of tax assessors and collectors temporarily engaged could not be pure. They were aided by an army of informers, actuated by direct gain or private animosity. Frauds in assessment and collection went hand in hand with extor- tion in return for real or supposed exemption. Inquisi- tion into private affairs, fabrication of false accounts where true ones did not exist or were inconvenient, acceptance of false returns, rejection of honest ones, unequal treat- ment of the similarly circumstanced — all these more or less prevailed. The tax reached numbers not really liable, for zemindars illegally recovered it from tenants and mas- ters from servants, while underlings enriched themselves by the threat of a summons. " Subsequent acts in 1863, while affording relief in some respects, practically stereotyped many inequalities and heartburnings. In later years, the system of assess- ment by broad classes was an improvement on the earlier complications, but the advance of local officers toward equitable assessment was perpetually being cancelled by the alterations in rate and liability, which I next notice. " Eenewed direct taxation in British India thus made a false start, from which it has never recovered. Possibly, with time and care, a great improvement might have been effected, if the law had remained unaltered. But, un- luckily, with its too English form came the idea that the tax was to be, as in England, a convenient means of recti- fying budget inequalities, and a great reserve in every financial or national emergency. In consequence of this idea, incomes between Es. 200 and Es. 500, which had been taxed at two per cent in 1860, were exempted in 1862, the four-per-cent rate was reduced to three per cent in 1863, and the whole tax was dropped in 1865. In 1867 it reappeared in the modified form of a license tax, at the rate of only two per cent at most, but reaching down again to incomes of Es. 200. In 1868 it became a certificate tax at rates a fifth lower, and again commencing with a Es. 500 limit. In 1869 it became once more a full-blown in- come tax at one per cent on all incomes and profits of Es. 500 and upward. In the middle of the same year it was suddenly nearly doubled. In 1870 a further rise to fully 172 THE THEORY AND PRACTICE OF TAXATION. three and an eighth per cent occurred ; but with better times the rate fell in 1871 to one and one-twenty-fourth per cent, with a limit of Rs. 750, and in 1872 the limit was further relaxed to Rs. 1,000 and upward. In 1873 came a second period of total abolition, to be succeeded from 1877 to 1878 by the new series of acts. Along with the changes in rate and incidence just described came changes in name, form, classification, and procedure. With one object or another, twenty-three acts on the subject have been passed since 1860." An income tax at a low rate, at present existing in India, grants an exemption of 500 rupees on all incomes, and exempts from taxation all income from the ownership of land or the sale of the products of land, and from prop- erty solely employed for religious or charitable purposes. It is thus assessable mainly on salaries, pensions, the in- come of companies, and of the ordinary trades and profes- sions. Its existence is the cause of considerable friction with the officials who administer it, and constant appeals from their decisions are made from all parts of the coun- try. In fact, this tax, at its present low rate, is universally detested, and the receipts from it are comparatively so inconsiderable— only 1,717,627 Rx. ($8,588,135) in 1894 — that it may be regarded as a fiscal failure. Its whole ex- perience in India furthermore reaffirms what is worthy of being regarded as an economic principle, namely, that when an income tax ceases to be regarded as generally op- pressive it ceases also to be remunerative to the state. One other point in this connection is especially worthy of notice. For a long period of years India has been char- acterized as a " sink-hole " of the precious metals, or, in other words, there has been for many years a continuous flow of the precious metals — gold and silver — into India, where they have to a large extent disappeared, by burial under ground for the purpose of hoarding and conceal- ment.* The motive for this under the Mogul and native rulers was unquestionably to escape direct plunder or con- fiscation ; but under British rule these hoards, amounting to many hundreds of millions, are not taxed, mainly by * While this is still true in a measure as to silver, the move- ment of gold in India's commerce has undergone a change. The BURDEN OF INDIAN TAXATION. 173 reason of their inaccessibility, and partly by the recog- nised policy of the Government to avoid direct taxation of active capital, and encourage, by making safe its em- ployment, the tendency of these buried treasures to come to light and enter into the channels of trade. And that this policy has been a wise one is shown by the fact that within recent years there has been an increasing disposition on the part of the Indian owners of concealed treasures — espe- cially the Indian princes or rajahs — to withdraw them from their hoarding places and invest them in Govern- ment bonds, or other desirable, interest-bearing securities. In the year 1893 the burden of taxation on the people of India, inclusive of the revenue derived from the rent of land, was officially estimated at two rupees and four annas, or nominally less than fifty cents per head; or, exclusive of the revenue from land, at about twenty-three cents per head — a rate relatively much lower than the taxation of England; so that, if the taxable ability of the people of India is low, the poorer classes of that country, it is claimed, are more lightly taxed than the poorer classes of Europe, or even of the United States. Before England assumed dominion in India the system of exaction of her imports and exports of treasure, on private and government ac- count, have been as follows (in tens of rupees) : GOLD. SILVER. YEAR. Import. Export. Import. Export. 1886-'87 1887-'88 1888-89 1889-90 1890-91 1891-'92 1892-93 1893-'94 1894-'95 1895-'96 1896-'97 2.833,558 3.236.053 3.119.088 5.071.027 6.500.832 4,118.929 1,781.789 3.146.530 1.756.280 5.028.269 4,491,179 656,493 243.572 305.154 455,724 864,660 1.705.137 4.594.472 2.505.284 6.730.374 2.503.317 2.200,141 8.219.761 10.589.803 10.725.872 12.388.474 15.433.654 10.603.733 15.228.021 15.314.726 7.824.927 8,338,716 8,593,384 1.064.023 1.361.053 1,479,193 1,450.598 1,258,518 1,581,549 2.364.452 1.594.908 1,495,698 1.756.494 2,737,355 It was believed by many that the clo.sing of the mints to silver would attract gold to India ; but this has not been the event. A commission of the English Parliament on Indian currency has re- cently (1899) presented a report in favour of the gold standard. 174 THE THEORY AND PRACTICE OF TAXATION. native rulers was so perfected that they were assured of the very last penny that could be taken from the ryots, or peasantry, without stripping them of everything; leaving to the tenant class little more than the privilege of living. To-day the existing system of taxation in India is con- ceded to be at least eminently just. To-day it is generally admitted that there is no government in the world whose administration is more honestly conducted, and which is now doing more for the material good of the governed, than the present British Government of India. And herein is to be found the secret of England's success in ruling the vast congeries of people of different races, languages, and religions, known to i;s as India. The consideration of another matter of recent occur- rence and of the highest economic and social interest and importance, appropriately finds place in any discussion of the tax system of British India ; more especially because it sets forth an attempt, founded on an unwarranted senti- ment, indirectly to impose a large additional burden of taxation on the people of that country. As already pointed out, a present annual receipt of some $33,000,000 of reve- nue from the monopoly of the production and sale of opium, the incidence of which does not fall upon the In- dian people, constitutes an important factor in this system. Acting on the assumption that the continued use of this drug, as a narcotic and stimulant, is in the highest degree injurious to the consumer — worse even than the continued use of alcohol — and especially demoralizing and destructive to the people of China, who are the purchasers and con- sumers of the major part of the opium product of India, a body of public opinion has in recent years grown up in Great Britain whose representatives hold that it was dis- graceful and positively wicked for a people professing to be moral and enlightened to engage in or sanction the business of producing and supplying opium; and that it is the duty of their Government to at once interfere and put an end to it. And in recognition of this public opin- ion, and in deference to a numerously signed address to the Crown, the British Government, in September, 1893, created a commission, consisting of nine eminently quali- fied persons, including two natives of India of high posi- tion and unconnected with the Government, and an emi- THE OPIUM COMMISSION. 1Y5 nent physician, to inquire into and fully report on this whole subject. The first report of the commission, pub- lished in 1894 and presenting simply the evidence taken in England, was an exhibit of the most interesting but utterly antagonistic and contradictory opinions and evi- dence. For the petitioners, sixteen witnesses, mainly mis- sionaries, medical men connected with missions and resi- dents for considerable periods in India and China, were called; and nearly all of these, as the result of personal experience and observation, testified in the most positive manner, and in consonance with popular opinion, that the use of opium physically, morally, and socially is highly deleterious, and ought to be discouraged, and if possible absolutely prevented. Considered by itself this testimony would seem to be conclusive and incapable of refutation. But, on the other hand, an equal number of witnesses — English officials qualified by education, lengthened resi- dence in India and China, and exceptional opportunities for observation, civil servants, medical men of the highest reputation connected with hospital and sanitary work and with the army in every part of India — gave unqualifiedly contradictory evidence, which may be summed up as fol- lows : That opium has been used for centuries in India and China, without any extensive deleterious influence on the population ; that the " Sikhs " of India, who in point of physical structure and health are claimed to be the finest people in the world, and whose religion forbids the use of tobacco, are habitual users of it ; that while the excessive use of opium is unquestionably in a high degree deleterious, it is far less so than the excessive use of alcohol ; that the use of opium in India and China is comparatively much less than the use of ardent spirits in Great Britain ; that the ex- cessive use of it, as by the so-called " opium sot," is the re- sult very largely of the circumstance that the miserably poor afflicted with disease in India, China, and other Asiatic countries where there is no intelligent medical treatment, and little or no hospital service, resort to it as the only means of lessening their sufferings; that so far from the allegation being true that the supply of opium by India to China is disastrous in the highest degree to the people of the latter country, the fact is that the use of the Indian product, owing to its higher quality and price, is almost 176 THE THEORY AND PRACTICE OF TAXATION. wholly restricted to the wealthier classes of China; that the c-ultivation of the poppy for the production of opium is very general in China, and to such an extent that one single province of the empire annually produces more opium than the entire export of India; and, finally, that any attempt on the part of either the Indian or Chinese Government to interfere with the production and sale of opium, with a view of restricting or preventing its con- sumption, would be utterly futile, and in the case of the former country would undoubtedly lead to revolution. One witness, Surgeon-General Sir William Moore, stated as the result of thirty-three years' service and ob- servation in India, that opium-smoking is practically harmless, and opium water not only harmless, but bene- ficial in moderation, and a prophylactic against malarial fever. The following circumstance was also regarded as sub- stantiating this position: During the years 1893-'94 the island of Hong-Kong, on the Chinese coast, was ravaged by a pestilence, in the nature of a filth disease, of great malignity. Since its abatement it is claimed, with an ac- companying array of evidence, that the opium smokers and eaters were almost without exception exempted from the pest. Very naturally, also, the (British) Indian civil-service officials, holding the view that the large revenue derived by the Government from the monopoly of the production and sale of opium is in no sense a tax burden upon the Indian people; and recognising also the great difficulty (but abso- lute necessity) of making good the deficiency consequent upon the abrogation of such revenue through new and addi- tional taxation upon the people, were unanimously of the opinion that any change in the existing system in respect to opium would be in the highest degree inexpedient and unwarranted. When the question was put to Sir John Strachey, who in the course of thirty-eight years of Indian civil service has filled almost every post, from the most subordinate to the governorship of provinces and member- ship of the Government of India, how he accounted for the great contrariety of belief in respect to the opium ques- tion, he made answer as follows : " The ignorance that prevails in this country [Eng- FOOD OF THE INDIAN PEOPLE. 177 land] regarding everything Indian is enormous, and is not confined to those whom we expect to be ignorant, but ex- tends to the most highly educated classes. It extends to all Indian subjects — history, geography, the conditions and habits of the people, the constitution of the Government — in fact, everything. I will give an illustration which always seems to me to have a useful bearing on this opium question. Mr. Buckle, in his History of Civilization, de- rives all the distinctive institutions of India and the pecul- iarities of its people from the fact that the exclusive food of the natives of India is rice. It follows from this, he tells us, that caste prevails, that oppression is rife, that rents are high, and that customs and laws are stereotyped. I have no doubt that if Mr. Buckle had been asked, he would have said that the same cause accounted for the consumption of opium in India. I sometimes ask my English friends, when they talk about opium, what they suppose to be the ordinary food of the people of India. The almost universal answer, perhaps with an air of dis- pleasure that they should be asked such a foolish question, is that of course it is rice. I believe that nine tenths of the educated men and women of this country believe this to be true. When they have not learned such an elementary fact as this, that throughout the greater part of India rice is no more the ordinary food of the people than it is in England, how can we be surprised if they do not know the truth about opium? We who have spent our lives in India are not all fools or impostors. When I hear the Government of India charged with the abominable wicked- ness of poisoning its own subjects, and millions of Chi- nese also, for the sake of filthy lucre, there is only one reason that prevents me from being filled with indigna- tion, and that is that I know that these charges are the offspring of ignorance alone. Unfortunately, this does not make them less serious, for, of all enemies to human prog- ress, ignorance is the most formidable, and is especially formidable when, as in this present case, it is combined with honest enthusiasm and an anxious desire for what is right." The commission, having finished its investigations in England, visited India, and there renewed them in nearly every place of importance for obtaining information. It 178 THE THEORY AND PRACTICE OF TAXATION. examined seven hundred and t\vent3'-three witnesses, of whom four hundred and sixty-six were natives of India or China, including Government officials, planters, land- owners, traders, members of the professional classes, espe- cially physicians, missionaries of nearly every denomina- tion, military officers and private soldiers, and the chiefs and officials of the native states. As a result of this elaborate inquiry, the commission, by a majority of eight to one, pronounced clearly and un- hesitatingly in favour of the maintenance of the existing system of opium production and sale of opium in India; finding no evidence of extensive moral or physical de- moralization arising in India from the use of the drug, or of any desire on the part of its people or of the Chinese Government to prohibit it. The commission also decided, in respect to the effect on the finances of India of a prohibition of the sale and ex- port of opium, that, " taking into consideration the com- pensation payable, cost of the necessary preventive meas- ures, and the loss of revenue that would result from a policy of prohibition, the finances of India are not in a condition to bear the losses that such a policy would en- tail." The testimony of the missionaries in India before the commission was not unanimous. That of the members of the American Methodist Episcopal and Canadian Pres- byterian commissions, and the representatives of the Pres- byterian and Baptist missions, was in favour of prohibition. On the other hand, the views of the Episcopal bishops and clergy of Calcutta and Lucknow, and of the Eoman Catho- lic Archbishop of Calcutta, were adverse to prohibition. Several of the former, however, frankly admitted that the evils of the opium habit, deplorable as they undoubtedly are, have been grossly exaggerated, and the good that it accomplishes has been but little recognised. The use of opium in India and China is as much a natural habit as the use of alcohol among Western nations. It has been practised in those countries for centuries, and it would seem impossible by legislation, and especially by the legislation of an alien nation, to do anything more than control the more manifest evils resulting from it. A policy of rigid restriction of the use of opium would unquestion- THE OPIUM HABIT. I79 ably be a substitution of the use of opium by alcohol; and all the evidence given before the commission as to the evils arising from the opium habit showed, that as a source of social disorder, organic disease, insanity, and suicide, opium is not to be compared with alcohol.* * For the full details of this most interesting inquiry, whether regarded from an economic, social, or medical point of view, refer- ence is made to the First Report of the Royal Commission on Opium, with minutes of evidence and appendices, presented to Parliament in 1894, and to two final reports. Parts I and II, with historical appendices, etc., presented to Parliament in 1895, after the return of the commission from its visit to India. CHAPTER VIII. TAXATION IN SWITZERLAND. Any review of the notable experiences of the Govern- ments of different countries in raising revenue for their maintenance and support would be incomplete if it failed to notice those of Switzerland, where the conditions in- volved are, to say the least, exceptional, or different in many respects from those of any other government or country. These conditions, stated briefly, are as follows: A country of comparatively small area — 15,964: square miles — and in one small part uninhabitable and practically inaccessible, with a population in 1894 of about 3,000,000 (2,986,848). These conditions may be best appreciated by the following comparisons : Of the four countries that are immediately contiguous to and bound Swit2;erland, France has an area of 204,092 square miles and a popu- lation of 38,343,192 ; Germany, 208,738 square miles and a population of 49,428,470; Austria-Hungary, 264,264 square miles and 40,810,916 population; and Italy, 114,410 square miles and 29,699,785 population. A comparison with some of the States that in the aggregate constitute the United States also affords the following results: The whole of Switzerland has about one third of the area of the State of New York and one half of its population ; one sixteenth of the area of the State of Texas; less than one third of the area of the State of Georgia, etc. Of the total area of Switzerland, only seventy-two per cent, or an area about as large as the States of Massachu- setts, Connecticut, and Rhode Island combined, is classed as habitable and productive; and the soil of this portion does not yield sufficient for the support of more than two thirds of the population, a large percentage of the re- maining third finding employment and support mainly in very small industries, occupying only a family. The posi- tion taken by Switzerland in the trade and commerce of 180 FOREIGN TRADE OF SWITZERLAND. 181 the world is most remarkable, especially when the vari- ous natural obstacles are considered — such as the absence of raw material for her industries, asphalt being the only raw mineral product of which the export exceeds the im- port — the costly and difficult means of transport, and the restrictive customs established by neighbouring and bound- ing countries. Thus, a comparison of the exports of dif- ferent countries, in proportion to their population, of manufactured products to the world's markets, shows that Switzerland takes the lead in respect to values; namely, $37 per capita per annum. Of other countries, the Nether- lands comes next to Switzerland, with a present annual export valuation of manufactured products of $35.60 per capita ; then England, $24.60 ; Belgium, $23.40 ; Germany, $11.50; France, $11; Sweden, $7; Norway, $4.60; and, finally, the United States, with $3.40. In respect to com- parative aggregate valuations, Great Britain furnished nearly thirty per cent of such exportations ; Germany nearly eighteen per cent; and France thirteen per cent, making about sixty per cent for these three countries. The proportionate valuation of the United States for 1894 was 12.16 per cent.* The principal articles of Swiss exportation are cotton fabrics (printed and embroidered), silks (especially rib- bons), food stuffs, cheese and condensed milk, clocks and watches, machinery and carriages, works of art, mineral waters, straw goods, etc. The leading characteristics of the people of Switzerland are the habits of persistent industry, the practice of rigid economy (in great part by reason of necessity) in their expenditures, a degree of patriotism that is everywhere exhibited and acknowledged, and a remarkable diversity of language. " Three tongues have existed side by side in Switzerland for centuries, and their individuality is recognised in the Federal Constitution, by providing that laws shall be printed in all of them, and that in the dis- tribution of certain offices regard shall be paid to the lan- guage of the people for whose benefit the official serves." f * Address of Theodore Search, President of the National Asso- ciation of American Manufacturers. t State and Federal Government in Switzerland. By John Martin Vincent. Johns Hopkins Press, Baltimore, 1891. 182 THE THEORY AND PRACTICE OF TAXATION. Education is compulsory; primary education is free, and the percentage of illiteracy is small — almost nothing. Their standard of morality may be indicated by the cir- cumstance that about five per cent of the births are re- ported as illegitimate. The present political organization of Switzerland close- ly resembles that of the United States, but is far better entitled to the claim of being free and democratic, and in this respect is probably typically superior to any other Government that exists or ever has existed.* Under the present Constitution, adopted in 1874, and which prac- tically reaffirmed previously existing conditions, Switzer- land became a federated republic, whose proper and official designation is the " Helvetic Confederation," consisting of twenty-two Cantons or States; although the division of three Cantons into two demi-Cantons makes the total num- ber of federative units twenty-five. The several Cantons elect a Federal Assembly (Nationalrath) and a States Coun- cil (StdnderatJb) in which are vested the parliamentary gov- ernment of the country. The first consists of members chosen every three years in the ratio of one for every twenty thousand of the population, the election being direct, with the right of participation by all citizens who have attained the age of twenty years. The second is composed of forty- four members, two from each Canton irrespective of its size, the mode of their election and the term of their mem- bership being left exclusively to the respective Cantons. Clergymen are disqualified as candidates, though they are eligible for election to the Federal Assembly. The chief executive authority is deputed to a Federal Council (Bundesrath) of seven members, elected for three years by the Federal Assembly, and who during their term of service can not hold any other office in the Confederation or Cantons, or engage in any calling or business. The * " The county, State, and Federal Governments (of the United States) are not democracies. In form they are quasi-oliparchies composed of representatives and executives, but in fact they are frequently complete oligarchies, composed in part of unending rings of politicians that directly control the law and the oflfices, and in part of the permanent plutocracy who purchase legisla- tion through the politicians." The Initiative and Referendum in Switzerland. By J. W. Sullivan. Nationalist Publishing Co., New York, 1893. THE SWISS CONSTITUTION. 183 President and the Vice-President of the Federal Council are the first magistrates of the Confederation. Both are elected by the Federal Assembly for the term of one year, and are not eligible for the same office until after the expiration of another year. The salary of the President is three thousand dollars per annum. His prerogatives are very limited. He has no rank in the army, no power of veto, or independently to name any officials. He can not enforce a policy, declare war, make peace, or conclude a treaty, and the name of their President for any one year is even said not to be familiar to the mass of the Swiss people. The Constitution of 1874 declares that the Confedera- tion has for its object to insure the independence of the country against foreign control, to preserve the tranquility and the rights of the Cantons, and to increase their com- mon well-being. The Confederation has alone the right to declare war and conclude peace, as well as make alliances and treaties with foreign states, especially commercial treaties. But the Cantons reserve the right of negotiating with foreign states any treaty affecting general adminis- tration, local intercourse, and police, so long as such treaties contain nothing injurious to the Confederation or to the rights of other Cantons. The Confederation may not support a standing army, but every male citizen be- tween twenty-four and forty-four years of age is bound to military service and drill. Those between the ages of twenty-four and thirty-two are designated as the regular army, and number — officers and men — about a hundred and twenty-five thousand ; those between the ages of thirty- two and forty-four constitute the Landwehr (militia), and number about eighty-four thousand. Thus, while no great army seems to exist in Switzerland, the whole able-bodied male population of the country can readily be made into an army. The natural defences of the country have been utilized to the best advantage, and great care has been ex- pended upon numerous defensive works on the frontiers. No Canton may have more than three hundred men under arms. If disputes arise between Cantons, they shall abstain from all recourse to violence or arms, and shall submit themselves to the decision taken upon these disputes in conformity with federal regulations. That is to say, in 184 THE THEORY AND PRACTICE OF TAXATION. case of necessity the Federal Council summons the Assem- bly to act; or it may demand the aid of other Cantons, which are bound to give it, or it is authorized to raise troops and employ them on condition of immediately sum- moning the cantonal councils if the number of troops raised should exceed two thousand, or if they remain under arms more than three weeks. Other articles of the Constitution regulate the military training and employment of citizens; the power of the Federal authorities in regard to public works; the main- tenance of free, compulsory, and non-sectarian education ; the principles of taxation and cantonal tariffs, consistently with general free trade; the right of domicile; municipal and communal rights, and the general toleration of re- ligious belief and worship. Nevertheless, the Order of Jesuits and the societies affiliated therewith may not be admitted into any part of Switzerland ; and all intervention by their members in the church or in the schools is for- bidden. " The exercises of the Salvation Army fell under the laws of the municipalities against nuisances ; the final judicial decision in this case being in effect that while persons of every religious belief are free to worship in Switzerland, none in so doing are free seriously to annoy their neighbours." * Freedom of the press, of local trial, and trial by jury are also guaranteed. Previous to 1848 the different Cantons conducted their postal service by different methods ; but since that time its control and man- agement, together with that of the railway system of the country, have become exclusive functions of the Federal Government. Attention is next asked to the cantonal political organi- zation and government. Every Canton and demi-Canton is sovereign and independent in local affairs and in all other matters that are not limited by the Federal Con- stitution. In respect to their forms of government, they agree in little else than the claim and possession of abso- lute popular sovereignty ; and difPer much in respect to governmental organizations and methods of administra- tion. Twenty-two of the twenty-five Cantons (states) are divided into 2,706 communes (townships) ; and each com- * J. B. Sullivan. The Commonwealth of Switzerland. THE SWISS BUDGET. 185 mune governs itself in respect to all local affairs, so far as is consistent with cantonal and Federal rights. " The citizens of each commune regard it as their smaller state, and are jealous of any interference by the greater state; and unless the interests of the Canton or the Confederation are manifestly superior to those of the locality, the com- mune is unwilling to part with its administrative power and jurisdiction over its lands, forests, police, roads, schools, churches, or taxes. In the Cantons in which German is the official language (sixteen in number) it is customary for the adult male population to meet annually in an open-air assembly in a town market-place or on a mountain side, and there propose, debate, and enact their laws, and elect their officers by universal vote ; thus defer- ring to and establishing popular will without resort to any intermediate representative machinery." The question here naturally arises. How did such a nation or confederation, made up of twenty-two small states differing from each other in many essential features — re- ligious, political, social, industrial, physical, and linguistic — originate? A general answer, based on a large amount of historical research and publications, is that it was due originally to a dra^dng to a common centre of a number of small districts, from the contiguous monarchies of Ger- many, France, and Italy, for common defence against a common foe; and hence also it is not surprising that the political boundaries of Switzerland do not follow the natu- ral configuration of the country. The revenues of the Confederation or Federal Govern- ment of Switzerland in 1894 were estimated at 84,047,312 francs ($17,000,000), and its expenditures at 83,675,000 francs. The various Cantons of Switzerland have their own budgets of revenue and expenditure. For 1895 their combined budgets indicated a revenue of about 78,880,000 francs ($15,700,000), and an expenditure somewhat greater, making a nominal aggregate of about $33,000,000 to be annually raised by some form of popular contribu- tion or taxation. As a considerable part of the cantonal revenues is derived from the proceeds of taxes imposed and collected by the Federal Government, and as contributions are made in turn to the latter by the Cantons, it is not easy to estimate the present annual average per-capita burden of 13 186 THE THEORY AND PRACTICE OF TAXATION. taxation on the people of Switzerland ; but, making all allowances, it is certainly not inconsiderable. Some years since the average tax burden on every inhabitant of the Canton of Zurich, the most populous and richest of the Swiss Cantons, was reported at 40.15 francs ($8).* A further question of interest and importance that now arises (and which constitutes the main subject for con- sideration in the present chapter of this series) is. Under what system and by what methods is this certainly large average per-capita obligation for the maintenance of the several governments of Switzerland apportioned and col- lected? And as a help to a proper understanding of this problem the foregoing somewhat detailed description of the nature and functions of these governments has been thought necessary. For the Confederation or Federal Government of Switzerland, which is not allowed to levy direct taxes, the main source of revenue is the customs (duties) on imports, which are levied and collected on the frontiers of the re- public. Originally the idea on which it was sought to base the Swiss customs was to tax all articles of commerce en- tering from foreign countries on a single uniform plan, having regard solely to financial and not to prohibitive or protective results; and this same idea prevails at the present time. " Changes in the customs have been made in recent 3'ears to correspond to new conditions or new commercial relations, but the Government has always kept as near free trade as good financiering would allow. The system of assessment of duties on imports differs from that of England, in that instead of a few articles being selected to stand as much duty as they will bear, a large number — almost every commodity, in fact — is taxed a little. The schedule of rates contains over eight hundred articles which are subject to import duty." f As a rule, raw materials necessary for manufactures are admitted free of duty, and while the principle of im- posing the highest duties on luxuries is fully recognised, * The present aggregate of all forms of taxation imposed for defraying all the expenditures of the Federal Government of the United States is equivalent to an average of about $6,538 per head of all its population. t Vincent on the Government of Switzerland. THE ALCOHOL MONOPOLY. 187 the duties on articles of general consumption are very light; tobacco paying from two to four cents per pound, tea about four cents, coffee one cent. Export duties are levied upon a very few articles, chiefly on timber, live stock, and certain raw materials. As recently as 1848 each Canton imposed cantonal tariff duties on imported goods, but these have now been abolished, with one curious exception, namely, that of salt. The sale of this article being a monopoly of the state, whether its production be domestic or foreign, but its retail price being regulated by each Canton for itself, the supervision of the imports of salt into each Canton becomes necessary. By a statute passed in 1887 the manufacture of alco- holic liquors was made a state monopoly. The net proceeds of the business as thus conducted are considerable, but the entire net receipts are distributed among the several Can- tons in proportion to their population. Smuggling and other evasions of the law under the new system are acknowl- edged to be extensive and irrepressible, so that the measure in question is yet generally regarded in the light of an experiment. As this subject is one of special interest in other coun- tries, it is thought expedient in this connection to submit a presentation and review to it as recently made by Prof. John Martin Vincent, Professor of History in Johns Hop- kins University: " The right to manufacture the higher grades of dis- tilled spirits belongs exclusively to the Federal Govern- ment of Switzerland. This is effected by contract either with home or foreign distillers, but at least one fourth of the quantity required must be manufactured by do- mestic companies, to whom the Government makes allot- ments from time to time. In order to encourage agricul- ture, the distillation of certain native fruits and roots is exempted from the monopoly and made free to any one. The Government is also the distributor of liquors in quan- tities not less than one hundred and fifty litres (a litre = 1.05 quart), and fixes the prices. Spirits used for tech- nical and household purposes must be sold at cost of manu- facture, and before delivery must be reduced by the addi- tion of wood spirits or other mixtures which render them unfit for drinking. The peddling of liquor from house 188 THE THEORY AND PRACTICE OP TAXATION. to house is entirely forbidden except for the kind last men- tioned. Eetail dealers require a license from the cantonal authorities, and pay a graduated tax according to the amount of their sales. The traffic in quantities above forty litres is considered wholesale and under no restriction. The administration of the liquor business is therefore en- tirely in the hands of the Federal authorities until the spirits reach the retail dealers; there the States [Cantons] step in to regulate the number and the character of the dram shops, to make the necessary sumptuary and police laws, and exact such license fees as may seem best. The net profits of the government management are collected by the Federal authorities, but divided entirely among the states [Cantons] in proportion to population. The Can- tons on their part are obliged to expend at least ten per cent of this dividend in suppressing the evils of intemper- ance, and to report annually to the Federal Government. Distilleries, in order to continue operations, must be large enough to supply one hundred and fifty hectolitres (a hectolitre = 26.4 gallons) a year. The monopoly is pro- tected from competition by foreign countries by a duty of eighty francs per hectolitre upon all high-grade liquors imported, and by a graduated scale of duties upon all con- taining less than seventy-two per cent of alcohol. No one except the Federal Government is permitted to import alcohol for industrial purposes, because the reducing pro- cess must undergo inspection in order to prevent fraud. In getting its supply for the home market the Govern- ment may purchase three fourths of the demand for all kinds of spirits anywhere it chooses. The other fourth, as mentioned above, must be of home manufacture, and the Government has not exceeded that limit, because spirits can be bought cheaper abroad than at home." * The financial operations of this branch of adminis- tration in 1891 amounted to about 13,660,000 francs, from which the net revenue was 5,830,000 francs ($1,165,000). " This net gain was chiefly due to the mercantile profit on liquors for drinking purposes, since industrial spirits must be sold at cost. Hence, as a business enterprise, the * Vincent, State and Federal Government in Switzerland, pp. 77-79. CONSUMPTION OP SPIRITS. 189 monopoly is certainly a success. When we inquire into the moral and social results, there is at present less that is tangible to be observed. The expectation of the pro- moters of the scheme was that the evils of drunkenness would be reduced, both by decreasing consumption and providing a purer quality of drink. This latter end is obtained by Government inspection, not only of the mo- nopoly distilleries, but also of the smaller establishments manufacturing free products. " In the matter of consumption there would seem to have been a decrease. In 1885, before the introduction of the monopoly, the total demand of distilled liquors for drinking purposes was about 150,000 hectolitres, while in 1889 the amount sold by the Federal Government for such use was 67,212 hectolitres. But it would not be safe to say that the country had become temperate to this ex- tent, for there is strong reason to believe that much of the reduced alcohol intended for the arts is either purified again and used for drinking, or consumed outright in its mixed state. The use of liquor will by no means be brought under control so long as the distillation of low grades of fruit spirits and the manufacture of malt drinks are under no restriction. No one can tell whether the apparent decrease in consumption is not merely a diver- sion of appetite to applejack and absinthe, or perhaps to an increased use of wine and beer." * Small amounts to the credit of the Federal revenue also accrue from the postal and telegraph service, from the lease of public domains, the monopoly of the manu- facture and sale of gunpowder, from military exemptions, and the like ; but the aggregate income from these sources is comparatively unimportant. The powder monopoly at one time yielded considerable revenue, but when new and more powerful explosives came into favour the profits were greatly impaired. The income from the Federal domains amounts to about five tenths per cent of the total revenue. The largest item of expense to the Confederation is the army, which requires nearly forty per cent of its entire revenue. " Although carrying on no wars of its own nor joining in the conquests of other countries, Switzerland * Ibid., pp. 80, 81. 190 THE THEORY AND PRACTICE OP TAXATION. is compelled to undergo this great expense in order to pre- serve her neutrality and the integrity of her borders." The comparatively recent tax experience of the twenty- two Cantons of Switzerland has been very peculiar, and different in many respects from that of any other country — a result that might naturally have been expected from their respective governmental independence, jealousy of other Cantons, internal antagonisms consequent on the division of each Canton into sub-governing communes, and in the radical differences in respect both to language and religion. The taxation of property in general (or the so-called general property tax) has been thoroughly tried in Switzer- land and, although substantially abandoned in all other European countries, is still adhered to, and constitutes an important feature in the fiscal system of all the Swiss Can- tons. In the case of realty the tax is levied on the capital, and not upon the annual value of the estate. In the case of personal property everything is taxed, whether it yields an income or not — furniture, pictures, jewelry, carriages, etc. ; but furniture and trade appliances up to the value of $1,000 are exempted. With a view to the successful enforcement of this kind of taxation almost every conceivable method has been de- vised and adopted,' such as self-assessment in the form of compulsory returns on the part of the individual ; assess- ments by officials on assumed data, oaths and no oaths, publicity and secrecy; and all of these, as has been the experience of the United States in the same line of policy, have been confessedly ineffective. One institution, how- ever, has been developed in recent years that is peculiar to Switzerland, and that is the so-called inventory method (inventarizatio7i) . "As soon as a taxpayer dies his entire property is at once seized by the Government and held until an exact inventory is made of it. If this discloses fraud in the previous self-assessments, punitive taxes must be paid, ranging in some Cantons over a period of ten years." That such a method of tax administration has and will prove effective in increasing tax receipts can not be doubted, but its objectionable features are no less evi- dent. Thus it intrudes upon the privacy of families, for the purpose of fixing seals upon their property, at a most GRADUATED TAXATION. 191 inopportime moment, and seeks evidence of the violation of law, " as it were, in the very chamber of death." It also offers a bounty for the effective transfer of property by its owner in anticipation of death.* Considering that a greater equality of fortune prevails in Switzerland than in almost any other country, it is somewhat remarkable that it has taken lead of all coun- tries in instituting a system of progressive or graduated taxation, and has made it applicable not only to property but also to income and inheritance taxes. Graduated taxation now exists in a majority of the Swiss Cantons, and in only a few is there any prescribed limit to the progressive rate of assessment. The gradu- ation is applied in different ways. In some Cantons, estates (real and personal) are classified according to their amounts. The rate of the tax is the same, but a varying proportion of the value of the estate is exempted. Thus, in the Canton of Zurich the tax is levied on five tenths of a property valued at four thousand dollars, six tenths on six thousand dollars, seven tenths on ten thousand dol- lars, eight tenths on twenty thousand dollars, nine tenths on forty thousand dollars, and on the entire estate when exceeding forty thousand dollars in value. In other Can- tons, as Aargau and Schaffhausen, an addition of vary- ing percentage is made to the property tax according as the tax at the normal or ordinary rate exceeds a certain specified amount. Thus, in the former Canton, every one who is assessed for a tax of from forty to seventy francs in amount must pay five per cent additional ; from seventy to one hundred francs, ten per cent additional, and so on, until those who are assessed at over five hundred francs pay thirty-three per cent additional. In the latter Canton every one assessed at over five hundred francs pays fifty per cent additional. In other words, the tax is graded and made progressive by adding a certain percentage, not to the tax- able property, but to the amount of the tax according to a proportional ratio. In some of the Cantons, as Vaud, Basel, and Zug, real property is divided into three classes: (a) under five thou- sand dollars, (&) five thousand to twenty thousand dollars, * Essays on Taxation, Prof. E. R. A. Seligman, p. 387. 192 THE THEORY AND PRACTICE OF TAXATION. (c) twenty thousand dollars and upward, and a land tax which is enacted each year falls on these three classes in the proportions of 1, 1^, and 2. In some of the Cantons personal estate is divided into seven classes and taxed in the proportions of 1, 1|, 2, 2|, 3, 3|, 4 ; the tax being levied on the capital and not on the annual value of the estate. In most of the Swiss Cantons the progressive or graduated system of taxation in respect to property is also made applicable to incomes, inheritances, and bequests; and as a rule the progressive scale in these respects is more sharply graduated than in the case of property taxation. " Another peculiar feature of the Swiss taxes is that the progressive rate is applied separately to the income tax and the property tax. A taxpayer with twenty-five hundred francs income from property and twenty-five hundred francs from labour will be assessed separately for each, and will pay less than if he had five thousand francs income either from property alone or labour alone." — Seligman. There is, furthermore, no pretence of uniformity in the difi^erent Cantons in the practical application of the pro- gressive system. In fact, it is stated that in no two Can- tons are the rates of tax and the classification of the sub- jects of taxation identical. In the taxation of incomes the average rate does not generally exceed four or five per cent ; but in some Cantons the rates rule as high as seven and even ten per cent. Where income exists without a corresponding capital, as from wages, earnings, and life annuities, an exemption is generally made of eighty dollars a head for each person dependent on the head of the family for support.' Thus a bachelor earning one thousand dollars a year would pay about fifteen dollars, while a married man with the same income and twelve children would pay nothing. Taxes on inheritances and successions in Switzerland — which are levied in most or all of the Cantons — are char- acterized by extreme variations on rates, ranging from a very small percentage in some Cantons to twenty and even thirty per cent in others, in the cases of the remote, or non- relatives. Apart from the federal and cantonal systems of taxa- tion in Switzerland, there is a third system which is re- LOCAL TAXATION IN SWITZERLAND. 193 garded as distinctive, and under the name of local em- braces special and separate assessments for the purpose of defraying local or communal expenditures — i. e., police, preservation of forests, roads, schools, and the like. A leading characteristic of such taxes is, that they do not embrace the idea of progressive or graduated assessments; and in their chief incidence on local tangible property do not permit any material reduction of appraisements, or valuations on account of any incumbent indebtedness — mortgages and the like — as is the practice in the ap- praisements of like property for cantonal taxation. A household tax and a poll tax are also, to some extent, features of Swiss local taxation. Of the varied subjects of taxation from which the Swiss Cantons mainly derive their revenue, the following classi- fication and exhibit of those of the Canton of Vaud in 1887, the third largest Canton in respect to population, though not in area, will serve as an illustration : 1. Public lands, forests, and salt monopoly. 2. Licenses to retail tobacco, wine, and spirits. 3. Taxes on dogs, saddle horses, carriages, and billiard saloons. 4. A tax on all transfers of real property (droit de mutation) . 5. An annual tax on the capital value of real property (impot fonder). 6. An annual tax on the capital of all personal property and on incomes {impot mohilier). The last three taxes are the most important and pro- ductive, their united product being equal to about nine tenths of the entire revenue. Concerning the results of this novel and complicated system of taxation in Switzerland there is great diversity of opinion. That it is not uniform throughout the com- paratively small territorial divisions of the country to which it has been made applicable, only a very few Cantons being reported as in agreement ; that no fixed rules govern- ing progression or gradation in assessments have been generally agreed upon and established ; that the practical administration of the system is in the highest degree arbi- trary; and that the ascertainment of the tax that an in- dividual or estate shall pay often involves a series of com- 194 THE THEORY AND PRACTICE OF TAXATION. plex and difficult computations and additions, are all points in respect to which there is no question. The anomaly and gross iniquity of double taxation on one and the same property, contingent on the circumstance that the situs of the property and the domicile of its owner are not within the same territorial and governmental juris- dictions, and which is at present a subject of much discus- sion and deprecation in the United States, is also a vexing problem in the system of taxation in Switzerland, two dif- ferent communes, as a rule, making demands of a tax- payer by reason of his holding a landed estate in one and residing and exercising the rights of a citizen in the other ; and the probability of any just and satisfactory solution of this perplexing problem is as remote in one country as in the other. Notwithstanding the above and other objectionable features, the people of Switzerland appear to be generally satisfied with their fiscal experiment, and thus far have exhibited but little disposition to change it; and all the most important Cantons that have tested it report a steady increase in their aggregate valuation of both property and income. Even the extreme high rates of taxation assessed on large properties and incomes — amounting in some Can- tons almost to confiscation — have not been generally re- garded with disfavour, but probably for the reason that the number of persons in Switzerland who are liable to such assessments is comparatively limited. On the other hand, it is contended that any fiscal gain that is reported under the new system has been more than counterbalanced by depreciation in land values and injury to local trade. In the Canton of Yaud, for example, where the new ideas are specially exemplified, wealthy families are reported as having left the Canton, and that many of its citizens regularly close their houses for nine months in the year in order to evade the law. Foreigners, too, are said to be less and less anxious to reside in the Canton, In consequence of this, it is claimed that many properties in Yaud have depreciated fifty per cent, and that trade suffers greatly. Whether all these allegations are true or not, it is significant that a proposal to introduce the Yaud system into the Canton of Berne was rejected by its people by an overwhelming majority. TAXATION AND CIVILIZATION. 195 To THE Reader : With the publication of this chapter on The Tax Experiences of Switzerland, the first part of the plan laid out by the writer for discussing the Principles of Taxation comes to a conclusion. This plan, apart from an introductory survey of the subject, and a review of the interesting and most instructive tax experiences of the United States consequent on the civil war, and with which the writer (as chairman of the United States Revenue Com- mission in 1865, and as United States Special Commis- sioner of Revenue from 1866 to 1870) was officially and closely associated (Chapters I and II), was to set forth the position of taxation in literature and history ; and more especially to narrate the most notable experiences of differ- ent countries and nations in compelling contributions or exactions for the support of the state from the people governed, and the far-reaching and important results that have been contingent upon and have followed the differ- ent policies that have been adopted for such a purpose. The underlying idea that suggested this plan was as fol- lows: Every person of ordinary intelligence, if questioned, will probably admit that the subject of taxation is one of the most important that can concern the masses of the people; and that their well-being and the continuance of good government, and even of civilization itself, are more dependent on the involved power of its administration and discretionary incidence than upon any other agency — a power so great that its right exercise in even the smallest degree, according to the late Chief-Justice Mar- shall, " involves the right to destroy." And yet the same citizen will probably say that the subject, as ordinarily presented and discussed, is so dry and uninteresting as to be exceedingly unattractive, and even repellent ; that the conflict of opinion on the part of those who through study claim to understand it is so diverse that any general con- currence of opinion in regard to fundamental principles is impossible; and, finally, that all experience shows that by reason of this state of things mercenary and political considerations necessarily predominate in the construction of any general system of taxation. It is obvious that under such circumstances it must be difficult or impossible to induce the masses of the people 196 THE THEORY AND PRACTICE OP TAXATION. to intelligently interest themselves in the subject of taxa- tion, and that in countries like the United States, where under free and universal suffrage the same people elect the legislators who shall determine the policy of their Govern- ment, laws will be enacted for the collection of revenue for the support of the state that will be neither productive nor effective, and do not promote but rather impair the industrial and commercial interests of the country. The question, then, next suggests itself. How can a dif- ferent state of things be brought about? How can the people in general be induced, in the sense of persuasion and not of compulsion, to interest themselves in this subject? The idea of the writer is that such a change can best be effected by showing that the subject is not necessarily dry and uninteresting; that it really constitutes more than almost any other element the essence of history ; and that the record of the results that have followed the attempts to establish almost every form of taxation that human ingenuity can devise, has even in a very high degree the attraction of romance. Its study from such a point of view constitutes a better basis for casting a horoscope of the future of nations and governments than aught else within the ken of the historical student. In the chapters that are to follow, where a search for the underlying principles of taxation is to be prosecuted, a resort to more or less abstract reasoning is a necessity. But even here the presentation of abstract principles, to which assent will be asked or expected, will be avoided as far as possible, with the expectation that the reader will, from a consideration of the facts and deductions presented, be able himself to frame and determine the principles that should govern a correct system of taxation by a process of self-evident induction. CHAPTER IX. THE DEFINITION, OBJECT, AND SPHERE OF TAXATION. It would seem to be in the nature of an economic or common-sense axiom, that a large and varied experience in respect to the management of any one of the great de- partments of the "world's business, would result in the gradual evolution and final definite establishment of cer- tain rules or principles, which would be almost universally recognised and accepted as a basis for practical applica- tion and procedure. But in respect to the matter of taxa- tion — which is a fundamental necessity for the maintenance not only of all government, but of civilization — no such result has been achieved. In no department of economic science is there, moreover, so much obscurity and conflict- ing opinion. Most economists teach that there is " no sci- ence of taxation as there is a science of exchanges " ; and " that there are no great natural laws running through and controlling taxation and its effects." And while the student will find examples in the history of states or gov- ernments of the practical application of almost every form of appropriation of private property under the name of taxation which human ingenuity, prompted by necessity, selfishness, or greed, could devise,* and a sufficient record * " In Austria everything, it is said, is taxed except the air, and even that has to be paid for in places famous for their salu- brity. Dogs, cycles, newspapers, advertisements, and innumerable other articles — pleasures and necessaries — are included in the money-producing list; nothing, indeed, seemed excluded until a very short time ago, when a provincial financier forwarded an exhaustive report to the finance ministry on a neglected source of revenue — cats. The horse, the ass, the goat, the hog, the chicken, the dog, the goose — all contribute their mites to the support of the state, said this financial reformer. The cat alone is a parasite, paying nothing to any one and preying upon every one. But is the project really practicable? Certainly it is, replies its author, 197 198 THE THEORY AND PRACTICE OP TAXATION. of eifects to warrant the drawing of general and correct in- ferences, it is nevertheless probably true that there is not, at the present time, a single existing tax, decreed by despot- ism, or authorized by the representatives of the taxpayers, which has been primarily adopted, or enacted solely with reference to any economic principles, or which has sought to establish the largest practical conformity under concur- rent circumstances to what are acknowledged to be the fundamental principles of equity, justice, and rational liberty. But, on the contrary, the influence of temporary circumstances, as viewed, in most instances, from the stand- point of a governmental administration — despotic or re- publican alike — desirous of retaining power, has ever been ihe controlling motive in determining the character of r taxation; or, as Colbert, the celebrated finance minister of Louis XIV, is reported to have expressed it, in saying that " the art of taxation consists in so plucking the goose [i.e., the people] as to procure the largest quantity of feathers with the least possible amount of squawking." and he forthwith sets himself to prove it. Every cat for which the tax — a rather heavy sum — is paid would receive an official coloured ribbon for its neck, with a number and a government stamp. Every feline defaulter found without this ribbon would be seized and temporarily confined in the Cats' Home. If not redeemed before the lapse of a fixed term — say eight days — it would be sold or poisoned by the state." " A tax on beards was in operation for a long time and under various forms in Russia. Peter the Great, knowing the attachment that his subjects had for the hirsute adornment of the face, intro- duced a tax upon the beard in his empire. The beard is a super- fluous and useless ornament, said he, and, starting from this prin- ciple, he imposed a tax upon it as an article of luxury. This tax was proportional and progressive, not in proportion to the length of the beard, but to the social position of those who wore it. Each person upon paying his tax received a token, which he had to carry upon his person, for the guards were inexorable, and, always provided with scissors, ruthlessly cut off the beard of those who could not show their badge." " Catharine I confirmed this tax. In 1728 Peter II allowed the peasants to wear a beard, but kept up the tax for the other classes under the penalty of work on the galleys in the case of non-pay- ment. Czarina Anne rendered life still harder to bearded men, for not only were they obliged to pay the special contribution imposed upon them, but also had to pay a double tax upon every- thing else for which they were assessed. This tax was not abol- ished until the reign of Catharine II (1762-1798)." A SCIENCE OP TAXATION. 199 1: ^ \ o 3 Hence, apart from its methods of distributing power and patronage, the popular idea of evil, as connected with gov- ernment, may almost always be referred back to unequal or excessive exactions ; and to the reality of which, as evils, more than to any other one agency, may be referred most of the world's political revolutions, and the ferocity with which, as was notably the case in France, they have been often conducted. Hence, also, the preference almost always shown, on the part alike of those who enact and those who pay taxes, for indirect taxation, which very successfully blinds the taxpayer as to the amount which he pays and as to the time and place of its collection; and hence, finally, the idea, which has come to be all but universally enter- tained, that taxation per se is in itself an evil — something to be avoided, if possible, and an escape from which is always " good fortune." A QUESTION OF PRIME IMPORTANCE, therefore, which confronts us at the outset in entering upon any discus- sion of this subject is. Are these assumptions of economists that there is no science of taxation and no general lawsV "^ regulating its exercise and effects — assumptions generally ^e \^ -concurred in by jurists and popular sentiment — correct^ ^^^ \ If they are, then there are no principles of taxation to dis- Si? ' J{ V cuss, and a consideration of the subject must be limited^ \^ Sl mainly to a recital of the world's experiments and experi^ ences and an exposition of legislative enactments and court VAv decisions. To admit their correctness, furthermore, is ^ equivalent to confessing that human knowledge, in at least/' *l. "^y-.. one department, has reached its extreme limit; and that sr' ^^ ^o" class of transactions which, more than almost any other,p ^^ ^ are determinative of the distribution of wealth, the iorms\jj ^ in which industry shall be exerted, and the sphere of per- J^^ p sonal liberty, are best directed by accident or caprice. To f(j,/i^ ascertain the true state of the case ought, accordingly, to ^ v constitute the main object of inquiry, and, with a view '^t of helping to the formation of an intelligent opinion, atten- tion will be first asked to the meaning or definition of the two fundamental terms, tax and taxation. And in so doing z we obtain immediately an illustration of the indefiniteness ^ '^ - of idea and lack of exactitude in expression that charac- ^ terize this whole subject, and also a very definite clew to \ ^ their origin. ^ ^.y s ^ ^ •=\- ^ n 200 THE THEORY AND PRACTICE OF TAXATION. Analysis of the Word Tax. — Thus, the word tax in the English language, and its equivalent in all other lan- guages, is used in a very loose and indefinite sense. Many writers, and the dictionary-makers generally, use the word in an extremely generic sense, to cover and designate all contributions obtained by process of assessment and levy (act of collection) by a state or government from the per- sons and property of its citizens, or from persons and property within its power and jurisdiction; in whatever form, or however arbitrary the assessments or levies may be, and by whatever name they may be known or desig- nated — whether tribute, toll, talliage, duty, gabelle, cus- toms, impost, poll, subsidy, aid, excise, income, or benevo- lence.* Such a definition, however, which makes no dis- tinction between contributions levied at his unrestrained will or caprice, and for any purpose, by a bandit whom circumstances have raised to the head and government of a petty tribe or community ; or by an absolute and igno- rant Oriental potentate, like Ismail Pasha, Khedive of Egypt (1863-'79);f or by a European monarch, like Louis XIV, who said, " I am the state," and those con- tributions which represent that part of the wealth of a * " A tax is a rate or sum of money assessed on the person or property of a citizen by Government for the use of the nation or State." — Webster's Dietionary. Tax. — " 1. A disagreeable or burdensome duty or charge; an exaction; a requisition; an oppressive demand; strain; burden; J^ ^ ^ task. " 2. An enforced proportional contribution levied on persons, property, or income, either (a) by the. authority of the state for the support of the government, and for all its public or govern- mental needs, or {b) by local authority for general municipal purposes." — Century Dictionary. " The definition of both Webster (Daniel) and Story (Justice) is, that a tax is a contribution imposed by Government on indi- viduals for the service of the State." — Miller, on the Constitution of the United States, p. 235. " Taxes are defined as the enforced proportional contribution of persons and property levied by the anthority of the State for the support of the Government and for all public needs." — Cooley on Taxation, p. 1. \ ^ ^ "A tax is a portion, or the value of a portion, of the property '=^ % ^y or labour of individuals taken from them by Government and placed at its disposal." — J. R. McCuUoch. t See ante, p. 144. DEFINITION OF A TAX. 201 < y. 1 state which is taken from its citizens with their free con- sent for exclusive public purposes, in accordance with a well-defined and intelligent public policy ; a definition that recognises no distinction between these two methods and objects of taking, obviously can not be scientifically cor- rect ; for there can be no more analogy between the two methods than between a payment for value received and an act of highway robbery.* Obviously, also, there can be no science of taxation predicated or formulated on such a definition, for there can be no science of irregularity and arbitrary action. Again : " So long as people use words which have no precise signification, which may be interpreted in a variety of ways, and which present at once to the mind different ideas more or less obscure, more or less mixed up with one another, there will be uncertainty in the theory, or rather there will be a vague, incomplete, and ill-co-ordinated theory; and then, as all practice is the application of a theory, the practice resulting from it will be faulty." — M. Menier. The French economist above quoted also makes the - following well-warranted criticism on the current defi- nitions of taxation : " They have," he says, " one generaL-s- f ault : they try to point out the employment of taxes, but they do not show the origin of taxes." What, then, will be a correct definition of a tax? It is not easy to frame such a one, in clear and suc- cinct language, covering all the essential conditions. It probably never has been done, and therefore the best thing ^ to do is not to spend time and effort in attempting it, but <:^^^^^:^ rather to endeavour to illustrate and point out its meaning indirectly. And, with this purpose in view, it is impor- tant to recognise at the outset an exact and homely truth, and one which heretofore has often been overlooked by writers on taxation and political economy, namely : That a government never has any money — by which ^ J> * Despotic rulers in all ages of the type of Louis XIV, the Khedives of Egypt, the Sultans of Turkey, and the Czars of Russia have undoubtedly regarded their expenditures of money exacted under the name of taxation from their subjects for the mainte- nance of great armies, harems, mistresses, pensions to favourites, and the like, as for legitimate public purposes. 14 202 THE THEORY AND PRACTICE OF TAXATION. alone the expenses of the state can be defrayed — except what the people — citizens or subjects — give, or concede to it by voluntary or involuntary action ; and that the people, as a whole and in turn, never have any to give except what conies to them as the result of their work, or from an ex- change of the products of their work. And such being the case, it follows, as has been happily pointed out by Mr. Atkinson, that what the Government really wants of its people, when it calls upon them for taxes, is work, and that the methods of taxation are only methods for collect- ing and using the products of work.* Hence the following definition of a tax, deduced from the above statement of fact by Mr. Atkinson — that " it is that certain portion of the product of a country wJiich must he devoted to the sup- port of the Government " — embodies a meaning and a truth not incorporated and set forth in the ordinary or popular definitions. At the same time it is deficient in not recog- nising any distinction between a just and uniform tak- ing and an exaction or confiscation. TxlXATION IN THE UNITED STATES, ITS AGGREGATE AND Distribution. — During the year 1890 the aggregate reve- nue receipts of the several governments of the United States, derived mainly from taxation, as reported by the census of that year,f were $1,039,482,013, apportioned as follows: Federal taxation, $461,184,680; State taxa- tion, $578,328,333. The last aggregate was again sub- divided into $116,157,640 for State purposes, including the Territories and District of Columbia, $133,525,493 for * " Taxation means work, of the haad, of the hand, or of the machine, or all combined. And the method of taxation is only a method of distributing the products of work. It is measured, when in the process of distribution, in terms of money, but the money itself stands for work, or is derived from work. And the work of the Government is as much a part of the work of the community as any other. All who work, from the head of the nation down to the lowest municipal official, must be supplied with shelter, food, and clothing; and those who pay the taxes do the work that is necessary to furnish this supply." — The Indus- trial Prof/rrss of the Nation, Edward Atkinson; Taxation and IForA", same author. t The census of 1890 presented for the first time even an ap- proximation of the annual incomes of the several governments of the United States, and the amount and objects for which they were expended. TAXATION AND WORK. 203 county purposes, and $329,635,200 for municipalities and schools. If a temporary and extraordinary charge for pen- sions — $140,959,361 in 1895 — which now rests upon the Federal Government, were eliminated, and Federal ex- penditures were reduced correspondingly, the taxation and expenditures of the national or Federal Government would be small in comparison with the total cost of all govern- ment. Federal and State; a result that constitutes a com- plete refutation of the common assumption that the na- tional Government is rapidly absorbing the functions of the State and local governments and reducing them sub- stantially to police precincts. Of the Federal revenues, nearly one half under the existing fiscal system are derived from stamp taxes and taxes on distilled spirits, fermented liquors, and tobacco, all of which may be fairly regarded as self-imposed. If we assume, as we are probably warranted in doing, the average value of the product of each person in the country who is occupied for gain at six hundred dollars per year,* or two dollars per day for three hundred work- ing days, then that part of the annual product of the coun- try which went to the support of its Government or the State in 1890 was the equivalent of the work of 1,734,121 such persons for one year, or 520,236,300 days' work; or, in other words, for every dollar that the Government ex- pends, somebody must work for at least half a day, or furnish a value equivalent for such an amount of work. Again, for the year 1890, the aggregate of taxation in the United States — national. State, and local — required or rep- resented about seven per cent of the value of the entire annual product of the country, which probably approxi- mated $1,200,000,000. In former days it was often cus- tomary to allow persons to pay their taxes by actual days' work, and this is still the practice in some parts of the United States and in Canada and some countries of Eu- rope. Before the French Revolution, the tax imposed on the French peasantry, and known under the name of corvee, * The most recent investijjations of Mr. Atkinson, the best au- thority on this subject, have led him to the conclusion that the averajre value of the product of each person in the United States, workinc: for gain three hundred days in the year, was in 1890 nearer $700 than $600 per annum. 204 THE THEORY AND PRACTICE OF TAXATION. as has been already shown, was an obligation to render a specified number of days' work to the state, or to some seignior or noble. During the early colonial days of Massa- chusetts, the people of the settlements far removed from Massachusetts Bay paid their proportion of the expense of maintaining a colonial government at Boston in wheat, which was shipped down the Connecticut Kiver in canoes, and then transferred to sailing craft and transported by sea to Boston. One could hardly imagine the disturbance and excitement that would be occasioned if all the taxes of the country were to be collected in this way, and if the head of every family was compelled to perform annually some twenty days' labour to discharge the obligation in- cumbent on himself and family to pay taxes, which would be about the amount which the head of every family in the United States would have to perform to meet its present annual expenditures. Everybody would then be talking economy; and the politician who wanted votes, instead of promising public buildings, or more salaried offices to his constituents, would say, " Gentlemen, give me your votes and elect me, and I will have your compulsory labour cut down next year from twenty-five days to twenty, or even fifteen." And yet the difference between that state of things and the present is merely a difference of appearance. What is Taxation? — The popular or dictionary defi- nition of taxation — namely, " the act of levying a tax or im- posing taxes " — is as indefinite and imperfect as the ordi- nary definition of a " tax " has been shown to be. Scientifi- cally considered, taxation is the taking or appropriating such portion of the product or property of a country or com- munity as is necessary for the support of its government, by methods that are not in the nature of extortions, pun- ishments, or confiscations; and a systematic and orderly arrangement and presentation of the knowledge gained by experience and discussion, with a view to effect such a result with certainty, uniformity, and the minimum of cost and trouble to society and its individual taxpayers or contributors, constitutes the Science of Taxation* * Essentially the same definition of taxation has been given by Mr. J. R. MeCnllooh. " It is," he says, " the name given to the branch of the science of political economy which explains the mode in which different taxes affect the public interest, and in which MEANING OF TAXATION. 205 In what will be hereafter said, the word taxation will be used as far as possible in the sense in which it has been defined; but at the same time the employment of the un- scientific term has become so general that its use in default of any satisfactory synonym is almost unavoidable, espe- cially in the historical treatment of the subject. Such a limitation of the meaning and nature of the word tax as has thus been given is clearly of the first im- portance, and a lack of its recognition is undoubtedly re- sponsible in a high degree for the present unsatisfactory position of the subject of taxation as a department of economic knowledge ; and also for a very general belief that in determining the forms of taxes the only rule to be followed is that of expediency. It may be too much to claim that a general recognition and practical acceptance of the proposed definitions and limitations are absolute essentials for the conception and construction of any just and intelligent system of taxation, and also for any such collocation of general truths relative to taxation as will raise the subject to the dignity of a science. But, be this as it may, it seems certain that such recognition and ac- ceptance would at once sweep away many obstacles that would otherwise stand in the way of such a consummation, and bring a high degree of order into what is now a com- parative chaos. And, as one illustration of this, consider how entirely, and yet how naturally, the proposed definitions and limi- tations change the generally accepted idea of the relation of a tax to the individual taxpayer. As has been already pointed out, the popular idea of a tax is that it is always an evil. Most writers also on political economy, in discussing the subject, start with the idea that the act or exercise of taxation necessarily implies perpetual antagonism between the state, the sovereign, or the ex- the revenue required for the public service may be most advan- tageously raised." — Treatise on tJte Principles of Taxation, J. R. McCiiUo'ch, 1875. " Taxation. — The act of laying a tax, or of imposing taxes on the subjects or citizens of a state or government, or on the mem- bers of a corporation or company, by the proper authority; the raising of revenue required for public service by means of taxes; the system by which such a revenue is raised." — Century Dic- tionary. 206 THE THEORY AND PRACTICE OF TAXATION. I ecutive, and the private citizen. The parties concerned are the citizen on the one side and the state on the other, and the former being comparatively weak and the latter exceedingly strong, the state is always assumed to get the upper hand. M. Proudhon, in his work Theorie de I'lmpot, maintains that " all taxes are iniquitous," and that " if a sole tax was established it would be the sum of fiscal in- iquities." " There are no taxes," says Ricardo, " which have not a tendency to lessen the power to accumulate." J. B. Say, the eminent French economist, declared that, by whatever name known, taxes are always a burden upon the private citizen. M. Garnier, another French economist, defines taxes " as the reduction made on the private for- tunes of the citizens by the Government to meet public expenditures." According to John Stuart Mill, " it is im- possible in a poor country to impose any tax which will not impede the increase in the national wealth." " None of us feel, when the tax-gatherer comes, that to be taxed is a favour; or that, as to the money exacted, we •^ as individuals are the better off for its having been taken * from us. We know the tax is a burden ; as such it is recog- ' / nised by every person upon whom it is imposed." — Hon. Thomas M. Cooley. All such conceptions of the position of the state in re- spect to the taxpayer are, however, monarchical, implying the relation of master and subject, lord and serf;* and from such a point of view this general idea of antagonism between the taxpayer and the government is correct and has been in accord with the great mass of the world's ex- periences. In fact, these conceptions undoubtedly origi- * When the Jewish people, weary of the tax despotism of a sacerdotal class — i. e., the tribe of Levi, to whom the land was held to have been given by Jehovah — manifested an intention of scttino^ up a king, the prophet Samuel foretold that under royalty taxation would be still more oppressive, and " this," he said, " will be the manner of the king that shall reign over you: He will take your sons and appoint them for himself, and set them to ear his ground and reap his harvest ; and he will take your daiighters to be cooks," etc. ; " and your fields, and your vineyards, and your olive-yards, even the best of them; and the tenth of your seed, of your sheep, and your goodliest young men and put them to his work," etc. And the prediction then made was verified, as under like circumstances it has always since been. TAXATION NOT AN EVIL. 207 nated with the first or old economists, who, living under arbitrary, despotic governments, and unable to comprehend the modern ideas respecting personal liberty and a free government, came to the only conclusion respecting the nature of taxation that their limited sphere of observa- tion and experience would permit.* And so to-day, under an absolute government, the interests of the sovereign — czar, sultan, emperor, king, whatever name he bears — are always in a greater or less degree in antagonism to those of the nation, and these same conceptions have also to a large extent been generally accepted in states whose form of government is not monarchical, but free or popular, as in the United States, where, through lack of intelligence or interest on the part of the general public and of the law- makers, systems for raising revenues have been built up and tolerated which almost without exception are unjust in their administration and incidence. When an eminent lawyer and member of the Constitutional Convention of the State of New York in 1867-68 stood up before that assemblage when the subject of taxation was under con- sideration and said, " I insist that a people can not prosper whose officers either work or tell lies — there is not an assess- ment roll now made out in this State that does not both tell and work lies," f no man gainsaid him, for no man who had ever given any attention to the subject could. But such conceptions are not true of taxes levied under a popular form of government, and in accordance with conditions essential to justify their right to be called taxes; for there is no one act which can be performed by a com- munity which brings in so large return to the credit of * With the old economists the state always preponderates. It is the master of the citizen instead of being merely the steward of the nation. "It addresses the citizens imperiously. They are its contributablefi, and must pay. Accordinjj to such doctrine, life is a tollpate. They must give so much a head for the right of living in the country. Man is the debtor of the state. Man pays, not the commodity, and the citizen remains the serf of the state." " Under monarchical right, taxation is speculation by the king upon the people. In a Avord, there is an antagonism between those who pay and those who levy taxes. Taxation is the expression of that antagonism."-^A/. Menier. t Speech of Hon. M. I. Townsend, Delegate at Large, Constitu- tional Convention of New York, 1867-'G8. Proceedings and De- bates, vol. iii, p. 1945. 208 THE THEORY AND PRACTICE OP TAXATION. civilization and general happiness as the judicious expendi- ture, for public purposes, of a fair percentage of the gen- eral wealth raised by an equitable system of taxation. The fruits of such expenditure are general education and gen- eral health ; improved roads, diminished expenses of trans- portation, and security for life and property. And it will be found to be a general rule that no high degree of civili- zation can be maintained in a community, and indeed that no highly civilized community can exist, without compara- tively large taxation ; * the converse of this proposition, however, at the same time not being admitted, that the existence of high taxes is necessarily a sign of high civili- zation. It is interesting to note, however, that as civilization increases, and taxation becomes absolutely greater, it also becomes relatively less. Thus, in most of our great cities the cost of the water supply to its inhabitants constitutes at present one of the largest items of municipal expendi- ture — an item that forty or fifty years ago hardly found a place in municipal accounts. And yet the cost of a sup- ply of even the minimum quantity of water now regarded as essential to meet the ordinary requirements for personal cleanliness and health would be very much greater to every citizen, were he to undertake to supply himself, even if it were possible, by the old methods; to say nothing of the comfort and luxury, as well as protection against loss by fire, which an increased supply, mad^e possible only through a greatly increased aggregate of taxation, has afforded. In short, taxation assessed and levied under conditions clearly conformable to reason and justice, is no more of an evil than any other necessary and desirable form of ex- penditure. Its proper exercise does not diminish, but protects and augments, national wealth, and is no more a * " I have not seen an instance of rent being very low, and hus- bandry at the same time being good."^ — Lowe, quoted hij McCvlloch. " It is universally found that the low rents absorb the largest proportion of the product." — H. C. Carey, On Wealth, p. SJfl. " An ingenious philosopher has calculated the universal measure of the public impositions by the degrees of freedom or servitude that accompany them, and ventures to assert that, according to an invariable law of Nature, it must always increase with the former and diminish in a just proportion to the latter." — Statement by Gibbon, on the authority of Montesquieu. STATE EXPENDITURES. 209 burden upon the people of a state than the payments made for the care and profitahle management of private or cor- porate ijivestments of capital are a burden upon the owners of such capital. Indeed, M. Menier, whose study of taxa- tion entitles him to be regarded as an authority, contends that the analogy between the expenditures of a state which have to be remunerated by taxes and the expenditures of a manufacturer is most complete. The state, he says, pos- sesses a certain extent of territory. That territory has such and such natural utilities. These natural utilities have been developed by labour or appropriated by man, and the capital of the nation is the ensemble (the whole) of the utilities it possesses. In the case of a private person the conditions are the same. His capital is the ensemble of the utilities he possesses. The result which he, equally with the state, seeks to attain, is the same — namely, to make the capital which they control fructify to the greatest pos- sible extent for the benefit of the citizens of the state on the one hand and the individual on the other ; and between the expenditures which it is necessary to incur for the at- tainment of these ends on the part of the state and the individual there is no essential difference. And from this analogy, thus urged to identity, M. Menier deduces the following definition of taxes : They represent, he says, the investment of the capital of the nation, or state, and the general expenses of its care and development* It is obvious, however, that M. Menier's analogy would not hold good under a system which failed to recognise any difference between a tax and an arbitrary exaction. * M. Menier, in proposing the above definition, himself recog- nised the necessity of accompanying it with the following explana- tion : " When I say that taxes ' represent the investment of na- tional capital,' it is, of course, understood that I speak only of that of the investment assigned to the state, and that I am very far from the communistic theory, according to which the state, being the owner of the national capital, should turn it to account for its own profit. In the useful employment of the capitals of the nation there are an individual part and a collective part. In my definition of taxes only that collective part, the syndicate contribution, is taken into account." — A Treatise on the Taxation of Fired Capital, by M. Menier, of the French Chamber of Depu- ties. Enplish translation, by I. 0. Gallegan, Fellow of the Uni- versity of France; London, 18S0. 210 THE THEORY AND PRACTICE OP TAXATION. " So far as it is necessary for the security of person and property, money spent for tlie support of government is as usefully expended as is the purchase of clothing or pro- visions ; but when the sum taken exceeds what is required for that purpose, it is only a question of amount between the sovereign of India, who exacts one half of the produce, and the legislator of Great Britain or the United States, who exacts a million of pounds or of dollars for which an equivalent is not given." * An almost self-evident corollary from these sound de- ductions would be, that any tax or system of taxation that did not protect but diminished private property would tend to imperil or dry up the sources of public revenue. A recognition of the true relation which a just and equitable system of taxation sustains to the state and to the capital or property of its citizens, and also of the fact that under such a system a tax works to a diminution of the income of the property taxed, and not to a diminution- of the value of the property itself, ought to effectually ex- pose the fallacy of the somewhat popular idea, that taxa- tion is really a gradual (and in the course of time a com- plete) confiscation by the public of all private or individ- ual property ; and that in a certain sense no man by reason of taxation can be regarded as having a perpetual owner- ship of any property; an annual tax on the value of any property of one and a half per cent, with five per cent in- terest, exhausting such value in about thirty years. If tax- ation brought no returns, either direct or indirect, to the persons or property assessed, there would be some warrant for regarding it as an act of confiscation; but if it pro- vides, as every correct system of taxation does, for a cer- tain class of expenditures, in default of which in the pres- ent state of society there would be no adequate protection to property and no encouragement for its accumulation and development, then there is no more reason for regard- ing taxation as confiscation than for attributing the same effect to payments for wages, rents, repairs, interest, | in- surance, etc. • H. C. Carey, On Wealth, p. 343. Philadelphia, 1888. tThis same fallacy was indeed applied to interest in the United States, when an eminent official maintained that in paying interest HIGH CIVILIZATION AND TAXATION. 211 A practical illustration of the truth of this conclusion v is to be found in the circumstance, that as a rule the class of property paying the highest proportional taxes in any community is the most profitable or desirable to its owners. It is also a pertinent question, why property which has paid taxes for a given period — say thirty years — and has so been absorbed by the public, should continue to be as- sessed; or why, if the person popularly regarded as the owner of such property should refuse to pay taxes, the property should be sold for taxes when it has already been y^ taken to itself by the public. Another point of interest in connection with this sub- ject is, that if a high degree of civilization can not exist without a high degree of taxation,* the methods of econo- mizing labour, or, what is the same thing, of producing a greater amount of product with a given amount of labour — conditions which make high civilization possible — en- able a government progressive in this respect continually to take a larger share of the results of the work of its citi- zens, expressed in terms of money, without really increas- ing their burdens of taxation. " Every invention and dis- covery by which the production of commodities is facili- tated and their value reduced, enables individuals to spare a larger quantity for the use of the state. The sacrifice made in paying taxes consists in the labour or in the cost of the money or produce required to pay them, and not in the amount of such money or produce." A given amount of food and clothing, iron, steel, copper, leather goods, paper, and transportation can now, for example, be furnished to the Government of the United States for at least one third, and probably not more than one fifth, of the labour required to produce like quantities of these same commodities or services in 1840; while the wages paid for the work which such quantities represent or neces- for many years on the public debt the people of the country had more than paid off the principal, and were therefore morally justi- fied in repudiating the debt. * Year bv year the public demands more efficient schools, better postal facilities, better harbours, improved paving, drainage, and lighting of streets, a stricter abatement of nuisances and super- vision of infectious disease. All this means a higher standard of public well-being, entailing, however, constantly increased public outlay. 212 THE THEORY AXD PRACTICE OF TAXATION. sitate have been increased from fifty to seventy-five per cent and upward. In 1840 an operative in tlie cotton mills of Ehode Island, working thirteen to fourteen hours a day, turned off 9, GOO yards of standard sheeting in a year; in 1886 the operative in the same mill made about 30,000 yards, working ten hours a day. In 1840 the wages were $176 a year; in 1886 the wages were $285 a year. During the ten years from 1870 to 1880 the increase in the number of hands employed in anthracite coal min- ing was 32.2 per cent, as compared with an increase of product of 82.8 per cent ; while in the case of copper dur- ing the same period the ratios were 15.8 and 70.8 per cent respectively. The whole tendency, therefore, of the modern conditions of production is not to entail any greater sacri- fice on the part of the taxpayers for the support of the Government, but rather to diminish it. " Governments have precisely the same interest as their subjects in facili- tating production, inasmuch as its increased facility affords the means of adding to the quantity of produce at their dis- posal without really adding to the weight of taxation; whereas, on the contrary, a diminished facility of produc- tion must either diminish in an ecpial degree the produce appropriated by government or compel it to lay heavier bur- dens on its subjects. Public wealth, in short, is merely a portion of private wealth transferred to government, and the greater the amount of the latter the greater, of course, will be the magnitude of the portion that may be conven- iently spared for public piirposes." — J. R. McCuUoch. Whex Taxation becomes an Evil. — It is not pre- tended that taxation, even under a correct system of assess- ment and collection, may not under some circumstances be an evil. It is an evil when through extraordinary or in- judicious expenditures of the state it is excessive and de- /mands too large a proportion of the annual or concurrent iy^ income of the people (in the form of rents, interest, profits, salaries, and wages), out of which, or out of the annnally augmented wealth of a country, and not out of accumu- lated capital, all taxes ought to be paid, and as a rule are paid. The economic rule governing taxation of first im- portance laid down by Professor Cossa (Scienza delle Fi- . nanzp) is "that it should, when possible, tax income only, [^wlictlicr national or individual, but spare t he est ate itself." TAXATION MAY BE AN EVIL. 213 If the burden of taxation, or the amount taken, is not fully compensated by increased production or increased saving, it becomes one of the greatest evils to which a people can be subjected ; for under such circumstances the means of future production will be impaired, encroached upon, and the country will necessarily begin to retrograde. I When the share of the annual product falling to the workmen of any country is barely sufficient to support life free of taxation, then the burden of taxes begins to promote pauperism. | It takes that which is necessary to existence and the maintenance of energy. This is now occurring in Italy. The taxation of Italy probably absorbs more than one third part of the product of the country. The army is served first, the workmen second, while the women become diseased and the children die by lack of adequate nourishment. / Taxation is also an evil, though in a lesser degree, when the rate assessed is not the same upon all persons, property, and business within the same sphere of (business) com- petition; when it is made an instrumentality for effecting some other purpose than that of raising revenue, no matter how desirable that purpose may be; and when, as in the United States, it is largely indirect, and its incidence and amount are thereby concealed from the ultimate tax- payers.* * A most interesting and instructive example of the decay in modern times of a considerable state due to radically vicious methods of collecting revenue is afforded by the present condition of the Asiatic kingdom of Persia. Its typical despotic govern- ment, represented by the Shah, annually demands and exacts a large amount of money from its subjects to defray the expenses of the state, but not more, perhaps, than the resources of the country and its people would fairly warrant and sustain, if it were collected by intelligent methods. In default, however, of any knowledge of how to get revenue without destroying the springs of wealth, the method of taxing is so irregular both as to time and rate, and so thoroughly unjust and unequal, as to impair the value and security of property, prevent accumulation and free use of capital, and discoTirage commerce. A British ex]iert has recently reported to his liome government that if a qualified Euro- pean or American could bo placed at the head of the exchequer at Teheran, who was allowed such control that no penny exacted from the people of the state shoidd be absorbed on its way to the treasury, or be taken save in due course of law, he might yet save Persia and drain into it a new and vigorous Asiatic population, 214 THE THEORY AND PRACTICE OF TAXATION. The general result of experience is also to the effect that when excessive and exceptional taxation has been re- sorted to by a state for the purpose of regulating or de- stroying industries or traflic, it has rarely been successful. The economic and moral lesson deducible from such experi- ence may be briefly summarized as follows : Whenever a government imposes a tax on any product of industry so high as to suflicicntly indemnify and reward an illicit or illegal production of the same, then such product will be illicitly or illegally manufactured; and when that point is reached, the losses and penalties consequent upon detection and conviction — no matter how great may be the one or how severe the other — will be counted in by the offenders as a part of the necessary expenses of their busi- ness; and the business, if forcibly suppressed in one local- ity, will inevitably be renewed and continued in some other. It is therefore a matter of the first importance for every government, in framing laws for the assessment and col- lection of taxes, to endeavour to determine, not only for fiscal but also for moral purposes, when the maximum revenue point in the case of each tax is reached, and to recognise that in going beyond that point the government " overreaches " or cheats itself. Increase the duties (taxes) on imports beyond a cer- tain point, and smuggling springs up as by magic, and the most cruel and unusual punishments utterly fail to prevent it. American ingenuity was never more fertile or mani- fested in a more remarkable manner than in the evasion during the years 1864-'68 of a tax, approximating fifteen hundred per centum, imposed by the Federal Government on the manufacture and sale of distilled spirits, resulting in a complete failure on the part of the Government, with almost unlimited military resources at command, to en- force the law, and a final abandonment and repeal of the tax.* The comparatively recent tax imposed by the United who would fill its now deserted but fertile plains, and organize a commerce in which all the world stood ready to participate and furnish the instrumentalities necessary for its development. * Out of a consumption of at least fifty million proof gallons of distilled spirits of domestic production in the United States during the fiscal year 18G7-'6S, the Federal Government collected a tax upon less than seven million gallons, the sale of the differ- EVASIONS OP TAXATION. 215 States on oleomargarine, with a view of destroying its manufacture and preventing its use as an article of food, has been so far ineffectual that its production and consump- tion have been greater than they were before the law au- thorizing the tax was enacted.* More than a century ago Adam Smith pointed out that such taxes " tempt persons to violate the laws of their country who are frequently incapable of violating those of natural justice, and who would have been in every respect excellent citizens had not those laws made that a crime which Nature never meant to be so." Some other fallacies concerning the sphere and influ- ence of taxation which have obtained popular credence may be here appropriately noticed. Thus, it is not infrequently assumed that any injurious influences of excessive or unnecessary taxation are largely or wholly imaginary, inasmuch as they are really returned to the contributors (taxpayers) through the expenditures of Government; which, by increasing demand for com- modities and services, create or extend markets, maintain prices, and enlarge the sphere or opportunity for industrial employment, and favour an increase in the supply and cir- culation of money. This assumption is obviously but a reproduction in another form of the fallacy (before no- ticed) that industry can be stimulated by taxation; and which in turn finds its antitype in a favourite idea of the middle ages, that the destruction or waste of commodities " made good for trade " ; and which maxim, it is said, a guild of glaziers in Paris practically carried out by en- couraging their apprentices to break windows, who may have attempted to justify their conduct by asking them- ence at the current market rates of the year, less the average cost of production, returning to the credit of corruption a sum approxi- mating sixty million dollars. * The tax on oleomargarine was first imposed in 1886, and, with the special taxes on manufacturers and dealers in that product, yielded a revenue of $72,3.948. In 1898 the amount collected from the same sources was $1,31.5,7'80. The quantity produced rose from 34.32.5..527 pounds in 1888 (the first full year of returns) to 57,516,136 pounds in 1898. A tax, bearing the same objects as that on oleomargarine, to control its manufacture, sale, and ex- port, was laid in 1897 on "filled cheese," and in 1898 on "mixed flour." 216 THE THEORY AND PRACTICE OP TAXATION. selves the question, " What would become of the glazing business if nobody ever broke windows?" \/^ A general answer to this fallac}^ is, that to break, spoil, or waste by fire, pestilence, war, famine, shipwreck, or in- judicious and unnecessary taxation and public expenditure, always entails a loss to society; and if these results give to certain class interests an opportunity to perform un- necessary work, or sell products at an advance over their current prices in the world's market, and thereby inflict imnecessary and additional taxes on other individuals, it can not be regarded as other than an evil, and prejudicial \/to public interests. To those who live on the produce of unnecessary taxa- tion and correlative governmental expenditure, any eon- sequent encouragement of industry by increasing demand and extension of markets, will very naturally seem to be in the highest degree beneficial. But, in order that in- dustry may be truly benefited, the market must be real and not artificial, or one created by unnecessary taxation and expenditure. " It is contradictory to suppose that either individvials or states should receive the smallest bene- fit from the demand of those whom they have previously furnished the means of buying. This, however, is always the case with buyers who live on the produce of taxation. And to keep up useless regiments and overgrown establish- ments, on the pretence of encouraging industry by increas- ing demand, is quite as irrational as it would be for a shopkeeper to attempt to increase his business and get rich by supplying his customers with money to buy his goods." * Hamilton (a Scotch economist) puts the case even more forcibly. " To argiie," he says, " that the money raised in taxes, being spent among those who pay it, is therefore no loss to them, is no less absurd than the defence of a house- breaker who, being convicted" of carrying off a merchant's money, should plead that he did him no injury, for the money would be returned to him in the purchase of the commodities in which he dealt." f " It is obvious that the services rendered by the public * McCulloch, Treatise on the Principles and Practical Influence of Taxation, second edition, p. 14. t On the National Debt, third edition, p. 35. UNNECESSARY TAXATION. 217 functionaries who receive taxes form the only return made to the contributors. And it is undoubtedly true that these services are of the highest value, and that, when neither the number nor the salaries of those by whom they are rendered are unnecessarily large, they constitute a full and fair equivalent for the sums expended upon them. But whatever is beyond this — whatever is expended in overpay- ing public functionaries, or in maintaining such as are un- necessary — is wholly lost to the taxpayers, or is not in any way compensated to them." * "" We might as well say that it would be a good thing to put snags in the rivers, to fell trees across the roads, to dull all our tools, as to say that unnecessary taxation could work a blessing." — Prof. W. G. Sumner. Some writers of repute have advocated the special im- position of taxes on the ground that they act as stimulants to industry. M. Gamier entertained this opinion. The late J. R. McCulloch, who wrote learnedly on the Prin- ciples of Taxation, favoured such practice on the part of government, provided the taxation was " moderate." But of taxation employed for such object which was not mod- erate he wrote as follows : " The effect of exorbitant taxes is not to stimulate in- dustry, but to destroy it. The stimulus given by excessive taxation to industry has been not inaptly compared to the stimulus given by the lash to the slave — a stimulus which the experience of all ages and nations has proved to be as ineffectual as it is inhuman, when compared to that which the expectation of improving his condition gives to the productive energies of the citizen of the free state." The direct beneficial agency not merely of moderate but of most excessive taxation, as a stimulant to industry, is also obviously a fundamental principle in every so-called " protective tariff system." Very curiously, the best refutation of these ideas was made by the late H. C. Carey, in a Treatise on Wealth, published in 1838. After indorsing the statement of Mr. McCulloch as to the influence of exorbitant taxation on industry, and the correctness of his analogy between the stimulus afforded thereby and that imparted by the lash, * McCulloch, Treatise on Taxation, p. 14. 15 218 THE THEORY AND PRACTICE OP TAXATION. he antagonizes the proposition that the effect of even 7nod- erate taxation imposed as a stimulus to industry can be in any degree beneficial, by asserting that what is true of the influence of exorbitant taxation in this respect " is equally true of all unnecessary burdens (of taxation), whether great or small." "If taxation be a stimulus," he says, " the advantage must increase with its extent, and taking 2s. per week must do more good than taking l,s. Moderation depends upon habit. We think Mr. McOulloch has fallen into the same error with the man who attributes increased vigor to two glasses of brandy, while he deprecates the drinking of a quart as likely to produce intoxication. The man in sound health who drinks two glasses will not work as well as he who drinks none, but he will do so much better than his neighbours who drink by the quart that it may be sup- posed that his superiority results from the glasses taken, when it really arises out of the six that he has forborne to take. If taxation is good, so is the lash : both will make people work, but neither will make them work well. The moment we admit that taxation in any case tends to promote industry, it is impossible to say where we shall stop." Another fallacy which has obtained credence, especially in recent years in the United States and even among its legislators, is that the burden of taxation is increased by a fall in the prices of commodities which represent the work that furnishes the money with which taxes are paid. It owes its existence and tolerance to the non-recognition of a principle of taxation which has also been thus set forth by Mr. J. E. McCulloch : " The amount of a tax is not to be estimated by the hull: or species of the produce which it transfers from in- dividuals to government or to creditors in general, hut ex- clusively by its value. A heavy tax consists in the abstrac- tion of a large value, and a light taxation in the abstraction of a small value. When a fall takes place in the cost of producing any article, its price necessarily declines in an equal degree, and its producers are obliged to dispose of a proportionally larger quantity to obtain the means of obtaining the same amount of taxes. But it is an obvious error to suppose, as is very commonly done, that the burden PRICES AND TAX BURDENS. 219 of taxation is consequently increased. The value paid by contributors remains the same, and it is by values and not by quantities that the weight of taxation is to be measured. If through improvements in agriculture, machinery, or any other cause, two quarters of wheat or two yards of cloth were produced with the same expenditure of capital and labour that is now required to produce one quarter or one yard, it would be no hardship to give double the quan- tity of wheat or cloth in payment of taxes." * A failure to recognise and understand this principle has led to much erroneous reasoning on the subject of taxation, and finds a curious practical illustration in the following record of recent experience. Thus in the so- called bimetallic discussion in the United States it has been unqualifiedly asserted that, owing to the remarkable de- cline in the average prices of general commodities (esti- mated at about eighteen per cent from 1867 to 1877, and thirty-one per cent from 1867-'77 to 1886-88), and which in turn has been assumed to have been occasioned by the demonetization of silver and consequent appreciation in the value or purchasing power of gold, the burden of the national debt of the United States and also all private debts, especially such as are in the nature of mortgages on land or on other productive fixed capital, has been greatly increased, inasmuch as a greater effort of labour on an in- creased amount of the products of labour — typically cotton and iron — had become necessary to liquidate such debts and the interest thereon, f The error in such reasoning or assumption is found in the circumstance that no con- sideration is given or allowance made for the different * McCulloch, Treatise on Taxation, second edition, p. 4. The wording is a little different. t In 1885 a memorial signed by ninety-five members of the United States House of Representatives of the Forty-eighth Con- gress and presented to the President of the United States contained the following statement: "Eighteen million bales of cotton were the equivalent in value of the entire interest-bearing national debt in lSfi.5 (.$2,221,000,000) : but it will take thirty-five million bales at the price of cotton now (1885) to pay the remainder of such debt ($1,190,000,000). Twentv-five million tons of bar iron would have paid the whole debt (.$2,674,000,000) in 1865; it will now take thirty-five million tons to pay what remains ($1,375,000,000) after all that has been paid." 220 THE THEORY AND PRACTICE OF TAXATION. results of labour at the periods of price comparisons, and that the real cost of producing the staple commodities of the United States, or the effort needed to produce a given amount of general merchandise, or the number of days' work put into each piece of such merchandise, has on an average decreased during these periods more than their market prices have decreased, so that instead of the decline in the prices of commodities under consideration having increased the burden upon labour of national and other debts created before such decline, the burden has been lessened to just the extent that the average cost of produc- ing commodities has declined to a greater degree than their average market prices. Thus all authorities are sub- stantially agreed that there are few departments of indus- trial effort in which the saving of time and work in the twenty to thirty years next anterior to 1890 was at least forty per cent, and in not a few instances has been much greater (in the manufacture of boots and shoes, for ex- ample, eighty per cent). In North Carolina the relative increase in cotton product and population from 1870 to 1880 was as 4.5 to 1. With slight changes in the relation of labour to product, the cotton crop of the United States increased seventy-six per cent between the years 18GG and 1872, and forty-nine per cent between 1872 and 1886. Recent investigations have shown, in the case of certain leading articles in hardware, that a given quantity which represented a labour cost in 1870 of a million dollars could be afforded in 189-1 for a like cost of $444,444. An- other striking illustration of the present cheapness of manufactured articles per unit and as measured in terms of labour payments per hour or day, compared with former recent periods, and as the result of present industrial con- ditions, is found in the statement that wire nails are now so cheap that, if a carpenter drops a nail, it is cheaper to let it lie than take time to pick it up ; and the correctness of which has been demonstrated as follows : " Assuming that it takes a carpenter ten seconds to pick up a nail which he has dropped, and that his time is worth thirty cents per hour, the recovery of the dropped nail would cost 0.083 cent. There are two hundred sixpenny nails in a pound, and they are worth on an average 1.55 cent per pound, making the value of one nail 0.0077 cent. In other CONDITIONS IN THE UNITED STATES. 221 words, it would not pay to pick up ten nails at the assumed loss of time and rate of pay of the carpenter." On the other hand, wages have increased in the United States since 1870 in an approximative ratio with the in- crease in the effectiveness of labour in producing commodi- ties, and touched the highest point ever known about the year 1890. During the same period debtors have gained greatly by the decrease in the cost of living, and a conse- quently increased opportunity for laying up a surplus for meeting tax demands and other purposes. The assump- tion that the comparatively recent fall in the price of com- modities in the United States has increased the burden of taxation upon its people, therefore merits the characteriza- tion of being one of the most irrational and fictitious of popular economic fallacies. JCHAPTER X. RELATION" OF TAXATION TO THE STATE. The next step of importance in this discussion is to recognise clearly the relation which the exercise or func- tion of taxation, as it has been defined, sustains to the state. Origin and Justification of Taxation. — The ques- tion at once suggests itself, " By what right does that entity which we call the state, whatever may be its con- crete form, and whether its powers are exercised by a single man (CjBsar), by a particular class, or by a majority of citizens, take from the individual that which hitherto was absolutely his, annul his ownership, and convert the thing of value to its own use ? " * How happens it that the ~ . exercise of this right is so absolute that the state requires ^^4^he citizen to set apart from the earnings of his labour a .fj^certain sum for its use before he applies any of those earn- "^ ings to the support of his family? f ^H,^ On this point there has been considerable speculation 4and philosophizing. It has been assumed that there must <5 be an ajrhi^jjTTrJjiipTj erl co ntract between the state and the itizen, in virtue of which the state supplied a certain amount of protection to life and property, and for which the citizen in return pays an equivalent in money, mei;^ * " Titius is to render to Cfesar that which is Caesar's. But when Caesar comes to take the shock of wheat or the firstling of the flock Titius may well ask, as he eives them up: Why are they Caesar's rather than mine? What right to them has Cfesar and not my neighbour Maevius?" Tyranny in Taxation. Theodore Bacon. New-Englander, 1867. t The probate judiciary of the State of Connecticut has recently held that in the settlement of insolvent estates taxes due prior to the assignment of an assigning debtor should be regarded as preferred claims, and as such should be paid in full by the trustee. 222 ?- THE STATE AND TAXATION. 223 chandise, or personal service. There is, however, no his-] torical example of any such contract. / Others have sovight to refer the origin of this right on -;;;;; the part of the state to take the property of the citizen to Z an antecedent right of might, and have assumed that, as /^ the ruling power, whether monarch or majority, is phys- >. ically able to take and apply to its own use all that the individuals ruled over may call their own, it is therefore legitimate and morally correct for it to exercise this right >• and take such part of its subjects' property as it may see fit. ^ A tliird and more plausible theory is, that as all rights C of property are conventional and not natural, and without -5 the intervention of the state by its laws could not be en- '^^^'^^r^- forced or protected, and, indeed, could hardly be said to ^ exist ; therefore the state is the source of all title, and the -r individual holds only by grant or sufferance of the state. From these premises it follows that the state, in compelling ^_^^ ' contributions from its subjects, or, as is ordinarily ex- pressed, in " taxing," is in the position of an absolute proprietor who takes simply what is his own. This was the theory accepted and practically carried out by all the monarchs of Europe in the seventeenth century, or about two hundred and fifty years ago, and defended by the best and most eminent men of the time, as Bossuet in France and most of the great jurists of England under Charles I, as was exemplified in the case of John Hampden, who was prosecuted for refusing to pay an arbitrary tax known as " ship money " ; and the decision in which, by the High Court of Exchequer, placed the property of every Eng- lishman at the disposal of the crown. It was also so clearly expressed by Louis XIV that his words are worthy of exact citation. Thus, in a manual which he wrote for the guid- ^ ance of his heir and successor, the Dauphin, he says : " I hold the place of God. To me belong exclusively the lives and fortunes of my people. The nation resides entirely in the person of the monarch. Kings are absolute masters, and may naturally, fully, and freely dispose of all the property possessed by either the clergy or laity, to use at all times like wise stewards and according to the needs of the state." Herbert Spencer refers the growth of revenue, which < f^ involves the right to take it, from the outset, like the ^ \ it \ r 224 THE THEORY AND PRACTICE OF TAXATION. growth of political headship which it accompanies, directly or indirectly, to the results of war. " The property," he says, " of conquered enemies — at first goods, cattle, pris- oners, and at a later stage land — coming in larger share to the leading warrior, increases his predominance. To secure his good will, which it is now important to do, pro- pitiatory presents and help in labour are given ; and these, as his power further grows, become periodic and com- pulsory. Making him more despotic at the same time that it augments liis kingdom, continuance of this process increases his ability to enforce contributions, alike from his original subjects and from tributaries ; while the neces- sity for supplies, now to defend his kingdoms, now to in- vade adjacent kingdoms, is ever made the plea for increas- ing his demands of established kinds and for making new ones. Under stress of the alleged needs, portions of their goods are taken from subjects whenever they are exposed to view for purpose of exchange. And as the primitive presents of property and labour, once voluntary and vari- able, but becoming compulsory and periodic, are eventually commuted into direct taxes; so those portions of the trader's goods which were originally given for permission to trade, and then seized as of right, come eventually to be transformed into percentages of value paid as tolls and duties. But to the last as at first, and under free govern- ments as under despotic ones, war continues to be the usual reason for imposing new taxes or increasing old ones ; at the same time that the coercive organization in past times developed by war, continues to be the means of ex- acting them." * Mr. Spencer further asserts that " in the early stages of social evolution nothing answering to reve- nue exists." These conclusions of Mr. Spencer seem, how-i ever, to be singularly imperfect, inasmuch as they do not^ appear to recognise that there can be such things as volun- tary or beneficial taxes, or that society in order to exist would in the course of time institute taxation, even if there had been no war. He does, however, recognise that the increasing progress and complexity of civilization, by * Abundant illustrations from historical or recent experiences of the successive stages of such assumed evolution of taxation are given by Mr. Spencer in the chapter On Reveniie in his Political Institutions, Principles of Sociology, vol. ii, p. 557. SOVEREIGNTY AND TAXATION. 225 continually enlarging its sphere and functions, would con- tinually necessitate an increase of taxation. All such speculations and theories as to the origin and sphere of the rights of government in respect to appropriat- ing the property of its subjects or citizens, although of phil- osophic interest, are, however, of little practical impor- tance.* It is only necessary to recognise that in some form the organization or entity which we call the state exists for certain definite purposes, even though they be difficult of precise limitation ; and to analyze the situation, as we find it, to obtain a satisfactory answer to the question at issue. For the command of a constant and adequate revenue being beyond dispute absolutely essential to the existence of organized government, the power to compel or enforce contributions from the people governed, or, as it is termed, " to tax," is inherent in and an incident of every sover- eignty, and rests upon necessity, f The question of the obtaining of such revenue obviously, therefore, is the ques- tion of first importance in the economy of a state; the one in comparison with which all others are subordinate. For without revenue (and a government never has any resources except what it has obtained from the people), regularly * Edmund Burke, the great Irish statesman, is on record as characterizing any discussion of the abstract right of taxation in place of the actual facts of the situation, as belonging to the domain of political metaphysics, " a great Serbonian bog in which armies whole have sunk," and that it was by fighting for such " a phantom, a quiddity, a theory that wants not only a substance but even a name," that English statesmen threw away their Ameri- can colonies. t " When we ask. What right has the state to infringe upon man's natural freedom? we are involved in the diflficulty that there are no rights, in the strict sense of the term, antecedent to the state. All rights that we know anything about are either legal or moral. The right of the state to govern man can not be derived trom law, for law is the creature of the state. If it is a moral right, it must rest on the same basis on which all morality rests, and this must be either conscience, or divine revelation, or utility. Of course, consent has nothing to do with morality. Conscience, furthermore, will not do as a basis for the state, for conscience does not enlighten us further than to let us know that we ought to obey the state if it is right to do so. Revelation, also, answered only so long as a direct and miraculous connection was believed to exist between human and divine authority. This leaveT'notlimg" but utility as the basis for the moral right of the state to inter- fere with man's natural freedom." — Anonymous. "" 226 THE THEORY AND PRACTICE OF TAXATION. and uniformly obtainable, no governmental machinery for the protection of life and property, through the dispensing of justice and the providing for the common defence, could long be maintained ; and in default thereof production would stop or be reduced to a minimum, accumulations would cease or become speedily exhausted, and civilization would inevitably give place to barbarism and the wilder- ness. For like reasons also, or as the old-time Latin maxim, " saJus popiili suprcma lex," concretely expresses it, the state holds command over the lives and liberties of its citizens equally as it does over their fortunes. In fact, the sovereignty of a state consists and exemplifies itself in the power to abridge the liberty of the individual citizen and to take his property; and the character of every gov- ernment is mainly determined by the intent and purpose for which these two great functions from which all its force proceeds are exercised. ; The Sphere of Taxation. — The sequence of these (premises is no less important, or rather of transcendent im- Iportance; for if the power of taxation is an incident of sovereignty, as it confessedly is, then the right to exercise that potver must he coextensive with that of which it is the incident; or, in other words, as the power of every com- plete sovereignty over the persons and property of its sub- jects is unlimited, the power, therefore, in every such sover- eignty to compel contributions for the service of the state, or, as we term it, " to tax," must be unrestricted. " The power to tax is therefore the strongest and most pervading of all the powers of government, reaching directly or in- I directly to all classes." * The power to tax, said Chief-Justice Marshall, in giv- ing the opinion of the United States Supreme Court deny- ing the right of Maryland to tax the Bank of the United States (McCulloch vs. Maryland, 4 Wheaton, pp. 316-431), " involves the power to destroy, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it." In the case of Weston vs. the City of Charles- ton, the same court, by the same eminent authority, also • United States Supreme Court ; Loan Association vs. Topeka, 20 Wallace, 655. ^S, EXTENT OP POWER. 227"" held that "if the right to impose a tax exists, it is a right ivhich, in its nature, acknowledges no limits. It may he carried to any extent within the jurisdiction of the State or corporation which imposes it, which the will of such State or corporation may prescribe." And in a more recent case (Loan Association vs. Topeka, 20 Wallace) the court, through the late Justice Miller, again expressed itself to the same effect as follows : " Given a purpose or object for which taxation may be lawfully used, and the extent of its exercise is in its very nature unlimited." The government of a complete sovereignty can there- fore tax all that it can lay hands on to enforce the tax — - men, women, and children ; all property and business — H^v and the power may be exercised again and again until the ^^ subject taxed is exhausted or the privilege can be no longer rf^^ exercised. This statement finds abundant illustration in, history of people absolutely impoverished by taxation, and ct 0* 5" of individuals who have been sold into slavery because of their inability to pay the taxes that the state or ruling^j^jj^j power had assessed upon them. The popular idea is that such examples of the extreme exercise of power on the part of the state to compel contributions have passed into his- tory; but this is not the case. In every purely despotic Government there is no lirnitation on its exercise except . such as arises from the inability of the subject to con- tribute. The heacT of the state — shah, czar, or emperor—-, decides how much shall be exacted and the time and man- ner of exaction; and not infrequently the amount taken is only a little short of what is necessary to leave to th? producer in order to enable him to maintain a mere ani- mal existence. Thus in Eussia the present governmental exaction — under the name of taxes — from the agricultural peasant is understood to amount to about forty-five per cent of his annual product or earnings. In 1890 the excise taxation of Russia — which is mainly levied upon distilled spirits and other alcoholic drinks, tobacco, sugar, kerosene, and matches — is reported to have amounted to seventy-five per cent of the value of the arti- cles taxed. On the other hand, the Russian customs duties in the same year averaged but thirty- four per cent of the import value of the foreign goods imported — a circum- stance that may find an explanation in the fact that a large 228 THE THEORY AND PRACTICE OP TAXATION. proportion of the imports of Eussia is in the nature of ma- chinery or crude materials for industrial use or elabora- tion, and apart from this the requirements of the masses in Russia for foreign products are comparatively small. In Egypt until quite recently, as has been already shown, the annual exactions from its peasantry — the fel- lahs — under the name of taxation produced an extremity of want which closely bordered on starvation. In Italy, which in ancient times was regarded, as it is in fact to-da}', potentially the richest country in Europe, and although its present Government can not fairly be characterized as despotic, its agriculture is burdened with state exactions that are reported as absorbing from one third to one half of the value of its annual product. The existing debt of the country, created largely by enormous military and naval expenditures, entails an annual in- terest charge of about $3.75 per head of its population.* Another disastrous interference with the prosperity of the state is the system of taxing all business enterprises, after they have been established three years, at rates which * A national tax on movable (personal) property — the ricchczza mohile — is levied on the poorest of the Italian people; and often the bed has to be sold or the saucepans pawned to pay it. The gate tax, (hizio consiumo, best known to English ears as octroi, which has been the especial object of the Sicilian fury, is a curse to the whole land. Nothing can pass the gates of any city or town without paying this odious and inquisitorial impost. Strings of cattle and of carts wait outside from midnight to morning, the poor beasts lying down in the winter mud and sum- mer dust. Half the life of the country people is consumed in this senseless, cruel stoppage and struggle at the gates: a poor old woman can not take an egg her hen has laid, or a bit of spinning she has done, through the gates without paying for them. The wietched live poultry wait half a day and a whole night cooped up in stifling crates or hung neck downward in a bunch on a nail ; the oxen and calves are kept without food three or foTir (lays before their passage through the gates, that they may weigh less when put in the scales. By this insensate method of taxation all the food taken into the cities and towns is deteriorated. The prating and interfering officers of hygiene do not attend to this, the greatest danger of all to health — that is, inflamed ami injured animal and fowl carcasses sent into the markets. The municipali- ties exact the last centime from their prey; whole families are ruined and disappear through the exactions of their communes, who persist in squeezing what is already drained dry as a bone. — The Italy of To-day, in Fortnightly Review, February, ISQ-i, p. 230. EXCESSIVE TAXATION. 229 in some cases swamp the profits. And in addition to such disturbing elements there is undoubtedly an all-pervading evasion for a consideration of all forms of taxation by the functionaries whose business it is to collect the revenue. A very general feeling, therefore, naturally prevails that it is a laudable thing to cheat or rather rob the Govern- ment whenever opportunity offers.* A more recent instance of excessive taxation is to be found in the island of Cuba, where the exactions of govern- ment and the known dishonesty attending their collection drove the planters into revolt. The low price of sugar in the markets of the United States made it impossible to endure demands that were easily met when the profits of sugar planting were large. Limitations in the Sphere of Taxation. — Atten- tion is next asked to the fact that the foregoing proposi- * It is enough to see how railways are built by the Government of Italy to form an idea of the openings afforded for rascality and fraud in their construction. " They are not built by contract, but on estimate. A building company estimates that a certain line will cost a certain sum and receives the job, which is always indeed a ' job.' The Government guarantees a certain income per kilometre, and the constructor makes the road as long as possible; but when the grant (which is made in bonds of the state) for the amount authorized is exhausted, the constructor coolly tells the ministry that the road must stop there unless the ministry makes another grant, which is of course done, and the invariable result is that the original estimate is nearly, or quite, or even more than doubled ; with the consequence that none of the roads, as they are made, ever pay their expenses and interest on their cost of construction. More than that, they are so burdened with deadheads that it is estimated that only forty per cent of the passengers they carry pay full fare, the remaining sixty per cent paying from nothing up to seventy-five per cent of the fare. Depu- ties and senators travel free everywhere in the kingdom, but as the state pays a block sum for their privilege, it is not a dead loss, though, as every deputy who travels insists on having a whole compartment for himself, the road becomes anything but a profitable one. Every employee of the great systems of Italian railways has the right to make three journeys a year on each one, where he likes, and with his family, and the consequence is that some of them ruin themselves taking long railway journeys for which they have not the money to pay the expenses. And they are sixty thousand, with as many more pensioned off who have the same privilege; and, as all travellers know, the railway fare is the smallest part of the expense of a journey." — Neic York Nation, June 25, 1896. 230 THE THEORY AND PRACTICE OF TAXATION. tions respecting the unlimited power of a state to compel contributions, or to tax, and which (as shown) have re- ceived the sanction of the highest judicial authorities, are predicated on the assumption of complete sovereignty on the part of the state. But in a truly free state such sover- eignty does not exist, and the conditions which make it . free necessarily preclude its existence. Thus in every such \ state the two great functions which constitute its sover- eignty, namely, the right to interfere with the liberty of the citizen and Math his jiroperty, have been called into existence and caii"T)e rightfully exercised for certain pur- poses only, which admit of precise definition. In such a state the fundamental and essential purpose of government is not to abridge the liberty of the individual citizen in \y respect to his person, or his possession and use of property, but to increase it; and this result (overlooked in a great degree by economists and legislators), as has already been pointed out, can only be attained by taking a part of the property of the citizen which the existence of the state has enabled him to acquire, for the purpose of maintain- ing instrumentalities for preventing any encroachment upon his rightful liberty and punishing those who attempt it. In fact, in every free state there are limitations on the exercise of the taxing power, growing out of the structure of its government, or because it is free ; or, as Chief-Justice ^larshall expressed it, " by the implied reservations of in- dividual rights growing out of the nature of a free govern- ment, and the maintenance of which is essential to its existence." From the first dawn among the Anglo-Saxon race of the idea of a constitutional or free government, the neces- sity of establishing an inhibition on the power of govern- ment, in respect to the taking of property, was recognised ; expressed or implied in the Magna Charta, and subse- quently incorporated in the Federal Constitution, through its provisions respecting the equality of taxation, and that private property shall under no circumstances be taken for public uses without just compensation. The necessity of a free state may, however, be so great — i. e., in the prosecution of war for national defence, or the maintenance of national existence — as to require that the entire resources of its people should be at the disposal LIMITATIONS ON TAXATION. 231 of the Government, and compel a resort to taxation, even to the exhaustion of everything — property and business — which may be its objective ; and in this sense — i. e., for th e preservation of individual liberty _and_jproperty — and in this sense only, is "involvexPariy inherent power or right in taxation to destroy. The nature of the principle in- volved also finds illustration in the circumstance that mu- nicipal authorities are warranted, in the case of extensive conflagrations, in absolutely destroying large amounts of property in the shape of buildings and their contents, in order to preserve a much larger amount of like property from destruction. The principle under discussion would not accordingly justify the use of taxation in time of peace (as has been exercised by the Federal Government of the United States) for the primary purpose of destruction, and not for revenue or the preservation of property. Clear- ly, if this right of taxation is unlimited, the property of every citizen would be subject to the absolute disposition and control of the depositary of power in the state for the time being ; and the recognition or non-recognition of such limitation marks, as before pointed out, more than any other one thing, the dividing line between a free govern- ment and a despotism.* Probably the most weighty and concrete judicial opin- ion on this subject was that given by the Supreme Court of the United States in 1874 in the now celebrated case of the Loan Association vs. Topeka, 20 Wallace, in which the late Justice Miller, with the substantial concurrence of his associates, indorsed and amplified the opinion of Chief- *"The dictum of Chief-Justice Marshall, used by this distin- guished jurist in the heat of arg^ument, has been adopted by many courts as justifying the uncontrolled exercise of the taxing power. A slight consideration will not justify the dictum. The proposition that the power to tax is the power to destroy is in opposition to the fundamental principles of a free government. It asserts the broad doctrine that the power to tax, one of the legislative powers, is unlimited and arbitrary. It -is claimed that there is no such thing as arbitrary power in this country: that the form of gov- ernment being republican, those who exercise the powers of gov- ernment, whether executive, legislative, or judicial, are clothed with a trust which is not to be executed in accordance with a mere whim, or in an arbitrary manner, but according to the pur- pose of its creation." — Burrovghs's Law of Taxation, 1877. 232 THE THEORY AND PRACTICE OF TAXATION. vc %■ ^ :? Justice Marshall touching the reservation of individual rights under a free government as follows : " It must be conceded," he said, " that there are rights in every free government heyond the control of the state. A government which recognised no such rights, which held the lives, the liberty, and the property of its citizens sub- ject at all times to the absolute disposition and unbounded control of even the most democratic depositary of power, is after all but a despotism. The theory of our govern- ments, State and national, is opposed to the deposit of imlimited power anywhere. The executive, the legislative, and the judicial branches of these governments are all of limited and defined powers. There are limitations of such powers which grow out of the essential nature of all free governments — implied reservations of individual rights, without which the social compact could not exist, which are respected by all governments entitled to the name. . . . Of all the powers conferred upon the Government that of taxation is most liable to abuse. Given a purpose or object for which taxation may be lawfully used, and the extent/ of its exercise is in its very nature unlimited. This power can as readily be employed against one class of individuals and in favour of another, so as to ruin the one class and give unlimited wealth and prosperity to the other, if there are no implied limitations of the uses for which the power may be exercised. To lay ivith one hand the power of the Government on the property of the citizen, and with the other bestow it upon favoured individuals to aid private enterprises and build up private fortunes, is none the less robbery because it is done under the forms of the law and is called taxation. This is not legislation. It is a decree under legislative forms." And in the same case the same court declared that " the whole theory of our governments — State and national — is opposed to the deposit of un- ilimited power anywhere." No one would probably question that if an assemblage of men reasonably intelligent — though not versed in law, political economy, or the teachings of social science — were to come together for the purpose of founding a state de novo, they would, while recognising at once, and as it were instinctively, the necessity of insuring to the government of such state a revenue adequate to its support, never even I NEW ENGLAND PLANTATIONS. 233 SO much as dream for one moment of intrusting to it a power to take the property of any individual member of such assemblage, except so far as might be absolutely neces- sary to carry out and fulfil the purposes for which it was proposed to call the state into existence. They would be mentally blind if they did not see at once that in intrusting to that state a power of unlimited intereference with the citizen's right to property, they would create not a free government but a despotism. The question may be here naturally asked, Is there any record in history of any assemblage of the founders of a state which discussed this subject, or took definite action in U^ respect to it? In answer it may be said that the two most striking assemblages in history which resulted in the forma- tion of states, and of which any record is preserved, occurred in connection with the first settlements of New England, and that which resulted in the formation of the Federal Constitution and the creation of the nationality of the United States. The assertion would hardly be warranted that the early plantations of New England were formal assemblages gathered together for the avowed purpose of forming a state. They were, in fact, land companies, and so far as the law then existing permitted, were incorpo- rated as such. This act of incorporation, derived from a corporation created by James I of England in 1606, and known as the Plymouth Company, was in the first instance and at once used as the basis for forming a political organi- zation by the members of a land company or plantation. The necessity of a revenue to defray the expenses of the organization or incipient government, and in default of which there would be no adequate protection to persons and property, or, what is the same thing, no civilization, was at once recognised ; and probably the very first act of the assemblage of the members of the company, after the selection of persons to exercise authority, was to authorize the levy of taxes. These taxes were assessed and collected in all respects as they are now in the great States that have been the outcome of these feeble plantations, through what may be termed a process of political evolution. That is, the individual members of the various communities or their authorized representatives met in their " General Court," as it was called, made appropriations, and, in 16 234 THE THEORY AND PRACTICE OF TAXATION. order to pay them, levied what they termed a " rate " or assessment. This levy was put into the hands of a con- stable, who proceeded to enforce or collect the tax, either in the form of work or commodities or money. There is furthermore no indication in the records of these early times of any limitation as to the extent or degree of assess- ment, and for the very obvious reason that it never then occurred to any one that the power of taxation could pos- sibly be used for the destruction of private property or controlling the acquisition and distribution of property — the inventions of a later period. The taxation of those days was necessarily of the crudest possible character. It fell almost exclusively on real property, and what was manifestly tangible and visible, for the very good reason that there was very little of what is now called personal property in existence — that is, there were no credit or paper representatives of property, but everything in the nature of property existed in the form of land, slaves, houses, ani- mals, agricultural products, tools, or furniture.* The record of the assemblage (convention) that drafted the Coxistitution, which by adoption by the parties (States) thereto called the United States into existence as a nation, on this subject of guarding and limiting the taxing power on the part of the prospective State or Government which they proposed to create, is comparatively full and com- plete. The Eevolution, which involved the renouncing of all allegiance of the British-American colonies to the mother country, had its origin in unjust taxation; and in the Declaration of Independence this fact was made con- spicuous among the reasons that were relied on by the colonies to justify their action in the opinion of mankind. The attempt in 1778 to establish a General Government by the union of all the colonies under certain conditions, known as Articles of Confederation, was found after a few years of experience to be wholly lacking in all the ele- ments of strength and stability, through the lack of any proper adjustment of the power of taxation; thereby en- tailing an almost complete inefficiency of sovereignty. Thus, there was no power in the Congress of the Confed- eration to raise money by taxation; but the Confederation * See note at the end of this chapter. REQUISITIONS AND TAXATION. 235 depended for revenue upon requisitions on the several States, with which the States might comply or not, as they chose, and with which they generally did choose not to comply, either promptly or fully, if at all. Some of the States levied duties on the imports of merchandise at the expense of their neighbours; and adjacent ports in differ- ent States competed with each other by arbitrarily vary- ing the rates on imports, as the Congress of the Confedera- tion had no authority to regulate commerce, or legislate on this subject for the whole country.* The result was, as Mr. Madison expressed it, that " the Federal authority had ceased to be respected abroad, while at home it had lost all confidence and credit." It was to remedy this one radical infirmity, more than any other, that the present Constitu- tion was projected and formed. Other great improvements in the Articles of Confederation were contemplated and made in the Constitution when it was formed, but the most important of all was in the regulation of taxation. Hamil- ton, who drafted the address to the States inviting them to send delegates to the convention by which it was formed, wrote, in The Federalist, "The power of taxation is the most important of the authorities proposed to be conferred on the Union." The necessity of conferring adequate power in this par- ticular upon the new Government which it was proposed to create was admitted by all ; and yet there was no power which the people were more determined to guard, so that it could never be arbitrarily or imjustly exercised. And if it had not been supposed that the provisions of the new Constitution furnished ample security against any such action, not one of the States would have assented to its ratification. The preamble of the Constitution asserts, almost in the first instance, that the object of its formation was to " estab- * The author of The Federalist (No. VII) refers to the situation of New York, as compared with that of Connecticut and New Jersey, as affording an example of the opportunities which some States had under the Confederation of rendering others tributary by a monopoly of the taxes on imports, and said that New York would neither be willing nor able to forego the advantage of levy- ing duties on importations, a large part of which must be neces- sarily paid by the individuals of the other two States in their capacity of consumers. 236 THE THEORY AND PRACTICE OP TAXATION. lish justice," an obvious correlative of which is that there must be equality, and no discrimination in taxation as respects the same persons or things. In its Article I (second section) it next provided that " representatives (in Congress) and direct taxes shall be apportioned among the several States according to their respective numbers, excluding Indians not taxed." The explanation of this provision, which now seems singular, is undoubtedly to be found in the assumption of the framers of the Consti- tution that taxation in the future, as it had been in the past, would be mainly direct in its assessment and inci- dence; and that wealth was so equitably distributed in the colonies (as it was at that time), and, as Roger Sherman, of Connecticut, expressed it, " the number of people alone " was " the best rate of measuring wealth." And on such supposition the absolute requirement of a strict apportion- ment of taxation according to population, with an inherent penalty of loss in congressional representation as the re- sult of evasion, was undoubtedly regarded as a safeguard against unjust or discriminating taxation. Next, in section 8, Article I, after empowering Con- gress " to lay and collect taxes, duties, imposts, and ex- cises," to pay the debts and provide for the common defence and general welfare of the United States, was added an- other provision, the like of which does not find an exact counterpart in any political constitution or statute of which there is historical record — namely, that " all duties, imposts, and excises shall be uniform throughout the United States." This provision is one of the first im- portance. It would seem that there could be no doubt that the framers of the Constitution, having specially in view the fact that, under the Articles of Confedera- tion, the several States endeavoured to tax everything be- longing to every other State that came within their ter- ritorial .jurisdiction, and that there was no authority on the part of the then General Government to prevent such action, did not mean that the entity, called a State, they were about to create, should have any power of discriminat- ing in respect to the imposition of duties, imposts, and excises in any degree; fully recognising that the moment a State or government thus discriminates it passes the line of distinction between a free government and one that RESTEICTIONS ON EXERCISE. 237 is not free. It is to be further noted that the words " to pay the debts and provide for the common defence and general welfare of the United States " should also be re- garded in the light of a limitation of the purpose for which the taxes, etc. (authorized in the opening words of the section), may be laid and collected. This view was taken and strongly presented by Mr. Jefferson in 1791, shortly after the adoption of the Constitution. He says : " To lay taxes to provide for the general welfare of the United States, that is to say, ' to lay taxes for the purpose of providing for the general welfare.' For the laying of taxes is the poiver, and the general welfare the purpose, for which the power is to be exercised. They are not to lay taxes ad libitum for any purpose they please; but only to pay the debts or provide for the welfare of the Union. In like manner they are not to do anything they please to pro- vide for the general welfare, but are to lay taxes for that purpose. To consider the latter phrase, not as describing the purpose of the first, but as giving a distinct and inde- pendent power to do any act they please, which might be for the good of the union, would render all the preceding and subsequent enumeration of power completely useless." * Finally, there was added by amendment to the Consti- tution the following provision, which, although implied in the Magna Charta, had not been previously so explicitly expressed in the Constitution or statutes of any other State : " Nor shall private property he taken for public use without just compensation.'"' Obviously this provision con- stitutes another limitation on the power of Congress in respect to the taking of private property for public use by taxation or any other method. In a case involving the bearings of this provision on the taxation of a citizen of New Jersey, the Supreme Court of that State analyzed and interpreted its meaning as follows : " A tax upon the person or property of A, B, and C individually, whether designated by name or in any other way, which is in excess of an equal apportionment among the persons or property of the class of persons or kind of property subject to this taxation is, to the extent of such excess, the taking of pri- * From Jefferson's opinion on the constitutionality of a national bank, written in February, 1791. 238 THE THEORY AND PRACTICE OF TAXATION. vate property for a public use without compensation. The process is one of confiscation and not of taxation." — 36 New Jersey, p. 66, 1872. It is certain, therefore, that in at least one assemblage for the purpose of creating a State — namely, the Federal Convention — its members clearly recognised the incompati- bility of the possession and exercise of an unlimited power of taxation by a State and the coexistence of a frcQ.govern- ment. Right of Eminent Domain. — Apart from the right of a State to take private property for its use by taxation, the State may also legitimately take such property when the interest of the public requires it, through what is called the law or right of eminent domain. The distinction be- tween the power of taxation and the power of eminent do- main is, however, clear and well defined. An appropria- tion of property under the right of eminent domain is a forced sale which its owner is compelled to make for the public good, and for which a pecuniary consideration equal to the estimated full value of what is taken is due from the State. And the exaction can not be considered as a tax " unless similar contributions are made by the public itself, or be exacted rather by the public will, from such con- stituent members of the same community as own the same kind of property." On the other hand, no pecuniary con- sideration is paid when money is demanded under the power of taxation, the benefits which the taxpayer is assumed to receive being indirect. An Important Imperfection or Omission in the Federal Constitution. — Any discussion of the sphere of taxation in the United States would be incomplete that failed to recognise a feature, in the way of imperfection or serious omission, in the Federal Constitution, that hitherto has not attracted the attention it deserves. All powers in- herent in the Constitution of the United States were de- rived from the States, and granted by them in their acts of ratification ; and " the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively or to the people." — Article X, Constitutional Amendments. As has been already pointed out, the convention that framed the Constitution was especially solicitous and care- RIGHT OP EMINENT DOMAIN. 239 fill to guard and limit the power of taxation on the part of the new Government which it was proposed to create, so that it could never be arbitrarily or unjustly exercised. They anticipated in action the aphorism of John Stuart Mill, that " men do not need political rights in order that they may govern, but in order that they may not be mis- governed " ; for, as was truly said by Guizot, " a consti- tution is only a device for turning ordinary mortals into tolerable monarchs." At the same time, the convention practically omitted to impose any limit or restriction on the exercise of the power of appropriating private property on the part of the States ; or, as Chancellor Kent expressed it in his Commentaries on the Constitution, they left " to a State the command of all its resources and the unimpaired power of taxing the people and property of the State." On this point the only direct provisions of the Constitu- tion are that neither the Federal nor State governments shall take private property for public uses — i. e., by taxa- tion or right of eminent domain — without due compensa- tion; and that no State, without the consent of Congress, shall lay any imposts or duties on imports or exports. By repeated decisions of the United States Supreme Court, another provision has been substantially ingrafted in the Constitution — to wit, that neither the Federal Govern- ment nor the governments of the States shall tax any of the instrumentalities or exclusive property of the other. The result is that, except for possible provisions in the Constitutions of the several States, their respective legis- lative assemblies may regulate, restrict, or appropriate the property of its citizens to an unlimited extent, and may delegate this sovereign power to local municipal corpora- tions created by them. In short, in virtue of the power^ of levying unlimited taxes, the power of the Legislatures of the States that make up the Federal Union is as absolute as that of the Czar of Russia or the Sultan of Turkey. Not only may they take in this form all the property in the commonwealth, but also the property of its citizens in other countries. There is no Federal constitutional hindrance to their taxing, to any amount, real estate in any other State or country owned by citizens resident within their territorial jurisdiction. The constitutional provision that private property must be paid for when taken for public 240 THE THEORY AND PRACTICE OF TAXATION. ■uses mainly refers, in the States, to the taking of land for highways and other similar acts of necessity by emi- nent domain.* How little the people of the United States recognise the fact that they are living under a dual form of govern- ment, with like powers to some extent, especially in respect to the exercise of taxation, finds an illustration in the fol- lowing incident: The question was recently put to the writer by a gentleman who had filled with ability the office of Governor of one of the leading States of the Federal Union, how it happened that the Federal Government could impose on him an income tax, and his own State, at the same time, assess him with not only another like income tax, but also with a tax on the property from which his income was derived? The idea of a dual government and its inconveniences, and that the Congress of the Federal Government had not cared to remedy the latter, had not occurred to the interrogator. Had the power of the States to take money by taxation from their people been limited at the time of the formation of the Federal Union by constitutional provisions, the in- * " There is nothing in the Constitution of the State of New York which requires that taxation shall be general, so as to era- brace all taxable persons in the State, or within any district of the State; or that it shall be equal, or that it shall be in propor- tion to the value of the property of the person taxed, or that it shall not be apportioned according to the benefit which each tax- payer is supposed to receive from the object on which the tax is expended." — People ex rel. (irifftn vs. Mai/cr, 4 N. T., 419, 1851. " There is no constitutional limitation upon the legislative power to tax the persons and property of individuals within the State. The power may be exercised to pay debts contracted be- fore the property-holder comes within the jurisdiction." — Pam- pcUu vs. TiUage of Ostrerjo, Ct. of A pp., 1863, N. T. " Unless restrained by provisions of the Federal Constitution, the power of the State as to the mode, form, and extent of taxa- tion is unlimited when the subjects to which it applies are within her jurisdiction." — Kirtland vs. Hotchkiss, Connecticut. " The Legislature can constitutionally impose a tax on all watches, pianos, carriages, dogs, spirituous liquors, or other chat- tels without reference to their value. It can impose an arbitrary tax upon any avocation or business without estimating its vol- ume or value." — People vs. Equitable Trust Co., of Keu- London, Conn., 1881 ; System of Taxation in the State of New York, pre- pared h\i Bon. Julien T. Davies, at request of a committee of the Legislature, 1888. EXTRAVAGANT EXPENDITURES. 241 jury and disgrace of State repudiation might have been wholly avoided, and much wasteful extravagance checked. •/ " Within an hour's ride from the city of New York several towns can be reached that were bankrupted by undertaking ' public works upon a magnificent scale.' The number of Western communities that have been ruined from the same cause is countless. A very great number of people in the Eastern States, both poor and of the mid- dle class, have been impoverished by the sudden check to the prosperity of these communities. Nor is any severer tax imposed upon any class than that which is paid by those who have only their wages to live upon, when they are deprived of these by the collapse of municipal credit and the consequent sudden stop to extravagant expendi- ture. The average cost of the pensions paid by the United States is ten to twelve dollars a year to every family in the country, and in many cases the pension charge alone is equal to half a month's or even to a month's wages. Not a few of the governments of the earth are now insolvent because of excessive expenditures upon public works. In South Amer- ica and Australia, extravagant undertakings of this kind have caused widespread ruin and distress; and the poor of several other nations are likely to find out eventually that , the alleviation of temporary distress by governmental ex- ( penditure of capital is like keeping off the cold by burning / down the house." * / That the State governments should have bestowed the unlimited and imperial power of taxation upon city govern-* ments, and given up to their use and control the entire f^ ^ r property of the citizens, is an extraordinary abuse of trust ^'\^ and a renunciation of the true functions of government. ^ As a result of this policy these delegated governments have, within a comparatively recent period, absorbed for alleged public uses a large proportion of the property of the citi- zens, to the estimated extent in some instances of more than \J^ one third — that is, the usufruct (right of using and en- \ '^i joying) — and the American citizen has to-day no consti- \L^\k tutional or legal remedy. " No such plunder was ever / ^Xl sanctioned or practised before in the history of civilized governments. That it has been possible in the United * D. MacG. Means, in The Forum, 1894. 242 THE THEORY AND PRACTICE OF TAXATION. States argues the gravest defect in its political system. That a check is needed of the most absolute kind is recog- nised by all thoughtful men. Such check can only be had from the Legislatures of the States, who can not be too prompt in correcting the evils resulting from this extraor- dinary surrender of their supreme jurisdiction on the vital subject of taxation. The Legislature holds the public purse, and is false to its trust as its custodian when it authorizes corporations to put their hands, unwatched, into this purse and take from it, uncounted, all that their ex- travagance and cupidity desire. It is no apology that city governments are chosen by popular vote. It is the essence of our government that personal rights are, by our Con- stitution, wholly independent of the voting power, and cer- tainly property should be equally so protected." The question here naturally arises, How happened it that the framers of the Constitution and founders of our Government, while carefully defining and limiting the powers of the Federal Government in respect to the taking of property through taxation, omitted to make any like provisions applicable to the States? An answer is, that it was probably an oversight, favoured by the circumstance that there was no English precedent for such provisions. At the time of the Eevolution it was, and ever since has been, the occupation and duty of the British House of Com- mons to limit and, if considered expedient, resist the pecun- iary demands of the crown, and latterly of its ministers ; and this occupation and duty were never delegated with- out restriction to any subordinate legislative assemblage. It might have been, and probably was, assumed by the framers of the Federal Constitution, that the several States in making their Constitutions would have followed the precedents respecting the rights and duties of taxation that they (the framers) had established ; and, if the several Legislatures of the States had been confined to these rights and duties, and had never delegated them without restric- tion to the complicated, ill-organized, and irresponsible municipal corporations, which in latter days have grown to such portentous size, little of danger would have followed.* * In his treatment of this important topic, the author is mainly indebted to Mr. Manley Howe, of Boston, who, in a newspaper article published some years ago, seems to have been the first LIMITATION ON TAXATION. 243 It should, however, be here noted that remedial action in this matter has recently been taken by some of the States, by forbidding their counties, cities, towns, or vil- lages from incurring an indebtedness in excess of a per- ' centage, varying with their population, of the valuation of-^ the real estate subject to taxation. Constitutional restric- tions on the borrowing power of the State itself, and of the municipalities within its territorial jurisdiction, have also in some of the States been adopted. From the above discussion the following conclusions would seem to be fully warranted : The limitation on the exercise of the power of taxation under a free government necessarily grows out of the source and sole justification of the power — namely, its necessity; and the righteousness of any specific interference by the state with individual rights in respect to property (as well as in respect to personal liberty) may be tested by the question, Is it necessary? Not, Is it convenient? Not, Is it suitable? If the necessity exists, then the power may be justifiably exercised to a corresponding extent. But, on the other hand, if the interference transcends that which is absolutely essential for fulfilling the rightful purposes for which the state exists, then it loses its sole justification of necessity and becomes tyranny, the definition of which is " despotic use of power." Further, " if the state, even to promote its necessary and legitimate objects, takes the amount of property to which it is entitled in such a man- ner as requires a citizen to pay more than his just share of the requisite amount — whether it be great or small — it takes that to which it has no right ; it does what, if done by a citizen in defiance of law, is called robbery; if under colour of law, is called fraud ; but which in a government which makes law is simply confiscation and tyranny." And yet, very strangely, this tyranny has come to be regarded and defended by not a few intelligent persons who claim to understand the theory and nature of a free and just government as an act of wisdom and statesmanship, and in the highest degree beneficent to the citizen whose property is confiscated. person to intelligently present the facts in the ease and their con- sequences to the general public. 244 THE THEORY AND PRACTICE OF TAXATION. It will be interesting to print the provisions for " Pub- lick Charges " contained in the " Book of the General Lawes and Libertyes concerning the Inhabitants of Massachusets, 1660," one of the earliest compilations of the laws of an American colony : "2. The Court considering the necessity of an equal contribution to all common charges in Townes, Doth Order, That every Inhabitant, shall contribute to all charges, both in Church and Commonwealth whereof he doth or may receive benefit : And every such Inhabitant, who shall not contribute, pr oportionably to his ability, to all common charges, both Civil and Ecclesiastical, s^all be compelled thereunto, by Assessment and distress, to be levyed by the Constable, or other Officer of the Town, and tlie lands and estates of all men (wherein they dwell) shall l)e Rated for all Town charges, both civil and Ecclesiastical (as afore- said) where the lands and estates shall lye: and their per- sons where they dwel. " 3. For a more Equal and ready ivay of raising means for defraying the puhlick charges, and for preventing such inconveniences, as have fallen out upon former assessments. It is Ordered and enacted by the Authority of this Court. That the Treasurer for the time being, shall from 3'eare to yeare in the fift month, without expecting any other order, send his warrants to the Constable, and Selectmen of every Town within this Jurisdiction, requiring the Constable to call together the Inhabitants of the Towne, who being so assembled, shall chose some one of their freemen, to be a Commissioner for the Towne, who together with the Select- men, for their prudential affairs, shall some time in the sixt month, then next ensuing, make a List of all the male persons in the same Towne, from sixteen yeares old and upwards, and a true estimation of all personal and real estates, being or reported to be the estate of all and every the persons in the same Towti, or otherwise under their custody or managing according to just valuation, and to what persons the same doe belong, whether in their owne Town or elsewhere, so neer as they can by all lawfull means, which they may use, viz., of houses, lands of all sorts as wel broken up as other (except such as doth or shall lye common for free feed of cattle, to the use of the in- habitants in general, whether belonging to Townes or par- TAXATION IN EARLY MASSACHUSETTS. 245 ticular persons, but not to be kept or bearded upon it, to the damage of the proprietours,) mils, ships and all small vessells, merchantable goods, cranes, wharfs, and all sorts of cattle; and all other known estate whatsoever, either at sea or on shore, all which persons and estates are by the said Commissioners and Selectmen to be assessed, and rated as here followeth; viz. every person aforesayd (except Magistrates and Elders of Churches) one shilling and eight pece by the head, and all estates, both real and personal, at one penny for every twenty shillings, according to the rates of cattle, hereafter mentioned. The estates of all marchants, shopkeepers and factors, shall be assessed by the Eule of common estimation, according to the will and doom of the assessours, having regard to their stock and estate, be it preferred to view or not, in whose hands soever it be, and if any such merchants find themselves over valued, if they can make it appear to the Assessours, they are to be eased by them, if not by the next County Court ; And houses and land of all sorts (except as aforesayd) shall be rated at an equal and indifferent value, according to their worth in the Towns and places, where they ly. Also every Bull and Cow of four years old and upward at three pounds, Heifers and steers between three and four years old at fifty shillings, and between two and three years old at forty shilling, and between one and two, at twenty shillings, and every ox of four years old and upward at five pound, every horse and mare of three years old and upwards ten pounds, between two and three at seven pounds-^ of one year old and upwards, at five pounds, every ewe sheep above one year old, at five and twenty shillings, every goat above a year old, at eight shillings, every weather sheep above one year old, at ten shillings, every swine above one year old, at twenty shillings, Every Asse above one year old, at forty shillings. And all cattle of all sorts, under a year old, are hereby exempted, as also all hay and corn in the hus- bandmans hand because all meadow, arable ground, and cattle are rateable as aforesaid. And for all such persons as by the advantage of their arts and trades, are more en- abled to help bear the publick charge, then common labour- ers and workmen, as Butchers, Bakers, Brewers, victuallers, Smiths, Carpenters, Taylers, Shoemakers, joyners, Barbers, Millers and Masons, with all other manual Persons and 246 THE THEORY AND PRACTICE OF TAXATION. Artists, such are to be rated for returnes and gaines, pro- portionable unto other men, for the produce of their estates. Provided that in the rate by the poll, such persons as are disabled by sickness, lameness or other infirmitie, shall be exempted. And for such servants and children as take not wages, their parents and masters shall pay for them, but such as take wages shall pay for themselves. And it is farther Ordered, that the Commissioners for the several Towns in every shire, shall yearly upon the first fourth of the week, in the seventh month, assemble in at their shire Town : and bring with them f airely written the just number of males, listed as aforesaid, and the assessments of estates made in their several Towns, according to the rules and di- rections in this present Order expressed, and the said Com- missioners being so assembled, shall duely and carefully ex- amine all the said lists and assessments of the several Towns in that shire, and shall correct and perfect the same, accord- ing to the true intent of this Order, as they or the major part of them shall determine, and the same so perfected, they shall speedily transmit to the Treasurer under their hands, or the hands of the major part of them ; and there- upon the Treasurer shall give warrants to the Constables to collect and leavy the same; so as the whole assessment, both for persons and estates, may be payd in, unto the Treasurer, before the twentieth day of the ninth month yearly; and every one shall pay their rate to the Con- stable, in the same Town where it shall be assessed, (nor shall any land or estate be rated in any other Town; but where the same shall lye, or was imployed to the owners, reputed owners, or other proprietors use or behoof, if it be within this jurisdiction) and if the Treasurer cannot dis- pose of it there, the Constable shall send it to such place in Boston, or elsewhere, as the Treasurer shall appoint at the charge of the Country, to be allowed the Constable, upon his account with the Treasurer, and for all peculiars, viz.: Such places as are not yet layd within the bounds of any Town, the same lands, with the persons and estates there- upon, shall be assessed by the rates of the Town next unto it, the measure or estimation shall be by the distance of the meeting houses." It was also ordered that no estate of land in England should be rated in any public assessment. CHAPTER XI. LIMITATION ON THE INSTRUMENTALITIES OF TAXATION. Attention is next asked to the instrumentality by which taxation subserves the necessities of the state and enables it to effect the purposes for which it was instituted. The designation of this instrumentality is " revenue," as is indicated in the phrase "tariff (or taxation) for reve- nue." But the term " revenue " is abstract and most in- definite, and as popularly used conveys little meaning other than a receipt of something of value. In rude or incipient forms of government, where tribute or taxes were payable in cattle, skins, cocoanuts, salt, grain, and the like, the term might be fairly interpreted as an income of property in general. But in a highly civilized state such a meaning is inadmissible. The government of such a state obviously could not defray its varied expenses by payments with various articles of property, even though their value may be unquestioned — as, for example, its executive with fish, fresh or salt ; its legislators with distilled or fermented liquors; its judges with boots and shoes; its soldiers and sailors with cotton or corn ; and its clerks with agricultural implements — even though the producers of all these forms of wealth or property may be most willing to give them in discharge of their tax obligations.* In such a state revenue has and can have, therefore, but one meaning — * In ancient times cattle were regarded amonof nations of a considerable degree of civilization as standards of value, and obliga- tions to government in the nature of taxes were payable therein. As recent, moreover, as 1758 taxes in Virginia and Maryland were payable in tobacco; and in Massachusetts, Indian corn, musket balls, dried peas, cattle, and beaver skins were made legal tender for the payment of taxes until the early years of the eighteenth century. Ultimately, and in all eases as civilization advanced, such media for the payment of taxes, or the discharge of other forms of indebtedness, have been found to result in terrible currency confusion and to be wholly impracticable, 247 248 THE THEORY AND PRACTICE OF TAXATION. namely, money ; because money is the indispensable and practically the only means of defraying the expenses of the state and efficiently administering its government; and taxation is the process by which the state obtains money from its citizens, who in turn obtain it (as before pointed out — see Chapter IX) in exchange for some product of their labour or for some direct personal service. In short, money is an expedient that finds its sole justifica- tion in its adaptation to a special purpose. At the same time it is important to bear in mind that the raising or procurement of money with the view or pur- pose of accumulating wealth is not a legitimate function or object of civil government. This point, which, stated and regarded as an abstract proposition, may seem to the reader as a matter of interest but of little practical importance, finds a very interesting and most instructive exemplification in the recent attempt to govern South Africa by means of a chartered company — " The South African Company." The attempt failed by the confusing on the part of the company of two things which are absolutely irreconcilable and ought never to be associated — namely, the prerogative of governing men on the one hand and the desire of making money on the other. This the company in question attempted to do by taxing the inhabitants of the territory embraced in its charter for the purpose of making dividends for shareholders, who as a rule did not live in the country, but mainly in England. The result has been a thoroughly vicious and intolerable form of government, one which " has operated to deaden the sense of responsibility among the rulers, who are here to-day but are gone to-morrow, and answerable to nobody but the company." Now, if these premises are correct — and it is difficult to see how they can be disproved — it would seem to follow that to seek to make taxation, which is a fit contrivance only for raising revenue, an instrument for effecting some ulterior purpose, be it never so just and legitimate, to seek to use it for the attainment of any other advantage than the obvious one of raising money, is to lose sight of a fundamental principle of every free government and to forbid all expectation of recognising any other basis for the exercise of this great sovereign power of the state than TAXATION FOR REVENUE. 249 expediency, which in turn will depend upon the actions, passions, and prejudices of legislators, who may not be the same in any two successive legislative assemblies. Such a perversion of principle, furthermore, reaches its climax of absurdity in practice when its immediate bene- ficiaries claim to be the only proper persons by whom the incidence and amount of taxation can be intelligently de- termined — a claim that is practically equivalent to the assumption that privilege should take precedence of rights in the theory of government.* And yet there have been but very few of the revenue enactments in recent years of the Federal Government of the United States that have not only indorsed the rightfulness and desirability of such claims, but have made them the basis of most important legislation. As this subject has hitherto received but little attention from legislators and the legal profession in the United States, the following citations from recognised American authorities are most pertinent in this connection : " A burden laid not for the purpose of producing reve- nue, but in order to accomplish some ulterior object which the General Government lacks the power otherwise to ac- complish, comes under no definition of the word " tax " which is recognised in public law. It demands no con- tributions for the service of the state; it adds and is ex- pected to add nothing to the public revenue. It annihi- lates that upon which it is levied, and it differs from confiscation only in this : that confiscation seizes something of value and appropriates it to the needs of the Govern- ment, thus making it useful, while this seizes it for the purpose of destruction." — Cooley, Law of Taxation, p. 75. * In popular discussions of tariff revisions in the United States such a claim has actually been advanced by the representatives of interests in whose behalf certain imposts had been specially enacted, and which were not for purposes of collecting but rather for the prevention of revenue. "It is not claimed that this statute [McKinley Tariff Act], any more than any other human ordinance, was perfect in its de- tails, nor that all its rates of assessment of duties should have been maintained, but the modifications suggested by time and ex- perience should have been left to the friends of the measure."' — ■ Letter of the Hon. L. P. Moi'ton, accrpthi<7 nomination for the office of Governor of New York, October 9, iS94- 17 250 THE THEORY AND PRACTICE OF TAXATION. / " One grievous invasion of property — and of course /ultimately of labour, from whose accumulations all prop- j I erty grows — is by Government itself, in the shape of taxa- \r ' tion for objects not necessary for the common defence and general welfare. Men have a right not only to be well s^ governed, but to be cheaply governed — as cheaply as is consistent with the due nuiintenanee of that security for which society was formed and government instituted. This, the sole legitimate end and object of law, is never to be lost sight of — security to men in the free enjoyment and development of their capacities for happiness — se- curity : nothing less, but nothing more." — Sharswood, \ Legal Ethics. " To the extent that the mass of our citizens are in- ordinately burdened beyond any useful public purpose and for the benefit of a favoured few, the Government, under pretext of an exercise of its taxing power, enters gratuitously into partnership with these favourites, to their advantage and to the misery of a vast majority of our people." — Message of Grover Cleveland, President of the United States, December, 1888. Taxation for Revenue only. What does it mean ? — It is essential to the completeness of this discussion to call attention at this point to the circumstance that a full recognition and rigid adherence in practice by a Govern- ment to the principles of taxation above shown to be funda- mental, will not interfere with or impair the efficiency of its administration. The raising of revenue (money) by taxation is one thing; the determination of how the reve- nue collected shall be used or expended is quite another thing; and the danger line to the liberties of the people is crossed when these two functions are confounded. The exercise of the first, as already pointed out, is subject to limitations growing out of the conditions essential to the existence of a free Government. The determination of the second rests primarily in the legislative department of such Government, and is subject to no legal limitations in the United States other than what flows from the oft- repeated dicta and decisions of its highest judicial authori- ties, that money taken out of the pockets of the people by taxation can not be used (expended) for any other than a public purpose; but what constitutes a public purpose REVENUE AND EXPENDITURE. 251 is so indefinite that one eminent jurist, especially versed in the subject, has declared that " there is no such thing as drawing a clear line of distinction between purposes of a public and those of a private nature." * If a state, therefore, in the plenitude of the wisdom of its legislators, desires to interfere with the operation of the laws of trade, domestic or foreign, control the preferences of its citizens in respect to production or consumption, re- press one form of industry and stimulate another, and dis- courage even to prohibition the indulgence of such tastes and passions as it may judge to be detrimental to itself or the individual, it may legitimately exercise functions entirely different from that exercised in raising revenue and governed by entirely different principles. The right to regulate trade and commerce and the power of police are entirely independent of the right to raise revenue. If the state, in providing itself with what it regards as necessary revenue, levies its taxes in such a manner that no citizen is required to pay more or allowed to pay less than his just proportion, then there is no tyranny in taxa- tion, even if the methods employed, without any such in- tent, may incidentally promote private interests and sump- tuary purposes. But if, on the other hand, a just and equitable method of taxation will not promote these pur- poses, and, as is usually the case, the state resorts to meth- ods that are not just, not equitable, and imposes upon some citizens an undue share of the general public burden, then to that extent taxation becomes tyrannical, and can not be justified except upon the assumption that there is no limitation on the right of a state to interfere with individ- ual rights to property; which is the same thing as assert- ing that the state in question is not " free," but is a " des- potism." In short, the proposition would seem to be clear that the state can not, without violating that simple prin- ciple of justice which prescribes equality in taxation, use its taxing power for effecting any other purpose whatever except to raise money, f * Cooley, Law of Taxation, p. 70. t A legal writer of eminence ( Jvistice Cooley) has recently con- tended that this is not a correct view, for the reason that it is one which finds no " countenance in the practice of our Govern- 252 THE THEORY AND PRACTICE OF TAXATION. The principle here involved may be further illustrated by reference to a curious chapter of railroad experience. Some years ago the managers of one of the great railroads of the United States appropriated a part of its receipts from the carriage of freight and passengers to the support of an opera house and a corps of ballet dancers. Extraor- dinary as was this procedure, there was no question that the directors, who were trustees for the stockholders, had the right to determine how the earnings of the road should be applied, so long as the stockholders failed to restrain them or prevent their continuance in office; and as they did not, no legal action or restraint of their singular use of the receipts of the property was attempted. But if these same directors had decided not to take money directly from the aggregate earnings of the railroad for the fur- therance of their peculiar views, but that in addition to certain rates for transportation all passengers and freight should pay a special sum (tax) for the support of the opera house, the state would have undoubtedly and prop- erly intervened and forbidden its collection, on the ground that the railroad was not chartered (called into existence) for any such purpose, and that the attempt to use any power other than what was granted or contemplated in its charter was illegal and unwarranted. Again, if the legislative department of the state decides that it would be expedient to establish or stimulate the manufacture of certain commodities, no one under a free government would venture openly to justify such action, except on the ground that public welfare would be thereby promoted, although practically such justification in the United States has long since ceased to be other than a pretence and a cover for the promotion of private interests. Suppose, for example, that the manufactvire of the com- modity which it is proposed to stimulate is tin plate, and it is decided that the desired result can be best attained by giving the domestic manufacturer the difference between what his product will sell for in a free market and what ment, or indeed that of any other." But if this contention is valid, then it may be pleaded with equal effect for the justifica- tion and continuance of every practice which old-time views and long usage have tolerated, but which a higher civilization or a broader culture demands shall be abrogated. INDUSTRY AND STATE AID. 253 he can make it for — say fifteen million dollars per annum — it would seem to be only simple justice that the state should fairly and honestly pay the sum representing this differ- ence, and raise the money,* not by a tax on the consumers of the product artificially maintained, who are no more interested in the matter than all other citizens, but by a levy upon the community at large, in the same equitable manner as it raises money to defray its other expenses. In short, if any industry can not live without state aid, and it is for the public welfare that it should live, let the state directly subsidize it, and not maintain it by allowing pri- vate interest arbitrarily to exercise the great sovereign power of taxation, f * A written public statement made by a Senator of the United States (George F. Hoar) in 1892, that an assertion by the Na- tional Democratic party of the United States in its presidential platform of that year, that " the Federal Government has no con- stitutional power to enforce and collect tariff duties except for the purpose of revenue only," was equivalent to an unveiling of an opinion that " the American people alone, of all civilized na- tions, have no power to do anything for the encouragement of their own industries," displayed an amount of ignorance and mis- conception of the powers and objects of the Government he served which, to say the least, was discreditable to its author. t " Granting that it is expedient for the Government to spend money in the maintenance or the promotion of the iron manu- facture, for example, it must be expedient also that the public should know the exact amount which it costs annually, just as it is expedient that the public shoidd know exactly how much the army and navy costs, or how much the annual improvement of rivers and harlaours costs. No view, however broad, of the province of government can furnish an excuse for concealing the expense of any great national undertaking. . . . But there is no trace of this expenditure in the national accounts. . . . Next, it must be said that any fund of large amount, raised and distribiited in this way, must of necessity prove a corruption fund. By this I do not mean a fund distributed in bribes to individuals or organ- izations, but a fund the existence of which must be constantly present to the mind of the lazy, the improvident, or incompetent, as something to fall back on if the worst come to the worst. Suppoi^e the national appropriations for the purpose of protecting manufacturing industry were made in the ordinary way by a dis- tinct vote of Congress; were made, for instance, as the appropria- tions for the promotion of the carrying trade — the steamship sub- sidies, as they are called — are made in the shape of an annual maximum sum. Suppose this sum were paid over to the corpora- tions or individuals engaged in each manufacture on their giving proof that they were carrying on a bona-flde business. Suppose 254 'i'lIE THEORY AND PRACTICE OP TAXATION. This was the idea of Alexander Hamilton, who in the early days of the republic favoured state interference with the pursuits of the people to a large extent, as the best method by which domestic manufacturing should be stimu- lated by the state. This idea, however, found no more favour with the parties specially interested at that time than it would at present; inasmuch as a brief practical experience would so soon demonstrate the smallness of the revenue necessary to be raised by honest-^xation for the direct maintenance of an industry by the state, in com- parison with the amount raised, for the most part by in- equitable and unjust taxation, for the support of that form of interference by the state Avith production which goes under the name of " protection," as to make any long toleration of the latter policy by a free people exceedingly unlikely. Generic Difference between the " Taxing " and " Police " Powers of the State. — Attention is next asked to the generic difference between the " taxing '" and "police" powers of the state (to which a brief reference has been made already), and to the incongruities and gov- ernmental abuses that inevitably result from a lack of full recognition of this fact. The object of the taxing power is to raise money to defray the expenditures of the state, and proof and argument seem conclusive that it can not be legitimately used for anything else. By the power of police is understood the internal regulation of the affairs of the state in the interest of good order. The idea, there- fore, of resorting to taxation for the purpose of protecting individuals against their own foolishness, enforcing moral- ity, preventing social evils, or as an instrumentality for the punishment of crime, is to pervert an agency from the one sole purpose for which it can rightfully exist to another less fit and not warranted by necessity, and pre- supposes an entire misconception of the principles of a that to each were given as much as would meet the loss, as shown by his books, incurred by him in competing with foreigners in the home markets. . . . The political objections to the protective sys- tem can not be made so clear as by inquiring how the plan of dis- tributing the money directly by the public Treasury would work." — E. L. Godkin, Problems of Modern Democracy, in Some Political Aspects of the Tariff, p. 98. TAXING AND POLICE POWERS. 255 free government ; and all perversions of this power are cer- tain to entail evils greater than the abuses which it is de- vised to remedy. If the prosecution of any trade or occu- pation, or the manufacture and use of any product, consti- tutes an evil of sufficient magnitude to call for adverse legislation, let the state proceed against it directly, coura- geously, and with determination. To impose taxes upon an evil in any degree short of its prohibition is in effect to recognise and license this evil. To demand a portion of the gains of a person practising fraud, may be an effectual method for putting an end to his knavery by making his practices unprofitable; but it would be, all the same, a very poor way for a state to adopt as a means for sup- pressing fraud. If absolute prohibition is the object, then such result should be attained through the police force of the state, and through its legislative enactments making the act, powers, or products which it is desired to suppress, misdemeanours or felonies. The manufacture and sale of spirituous liquors, in common with all other branches of business, is a legitimate subject for taxation, but there is a broad distinction — indeed, nothing in common — between taxing this business for revenue and in levying taxes with a view of preventing the business from being transacted at all, and so preventing revenue. Again, if the above analysis of the origin, justification, and limitations of the power of taxation is correct, it would seem evident that to seek to make the occasion for the exercise of the power other than necessity, and the object anything else than the raising of money for meeting the expenditures of a government economically administered, is to strike a blow at not only good government, but also at free government. It is also a flat denial of the authori- tative statement of the United ^tates Supreme Court that " there are rights in every free government beyond the con- trol of the state," and that the theory of our Government, State and national, admits of no place for the deposit of unlimited power. For the deliberate recognition and in- dorsement of the right on the part of the state to dis- regard these limitations in a single instance, is equiva- lent to a denial that there are any such, and certainly in this one department makes the Government despotic rather than free. Once recognise the principle of in- 256 THE THEORY AND PRACTICE OF TAXATION. equitable taxation, and no one can foresee how far it may be carried. If it is contended, as it is, that the use of the power of taxation for purposes other than the collection of reve- nue finds justification in the fact that " the law-maker must look far enough beyond the general purpose to satisfy himself how any proposed levy is likely to affect the general good," a sufficient answer to such contention would seem to be that the general good is always best subserved by doing what is exactly right, and not what is expedient. There is no question that the Federal Government of the United States, under its peculiar organization, is ex- cluded from all responsibility for the internal order or morality of the States that make up the Union, and under such circumstances it follows that where Congress assumes that the consumption or use of certain commodities is prejudicial to the interests of the people (as it has done, as will hereafter be shown), and attempts, when providing means for the support of the Federal administration, to embody such assumptions, with a view of prohibitions or restraints, in measures of revenue, it is also enacting sumptuary laws * and imposing taxes, not in accordance with any rule of equity, but by reason of some arbitrary and sentimental notions of how a citizen ought to live, dress, eat, and drink. In the case of the several States of the Union, whose power of taxation is practically unlim- ited, such action is in the nature of oppression ; but in the case of the Federal Government, whose powers of taxation are carefully limited by its Constitution, it is clearly an act of usurpation. In further elucidation of this matter, it is interesting to note, that probably no example can be found in history in whic]^ an attempt has been made to continue the raising of revenue with the regulation of popular consumption, that has not resulted in failure as respects the attainment of both objects. One of the most notable perversions of the correct prin- * "Sumptviary: Relatinsr to expense. Laws or reprulations which restrain or limit the expenses of citizens in apparel, food, furniture, etc. Sumptuary laws are abridprments of liberty and of very difficult execution. They can be justified only on the ground' of extreme necessity." — Webster's Dictionary. SUMPTUARY LAWS. 257 ciples of taxation for the purpose of affecting the popular consumption of a commodity, has been the comparatively recent attempt of the Federal Congress (act of August, 1886) to prevent the use of one of the great discoveries of the age — namely, the manufacture of artificial butter, which, when properly prepared, is a most valuable and per- fectly healthy addition to the food resources of the people. The practical results of this attempt are exceedingly cu- rious and ought to be in the highest degree instructive. The burden of the tax — two cents per pound, and special taxes . on manufacturers, wholesale and retail dealers — which was intended to be prohibitory, has not been suffi- cient to accomplish the object of its levy; for the annual production, sale, and consumption of oleomargarine in the United States have continually increased (from 34,325,000 pounds in- 1888 to 48,364,000 in 1892, and 69,632,000 in 1894). The Federal courts having decided that it is mer- chantable, the States may to a certain extent also regulate its sale, but can not prevent its importation. The Federal Government furthermore derives a considerable revenue from its domestic manufacture and sale ($1,409,211 in 1895), and an annual large and increasing quantity for the consumption and use of foreign countries is exported (127,193,000 pounds in 1894) ; and clearly, if such pro- duction and sale are fraudulent and wrong, the Govern- ment has become a partner in such fraud and wrong and in effect licenses them. It is also an interesting fact that this idea of resorting to taxation for the primary purpose of enforcing morality and preventing social wrong is a comparatively modern idea, and finds its chief exemplification in the United States. The lesson of all history is to the effect that, save in the case of war or invasion, nations have rarely or never lost a freedom once possessed, except through the tolerance (born of indifference) of a succession of gradual and in- sidious perversions and weakening of those fimdamental principles which must be maintained unimpaired to make popular liberty possible. And it is alike startling and discouraging to note how rapidly, in recent years, the United States, as a political entity, has been travelling in this direction. 258 THE THEORY AND PRACTICE OF TAXATION. Theory of the Powee of Taxation originally ENTERTAINED BY THE AMERICAN PEOPLE. The idea of using the power of taxation for other purposes than that of obtaining revenue for defraying the necessary expendi- ture of the Government, was one hostile at the outset to all the beliefs and habits of thought of the American people; was totally incongruous with the social and political system which they instituted and expected, and was reluctantly admitted under the idea that the industries of a new country might need some temporary stimulus and assist- ance at the outset.* The party (old Whig) that in sub- sequent 3'ears specially advocated the policy of protection to domestic industries, always also admitted that the Fed- eral Government had no original right to exercise the power of taxation except for revenue, but it claimed that taxes on imports might and should be so adjusted as to afford protection for our infant industries. And in this they were joined by some members of the other great national party — the Democratic — who argued in favour of what was called " incidental " protection, or the protection which inevitably results in a greater or less degree from the im- position of duties without any such premeditated purpose. Theory and Practice of Later Days. — But it was not until after the termination of the war in 1865 that anybody in the United States ventured to openly main- tain or defend the proposition that protection was other than the incidental and not the main object of the exer- cise of the taxing power, although this perversion of prin- ciple was tacitly recognised by the imposition and con- tinuance of taxes which had for their intent, or resulted in, a prevention of the raising of revenue. Illustrative Examples of the Practical Perver- sion of the Theory and Principles of Taxation. — One of the most instructive examples of this kind was afforded by the imposition of a tax in 1869 of five cents a pound on the importation of crude or unmanufactured copper; which proved so prohibitive that in one year (1878) revenue to the extent of only five cents, accruing * The doctrine of Hamilton was that while the payment of bounties for the encouragement of new industrial undertakings was justifiable, their " continuance on manufactures long estab- lished was most questionable." — Report on Mannfactures, 1191. DUTIES FOR PROTECTION. 259 from the importation of only one pound of copper, was collected. The legislators who enacted the law productive of such a result might have pleaded in justification that revenue was their intent ; * but when a brief experience had proved that the taxing power had been used to pre- vent the raising of revenue by the state, and for a differ- ent purpose, it was evident that a continuance of the policy (and the tax was long retained) was in effect a justification and an indorsement of it. To complete the illustration, it should be further pointed out that the re- sult of this perversion of the taxing power was to enable the owners of copper mines in the United States, especially certain ones of unprecedented richness — formerly the prop- erty of the United States, but sold for a mere song — to extort for a period of years from the people of the whole country the sum of five cents for every pound of copper they consumed, but from which exaction (aggregating mil- lions) the people of other countries, who consumed the large surplus product of American copper exported, were exempt, as the tax laws of all countries have no extra-ter- ritorial jurisdiction. During the discussion and defence of this tariff enacted in 1890, however, all pretence and evasion were discarded, and the position openly taken that the Government could rightfully levy taxes, not for the purpose of raising revenue, and not to subserve any neces- sity of the state, and under the name of protection delegate to private or corporate interests the right to collect and appropriate them. It has been contended by authorities worthy of all re- spect (the late George Ticknor Curtis, for example) that there is no perversion of the taxing power in the levy of duties on imports by the Federal Government for pur- poses other than revenue, for the reason that " duties are not taxes, but assessments, in the nature of tribute imposed on merchandise imported from other countries," and that " when the Government levies duties on foreign prod- ucts," under the provision of the Constitution that " Con- gress shall have power to lay and collect taxes, duties, im- * The United States Supreme Court has held that the judicial power can not inquire into the intentions of Confjress in imposing a tax; and that, if injustice is done, the only remedy is an appeal to the legislative power that has inflicted it. 260 THE THEORY AND PRACTICE OF TAXATION. posts, and excises/' " it does not exercise or pretend to exercise its taxing power." * In answer to this it is to be said, first, that the appli- cation of different names to one and the same act does not alter the nature of the act. Second, that usage and au- thorities among all nations and at all times are in unison in regarding such terms as imposts, duties, excises, cus- toms, tolls, gabelle, talliage, tribute, and the like, when used in respect to the fiscal functions of a government, as expressive simply of different methods of effecting one and the same object — namely, the compelling of contribu- tions from persons, property, or business for the use or sup- port of the state. The contention, then, thus far is simply a quibble as to the meaning of words. Third, the authority given to Congress by the Constitution " to lay and collect ' imposts,' in connection with taxes, duties, and excises," does not warrant the assumption that any of these acts of levying and collection are to be by methods that are not primarily for the purpose of raising revenue (money) for the service of the state, or are antagonistic to the struc- ture of a free government. Following the precedents be- fore noted, a measure known as the Anti-option Bill was introduced and found favour in Congress, which was noth- ing more nor less than an attempt to make people dealing in certain staple agricultural commodities honest by the exercise of the taxing power; a measure devised for effect- ing indirectly that which it would be unconstitutional to do directly — namely, to prevent trading in cotton, grain, * Mr. Curtis does not repeat this statement in his Constitu- tional History of the United States. In the second volume he had contemplated a note on a " tariff for revenue only," but his intention was laid aside, and the following appears: " This question being in the domain of party politics rather than in that of constitutional history, the note suggested at p. 190 is omitted. Whether protection to manufacturers should be the direct object of a tariff, or whether it should be incident thereto, appear to be matters of mere verbal dispute. Every tariff is for revenue: and every tariff is intended to be so laid as to protect rather than to injure. If a tariff were laid for protection only, it would find no constitutional warrant. Whether or not a given tariff discriminates unfairly in favour of one class at the expense of the others is a question for the law-making power to decide; and self-interest and party spirit will largely determine the con- duet of legislators upon that question" (p. 691). ANTI-OPTION LEGISLATION. 261 hops, meats, etc., for future delivery, by first assuming that all such sales are " immoral, unnatural, unjust, and injurious," and then attempting to put an end to them, not by the exercise of the police power of the several States, but by licensing and taxing them by the Federal Govern- ment under pretence of collecting revenue, when by the very terms of the bill no taxes productive of revenue are likely to accrue from its provisions. It is difficult to see why, if this extraordinary measure had become law and obligatory on all citizens, the policy of restraint involved should not have been made also applicable to the buying and selling of all articles other than cotton and cereals — as cloth, stoves, boots and shoes, securities — and even per- sonal service ; and why, if it is right to extinguish one trade or calling by taxing it, every other may not be uprooted and extinguished in the same way.* * As pertinent and most instructive on this subject, attention is asked to the following extract from a speech of Hon. Edward D. White (then a Senator of the United States from Louisiana, and now a judge of the United States Supreme Court), in the course of a debate in the Senate in July, 1892, on the so-called Anti-option Bill : " No power as to imposts was reserved in the States by the Federal Constitution. All the lawful powers of government which could be exercised in that particular passed into the life and being of the Federal Government by the lodgment in that Government of the power to levy imposts. In my judg- ment, if complaint is made of import taxes by the Federal Gov- ernment, levied not for the purpose of revenue, but for protection or prohibition, the complaint is not that the Federal Government violates the Constitution or the limitations of the Constitution, because as to that all authority is granted by the Constitution. When I say this I mean no limitation by the Constitution by ex- press provision of the Constitution. The complaint of undue or prohibitory external imposts is not that the Constitution has been violated. " No, but that there has been a violation of the great funda- mental and elementary principle of all government, which under lies all constitutions, which affect this Government and every other government, and which would affect the most unlimited government in the world. These principles are. that government is created with limitations flowing from the nature of its being, which teach that no government shall use its power for the benefit of the few to the detriment of the many. Therefore, all the argu- ments which have been made on the subject of the abuse of the impost power in the Federal Government are arguments address- ing themselves not to the limit of delegation under the Constitu- tion as to imposts, but to the want of power arising from the 262 THE THEORY AND PRACTICE OF TAXATION. Another proposition which has received the indorsement of high judicial anthority in the United States * is to em- ploy Federal taxation for the crushing out of State lot- teries, with the absurd accompaniment of no revenue (taxes) ; for if the desired object is attained, the payment of taxes and the procurement of revenue will be prevented. It seems clear, also, that if such a measure was once adopted it would constitute a precedent and authority for the de- struction by the Federal Government, through the exer- cise of the taxing power, of nearly every faculty or power now belonging to and exercised by the several States; and that houses of prostitution, gambling and liquor saloons, very nature of government itself. The usurpation of power by Congress, not vested by the Constitution in Congress, is uncon- stitutional." In the course of the debate to which reference has been made, Mr. White, in response to a question as to what he would as a Senator consider his duty in respect to a bill proposed to Con- gress for enactment which, while undoubtedly productive of rev- enue, was intended for some other purpose, made answer as fol- lows: "I would have two questions to ask myself: Is this a bill raising revenue? That is the first question. If I determine that question in the aflSrmative, the lamp of my duty might lead my mind toward supporting that bill, but it could not carry me to that point unless another question were also answered: Is it an honest exercise of the taxing power, or is it a dishonest scheme to raise revenue and accomplish another purpose? If my mind, in the exercise of my duty here, found that either of these tilings existed, then, although it was a bill raising revenue, I would not vote for a dishonest bill raising revenue." The point here at issue was also cleai-ly recognised by President Cleveland, in his message in 1886, announcing his signature to a bill (above noticed) for taxing oleomargarine, where the real intent of taxation was popularly assumed to be prohibitive of production and sale and not revenue. " It has been urged," he said, " as an f)bjection to this measure that while purporting to be legislation for revenue, its real purpose is to destroy, by the use of the taxing power, one industry of our people for the protection and benefit of another. If entitled to indulge in such a suspicion as a basis of official action in this case, and if entirely satisfied that the consequences indicated would ensue, I should doubtless feel con- strained to interpose executive dissent." In other words, the President took the bill as it came to him as ostensibly a revenue measure, and in the exercise of his executive prerogative passed upon it as such, but at the same time he was careful to say in this message that if that bill had not presented that aspect to him, he Avould have been constrained to exercise the executive veto. * Judge Cooley, Atlantic Monthly, April, 1892. SUPPRESSION OF LOTTERIES. 263 opium " joints," and other haunts of vice now under the control and supervision of the police powers of the States, might be regulated or suppressed by Federal taxation, as well as lotteries.* It should also be remembered that lotteries, if they exist at all in the United States, must do so under the authority of State laws; that Congress can not take from a lottery company the charter which a State Legislature haa granted; or make the issue of its tickets illegal, or punish as a crime the action of the managers by whom the business of a lottery is carried on ; and further, that any legislation to make lotteries illegal should inferentially pertain to the State : first, because no jurisdiction has been given under the Constitution to Congress, except by remote inference, to interfere with this matter; and, second, be- cause there is no doubt that there was a complete unanimity of opinion among its framers that lotteries were legitimate and unobjectionable instrumentalities of society, inasmuch as at the time the Constitution was framed they were au- thorized by the States and extensively employed through- out the country for the founding of schools and colleges, and the erection of churches, hospitals, and the construction of roads, bridges, and ferries. On the other hand, it does not admit of contention that under the exclusive power vested by the Constitution in the Federal Government to " establish post offices and post roads," the use of the mails for the transmission of lottery tickets and correspondence may be legitimately inhibited, or that the general business of lotteries may not be rightfully made suljject to Federal taxation for the sole purpose of revenue. When the Pro- vincial Legislature of Canada recently decided to suppress lotteries in the Dominion, the measures which it instituted for so doing were not made contingent in any way upon the power of taxation, but by the imposition of heavy fines and penalties, not only on those engaged in the business, but also upon those having lottery tickets in their pos- session. During the early years of the late war, taxes were im- * " Congress is not empowered to tax for those purposes which are in the exclusive province of the States." — United States Su- preme Court, Gibbons vs. Ogden, 9 Wheaton, i, 199. 264 THE THEORY AND PRACTICE OF TAXATION. posed on the circulation of the State banks, " manifestly with a view to raise revenue and inform the authorities of the amount of paper money in circulation, and for no other purpose." But in 1865 these taxes were greatly in- creased, not for revenue, but Avith the admitted intent of destroying all banking institutions chartered by the States, leaving only similar institutions chartered by the Federal Government in existence. The result sought was fully attained, and the constitutionality of the legislation by which it was achieved was subsequently affirmed by the United States Supreme Court, which in the case of Veazie vs. Fenno (8 Wall., p. 552) nevertheless held that "the States possessed the power to grant charters to State banks," that " the power was incident to sovereignty, and that there was no limitation in the Federal Constitution " of such power. But in delivering the opinion of the court, the Chief Justice (Chase) declined to enter upon an in- quiry whether the tax imposed on the State banks was so excessive as to divulge the legislative intention to prohibit banking on their part, but he argued elaborately that for another and stronger reason the tax could be constitu- tionally imposed because it was a tax levied for a lawful purpose, which lawful purpose was to restrain a State from interfering with the Federal control of the currency and the right of the national Government to emit bills of credit, and it was upon that point that the decision of the Supreme Court was in fact rendered. The point of interest in this decision, however, is not the right of the Federal Government to regulate, especially under the original admitted necessity for the exercise of war powers, the currency of the country, but whether, having regard to the limitations on the exercise of the tax- ing power growing out of the nature of a constitutional government, the Federal authorities were justified in em- ploying it as an instrumentality not to collect revenue but to prevent revenue, and when the desired end could be effectually achieved by other and unobjectionable methods ; and on this point the court, following a well-established precedent of avoiding as far as possible all conflict between the judicial and legislative powers of the Federal Govern- ment, avoided any direct expression of opinion. As the case now stands, and as Congress has refused to discontinue MISUSE OF TAXATION. 265 the tax, it must be regarded as equivalent to an assertion that the Federal Government has the constitutional right to exercise the taxing power not for revenue and not by reason of any necessity that can justify it.* During the recent discussion of the silver problem, an eminent American writer on economic questions recom- mended that a Federal tax should be imposed on silver, varying from month to month according to the changes in its market price as bullion, with the view of establishing and maintaining a parity of value between gold and silver, with, of course, a total disregard of the sole object and justification of taxation — namely, revenue. But the most curious illustration of the extent to which an entire misconception of the nature and functions of taxation has obtained favour in the United States is to be found in a pamphlet entitled Eational Principles of Taxa- tion,! recently published by a Professor of Political Econo- * Concerning the legitimacy and constitutionality of this pro- cedure, a minority of the Finance Committee of the United States Senate, in a report in May, 1892, on a proposition to repeal this tax, expressed themselves as follows: Prior acts imposing taxes of one or two per cent on the notes of State banks, imposed for revenue purposes, the committee regard as entii-ely justifiable; but in respect to the ten-per-cent tax, which neither produced nor was intended to produce revenue, the committee say: " This is flagrantly obnoxious in its manifest perversion of the taxing power conferred upon Congress by the Constitution. . . . We think also that a reasonable construction of the taxing-power clause in the Constitution, to wit, ' the Congress shall have the power to lay and collect taxes, diities, imposts, and excises to pay the debts and provide for the common defence and general welfare of the United States, would mean that Congress shall pay the pub- lic debt, provide for the common defence, and promote the general welfare with the money arising from such taxation, and not that Congress shall have the power to discharge these public duties by the mere framing of a statute without any revenue resulting there- from. Surely it would be an absurdity for the Constitution to say that Congress shall have the power to discharge the debt of the United States by the mere framing of a statute or the word- ing of a law. The payment of money or the transfer of things of value is the only way by which a debt can be paid. Therefore the enacting of a law in the name and under the pretence of rev- enue which is intended to raise no revenue in fact, but which has another and entirely different object, is a gross and fraudulent perversion of the taxing power conferred by the Constitution." t Rational Principles of Taxation. By Simon N. Patten, Pro- fessor of Political Economy, University of Pennsylvania, 1890. 18 266 THE THEORY AND PRACTICE OF TAXATION. my in the University of Pennsylvania, and included among the authorized publications of the university. In this the author advocates the levying of taxes by the national Government for the purpose of effecting " stability in prices " ; and on the assumption that a large and increas- ing percentage of the national wealth is consumed in the expenses of the retail distribution of commodities, proposes to remedy the evil by imposing a discriminating tax on retail dealers so heavy as to crush out all such whose busi- ness and profits in a given time do not exceed a certain amount to be prescribed by statute. Among the antici- pated advantages enumerated by the author of the adoption of such a scheme would be the saving of rent " on one half the stores " of cities and a great reduction of rent on the other half. " There would be little need of advertising ; . . . the stocks of goods carried by the whole trade would be greatly reduced, from which there would be great saving of capital." But " perhaps the greatest saving of all would arise from the reductioTi ijf the force of salesmen and in the cost of delivering goods." And finally, carried away apparently by a beatific vision of the glories of such a tax millennium, the professor exclaims, " Think of all the elements of economy in conjunction, and an idea can be formed of the amount of taxes that could be levied on retail dealers without putting the public to any inconvenience ! " * and " would not the unnecessary capital now absorbed in business be fully sufficient to furnish us with pure water, lovely parks, fine-art gal- leries," etc.? Prospective Evils of the Perversion of the Tax- ing Power. — In view of such experiences and propositions, the questions are most pertinent : How much further is such a perversion of the taxing power to be carried ? And is not the entire recent experience of the nation in this respect in the direction of supplanting a " f ree " by a " pa- ternal " government, which last in turn finds its highest expression in the enactment of sumptuary laws for the * Obviously the author of this scheme supposed that the retail dealers of this country are such simple-minded people that they will cheerfully pay their proposed heavy taxes out of their capital, and not transfer them, through increased prices of their goods, to their consuming purchasers. EVILS OF PERVERSION. 267 control by government of the private life of its citizens? All despotic power is alike in its nature; and, once in- dulged in, the results are always the same. Once let it be fully accepted as a legitimate feature of public policy that the great public power of taxation may be intrusted to individual hands for private purposes, and the power of life and death will be promptly seized to make the former effective. Once confer upon government the power of dealing out wealth, and the day is not far distant when its recipients will control the Government, and by the use of money elect their magistrates and legislators to per- petuate this policy. Had the framers of the Federal Constitution even so much as dreamed that the Government to be established under it would ever practically refuse to acknowledge any limitations on its right to interfere with the property of its citizens, would use the taxing power with undisguised intent for promoting private rather than public purposes, and would levy taxes to prevent the payment of taxes, the Constitution itself would never have been called into exist- ence, and the great American Eepublic would never have had a history.* * The economic student and writer (and indeed almost the only one) who has discussed this subject in the English language with originality and cogency that is most potent for conviction, is Mr. Theodore Bacon, of Rochester, N. Y., in an article con- tributed to The New-Englander in 1867, and to which the author acknowledges his indebtedness both in respect to ideas and lan- guage. CHAPTER XII. THE SPHERE OF TAXATION PECULIAR TO THE FEDERAL GOVERNMENT OF THE UNITED STATES. The United States presents the curious anomaly of a great nation existing under two systems, or dual forms of government; each having a sphere of action peculiar to itself, and both exercising the general functions of government, namely: the executive, the legislative, and the judicial. These two are the Federal or national Gov- ernment, existing in virtue of an agreement of union entered into originally by thirteen separate and inde- pendent States, and known as the Federal Constitution; and next, a system of State or divisional governments, existing in virtue of certain original powers retained by the independent and sovereign parties to the above agree- ment, and not delegated by them, in entering the Fed- eral Union, to any other or higher sovereignty. At the same time a concession of power to tax or compel con- tributions from persons, property, and business by each of these two forms of government, in order to defray their necessary expenditures, was obviously essential to their existence and continuance, and was so recognised from the first inception of any compact of union. But how to divide this power — the badge and symbol of sover- eignty — between two distinct sovereignties of the same nations, namely, the Federal Congress and the Legisla- tures of the several States, and impose limitations in both cases on the exercise of a function so vast in its sweep and so imperative in its action, was one of the most difficult problems that confronted the framers of the Federal Constitution, and one without precedent in the world's history. The problem occasioned much discus- sion, and was really left unsettled — a general power being given to the national legislature, or Congress, " to lay and 268 STATE AND NATIONAL TAXATION. 269 collect taxes, duties, imposts, and excises," with the limitation that " all duties, imposts, and excises shall be uniform throughout the United States "; that " no capi- tation or other direct tax shall be laid unless in pro- portion to the census "; that " no State shall, without the consent of Congress, lay any imposts or duties on im- ports or exports," and that no tax or duty shall under any circumstances be laid on articles exported from any State. Under such a loose and indefinite condition of things, a conflict of laws and of jurisdictions was inevitable, giv- ing rise to controversies whose determination was really vital to the integrity and efficiency of the Federal Con- stitution. But happily, owing to the firmness and wisdom of the national tribunal (United States Supreme Court) before which these questions have been brought for ad- judication, most of the difficulties which once seemed so formidable have been overcome, and are now mainly in- teresting as matter of history. One of the earliest and most celebrated of these con- troversies culminated, as it were, in a case or suit known as McCulloch vs. Maryland, which came before the Su- preme Court of the United States and was decided in 1819, under the following circumstances: Congress in 1815 chartered a national (United States) bank, which as a legitimate and authorized feature of its organization estab- lished branches in the States, with power to issue circulat- ing notes. This measure proved unpopular in many of the States, and attempts were made by them to resist the various operations of this banking institution within their territory. Foremost among these was the State of Mary- land, which, through an enactment of its Legislature, re- quired every bank doing business in the State, and not chartered by the State, either to pay a stamp duty on every note issued, or pay a tax of $1,500 in gross per an- num, and in addition imposed certain penalties on all the officers of a bank violating the law, and upon every per- son who had any agency in circulating such notes. Con- temporaneously, also, the State of Ohio imposed an annual tax of $50,000 upon the branch bank of the United States established in that State. The validity of the Maryland statute having been affirmed by the Court of Appeals, the highest court of 270 THE THEORY AND PRACTICE OF TAXATION. law in that State, and an action having been brought for the enforcement of a penalty against an official of the Maryland branch (United States) bank for a violation of the State law, the defendant — one McCulloch, the cashier of the said branch bank — thereupon brought the case (as involving an interpretation of the Federal Constitution) by writ of error before the United States Supreme Court. A little reflection will abundantly satisfy the reader that the question involved in this procedure was of the greatest importance, inasmuch as it necessitated certain rational and fundamental conclusions that had not pre- viously been authoritatively reached and popularly ac- cepted, respecting the nature and power of the Federal Government; and a definite interpretation of the letter and spirit of certain features of the Federal Constitution which, as the action of the States before noticed demon- strated, had, to say the least, been heretofore regarded as ambiguous. So that, whatever might be the decision of the court, the consequences were certain to be most momen- tous. Thus, if the right of a State to tax — which prac- tically involved the right to destroy the instrumentalities of the Federal Government, was denied, then such Gov- ernment rested on sure foundations. If, on the other hand, to quote the language of the court, " the right of the State to tax the means employed by the General Gov- ernment be conceded, the declaration that the Constitu- tion and laws made in pursuance thereof shall be the supreme law of the land is an empty and unmeaning dec- laration," and the United States, in the sense of a nation, would practically cease to exist. Taking also into account the increase in the number of States that would have to harmonize if anything was accomplished in a new consti- tutional convention, and the number of new antagonizing elements on the part of the several States that had arisen — the vexing question of the future tolerance and ex- tension of slavery, which finally eventuated in civil war, the power of Congress to create banking corporations, and the right of the Legislatures of the States to subject them to taxation, and the like — and it is very doubtful whether any new Federal Constitution could have been established. As a matter of fact, the Federal Government and the union of the States came nearer disruption and dissolution Mcculloch vubsus Maryland. 2YI in 1819 than when, forty-two years subsequently, Fort Sumter was fired upon and the flag of the Union forcibly hauled down — which latter events are generally regarded as constituting the leading features of the constitutional history of the United States. And this situation was so well recognized by Chief-Justice Marshall (to whom the nation is indebted for its preservation to a greater degree than has been generally recognized) as to draw from him the remark, preliminary to announcing the decision of the court, that "■ no tribunal could approach such a question as was involved without a deep sense of its importance and of the awful responsibility involved in the decision." * The decision of the court was unanimous that " the States have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operation of the constitutional laws enacted by Congress to carry into execution the powers vested in the General Govern- ment; and that the law passed by the Legislature of Mary- land imposing a tax on the Bank of the United States is unconstitutional and void." " If we apply," said the Chief Justice, " the principle for which the State of Maryland contends to the Consti- tution generally, we shall find it capable of changing totally the character of that instrument. We shall find it capable of arresting all the measures of the Government, and of prostrating it at the foot of the States. The American people have declared their Constitution and the laws made in pursuance thereof to be supreme; but this principle would transfer the supremacy, in fact, to the States. If the States may tax one instrument em- ployed by the Government in the execution of its powers, they may tax any and every other instrument. They may tax the mail; they may tax patent rights; they may tax the papers of the custom house; they may tax judicial process; they may tax all the means employed by the Government, to an excess which would defeat all the ends of govern- ment. This was not intended by the American people. * " No more impressive words are to be found in any English or American adjudication than those uttered by Chief-Justice Marshall as a preamble to the judgment in this most interesting and important case." — Francis HiJIard, The Law of Taxation. 272 THE THEORY AND PRACTICE OP TAXATION. They did not design to make their Government dependent on the States." The court, however, held that its decision did not de- prive " the States of any resources which they originally possessed. It does not extend to a tax paid by the real property of the bank, in common with the other real property within the State, nor to a tax imposed on the interest which the citizens of Maryland may hold in this institution, in common with other property of the same description throughout the State. But this is a tax on the operation of the bank, and is consequently a tax on the operation of an instrument employed by the Govern- ment of the Union to carry its powers into execution. Such a tax must be unconstitutional." * The successful counsel in this case were Daniel Web- ster and William Pinkney, and in the course of his decision the Chief Justice complimented the counsel on both sides as maintaining the affirmative and negative with a splen- * The following additional extracts from the decision of the court in this celebrated case will help to a further elucidation of its involved subject-matters: " In the case now to be determined," said the chief justice, " the defendant, a sovereign State, denies the obligation of a law enacted by the Legislature of the Union; and the plaintiff, on his part, contests the validity of an act which has been passed by the Legislature of that State. The Constitution of our coun- try, in its most interesting and vital parts, is to be considered; the conflicting powers of the Government of the Union and of its members are to be discussed; and an opinion given which may essentially influence the great operations of the Government. No tribunal can approach such a question witliout a deep sense of its importance and of the awful responsibility involved in its decision. But it must be decided peacefully, or remain a source of hostile legislation — perhaps of hostility of a still more serious nature; and if it is to be so decided, by this tribunal alone can the de- cision be made. On the Supreme Court of the United States has the Constitution of our country devolved this important duty. The sovereignty of a State extends to everything wliich exists by its own authority, or is introduced by its permission; but it does not extend to those means which are employed by Congress to carry into execution powers conferred on that body by the people of the L'nited States. We think it demonstrable that it does not. These powers are not given by the people of a single State; they are given by the people of the United States to a Government whose laws, made in pursuance of the Constitution, are declared to be supreme. Consequently, the people of a single State can not confer a sovereignty which will extend over them." TAXATION OP NATIONAL INSTRUMENTS. 2Y3 dour of eloquence and a strength of argument seldom, if ever, surpassed. It may also be added that no decision of the United States Supreme Court, or of any other court in the United States, has since impugned the correctness of the prin- ciple upon which the case of McCulloch vs. Maryland was decided. A brief notice, however, of subsequent judicial proceedings is interesting and necessary to complete the history of this celebrated case. Thus, the Legislature of Ohio having, as before stated, imposed an annual tax of $50,000 upon the branch of the Bank of the United States established in that State before the decision in the McCulloch case, the State officers, even after the decision, proceeded to levy and collect the tax. Thereupon the case was again brought before the United States Supreme Court on an application for injunction, and was reargued, with reliance upon the point that the bank was a mere private corporation, whose chief object was indi- vidual trade or profit. The court, however, at once re- affirmed its former judgment, and held that the bank was a public corporation, created for national purposes, and an instrument for carrying into effect the national powers. At the same time the opinion of the court in the McCulloch case, that its decision " did not deprive a State of any resources it originally possessed," remained unaffected. Subsequently a case came before the United States Supreme Court (Weston vs. the City of Charleston, S. C.) * in which the question involved was the right of a State to tax stock issued for loans made to the United States, whether on the stock, eo nomine or included in the ag- gregate of the tax-payers' property to be valued at what it was worth. The court, by Chief-Justice Marshall, held " that a tax on stock of the United States, held hij an in- dividual citizen of a State, is a tax on the potver to borrow money on the credit of the United States, and can not be levied on the authority of a State consistently with the Con- stitution," and, further, " that if the right to impose a tax exists, it is a right which in its nature acknowledges no limits. It may be carried to any extent ivithin the juris- * 2 Peters, 449. 274 THE THEORY AND PRACTICE OF TAXATION. diction of the State or corporation which imposes it, which the will of such State or corporation may prescribe. Can anything," continued the Chief Justice, " be more dan- gerous or more injurious than the admission of a prin- ciple which authorizes every State and every corporation in the Union which possesses the right of taxation to burden the exercise of this (borrowing) power at their dis- cretion?" A tax on the stock or bonds of a State is therefore a tax on the borrowing power of such State. The court further held that a tax of this description was a tax upon contracts,* using the following language : " Congress has power to borrow money on the credit of the United States. The stock it issues is evidence of a debt created by the exercise of this power. The tax in question is a tax upon the contract subsisting between the Government and the individual. It bears directly upon the contract. While subsisting and in full force, the power operates upon the contract the instant it is framed, and must imply a right to aifect that contract. If the States and corporations throughout the Union possess the power to tax a contract for the loan of money, what shall arrest the principle in its application to every other contract? * What interpretation the Supreme Court puts upon the word " contract," as found in that clause of the Constitution of the United States which provides " that no State shall pass any law impairing the obligations of contracts," is made clear by the fol- lowing language employed by Chief-Justice ^Marshall in giving the opinion of the court in the celebrated case of the Trustees of Dartmouth College vs. Woodward : " The term contract must be understood as intended to guard against a power of at least doubtful utility, the abuse of which had been extensively felt, and to restrain the Legislature in future from violating the right to property ; that anterior to the formation of the Constitution a course of legislation had prevailed in many if not all of the States which weakened the confidence of man in man, and embarrassed all transactions between individuals, by dispensing Avith a faith- ful performance of engagements. To correct this mischief by re- straining the power which produced it, the State Legislatures were forbidden ' to pass any law impairing the obligation of contracts ' — that is, of contracts respecting property, under which some indi- vidual could claim a right to something beneficial to himself; and that, since the clause in the Constitution must in construction receive some limitation, it may be confined, and ought to be con- fined, to cases of this description — to cases within the mischief it was intended to remedy." TAX ON INTERSTATE COMMERCE. 275 What measure can Government adopt which will not be exposed to its influence? The right to tax the contract to any extent, when made, must operate upon the power to borrow before it is exercised, and have a sensible influ- ence on the contract. The extent of this influence de- pends on the will of a distinct government. To any ex- tent, however inconsiderable, it is a burden on the opera- tions of government. It may be carried to an extent which shall arrest them entirely." As a sequence to these decisions of the United States Supreme Court, not only has the general principle that no State of the Federal Union can impose any tax upon any agency of the Federal Government — as its mails, its build- ings, its lands, its ships, its money, and the like — come to be universally recognised as in the nature of an un- questionable law of the land, but the question of the appli- cation of the principle in respect to many cases to which some latitude of opinion was legitimate, has been specially and definitely determined. Thus, for example, it has been established, that a State can not impose license taxes upon persons passing through or coming into it merely for a temporary purpose, especially if connected with interstate commerce ; a State, furthermore, can not enact any law or establish any regulation affecting interstate commerce, inasmuch as the same would be an unauthorized in- terference with the power given to Congress on the sub- ject. Interstate commerce also can not be taxed at all by a State statute, even though the same amount of tax should be laid on commerce which is carried on solely within the State; 'and the negotiation of sales of goods, which are in another State, for the purpose of introducing them into the vState into which said negotiation is made, has been held to be interstate commerce. A tax levied by the State of Michigan of one cent and a half a ton on iron ores, if taken out of the State for smelting, while exempt if smelted within the State, was held by the United States Supreme Court to be a tax on commerce and therefore void. A State statute which levies a tax upon the gross re- ceipts of railroads for the carriage of freights and pas- sengers into, out of, or through a State has been held to be a tax upon commerce between the States, and therefore 276 THE THEORY AND PRACTICE OP TAXATION. void. Under the provision of the Federal Constitution that "no State shall, without the consent of Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspec- tion laws," some difficulty has been experienced in indicat- ing with sufficient accuracy for practical purposes, the point of time at which articles brought into the country from abroad cease to be regarded as imports in the sense of constitutional protection, and become liable to State taxation. But it has been held by the United States Su- preme Court that where the importer has so acted upon the thing imported that it has become incorporated and mixed up with the mass of property in the country, it has lost its distinctive character as an import, and be- come subject to the taxing power of the State; but while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported, a tax upon it is too plainly a duty upon imports to escape the prohibition in the Constitution. The deductions from a contrary rule would be manifestly as follows: " No goods would be imported if none could be sold. The same power that imposes a light duty can impose one that amounts to prohibition. A duty on imports is a tax on the article, which is paid by the consumer. The great importing States would thus levy a tax on the nonimporting States," as was done under articles of the Confederation prior to the adoption of the Federal Constitution. " This would necessarily produce countervailing measures." In the case of Brown vs. Maryland, where the latter State, for revenue purposes, required a merchant to take a license and pay fifty dollars before he should be al- lowed to sell a package of imported goods, the court (by Chief -Justice Marshall) held that this tax, though indirect in form (i. e., a license on the person of the importer), was in fact equivalent to a duty on imports, and therefore illegal; and that the right to import carried with it the right to sell.* * As an extension of the history of this ease the following futile criticism of a former chairman of the Board of Assessors of the City of Boston (report for 1871) is pertinent: "There is certainly a broad distinction between the prohibition of the right to sell an imported article and the right to tax the same as property. LIMITATIONS ON FEDERAL TAXATION. 277 This decision has been carefully recognised by the authorities of the several States in dealing with imported liquors under local license acts. " Under its police powers there is no constitutional restraint on a State prohibiting the retail and internal traffic in ardent spirits. But a State is at the same time bound to receive and permit the sale by the importer of any article of merchandise which Congress authorizes to be imported, but it is not bound to abstain from the passage of laws which it deems proper to guard the health or morals of its citizens, although the effect of such laws may be to discourage importation, and diminish the profits of the importer and the revenue of the General Government." — Burroughs, On Taxation. Limitations of the Taxing Power of the Federal Government. — If the States can not tax the agencies or instrumentalities by which the Federal Government per- forms its functions, it would seem clearly to follow that for like reasons the Federal Government can not tax State instrumentalities or agencies. That such reciprocal limitations are natural and neces- sary, and exist by implication, not only in the Constitu- tion of the United States, but also in the very structure of the Federal Union, must be evident, when one reflects that otherwise the Federal Government on the one hand, and the governments of the States on the other, might im- pose taxation to an extent that would cripple, if not wholly defeat, the operations of the two authorities, each within its respective and proper sphere of action. Or, in other words, if the Federal and the State governments had each unrestricted power to tax, or, what is equivalent, " the power to destroy," they might, and as experience proves The decision of the United States Court was to the effect that the State could not enact a law that would prevent the sale of such property, and did not touch the question of the right to tax. In a recent decision of the Supreme Judicial Court of Massachusetts (Dunbar vs. Boston, 101 Mass., 317), where the question was raised that the Commonwealth could not tax a stock of liquors, the sale of which, by her laws, she had declared illegal, the court sustained the tax, upon the ground that the case did not show that the goods could not be legally sold. As the law stood at the time the decision was given, but one class of the plaintiff's stock of intoxicating liquors could legally be sold; and that was his importations in the original packages." 278 THE THEORY AND PRACTICE OF TAXATION. they probably would, effectually destroy efficient govern- ment in both cases, and the necessity and validity of such reciprocal limitations have been recognised and enforced by the courts of the United States whenever this question has been brought before them for adjudication. Thus, in the case of Day vs. Buffington, United States Circuit Court, Massachusetts District, it was held that the salary of a State official, in this particular instance a judge of probate, could not be legally subjected to assessment for an income tax, under the laws of the United States au- thorizing the assessment and collection of internal rev- enue; and Congress, some years since, acting under the advice of the United States Supreme Court, repealed so much of an internal revenue act as previously required the affixing of stamps to State processes, warrants, commis- sions, etc. In the case of Warren vs. Paul, 22 Ind., 279, the court used the following language: " The Federal Gov- ernment may tax the Governor of a State or the clerk of a State court and his transactions as an individual, but not as a State officer. This must be so, or the State may be annihilated at the pleasure of the Federal Government. The Federal Government may, perhaps, take by taxation most of the property in a State if exigencies require, but it has not a right by direct or indirect means to annihilate the functions of the State government." In a recent debate in the United States Senate on a proposition to appropriate public money for the purpose of establishing and maintaining higher institutions of learning in the District of Columbia than were offered by its common schools, a leading Senator (John Sherman), others concurring, is reported as expressing himself as follows: " I concur entirely in the opinion expressed by the Senator from Rhode Island (Mr. Aldrich) that we have no right to use the public money to establish business high schools. It is the duty of every community to give the children who are growing up a good common-school educa- tion, which covers a pretty wide range now, according to the general ideas of our people, and there the duty should stop. Money for this pur})ose should be contributed by private persons. We do our duty when we furnish a fair, common-school education to the children that are grow- TAXES ON STATE INSTRUMENTS. 279 ing up among us '' — i. e., in the District of Columbia — " and that is all we ought to contribute." Can Congeess authorize the States to tax Na- tional Instrumentalities? — In the popular discussions which have occurred in recent years in reference to the taxing of United States securities, the position has been not infrequently taken that it would have been Just and expedient on the part of Congress, at the time of the creation of the present national debt, to have allowed the separate States to tax the evidences of such debt (i. e., the bonds) in the possession of their citizens, subject to a limitation that the same should not be taxed at any differ- ent rate than other " moneyed capital." A full considera- tion of the whole subject will, however, suggest a doubt whether Congress possesses- the power to grant any such authorization, inasmuch as to have done so would have been equivalent to authorizing the States to do an act which in itself is unconstitutional — a thing which it is self- evident that Congress can not do. Thus " the power to tax," says Chief-Justice Marshall, in giving the opinion of the Supreme Court denying the right of Maryland to tax the Bank of the United States, "involves the power to destroy"; and in the case of Weston vs. The City of Charleston, the same court, by the same eminent author- ity, held further, as before shown, " that if the right to impose a tax exists, it is a right which in its nature acl-nowl- edges no limits." For Congress, therefore, to have author- ized the States to tax " national agencies " would have been equivalent to authorizing the exercise of a right to destroy; which right, the Supreme Court has held, can not, from its nature, when once existing, be limited. Alienation of the Taxing Power. — The application of the decision by the United States Supreme Court in the celebrated Dartmouth College case, has resulted in the general acceptance of the legal principle that a charter of incorporation by a State is a contract between the State and the incorporators; and if such charter contains a clause exempting the incorporators entirely from taxation, or for a definite period, a subsequent Legislature can not repeal the clause of exemption. Within a recent period the in- terest involved in this question has become so great, and the power of wealthy corporations who claim the benefit 280 THE THEORY AND PRACTICE OF TAXATION. of this principle is so extensive, that it is desirable to briefly call attention to views of dissenting legal authorities and dissenting State courts. " It is claimed that the power of taxation is one of the sovereign powers of the State necessary to its continued existence, and that it was never contemplated, when the people through their Constitutions delegated to their rep- resentatives in Legislature assembled the power to make laws for the good of the people of the State, that this grant of legisaltive power carried with it the right to barter away with private corporations one of the essential pre- rogatives of the Government, the verv life-blood of the State." *' How one of the States of the Union — Connecticut — has recently thrown away valuable public franchises is thus graphically described by one of the leading and authorita- tive newspapers of New England — i. e., the Springfield Eepublican. We have here the astonishing fact that over seventy per cent of the stock capital of twenty-six mo- nopoly electric or " trolley " companies operated in that State has been issued for something other than money, (cash) paid in, and hence may be said to represent nothing but what is popularly characterized as " water." The bonded debt of these roads amounts to $8,690,100, or over three times the amount of their cash stock — i. e., $2,671,- 240. This bonded debt, standing in comparison with a total stock issue, strikingly illustrates what has taken place: first, a gratuitous grant or franchise; second, an issue of bonds thereon to build the roads; third, a share capital, the product of the printing press, and represent- ing no value whatever except as an instrumentality for obtaining extra profits and exceptional legislation through its distribution. " This watered capitalization will in time, of course, pass into innocent hands, and the ' rights ' of the monop- olies in the matter of charges will all be gauged by the yearly revenue in its relation to this totality of nominal capital. The stock waterers will have sold their water at handsome figures and made off, and the purchasers of * Biirroufjhs On Taxation, from Avhich authority the writer is mainly indebted in his presentation of this important subject. ALIENATION OF TAXING POWER. 281 the water must henceforward, of course, be considered legitimate investors whose holdings are entitled to full consideration; and only until monopoly charges suffice to pay eight and ten per cent on all capital, watered or other- wise, will it be safe for any community to demand a re- duction of charges without Ijringing upon itself the charge of being favourable to anarchy and confiscation. " The people of Connecticut are preparing the way to pay handsomely for their electric transportation. The penalty of present neglect to guard and restrict closely the capitalization of these monopolies will fall in ugly force upon this and future generations; and when the time is ripe for municipal or State assumption of the monopolies, as may some time happen, the people will have the pleas- ure, no doubt, of paying more than face value for the water now so freely allowed to issue." * On this subject the late Chief-Justice Taney expressed his views as follows, in a case that came up before the United States Supreme Court in 1853: "The powers of sovereignty confided to the legislative body of a State are undoubtedly a trust committed to them to be executed to the best of their judgment for the public good; and no one Legislature can by its own act disarm its successors of any of its powers or rights of sovereignty confided by the peo- ple to the legislative body, unless they are authorized to do so by the Constitution under which they are elected. They can not, therefore, by contract, deprive a future Legislature of the power of imposing any tax it may deem necessary for the public service, or of exercising any other act of sovereignty confided to the legislative body, unless the power to make such contract is conferred upon them by the Constitution of the State. And in every contro- versy on this subject the question must depend on the Con- stitution of the State, and the extent of the power thereby conferred on the legislative body." The subject again came up before the United States Supreme Court in 1869, 1871, and 1872, when the ques- tion at each time was treated as res adjudicata (definitely settled). In the first of these instances Justice Miller thus expressed his views : " We do not believe that any * On a franchise tax, see the last chapter in this volume. 19 282 THE THEORY AND PRACTICE OF TAXATION. legislative body, sitting under a State Constitution of the usual character, has a right to sell, to give, or bargain away forever the taxing power of the State. This is a power which, in modern political societies, is absolutely necessary to the continued existence of every such society. While under such forms of government the ancient chiefs or heads of the government might carry it on by revenues owned by them personally and by the exaction of per- sonal service from their subjects, no civilized Government has ever existed that did not rely upon taxation in some form for the continuance of that existence. To hold, then, that any one of the annual Legislatures can, by contract, deprive the State forever of the power of taxation is to hold that they can destroy the Government they are ap- pointed to serve, and that their action in that regard is strictly lawful. The result of such a principle, under the growing tendency to special and partial legislation, would be to exempt the rich from taxation and cast all the burden of the support of government on those who are too poor or too honest to purchase such immunity." Like dissenting views have also found expression in various State courts. Chief-Justice Beasley, of New Jer- sey, for example, in commenting on the proposition that a charter of incorporation is a contract, says: " The entire contract on the part of a State, implied in such cases, is the supposed legislative agreement not to alter or recall the privilege granted. No other stipulation on the part of the State was ever suggested to exist, and it was the imagined existence of such stipulation alone which converted what else, in all its essential qualities as well as in its form, was an act of legislation, into a contract on the part of the com- munity with the corporators. Without such stipulation, having an obligatory force, I am wholly unable to conceive the ground of difference between the charter of a corpora- tion and any other act of legislation. If a statute lay no obligation on the State to do or refrain from doing a par- ticular thing or one or more particular things, such an enactment seems to me to be a pure act of legislation, and in no sense a contract." " A law which seeks to deprive the Legislature of the power to tax must be so clear, explicit, and determinative that there can be neither doubt nor controversy about its terms, or the consideration which POWER OF TAXING SOVEREIGN. 283 renders it binding. Every presumption will be made against its surrender, as the power was committed by the people to the Government to be exercised, and not to be alienated." (47 Missouri, 158.) And Justice Cooley (one of the justices of the Supreme Court of Michigan), in reviewing the action of the United States Supreme Court, says: " It is not very clear that this court has ever at any time expressly declared the right of a State to grant away the sovereign power of taxation." A court in Pennsylvania has also said: "Revenue is as essential to government as food to individuals; to sell it is to commit suicide." (30 Pennsylvania, 9.) Turning to English jurisprudence, we have an opinion of Edmund Burke that the charter of the East India Company, in virtue of which great authority was exer- cised, " was a charter to establish monopoly and create power," and not entitled to the protection of the various charters of English liberty. So long, however, as the decision of the United States Supreme Court in the Dartmouth College case is not re- versed by the same court, the above and many other like expressions of opinion on the part of judges and men learned in the law and in constitutional history have noth- ing of practical significance. CHAPTER XIII. RULES OR MAXIMS ESSENTIAL TO AN ADMINISTRATION OF RIGHTFUL TAXATION UNDER A CONSTITUTIONAL OR FREE GOVERNMENT. PART I. A PRESENTATION and discussion of the rules or maxims of administration which are in conformity with the fore- going exposition and discussion of the origin and sphere of taxation, and the limitations on the exercise of this great power which are essential to the existence and con- tinuance of a constitutional and free government, are next in order for the proper development and understand- ing of the general subject under consideration. Under such a government — one happily characterized and de- fined by President Lincoln as " of the people, by the people, and for the people " — the following rules or max- ims governing the administration of its lawful taxation would seem to be almost in the nature of economic axioms: First. No tax should he imposed hy a state or govern- ment except hy the consent of the people from whom it is to he collected, given either directly or hy their authorized representatives in Congress, Legislature, or Parliament as- sembled. Second. All taxes or enforced contributions levied hy the state in virtue of its sovereignty should be solely (singly) and exclusively for public purposes. Third. The sphere of taxation should be limited to per- sons, property, and htisiness exclusively within the terri- torial jurisdiction of the taxing power. Fourth. Taxes should he reasonable, regular, and not arbitrary as respects method, time, and place of assessment and payment, and, above all, proportional. 284 MAXIMS OF TAXATION. 285 Fifth. Taxation should not he employed as an agency or for the purpose of enforcing morality, or as an instrumental- ity for correction or punishment. Sixth. No tax should he levied the character and extent of which offer, as human nature is generally constituted, a greater inducement to the taxpayer to evade rather than pay. With a view of determining whether the above six propositions are so far fundamental and indisputable as to warrant their characterization as " economic axioms," attention is next asked to the following summary of rea- sons, or evidence to that effect, which may be separately adduced in respect to each one of them, commencing with the first — that no tax should he imposed hy a state or gov- ernment except hy the consent of the people from whom it is to he collected, given either directly or hy their au- thorized representatives in Congress, Legislature, or Parlia- ment assembled. " The right is then wedded to the power, and representation and taxation become correlative." — Miller, Justice Samuel F., on the Constitution. It requires no great amount of thought to see that the principle involved in this proposition is not only an essential feature of every just system of taxation, but also the primary and essential condition of the existence of every system of free or popular government. If this is not at once apparent, the following hrief historical retro- spect ought to make it so: The first great effort recorded in English history for its recognition and establishment as a fundamental prin- ciple of government was made hy the English barons in 1215, in their notable struggle with King John, and re- sulted in the incorporation in the Great Charter (]\Iagna Carta) of England of a provision which substantially for- bade the king from imposing any taxes, except by permis- sion of the General Council of the nation, duly summoned under writs regularly issued.* And it is interesting to * The exact language of the charter was: "No scutage or aid shall be imposed in our kingdom unless by the general course of the nation, except for ransoming our person [i. e., the king], mak- ing our eldest son a knight, and once for marrying our eldest daughter; and for these there shall be taken a reasonable aid"; the barons in turn agreeing that " we will not for the future grant to any one that he may take aid of his own free tenants," other than the aids above stated. 286 THE THEORY AND PRACTICE OF TAXATION. note, as showing the broad spirit of generous patriotism animating these rough old barons in their contest with King John, that they stipulated in the Magna Carta which they extorted from him that every limitation im- posed in it for their protection upon the feudal rights of the king should be also imposed upon their rights as mesne lords (i. e., lords superior in the second degree) in favour of the undertenants who held of them. In the many confirmations of the Great Charter in the ensuing reigns of Henry III and Edward I, its vital clauses as to taxation and the National Council were, however, in- variably and intentionally omitted; and the latter king so reasserted the taxing power of the crown as to alarm the nation and occasion a revolution (Barons' War, 1297), which for many subsequent years prevented any like as- sumption on the part of Edward's successors. Under the reign of Charles I the authority to levy and collect taxes in England was, however, again claimed — as it was in all the other European states — to be vested exclusively in the king ; and on the trial of John Hampden, in 1636, for his refusal to pay a tax known as " ship money," arbitrarily levied by the king for the maintenance of a naval force, this was the position taken by the crown lawyers representing the prosecution and accepted as valid by the judges in their verdict, the attorney general using in his plea language almost identical with that employed by Louis XIV, before cited, in defining his prerogative.* But when absolutism in government was overthrown in England in 1653, and a constitutional government estab- lished, no one principle was recognised as more funda- mental than that the executive could levy no taxes except such as had been granted by the people taxed, through their representatives; and one of the very first stntutes enacted by Parliament in 1689, under the reign of Wil- liam and Mary, and accepted by the crown, was that all levying of money for the crowTi by pretence of prerogative should be berenfter and forever illegal ; and secondly, in the latter third of the next century (1770), the unqualified affirmation and defence of the principle that those who pay the taxes should control the levying of them became the * See page 128, ante. TAXATION FOR PUBLIC PURPOSES. 287 primary cause of the American Revolution, and eventu- ated in calling the United States into existence. And hence, by reason of such experiences, it has become a part of the common law of all English-speaking people that the taxing power inherent in the state is vested exclusively in the legislative department of its government. Second. All taxes or enforced contributions levied hy a state in virtue of its sovereignty should he solely (singly) and exclusively for public purposes. Another and perhaps a more popular way of expressing this principle would be, to put it in the form of an affirma- tion, namely: All taxes that the people pay, the government should receive. All recognised authorities, judicial and economic, are agreed in regarding the above proposition as in the light of a political axiom from which there can be no rational dissent. From a great number of confirmatory and illus- trative legal opinions and decisions the following are espe- cially worthy of attention: " No State government, nor that of the United States, nor any other authority professing a regard for the rights of the people, is at liberty to take money out of their pockets for any other than a public purpose. Whenever it can be discovered that a tax is levied for something which properly can not be called such, it may be successfully resisted by all the measures that the law allows in courts of justice." — Miller, Justice 8. F., Lectures on the Constitu- tion of the United States, p. 2Jf2. " Taxation, by the very meaning of the term, implies the raising of money for public uses, and excludes the raising of it for private objects and purposes." — Allen vs. Inhabitants of Jay, 60 Maine (per Appleton, C. J.). " Taxation is allowable only for public purposes. The name (taxation) is not rightfully applied with reference to objects of a private nature, such as a bridge, manufactory, or foundry owned by individuals. An act of the Legis- lature authorizing a levy for a mere private purpose, or for a purpose which, though public, is one in which the people from which it is exacted have no interest, would not he a laiv, but a judicial sentence." — Hillard, Law of Taxa- tion, 1875. What are public purposes'? This question is an embar- 288 THE THEORY AND PRACTICE OP TAXATION. passing one, and in attempting to answer it there is oppor- tunity for much latitude of opinion. In the first place, the ordinary or dictionary definition of the term " public," as forming a part of the above question, is certainly in- felicitous and ambiguous — namely, " pertaining to a na- tion, state, or community; extending to the whole people " (Webster). Thus, for example, under a purely despotic form of government any exaction of contributions (taxes) from the people, and expenditures resulting therefrom, which the heads of the state may decree, be it for the expenses of a harem, the amusement or dignity of royalty, the reward or pensions of court favourites, or the main- tenance of a military force for the subjugating of the people, would be held to be for a public purpose, and any subject that should undertake to contravene this assump- tion would be amenable to punishment and perhaps to the charge of treason. On the other hand, under all popular or constitutional governments it would not probably be disputed, that taxa- tion should have but one object and taxes but one destina- tion — namely, to supply the expenses necessitated by those services which, according to established usage, it is the business of government to provide, and in contradistinc- tion to those which private inclination, interest, or liberal- ity will supply whenever a necessity or demand for such action becomes sufficiently manifest. Any form of levy, therefore, under such a government upon the person or property of its citizens that does not conform to these con- ditions is not for a public purpose and is not entitled to be called taxation. The following further amplification of these proposi- tions by the Supreme Court of Massachusetts has probably also the unqualified indorsement of all judicial authorities in the United States: ^ ' " The incidental advantage to the public, or the State, ~S /which results from the promotion of private interests and . i / the prosperity of private enterprise or business, does not TVj justify their aid by the use of public money raised by taxation, or for which taxation may become necessary. It is the essential character of the direct object of the expenditure which must determine its validity as justify- > ing a tax, and not the magnitude of the interest to be t DEFINITION OP PUBLIC PURPOSE. 289 affected, nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. The principle of this distinction is funclamental. It underlies all govern- ment that is based upon reason rather than upon force."/ — Lowell vs. Boston, 111 Mass., J^SJf. ^ " It has become a favourite maxim that it is the duty of government to promote the happiness of the people. The phrase may be interpreted so as to mean well, but it is a very inaccurate and unhappy one. It is the inalien- able right of men to pursue their own happiness, each man under such restraint of law as will leave every other man equally free to do the same. The happiness of the people j is the happiness of the individuals who compose the mass. ] Speaking now with reference to those objects only which human laws can reach and influence, he is the happy man who sees his condition in life constantly and gradually, though it may be slowly, improving. Let government keep its hands off, do nothing in the way of creating the subject- matter of speculation, and things naturally fall into this channel." — Sharswood, Legal Ethics. The distinction between a public and a private pur- pose in respect to taxation, however, is often a matter of great difficulty and embarrassment; and one eminent jurist and writer on taxation (Cooley) has indeed declared that " there is no such thing as drawing a clear line of dis- tinction between purposes of a public and those of a pri- vate nature." But the question at issue has been so often made the subject of definition and illustration by the high- est courts of the United States — speaking through jurists of the highest conceded ability — that, although complete unison of opinion does not now and probably never will exist as to whether certain particular purposes, as expendi- tures by the State for bounties, facilitating transporta- tion, education, charities, amusements, celebrations, and the like, are within the requirements to make them public. The sphere for disagreement has, however, within recent years greatly narrowed. One of the most clear and com- prehensive of illustrations on this topic, given by the Su- preme Court of Michigan (People vs. Township, 20 Michi- gan, 452), through Justice Thomas M. Cooley, was as follows: 290 THE THEORY AND PRACTICE OP TAXATION. " In respect to ' certain things of absolute necessity to civilized society/ the State is precluded either by express constitutional provisions or by necessary implications, from providing for at all, and which are thus left wholly to the fostering care of private enterprise and private liberality. We concede, for instance, that religion is essential, and that without it we should degenerate to barbarism and brutality; yet we prohibit the State from burdening the citizen with its support, and we content ourselves with recognising and protecting its observance on similar grounds. Certain professions and occupations in life are also essential, but we have no authority to employ the public money to induce persons to enter them. The necessity may be pressing and to' supply it may be in a cer- tain sense to accomplish a public purpose, but it is not a purpose for which the power of taxation may be employed. The public necessity for an educated, skilful physician in some particular locality may be great and pressing, yet, if the people should be taxed to hire one to locate there, the common voice would exclaim that the public moneys were being devoted to a private purpose. The opening of ( a new street in a city or village may be of trifling impor- tance as compared with the location within it of some new j business or manufacture; but while the right to pay out the public funds for the one would be unquestionable, the other by common consent is classified as a private interest which the public can aid as individuals, if they see fit, while they are not permitted to employ the machinery of government to that end. Indeed, the opening of a new street in the outskirts of a city is generally very much more a matter of private interest than of public concern; yet, even in a case where the public authorities did not regard the street as of sufficient importance to induce their taking the necessary action to secure it, it would not be doubted that the moment they should consent to so accept it as a gift, the street would at once become a public object and purpose upon which the public funds might be expended with no more restraints upon the action of the authorities in that particular than if it were the most prominent and essential thoroughfare in the city. " By common consent, also, a large portion of the most urgent needs of society are relegated exclusively to the law PRIVATE AND PUBLIC PURPOSES. 291 of demand and supply. It is this in its natural operation and without the interference of the Government that gives us the proper proportion of tillers of the soil, artisans, manufacturers, merchants, and professional men, and that determines when and where they shall give to society the benefit of their particular services. However great the need in the direction of any particular calling, the inter- ference of Government is not tolerated, because, though it might be supplying a public want, it is considered as invading the domain that belongs exclusively to private inclination and enterprise. We perceive, therefore, that the term ' public purpose/ as employed to denote the ob- jects for which taxes may be levied, has no relation to the urgency of the public need or to the extent of the public benefit which is to follow. It is, on the other hand, merely a term of classification to distinguish the objects for which, according to settled usage, the Government is to provide, from those which, by the like usage, are left to private inclination, interest, or liberality/' Under a constitutional and representative form of gov- ernment the determination of what constitutes a public purpose in respect to taxation rests primarily in the legis- lative department of such government ; biit legislative de- termination on this subject is not absolutely conclusive, for the question ultimately is one of law. If this was not so, a Legislature would possess unlimited power to make any- thing lawful which it might call taxation, which would be equivalent to an unlimited power to plunder the citi- zen.* Brief references to certain other court cases, in which the validity of this claim that certain taxes, or acts involv- ing the imposition of taxes, were for public purposes, was the question at issue, will also help to an understanding of the subject. In 1872 the city of Boston was authorized by the Legis- lature of Massachusetts to issue bonds to the amount of $20,000,000, the proceeds to be loaned to persons whose * In every case in which the Legislature shall have clearly exceeded its authority in this regard, and levied a tax for a pur- pose not public, it is competent for any one, who in person or property is affected by the tax, to appeal to the courts for pro- tection. — Cooley, Law of Taxation, p. 55. 292 THE THEORY AND PRACTICE OP TAXATION. property had been destroyed by a recent great fire. The Supreme Court of Massachusetts held that, although such " a promotion of the interests of individuals might result incidentally in the advancement of the public welfare," the measure was, " in its essential character, a private and not a public object," and therefore unconstitutional. — Loivell vs. Boston, 111 Mass. A similar statute enacted by the Legislature of South Carolina in aid of sufferers by a fire in Charleston was also declared by the Supreme Court of that State as uncon- stitutional. — Feldman & Co. vs. City of Cliarlesion, S. C, 57. (In 1870 the town of Jay, in Maine, voted to loan $10,000 to a firm of manufacturers, on condition that they would move their works to the town and establish and maintain them there for ten years. This vote, although ratified by an act of the Legislature, the Supreme Court of the State declared void. — Allen vs. Jay, 60 Maine, 124- r In connection with this case the Legislature of the State of Maine officially put the following question to the justices of its Supreme Court: " Has the Legislature au- thority under the Constitution to pass laws enabling towns by gifts of money to assist individuals or corporations to establish or carry on manufacturing of various kinds within or without the limits of said towns?" The ques- tion was answered in the negative. The court used the following language: "There is nothing of a public nature any more entitling the manufacturer to public gifts than the sailor, the mechanic, the lumberman, or the farmer. Our Government is based on an equality of rights. The State can not rightfully discriminate among occupations; for a discrimination in favour of one hrancli of industry is a discrimination adverse to all other branches. The State is equally bound to protect all, giving no undue advantage or special or exclusive preference to any. Taxation in aid of private enterprise is to load the tables of the few with bounty that the many may partake of the crumbs that fall therefrom." In 1875 the Legislature of Kansas authorized town- ships to issue bonds for the purpose of raising money to be applied for the relief of such farmers within their limits as had been deprived, by a failure of crops, of seed GRANTS TO PRIVATE OBJECTS. 293 with which to plant for a new season. This authorization was held by the court (Justice Brewer) to be unconstitu- tional, on the ground that the use of public moneys for the accommodation of a certain class was not a public pur- pose — " not for the benefit of the indigent, but of those who have fields to fill and stocks to care for " — and that if the principle involved is once recognised, it may be in- voked with equal propriety in aid of other or all classes. — State vs. Osawkee, IJf Kansas, Jf88. In the State of New York its Court of Appeals has held void an act of the Legislature authorizing a village to take stock in a manufacturing corporation, and to issue bonds to raise the money to pay for such subscription, and to levy taxes for the payment of the principal and interest on said bonds. (Weismer vs. Douglas, 64 IST. Y., 91.) In a similar case (Sweet vs. Hurlbert, 51 Barber) Justice James expressed himself as follows: " If this can be done, it is legal robbery; less respect- able than highway robbery in this, that the perpetrator of the latter assumes the danger and infamy of the act, where this act has the shield of legislative irresponsibility." In Cole vs. La Grange (113 U. S.), the case turned on an act of the Legislature of Missouri authorizing the city of La Grange, whenever two thirds of the resident tax- payers signified their approval at a special election, to levy a tax not exceeding two per cent per annum on the assessed value of the real and personal property in the city, to pay for a donation or subscription to the stock of a manufacturing company. The court held the act void; the opinion, written by Mr. Justice Gray, embodying the following language: " The general grant of legislative power in the Con- stitution of the State does not enable the Legislature, in the exercise either of the right of eminent domain or of the right of taxation, to authorize counties, cities, or towns to contract, for private objects, debts which must be paid by taxes. It can not, therefore, authorize them to issue boncls^to assist merchants or manufacturers, whether natural persons or corporations, in their private business. These limits of the legislative power are now too firmly established by Judicial decisions to require extended argu- ment upon the subject." 294 THE THEORY AND PRACTICE OF TAXATION. In Burlington vs. Beaslej^ (94 U. S., 310), however, taxation in aid of a public gristmill, the tolls of which the Legislature would have a right to regulate, was sustained; the construction of such a mill in a new country being probably a public necessity, and not possible without pub- lic aid. But perhaps the most weighty opinion on this question is that of the United States Supreme Court in the case of the Loan x\ssociation vs. Topeka, 20 Wall, 655 (before re- ferred to on page 231). In 1872 the Legislature of Kan- sas passed an act authorizing cities and counties to issue bonds for the purpose of encouraging the establishment of manufactures and other like enterprises; and under this act the city of Topeka created and issued its bonds, to the extent of $100,000, and gave the same " as a dona- tion," a majority of voters approving, to an iron-bridge company, as a consideration for establishing and operating their shops within the limits of the city. The interest coupons first due on these bonds were promptly paid by the city out of a fund raised by taxation for that purpose, but subsequently, when the second coupons became due, and the bonds had passed out of the possession of the bridge company by bona fide sale to a loan association, the city meanly repudiated its obligations, on the ground that the Legislature of Kansas had no authority under the Con- stitution of the State to authorize the issue of bonds, the interest and principal of which were to be paid from the proceeds of taxes, for any such purpose as the encourage- ment of manufacturing enterprises. Legal proceedings to enforce payment were thereupon commenced by the bond- holders in the United States Circuit Court, and judgment having been there given for the city, the case was appealed to the United States Supreme Court, where with only one dissenting voice (Judge Clifford) the judgment of the lower court was affirmed. The following extracts from the opinion of the court, given by Justice ]\Iiller, will forever stand as embodying economic and legal principles of the highest importance: " We have established, we think, beyond a cavil that there can be no lawful tax which is not laid for a public purpose. ... It may not be easy to draw the line in all cases so as to decide what is a public purpose in this sense LOAN ASSOCIATION VERSUS TOPEKA. 295 and what is not. But in the case before us, in which towns are authorized to contribute aid by way of taxation to any class of manufactures, there is no difficulty in holding that this is not such a public purpose as we have been consider- ing. If it be said that a benefit results to the local public of a town by establishing manufactures, the same may be said of any other business or pursuit which employs capi- tal or labour. The merchant, the mechanic, the innkeeper, the banker, the builder, the steamboat owner, are equally promoters of the public good, and equally deserving the aid of the citizens by forced contributions. No line can be drawn in favour of the manufacturer which would not open the public treasury to the importunities of two thirds of the business men of the city or town." * Twelve years later a similar case was decided by the same United States Court in the same way. Under the * Here, then, we have from the Supreme Court of the United States a decision, as recent as October, 1874, defining the limitation of the power of taxation growing out of " the essential nature of a free government"; and if under such natural limitation there is no power, as the court decided, in a State government (irre- spective of anything to the contrary in the Constitution of such State) to levy taxes for the support or encouragement of manu- facturers, it is difficult to see under what rule or authority the Federal Government can levy taxes like those now imposed, which, from the circumstance that they yield year after year little or no revenue to the national Treasury, are manifestly levied and maintained for other than public purposes. Whether, if a case involving the validity of tariff taxes like those above specified could be brought before the United States Supreme Court, it would apply the same rule of principle to the Federal that it has to a State government, in respect to the limita- tion of the sphere of taxation, may be regarded as an open ques- tion. An opportunity for avoiding a decision on this subject might be found in the assumption that there was no evidence before the court that any particular tariff act was passed by Congress for any other than revenue purposes, and that the court could not take cognizance of a subsequent change in circumstances growing out of changes in the conditions of prices and supply and demand. And in this connection it is curious to note that in the first tariff enactments of the Federal Congress, which embodied the prin- ciple of protection, the preambles of the act openly stated and recognised the objects aimed at, viz., " the support of the Govern- ment, and the encouragement and protection of manufactures " ; while in later years the latter clause, relative to manufactures, has been shrewdly omitted from the tariff act preambles — possibly from a suspicion that there was a constitutional question covered 296 THE THEORY AND PRACTICE OF TAXATION. authority of a State law, the city of Parkersburg, Vir- ginia, had issued bonds in aid of a private enterprise. The court decided these bonds to be void for the reasons set forth in Loan Association vs. Topeka. The decision was rested wholly upon the decision in the earlier case, and there was no dissent from it, although one justice (Clifford) had dissented in the Topeka case. Justice Blatchford, in r rendering the opinion, said: " Taxation to pay the bonds in question is not taxation for a public object. It is taxa- tion which takes the private property of one person for the private use of another person." Particular care has also been taken by the courts to close the door against the possibility of making taxation subservient to any private purpose by incorporating it with some public purpose: " Public aid to private purposes can not be secured by yoking them to a public purpose. And where the public and private purposes are attempted to be aided by a single concession, the latter vitiate rather than the former up- hold the grant. The entire purpose — or, if there are sev- eral, and no rule of apportionment as to the application of the proceeds — then all the purposes must be public." — Opinion of Justice Brewer, 23 Kansas, 7^5. The cases in which the above conclusions have been apparently antagonized before the courts of the United States have been numerous, and have related mainly to the right of the Legislatures of the several States to levy taxes for purposes in respect to which the paramount object — i. e., for public or private good — was not clearly evident ; as for the construction of railroads, the drainage of land, the promotion of sanitary measures, the payment of bounties in aid of educational or charitable institutions up in this matter of protective duties which some day would not be found able to stand judicial examination. But until the contrary is proved, the opinions and judgments of the Supreme Court of the United States, as given in the Topeka case, would seem to admit of no other construction than that taxation for any other purpose than revenue, or taxation for pro- tection, or in aid of private interests engaged in manufacturing, is beyond the province of the legislative power of either our na- tional or State governments, and when imposed — to use the exact language of the court — " is none the less robbery because it is done under the forms of law and is called taxation." RAILROADS AS PUBLIC OBJECTS. 297 whose property- is owned by and whose policy is directed by private individuals, religious sects, or corporations, and not by the State, and the lilvc. The question whether taxation by which aid was afforded by towns or counties to the building of railroads was for a public purpose, has been especially brought to the attention of the courts. State and Federal, in repeated instances; and, although the preponderance of opinion has been in the affirmative when legislative authority has been previously granted, yet the decision of the courts has rarely been unanimous, and in some cases has been adverse. Thus, in People vs. Township (20 Michigan, 452), an act of the Legislature of Michigan authorizing townships to pledge their credit to aid in the construction of a railroad from the city of Detroit to a suburban village was held void in a remarkably able opinion by Justice Cooley. Again, in Whiting vs. Sheboygan (25 Wisconsin, 157), an act of the Legislature of Wisconsin authorizing the county of Fond du Lac to levy a tax, the proceeds of which were to be given to aid the building of a railroad from the city of Fond du Lac to the city of Ripon, was also held by the court to be void. The argument in favour of the unconstitutionality or wrongfulness of the application of the proceeds of the taxation of the people by States or municipalities for aid- ing the construction of railroads has been, that they are built by corporations organized mainly for the purpose of gain; that they are under the control of such corporations rather than that of the State ; and that the taxes in ques- tion went to swell the profits of individuals, and did not result in good to the State or benefit to the public except in a remote collateral way. On the other hand, it has been urged that roads, canals, bridges, navigable streams, and all other highways, have in all times been matters of public concern; that such channels of travel and of the carrying business have al- ways been established, improved, and regulated by the State; and that a railroad had not lostthis character be-^p^ i cause constructed by individual enterprise, aggregated 1' ''^^^ into a corporation. In rendering an opinion in the celebrated Loan Asso- ciation vs. Topeka case, the court took up the question 20 298 THE THEORY AND PRACTICE OF TAXATION. whether the grants of public mone}' or credit which have been made by counties and municipalities in the United States in aid of railroad construction were not by parity of reasoning equally unconstitiitional as similar grants for establishing or encouraging manufactures have been held to be; and remarked that in all such cases, which have been numerous before the courts in every State in the Union, " the decision has turned upon the question whether the taxation by which the aid was afforded to the building of railroads was for a public purpose. Those of the judges who came to the conclusion that it was, held the law for that purpose valid. Those who could not reach that conclusion held them void. And it is safe to say that no court has held debts created in aid of railroad companies, by counties or towns, valid on any other ground than that the purpose for which the tax was levied was a public use, a purpose or object which it was the right and the duty of the State governments to assist by money raised from the people by taxation." But, continues the judge, " Of the disastrous consequences which have fol- loived its recognition hy the courts, and which were pre- dicted when it ivas first established, there can he no douht." It is interesting to note in this connection that since the decision in this case many States of the Union have been forced to prohibit loans in aid of the construction of railroads and like enterprises in the revision of their Constitutions. When the purpose of taxation is evidently to primarily promote the interests of individuals — i. e., to establish a manufactory, a brick company, a hotel, and the like — the courts whose province it is to decide whether the purpose is public or private will as a rule undoubtedly declare it void. A noted and the almost solitary instance in which the above proposition and precedents have been clearly an- tagonized by a judicial decision is to be found in a case in Louisiana, where an act of the State Legislature au- thorizing a municipal subscription to the stock of a com- pany incorporated to build a theatre was held valid, on the ground that " it would contribute to the wealth and embellishment of the city, afford a place of relaxation and amusement, and would tend to correct and enlighten the SUGAR BOUNTY CASE. 299 morals of the citizens." — First Municipality vs. New Or- leans Theatre Company, 2 Roh., Louisiana, 209. The Sugak Bounty Case of 1891. — A review of this department of the application of taxation would be in- complete that failed to notice a legal contention before the Supreme Court of the United States in 1891, respect- ing the constitutionality of the tariff act of 1890, which was questioned on several grounds; one of them being a provision requiring the payment of bounties to every pro- ducer of sugar of certain saccharine strength * from beet, sorghum, sugar cane, or maple sap, grown or produced within the United States. Under this provision of the tariff enactment of 1890, the citizen of Connecticut was taxed for the benefit of the farmer of Nebraska or Cali- fornia, and the farmer of New York for the benefit of the Louisiana planter; the farmer who raised wheat and corn at ten or twelve dollars an acre was taxed for the benefit of a farmer in a distant State who raised sugar cane or sugar beets at fifty or a hundred dollars an acre. There was, moreover, but little doubt that the inclusion of sugar, made from maple sap, in the bounty provision, was not originally contemplated by the originators and promoters of the act; inasmuch as the manufacture of such sugar is one of the most profitable industries of the country, and as a rule readily calls for a fancy or artificial price; but was included in the act, while under consideration by Congress, for the reason that its enactment into law would otherwise have been difficult or impossible. An- other interesting and anomalous feature of this case was that it originated in an attempt to obtain the bounty after the enactment (law) offering it was repealed, on the ground that the claimants planted cane in expectation of the continuance of the bounty, and would suffer loss if they did not get it. The question of the validity of the entire tariff act, by reason of the unconstitutionality of the bounty provision contained in it, having been raised, the attorney general of the United States antagonized such assumption before the court as follows: * Two cents per pound on sugar testing not less than 90° by the polariscope, and one and three fourths cents per pound on sugar testing less than 90°, but not less than 80°. 300 THE THEORY AND PRACTICE OP TAXATION. First, that under the clause of the Federal Constitution (section 8 of Article I) which empowers Congress to levy taxes, duties, etc., " to pay the debts and provide for the general welfare " of the United States, Congress has the power to expend taxes for anything which, in its judgment, is " for the general welfare." Second, tliat the judicial decisions of the State courts, to the clfect that taxation, to be lawful, must be for ])ublic purposes, have no applica- tion to this controversy, inasmuch as they were all of them cases of municipal taxation, which must be for public municipal purposes; and that it is obvious that the estab- lishment of a particular industry in one place, by a bonus to specified private individuals, is a very different object for taxation than the encouragement by the national Gov- ernment of a widespread industry in many quarters of the Union for national purposes, with a view of diversifying the industries of the country and making it independent of other countries for its necessities." — (Speech of United States Attorney-General Miller.) Third, that the assump- tion that " public purposes " in respect to taxation by Congress means something different than the same phrase when applied to State taxation is sustained by instances in which Congress has authorized the expenditure of public moneys for bounties or relief to people in this and other countries; some forty cases of this character being cited, in which relief in the form of money or supplies was given to sufferers by fire, grasshoppers, overflow of the Missis- sippi, yellow fever, earthquakes (one in Venezuela, South America), and for defraying the expense of transporting food to Ireland, France, and Germany. To these instances may perhaps be added the " codfish bounty," which was practically a drawback upon the duty on imported salt used for preserving fish. In rejoinder it was contended: First, that if Congress , has power to expend taxes for anything which in its judg- ment is "for the general welfare," then there is practi- cally no limitation whatever upon its constitutional power to raise and appropriate taxes; and that its power to treat the public purse as its own and give away the proceeds of taxation is as unlimited as is the cupidity of congressional lobbyists. It was also ingeniously pointed out that the position of the attorney-general was equivalent to saying GENERAL WELFARE. 301 that when a tax is levied by a State for a given purpose it is not for public use, but when levied by the national Government for the same or a like purpose it is for public use. Again, such an assumption of unlimited power on the part of Congress directly antagonizes the opinions of Chief-Justice Marshall (see page 230) and also the declara- tion, made in special reference to the taxing power, by the United States Supreme Court through Mr. Justice Miller in the Topeka case (page 232), " That the theory of our governments, State and national, is opposed to the deposit of unlimited power anywhere." Justice Story (on the Con- stitution, section 990) also asks and answers the precise question at issue: "Has Congress a right to raise and ap- propriate the public money to any and to every purpose according to their will and pleasure? They certainly have not." The same Jurist, in his lectures on the Constitution, thus further amplified his ideas on this subject, and evi- dently thought that he had in the following brief para- graphs brought the argument in support of the " un- limited " theory to a reductio ad ahsurdum. " A power to lay taxes for the common defence and gen- eral welfare of the United States is not in common sense a general power." It is " a power exclusively given to raise revenue, and it can constitutionally be applied to no other purpose. The application for other purposes is an abuse of the power; and in fact, however it may be in form disguised, is a premeditated usurpation of authority." A grant under the Constitution to Congress " to do any act they pleased which ought to be for the good of the Union . . . would reduce the whole instrument to a single phase, that of instituting a Congress with power to do whatever would be for the good of the United States; and as they would be the sole judges of good or evil, it would also be a power to do whatever evil they pleased " (1 Story, Constitution, section 926). Second, to the assumption that the decisions of the State courts in respect to the limitations of the power of taxation do not apply to this controversy, it was replied that the relation of the State courts to their State Consti- tutions is substantially the same as that existing between the Federal Supreme Court and Congress; that the State decisions (which have not been, as was claimed, " all cases 302 THE THEORY AND PRACTICE OF TAXATION. of mimieipal taxation ") frequently treat such legislation, independently of Constitutions, as being in violation of natural right, and that there are limitations imposed upon legislative power by reason of " general principles " has been recognised by the United States Supreme Court (Bartemeyer vs. Iowa, 12 Wallace). It would further seem that natural rights must be the same, whether against legislation by Congress or by the Legislature of a State. If a State can not levy and expend taxes for other than public purposes, it may be presumed, a fortiori, that the national Government can not, " for the former can do anything which the Constitution (and natural right) do not forbid; while the latter can do nothing which the Constitution does not first sanction." The Federal Gov- ernment has " no right to raise money by taxation for a thousand things for which the State may impose taxes and collect them of the people." — Miller, Justice, Lectures on the Constitution. Third, in respect to the instances cited, in which Con- gress has expended moneys for bounties, or relief of private interests, in this and other countries, it was replied that they were all matters of national charity; were never sub- jected to judicial scrutiny, or even seriously challenged in debate; w^ere never for large amounts, and did not contem- plate any special levy of taxes, but were from funds al- ready in the Treasury. It was also claimed that this was the first case in which the constitutionality of a congres- sional bounty, whether direct or indirect, for " protection," has ever been before the United States Supreme Court for discussion. And pertinent to the case it should be further noted, that when it was proposed in the Convention that framed the Federal Constitution to incorporate in it a provision for bestowing " rewards " for " the promotion of agriculture," the proposition was rejected. The facts about the bounty for codfisheries are, that it was given under the first revenue laws (levying duties) of the United States in 1792, and was intended to offset bounties and other measures adopted by England, as was believed, for the purpose of destroying the fisheries, not only of the United States, but also of France. Its enact- ment was strenuously resisted at the time, on constitu- tional grounds, and especially by as good a constitutional BOUNTIES AND THE CONSTITUTION. 303 authority as Madison, who held that the enactment of a bounty was beyond the power of Congress (4 Elliot's De- bates, Philadelphia edition, 1875, 525, 526). Its legality was never judicially examined, and the act expired by its own limitation in seven years. Subsequent acts expressing limitation were passed of the same character from time to time; and since their final expiration, many years ago, it is claimed that no Congress, until the Fifty-ninth, 1890, has asserted its right to levy taxation embodying the bounty principle. The court, in giving an opinion affirming the constitu- tionality of the tariff act of 1890, evaded the question of the constitutionality of its bounty provision, on the ground that the invalidity of one part of a revenue act does not invalidate the whole act; and when that principle was settled, the objections to the act based on separate clauses really disappeared.* The disbursement of the money voted by Congress for the payment of the sugar bounties having been withheld by the Comptroller of the United States Treasury on the ground that the appropriation was unconstitutional, the court held that if Congress made promises and thereby induced people to incur expenses which they would not otherwise have incurred, and has then appropriated the money to indemnify the parties, the payment can not be stopped by an administrative officer on the ground of the unconstitutionality of the primary bounty enactment. A question of interest in connection with this case, which may naturally suggest itself, especially to those not learned in the law, is. How happens it that repeated acts of expenditure of money raised by taxation for admittedly private purposes have been authorized by Congress, with- out any challenge before the proper courts of their consti- tutionality? The answer is to be found in the legal fact that " the question of the constitutionality of a law can never be presented and determined abstractly. It must always be raised by somebody whose person or property is affected by the execution of the statute the validity of * One of the best reviews of this celebrated ease, one to which the writer has been greatly indebted, is to be found in an article contributed to and published in the Harvard Law Review for February, 1892, by Charles B. Chamberlain, Esq., of Boston. 304 THE THEORY AND PRACTICE OF TAXATION. which he impugns. Until the opportunity for raising and the individual who can raise the question of constitu- tionality present themselves, there can be no presumption from the existence of such legislation upon the statute- book." In Maine, a law which for more than half a century — almost as long as the State has existed — had been enforced, and reproduced in each revision of the statutes, was de- clared unconstitutional so soon as challenged; the chief justice meeting the reason for such acquiescence by say- ing that " the judicial opinion and the public sense were not so much awakened to the principle underlying this then as now." (Brief of Smith and Clarke, averring the unconstitutionality of the tariff act of 1890.)* The nature, definition, and limitations of the service for public purposes, which a free representative govern- ment can render or perform by the expenditure of moneys raised by taxation having been once ascertained and enun- ciated by the supreme judicial authority of the State (as would seem to have been done in the United States), the instant, thereafter, that taxation essays to become any- thing but taxation — i. e., for an unquestionable public purpose; the instant that it is made an instrumentality for effecting any results other than such as are directly necessary or beneficial to the whole public, that instant it becomes inequitable and antagonistic to the very idea of a just government; and the citizen whose person or property is thereby affected has at least a moral right to demand protection and redress. * " It is by facts and instances that the people are tanght their Constitutions and their laws. Constitutions are framed; laws established; institutions built up; the processes of society go on, until at length, by some opposing, some competing, some contend- ing forces of the State, an individual is brought into the point of collision, and the clouds surcharged with the great force of the public welfare burst over his head." — Speech of Mr. Evarts for the Defence, in the Impeachment of President Johnson. CHAPTEE XIV. RULES OR MAXIMS ESSENTIAL TO AN ADMINISTRATION OF RIGHTFUL TAXATION UNDER A CONSTITUTIONAL OR FREE GOVERNMENT. PART II. In continuance of the discussion entered upon in the preceding chapter, as to whether under a constitutional and free government, and in virtue also of the natural and inalienable rights of the people governed, a state has a lawful right to levy and expend taxes in furtherance of private interests, more especially by way of bounties, the following additional points may be worthy of consid- eration : Probably no better exposition of the limitation on the exercise of the taxing power incumbent on a free government professing a regard for the rights of the peo- ple, and more especially on the Federal Government of the United States, under its Constitution, in respect to the granting of payment of bounties for the promotion of the private interests of any of its citizens, can be found than the following, accredited to Justice Thomas M. Cooley: " It is not in the power of the state, in my opinion, under the name of a bounty, or under any other cover or subterfuge, to furnish the capital to set private parties up in any kind of business, or to subsidize their business after they have entered upon it. A bounty law of which this is the real nature, is void, whatever may be the pre- tence on which it may be enacted. The right to hold out pecuniary inducements to the faithful performance of public duty in dangerous or responsible positions stands upon a different footing altogether; nor have I any occa- sion to question the right to pay rewards for the destruc- tion of wild beasts and other public pests, a provision of 805 306 THE THEORY AND PRACTICE OF TAXATION. this character being a mere police regulation. But the dis- crimination by the state between different classes of occu- pations, and the favouring of one at the expense of the rest, whether that one be farming or banking, merchandis- ing or milling, printing or railroading, is not legitimate legislation, and is an invasion of that equality of right and privilege which is a maxim in state government. When the door is once open to it there is no line at which we can stop and say with confidence that thus far we may go with safety and propriety, but no further. " Every honest employment is honourable; it is bene- ficial to the public; it deserves encouragement. The more successful we can make it the more does it generally sub- serve the public good. But it is not the business of the state to make discriminations in favour of one class against another or in favour of one employment against another. The state can have no favourites. Its business is to pro- tect the industry of all, and give all the benefits of equal laws. It can not compel an unwilling minority to submit to taxation in order that it may keep upon its feet any business that can not stand alone." A brief historical retrospect is here pertinent to this subject. The payment of bounties from the proceeds of taxation, or rather of exaction, is a relic of the commercial methods of the middle ages. They were, however, re- garded as legitimate fiscal expedients for the encourage- ment of trade and domestic industries during the whole of the last (eighteenth) century; but since then, under the influence of a higher civilization and modern economic ideas, have been almost entirely discarded from the fiscal systems of the leading commercial nations until wdthin a comparatively recent period, when they have been revived and made mainly applicable to the production and sale of a single one of the world's great commodities — namely, sugar ; * and the history of this experience constitutes a most interesting and instructive chapter in economic history. Although the practice of stimulating the production of * The policy of payment of bounties for the encouragement of shipping and of shipbuilding enterprise has also, to a limited ex- tent, been established, more especially by the three Governments of Germany, France, and Italy. BOUNTIES ON SUGAR. 307 beet-root sugar in Europe through high protective duties on imports and export bounties, direct or indirect, dates back to the first quarter of the century, the present com- plicated and curious state of affairs is really due to a method of taxing beet sugar by Germany which was adopted in 1869. The idea involved in this method was, in brief, to collect an excise or internal-revenue tax on all sugar produced, and by allowing a drawback on what was exported, give a bounty on so much as was sold to the peo- ple of other countries. The other states of continental Europe, finding the markets of their own product of beet- root sugar everywhere supplanted by the German sugars, and their domestic manufacturers being thereby brought to the verge of ruin, made haste to follow the example of Germany, until the policy of Germany, France, Belgium, Holland, Austria, and Russia seems to have been to stimu- late their domestic product of sugar to the greatest extent, and then enter into competition with each other to see which of them could sell cheapest to foreigners at the ex- pense of their own people. The general result is, that the great beet-sugar industry of Europe has been established and is now conducted on what may be regarded as an arti- ficial basis, and one not inaptly characterized as a most in- genious method for entailing money losses on the mass of the people of the countries above mentioned. The immediate sequence of this policy has been an enormous increase in the beet-sugar product on the Conti- nent of Europe— i. e., from 2,223,000 tons in 1885-'86 to nearly 5,000,000 (4,789,000) tons in 1895--'96— with such a reduction in price that the whole sugar industry of Europe is seriously depressed, with a general complaint on the part of producers that the amount received by them does not cover the cost of production. Under such a con- dition of affairs, the German Parliament (Eeichstag), in May, 1896, accepting a popular declaration that " sugar was the last and only agricultural product in which there remained any profit for the German farmer, and that what- ever skilful legislation could do to preserve and protect that industry should in justice to the suffering landowners be given a prompt and thorough trial," passed an act in- creasing the bounty on the export of sugars to an extent assumed to be sufficient " to enable German exporters to J 308 THE THEORY AND PRACTICE OF TAXATION. compete against all comers in foreign markets "; advancing the import duty on sugars to a prohibitory degree ; and fix- ing an internal-revenue tax on sugars to such an extent as to yield a net income to the state in excess of its disburse- ments on account of bounties on exports. The effects of the new statute have now become apparent and ominous. The foreign sugar market has responded to the increased bounty export by a proportionate decline in price; and a move- ment soon found favour to petition the Eeichstag to make certain amendments in the existing statute so as to restrict instead of stimulating production, and to invite interna- tional negotiations for the gradual abolition of all export bounties, which have been proved to be simply a burden on the treasury, which pays them for the benefit of non- producing foreign countries. The present burden which the sugar-bounty system en- tails upon the taxpayers of Europe is estimated at about $25^000,000 per annum, while the excise tax on sugar in Germany, France, and Austria is said to amount to $100,- 000,000 per annum. On the sugar consumed by the people of the continental nations of Europe which have adopted the bounty policy there is no bounty, but on the contrary an excise tax; the result of which legislation is to make exported sugars very cheap and home (Consumption abnor- mally dear. This is demonstrated by reference to the sta- tistics of the comparative consumption of different coun- tries. Thus in England, whose policy since 1874 has been to give her people sugar free of taxation, the per capita consumption has risen from fifty-six pounds in that year to eighty-six pounds in 1896; while the saving to the British \/ people from the reduction of the cost of this one item of \ their living has been estimated to be at least £6,000,000 ($30,000,000) per annum. The great reduction in the price of sugar has also given a remarkable impetus to the British industry of manufacturing sweets, in the form of confectionery, preserves, jams, marmalades, etc., which last to a considerable extent have undoubtedly supplanted the use of butter. The present annual average consumption of sugar in Germany is reported to be about twenty-seven pounds per capita. In France the declining consumption of sugar has been made the subject of recent debate in the Chamber of Deputies, where the question was pertinently ABUSE OF BOUNTIES. 309 asked by one of the deputies (M. Mery) if the object of the existing governmental policy in respect to sugar " was mainly to produce it or to have and enjoy it." The Agri- cultural Society of France has also recently unanimously indorsed a demand of the French sugar rnakers and re- finers that the Government should increase the present bounty on the export of sugar to an extent equivalent to the combined or aggregate bounties allowed in Austria and Germany. So much, then, for nearly half a century's experience on the part of the leading continental nations of P^urope in attempting to regulate the production, price, and con- sumption of sugar through a system of bounties.* Practical experience in respect to the employment of bounties also leads to a deduction, which may be almost regarded in the nature of a principle, that when bounties are employed for the promotion of some public good, the object sought eventually becomes subordinate to the op- portunity which an unnatural and unprincipled perversion of the bounty provisions affords for the promotion of pri- vate rather than public interests. The following illustra- tions, though somewhat comical in their nature, serve to sustain this proposition: In the early years of the present century the State of Connecticut, having in view the promotion of its agri- cultural interests, offered a premium on the destruction of the crow; to be paid on the production of the head of the bird to the proper authorities. Thereupon the sons of the farmers, desirous of earning a little money, then much more difficult to obtain than at present, diligently searched the woods for the nests of crows, from which at the proper time the eggs were transferred to sitting hens, by whom they were hatched and the resulting offspring brought up until their heads became available for pres- entation and procurement of the bounty. A summary of the general results of such experience would be somewhat as follows : First, a perversion of the legitimate industry of the hen; second, an elementary lesson for young per- sons in perpetrating frauds against the State; third, an impairment of the agency of a bird, whose habits have been * See my Recent Economic Changes, p. 296. 310 THE THEORY AND PRACTICE OF TAXATION. proved by subsequent scientific investigations to be bene- ficial ratlier than detrimental to the interests of the farmers. Again, in the early history of one of the North- western States of the Federal Union a bounty was offered, at the request of the farmers, for the heads of little bur- rowing animals known as " gophers," which attracted little attention till the experience of several years showed that the disbursements of the State on this account had become abnormal and were rapidly increasing. Investigation then proved that the raising of gophers by citizens of the State for the procurement of bounties had become a regular industry. A like experience in British India is also worthy of note. Some years since the Government, with a view of arresting the mortality among its native population from the bites of poisonous serpents, offered a bounty on their proved destruction; when it was found that for the sake of obtaining the bounties the cultivation of the " cobra " and other like snakes had been actually entered upon. Third. The sphere of taxation should he limited to per- sons, property, and business exclusively within tlie territorial jurisdiction of the taxing power. It would seem to be in the nature of a self-evident proposition, although in fact it is by no means so regarded, that the power of every state or government to tax must be exclusively limited to subjects within its territory and legal jurisdiction. " All subjects,^' says Chief-Justice Marshall, in giving the opin- ion of the Supreme Court in the case of McCulloch vs. Maryland (4 Wheaton, 431), " over ivhich the sovereign power of the state extends are objects of taxation; but those over ivhich it does not extend are, on the soundest principles, exempt from taxation." And again : " The sovereign power of the state extends to everything which exists by its own authority or is introduced by its permission." " Every na- tion," says Wheaton, " possesses and exercises exclusive sovereignty and jurisdiction throughout the full extent of its territory. It follows, from this principle, that the laws of every state control, of right, all the real and personal property within its territory. The second general prin- ciple is, that no state can, by its laws, directly affect, bind, or regulate property beyond its own territory. This is a consequence of the first general principle; a different sys- tem, which would recognise in each state the power of TAXATION AND SOVEREIGNTY. 311 regulating persons or things beyond its territory, would exclude the equality of rights among different states, and the exclusive sovereignty which belongs to each of them." (Wheaton's International Law, chap, ii, § 2; Foelix, Traite du Droit International Prive, §§ 9 and 10.) And in a de- cision of more recent date (State Tax on Foreign-held Bonds, 15 Wallace, 306, 338), the United States Supreme Court said: " The power of taxation, however vast in its character and searching in its extent, is necessarily limited to subjects tvithin the jurisdiction of the state. Property lying beyond the jurisdiction of the state is not a subjeci upon which her taxing power can he legitimately exercised. Indeed, it would seem that no adjudication should be ne- cessary to establish so obvious a proposition." The principle under consideration has also been made the subject of adjudication by the United States Supreme Court in a case of historic as well as of legal and economic ■interest. In September, 1811, the country being then at war with Great Britain, the town of Castine, in Maine, w^as captured by the British forces, and remained in their ex- clusive possession until after the ratification of peace in 1815. During this period the British Government exer- cised all civil and military authority over the place, estab- lished a custom house and allowed merchandise to be im- ported, some of which remained in Castine after it was evacuated by the enemy. On the re-establishment of the authority of the United States, the American collector of customs for the district, claiming a right on the part of the United States to Federal duties on the goods in ques- tion, demanded payment of the same from the owners or importers; and, the claim being resisted, the case went up to the United States Supreme Court, which with com- plete unanimity gave judgment, through Justice Story, for the owners or importers in the following language: " We are all of the opinion that the claim for duties can not be sustained. By the conquest and military occu- pation of Castine, the enemy acquired that firm possession which enabled him to exercise the fullest rights of sov- ereignty over that place. The sovereignty of the United States was suspended, and its laws could no longer be enforced there, or be obligatory on the inhabitants who re- mained there and submitted to the conquerors. By the A 312 THE THEORY AND PRACTICE OF TAXATION. surrender the inhabitants passed under a temporary alle- giance to the British Government, and were bound by such laws and such only as it chose to impose. From the nature of the case, no other laws could be obligatory on them; for ichere there is no protection or allegiance, or sover- eignty, there can be no claim to obedience." Taxes, therefore, are necessarily the creation of each state, and no self-respecting Government ever permits any other Government to interfere with its tax laws or their execution, and a toleration of such interference in any clegree presupposes dependence, subjection, or absence of independence. An obvious co-relation of this proposition, and also a matter of fact, is that a violation of the tax or revenue laws of one country has never been regarded as an offence or crime in any other country; and the English courts have held that contracts to evade the customs laws of a foreign country are not illegal. Hence, also, offenders in this respect are never taken into account in extradition treaties between different nations and their governments. Some years ago a United States district attorney in New York procured through the Department of State at Wash- ington the extradition of a person from England on the charge of forgery. On his arraignment before a United States court it transpired that the offence committed was the manufacture and use of fraudulent invoices, to which forged or fictitious names had been attached, for the pur- pose of evading the payment of United States customs or taxes on certain imports; and that the intent of the prose- cution was punishment, not for forgery in the ordinary sense of the term, but for smuggling, for which latter offence there was no precedent that extradition had ever been granted by any country. The attention of the Brit- ish Government having been called to the case, a request was preferred by it to the authorities in Washington that the trial of the accused should be discontinued, on the ground that a fugitive from justice, when surrendered by a country in which he had sought refuge, should not be tried for any offence other than the one specified in the extradition demand, and for which extradition was granted. Compliance with the request being refused, al- though as a matter of fact the trial was discontinued, the British Government took occasion, when extradition was TAXATION OF FOREIGNERS. 313 next demanded of her by the United States — which hap- pened to be the case of a former well-known citizen of Boston who had committed forgery in the sense that con- stitutes a crime in all countries — to refuse it, although the offender had in the first instance been arrested in Eng- land and was in custody; and for many years subsequent and for reasons above given there was no extradition in force between the United States and Great Britain and her colonies, with the result of making Canada an Alsatia, or place of safe refuge, for all criminals of the former country.* All, therefore, that any government can legitimately ask of another government in respect to taxation is, that its subjects or citizens residing in such foreign state shall not be there discriminated against because they are for- eigners; but shall be treated in exactly the same manner as the subjects or citizens of the taxing power and their property are treated — no better and no worse. If for- eigners feel aggrieved, they must first exhaust all the remedies against unjust taxation provided by the insti- tutions of the taxing country; as foreign importers, for example, aggrieved by rulings or appraisements at the custom houses of any country, must first appeal for redress to the courts of such country. A recent event of great economic and legal importance is also worthy of narration and consideration in this connection. A board of appraisers and assessors charged with the duty of assessing, for the purpose of taxation, the property in Ohio of telegraph, telephone, and express companies, discharged the duties incumbent upon it — taking an ex- press company for example — in the following manner: First, by determining the value and liability to taxation of the real estate of the company situated in Ohio; second, the personal property, including moneys and credits, owned by the company in Ohio, and the value thereof; third, the gross receipts during the taxing year of the company in Ohio, from whatever sources derived. It was conceded that the returns made by the company to the above officials were correct, and that the aggregate value of the * These cases of Lawrence and Winslow are fully treated in Wharton's Digest of International Law, § 270. 21 314 THE THEORY AND PRACTICE OF TAXATION. items included in such returns liable to taxation in 1895 — the same as other like property in the State — was $-12,065. The board of appraisers and assessors added, however, to this amount the sum of $191,030, making the aggregate of the tax liability of the express company $533,095; and based their action not on any belief or pretence that any considerable amount of real or personal property within the territorial jurisdiction of the State had been discov- ered which had hitherto escaped taxation, but that sources of reported value which were entirely outside of the terri- tory and beyond the jurisdiction of the State of Ohio — when they constituted a part of the value of the capital or franchise of a corporation located and established in some other State for the purpose of carrying on business, and that business " interstate commerce " entirely within the control of the Federal Government — might be added to the intrinsic value of property within the State; thereby assessing not only property within the State of Ohio, but a proportion also of all property situated ivithout its ter-* ritorial boundaries. The question involved was therefore the constitutionality of extra-territorial taxation; and the case, after consideration by State and United States Circuit Courts, was finally brought before the United States Su- preme Court. Here, notwithstanding the citation of nu- merous former opinions and judgments of the court wholly adverse to the constitutionality of the principle on which was based the assumption and action of the State of Ohio, the court by a majority of one held to a contrary view; and gave judgment in support of the State assessments on the express company.* It is clear, therefore, that the State of Ohio has been justified, for the time being, in an attempt to tax something that it calls property, but which is neither tangible nor visible; that has no intrinsic or essentially inherent value; and which procedure, if gen- erally accepted and put in practice by other States, would antagonize all formerly accepted theories and legal de- cisions in respect to extra-territorial taxation, and ulti- mately destroy all interstate commerce between the sev- eral States of the Federal Union. * See the decision of the court in Adams Express Company vs. Ohio State Auditor, 165 U. S., 194. TAXATION AND PROTECTION. 315 An Implied but Fundamental Eecipeocal of Taxa- tion. — Notwithstanding the absence of any warrant for assuming that there was ever any real or implied contract, whereby a State in its beginning or development agreed to give a certain amount of protection to life and property in return for an equivalent in money, goods, or services of its citizens — an assumption which has been characterized as the " commercial theory of taxation " * — it is neverthe- less true that the " co-relative " or " reciprocal " of taxa- tion is protection; or, in other words, according to the political theory of our governments, national and State, - \/^ and in fact of every government claiming the title to be f) '-^V free, taxes may be legitimately assumed to be the cora-^ot* pensation which persons and property pay the State~For protection. This assumption, it is believed, has been in- dorsed and accepted by every writer of repute on economic subjects who has discussed taxation from the time of Montesquieu down to a very recent period; f and in the * " The right of a State to take the citizen's property must be put on higher ground if it is to stand on perfectly safe ground. Of course, such higher ground is not to be found in the pretence that the right in question is the simple right of might; that the ruling power, whether monarch or majority, is physically able to take and apply as it chooses all that the individuals ruled over called their own : and that because it can, it morally may, take whatever part it thinks fit. With simple ethics the leviers of taxes, whenever they are a distinct class, are wont to content themselves. But whatever countenance they have received from such moral philosophers as venerate successful force, the principle will hardly serve those who study the matter as taxpayers." — Theodore Bacon. t " The philosophy of our plan of voluntary political associa- tion is, that all individuals, and all the values within a com- munity, shall aggregate into one mass all the power which they separately contain, which sum total shall constitute a sovereignty of the whole. This sovereignty — the soul of the State, which can not be impaired and the State survive — reflects back upon its con- stituents, in detail, all that it has received from them. What it receives, and what it returns, is of two kinds, as to both source and object, viz., indivic^ial service to the Government, and pro- < tection to the individual from it. Thus, in his individual capacity, a man is bound to perform military service, and the State, by the military arm, is bound to protect him from invasion. He is bound to do jury duty, and the authorities are bound, upon his demand, to provide him a jury. He is bound to aid the sheriff, and the sheriff is bound to execute process in his favour by posse comitatus, 316 THE THEORY AND PRACTICE OF TAXATION. repeated instances in which this matter has come before the courts for adjudication, the highest judicial authorities have uniformly given judgment or expressed opinions to the same effect. In confirmation of these statements the following citations are submitted: Montesquieu, writing with the monarchical institutions of France mainly or solely in view, discusses this subject in his Spirit of Laws (book xxxi, chap, i), as follows: " The public revenues are a portion that each subject gives of his property, in order to secure or enjoy the remainder." " The right to tax an individual results from the gen- eral protection afforded to himself and his property." — Vattel, Law of Nations, hook i, chap. xx. " Property and law (i. e., government or the state) are born together and die together. Before laws were made, there was no property; take away laws, and property ceases." — Bentham, Theory of Legislation. " Where there is no protection," said Judge Story (in the case of the United States vs. Kice, 4 Wheaton, 276), " there can be no claim to allegiance or obedience." Again the same eminent authority (in the case of Miles vs. Duryea, Cranch, 481) thus strongly expresses himself: " It is an eternal principle of justice that jurisdiction can not be justly exercised by a State over property that is not within reach of its process — that is, property which it can not protect." " Taxes are a portion which each individual gives of his property, in order to secure and have the perfect enjoy- ment of the remainder. Governments are established for the protection of persons and property within the limits of the State, and taxes are levied to enable the government to afford and give such protection. They are the price and if necessary. These personal services correspond to those which in feudal times the mesne lord, holding a frank tenement, owed the lord paramount. They can not be compounded for, for their value consists in their being rendered in kind. Their perforniance is the only price which the citizen pays ffir his citizenship. The terms are not only consistent and harmonious with our general scheme of government, but are highly politic. To all political privileges we admit each one by virtue of his being a man, free born, and of lawful age; we ask him nothing concerning his prop- erty, unless his property asks something from us." — Lowrey, Argu- ment, New York Assembly, 1862. PROTECTION OF PERSONS AND PROPERTY. 317 consideration of the protection afforded." (Ingersol, J., Circuit Court of the United States, Duer vs. Small.) " There is nothing poetic about tax laws. When they find property, they claim a contribution for its protection." (Lowrie, Chief Justice, Tinley vs. The City, etc., 32 Penn., 381.) The principle here involved is also clearly and suc- cinctly further expressed in the following citations: "• ' Taxation ' is, in any view, taking private property for public use, and it can not be so taken without an equivalent, both as to the Government or the citizens. It is not competent to convert private property to public use by way of taxation, and without compensation, any more than by any other mode. " Taxation (if anything in the nature of principle is assumed as its basis) therefore implies that the government imposing it will return an equivalent. But to return an equivalent in the form that was taken, namely, money, would be stultification. The only equivalent that a gov- ernment can return, and the only one, in truth, that justi- fies taxation, is in the nature of a guarantee that the per- son, property, or business on which the tax is imposed shall have all the rights which the civilization of the State repre- sents, or, in other words, ' protection.' " — Redfield. " ' If it were practicable to do so,' says Justice Cooley,\ ' the taxes levied by any government ought to be appor- \ tioned among the people according to the benefit which 1 r\r\yX/' each receiA^es from the protection the government affords J ^J )\y him. This is upon the assumption, never wholly true in ^ l*^ point of fact, but sufl'ciently near the truth for the prac- tical operations of government, that the benefit received from the government is in proportion to the property held or the revenues enjoyed under its protection.' " — CooJey, on Taxation, pp. IJ/^-ll. ISTotwithstanding this preponderance of opinion, argu- ment, and legal decisions in favour of the correlation of taxation and protection, the truth of this assumption has been called in question in recent years, and even wholly denied by some economic and legal authorities. Thus, in most of the States of the Federal Union (but not in other countries), sovereignty in respect to taxation is assumed, or enacted to embrace " goods, chattels, money, and effects. 318 THE THEORY AND PRACTICE OP TAXATION. wherever they are; ships, public stocks and securities, stocks in turnpikes, bridges, and moneyed corporations, within or without the State"; and where the administrators of the law tax residents for personal property, even of a visible, tangible character, having a situs in another State or country; and, by another irreconcilable rule, tax non-resi- dents for all of their personal property having a situs within the State. — Massachusetts Statutes. Such antagonism would seem to be wholly due to an inadequate comprehension of the subject. It is assumed, for example, that there can be no necessary reciprocity of the nature indicated between the State and the subjects of taxation, because, in the case of subjects — persons, property, and business — upon which no tax is levied, there can be no correlation, and therefore no claim whatever for protection; and in illustration and support of this proposi- tion it is pointed out that churches and other public insti- tutions, specifically exempt from taxation, need and re- ceive as much protection from the State as structures used for dwellings and stores, and that tramps, who have noth- ing to pay with, are equally entitled to invoke and use the power of the State for protection as those who are taxed for millions. " So also the business that is not taxed at all, it is said, can no more be plundered with impunity than that which is taxed the heaviest." * The error in all this reasoning is fundamental, and arises from a failure to comprehend that in every civilized state every person or "Nthing is taxed, either directly or indirectly, by the diffu- sion of taxes, and that it is not possible to name anything in such a State that is exempt from taxation ; that the pr i- m ary p ur[)()S(' for which the State exists is to aft'ord protec- tion to~ persons and property; that it — the State — practi- cally"ceases to exist when it is unwilling or unable to afford such protection ; and that, even if willing, it could not pro- tect, except through the ability that comes to it in the possession of the power and the exercise of taxation. Fourth. Taxes should he reasonable, regular, and not arbitrary as respects method, time, and place of assessment and payment, and, above all, proportional. * The claim or argument in defence of extra-territorial taxa- tion will be more fully considered hereafter. CERTAINTY OF TAXATION. 319 The justice and the necessity of these conditions as essentials of a true system of taxation ought to command universal assent without argument. Adam Smith held to the opinion, " founded," as he says, " on the experience of all nations, that the certainty of what each individual ought to pay is, in taxation, of so great importance that a very considerable degree of inequality is not near so great an evil as a small degree of uncertainty." The evil of uncertainty does not, however, often characterize the tax systems of the United States, except in the case of taxa- tion by the Federal Government of imports, when rates (customs) are sometimes held for considerable periods in abeyance Jay reason of political antagonisms of legislators. One of wie most remarkable examples of this occurred during the months from December, 1893, to August, 1894, when the uncertainty as to the prospective rates on im- ported merchandise occasioned great stagnation of busi- ness in the United States, with inevitable great contingent losses. Another even more striking illustration of the evils of uncertainty in taxation is to be found in the re- cent (1897) proposition to subject merchandise, imported in strict conformity with established laws and rates at the time of importation, to the retroactive incidence of in- creased taxes, not certain but prospective in respect to rates, and not enacted or embodied in the form of statute laws. Such action is in the nature of an arbitrary fine or penalty, and not taxation, and probably does not find a parallel in the history of any civilized nation, and would not now be tolerated in any of the most despotic govern- ments of Europe.* * A somewhat similar subterfiijre was resorted to under the Tariff Act of July 24, 1897. The bill passed both Houses of Con- gress, and, going to the President, received his signature at six minutes past four of the afternoon of July 24th. The Treasury set up the claim that the new act became operative from the earliest moment of the day on which it received the sisrnature of the President — namely, at twelve o'clock midnight of July 2.3, 1897. This claim was based upon a general rule of law which does not permit fractions of a day to be considered. The word- ing of the act was in unmistakable terms, and the phrase " on and after the passage of this act," or " on and after the day when this act shall go into effect," left no doubt as to the meaning of the measure. An early case, decided in February, 181.5 (Arnold vs. United States), involved a question of import duties arising 320 THE THEORY AND PRACTICE OP TAXATION. The term proportional, which is largely used in con- stitutional provisions and in statutes relating to taxation, has, however, a meaning so much broader and of such greater significance than is generally attributed to it by law-makers and even law interpreters, tliat it is worth while to institute an inquiry and endeavour to understand clearly what it does mean. Scientifically considered, it means the making of the burden of taxation equal upon all subjects of immediate competition. This principle is one of the prime essentials of taxation, and when it is violated the act of taking, or the enforced contribution, is not entitled to be considered, taxation, but becomes at once under a tariff act approved July 1, 1812, the importation being made on the same day. The act imposed an additional duty of one hundred per cent on all merchandise " which shall, from and after the passing of this act, be imported into the United States from any foreign port or place." The court ruled, through Justice Story, that "the statute was to take eflfect from its passage; and it is a general rule that, when the computation is to be made from an act done, the day on which the act is done is to be included." No question was raised, however, as to the precise hour the act was signed by the President or when the cargo arrived. In a much later case (Louisville vs. Savings Bank, 104 United States, 469, 475) Justice Harlan, after reviewing former decisions, admitted that there were established exceptions to the general rules, and " it can not be doubted that the court may, when substantial jus- tice requires it, ascertain the precise hour when a statute took effect by the approval of the Executive." As one of the latest decisions of the highest court this one is important, and, quoting from an Illinois case (Grosvenor vs. Magill, 37 111., 239), the court said: " It is true that for many purposes the law knows no divisions of a day; but whenever it becomes important to the ends of jus- tice, or in order to decide upon conflicting interests, the law will look into fractions of a day as readily as into the fractions of any other unit of time (2 Blackstone Com., 140, notes). The rule is purely one of convenience, which must give way whenever the rights of parties require it. There is no indivisible iinity about a day which forbids us, in legal proceedings, to consider its com- ponent hours, any more than about a month, which restrains us from regarding its constituent days. The law is not made of such unreasonable and arbitrary rules." That such a ruling is consistent with sound reason and public policy has the support of the leading authorities in legal writing. " Common sense and common justice equally sustain the pi'oposi- tion of allowing fractions of a dav whenever it will promote the purposes of substantial justice. The time of the approval of an act is a question of fact. The Constitution declares that to be PROPORTIONAL TAXATION. 321 an arbitrary spoliation or confiscation. Thus, to illustrate: Suppose it were proposed to tax the stock in trade of red- haired men five per cent, and those of red-nosed men ten per cent; or, as was provided in the income-tax law enacted by the Congress of the United States of 1894:, which ex- empted incomes below four thousand dollars per annum from taxation and taxed all above that sum two per cent; or to do as actually once was done in England, under an income-tax law enacted in 1691, tax Catholics at rates double those imposed on Protestants; it seems clear that such transactions could not involve any principle or be re- garded in any other light than the mere arbitrary and despotic exercise of power; or the making of the possession of a red nose or red hair, or the result of enterprise, skill, economy, or the fortuitous circumstance of birth or belief, the occasion for inflicting a penalty. Yet this was what substantially was done in the middle ages, when nobles were exempt from taxation because they were nobles, and the common people were taxed because they were villeins or bondmen; when Jews were assessed because they were not Christians, and Catholics because they were not Prot- estants. the time when the law takes effect. This act of approval can not look backward, and by relation or fiction make that a law at any antecedent period of the same day which was not so before the approval. The Constitution can not be abrogated by construction. The law prescribes a rule for the future, not for the past. And this in a republican government is a doctrine of vital importance to the security and protection of the citizen." — Potter's Dicarris on Statutes, p. 101. In an elaborate opinion the general appraisers concluded that the act of 1897 did not become operative until it had received the signature of the President, but this conclusion was so distasteful to the Government that the decision was " withheld for review." Upon being carried into the courts, the decisions were all against the Government, which reluctantly abandoned its absurd and unjust pretensions. Having before it the procedure of certain European countries, where power is conferred on the executive to raise or lower duties by decree, and to make a decree opera- tive at once, it thought to introduce the same procedure in the conduct of the United States Treasury in tariff matters. In the light of this attempt, and of the onerous, inquisitorial, and des- picable rules laid down as to the inspection of baggage of American citizens returning from abroad, it may be doubted if the customs policy of the country has ever been influenced so directly in favour of private greed and petty finance. 322 THE TPiEORY AND PRACTICE OF TAXATION. It would seem to be clear, therefore, that a tax that is not levied proportionally or, what is the same thing, equall}' and uniformly upon all subjects in the same field of competition — as, for example, upon all persons engaged in the same business or profession, or upon all property of the same kind and all profit or income (less exemptions in the nature of charities) in the same ratio — is a dis- criminating exaction, without claim to either justice or equality, inasmuch as to the same extent that some are favoured by the discrimination others are inevitably plun- dered or crushed. It is also well to remember that when the term " uniformity " in respect to taxation is used, as it often is, in the place of " proportionality," the meaning is essentially the same; and that uniformity of taxation does not consist in the payment of the same amount by each taxpayer, but that the proportion of the value of each particular class or subject which each person pays in taxa- tion to the State shall be everywhere the same. In the soundings which have been made at great depths in the ocean for telegraphic or other purposes, the sounding line has not infrequently brought up from the bottom small chambered shells or other minute animals of exquisite organization and structure; and the question naturally arises, How can these minute organisms live and flourish under the enormous pressure that in some in- stances must be exerted upon them of at least three tons to the square inch? The explanation is to be found in the circumstance that the pressure is everywhere equal- ized, being as much from within outward as from without inward, and thus an equilibrium is maintained, under which development goes on and existence is made possible; and it is the preserving this equilibrium, this equalization of pressure, that constitutes the very essence of correct taxation.* Another point worthy of attention in connection with this subject is, that forms of taxation which were not authorized with any purpose of making them unequal in their incidence or burden, not infrequently (as is especially the case in the United States) become so by reason of ex- * Speech of Mr. Lowe, afterward Lord Sherbrooke, Chancellor of the British Exchequer. INEQUALITY OE' TAXATION. 823 traneoiis circumstance; inasmuch as every tax which popu-\ lar sentiment, year after year, will not allow to be equally \ enforced, is, to the extent that it is enforced, a discrimi; ) nating tax of the most unjust and unequal character. zan- der the internal revenue laws of the United States as they existed not many years ago, there was a very striking ex- ample of this character in the case of the tax on matches, to which more particular reference will be made hereafter, and one worthy of notice still exists, in the case of the tax on negotiable securities (or instruments) — as railroad and other corporate bonds — which the laws of every State in the Federal Union make subject to taxation; inasmuch as it is notorious that such taxes are not paid by the great majority of the citizens w^ho own such securities, but are paid as a rule by guardians, "trustees, and executors, who are obliged to inventory them in probate offices; with the result that widows, orphans, and minors are plundered and crushed; while those who evade the tax, through the utter inability of the State to collect it, are rewarded for their evasion in an increased rate of interest. Uniformity or proportionality in taxation is, therefore, one of the fundamental principles of every free and just government; and the safety of all taxpayers against the grossest abuses demands that in taxing any class or locality the principle of equality of rate should be kept sacred and inviolate. The Constitution of the United States requires that " all duties, imposts, and excises shall be uniform through- out the United States "; and the question as to what con- stitutes uniformity of taxation under this provision has re- peatedly come before the courts — Federal and State — for the purpose of definition, and so has become invested with a degree of historical interest. A natural inference, at first thought, would be, that under this provision of the Federal Constitution all property subject to taxation must necessarily be taxed at the same rate or ratio — that is, if horses, wagons, and land are taxed, tben the same per cent of value must be assessed upon the horses and wagons as upon the land; and if some eight hundred per cent is assessed upon distilled spirits — whisky — (as is the case in the United States at the present time) every other com- modity from which it was proposed to raise revenue ought to be taxed in the same proportion. In like manner under 324 THE THEORY AND PRACTICE OF TAXATION. the customs, all imports — liquors and pig iron, for ex- ample — would have to be subjected to one rate of duty. This difficulty, so far as the Federal Government is con- cerned, has been obviated by an assumption, which the courts have sustained, that a tax " is uniform within the meaning of the constitutional requirement if it is made to bear the same percentage over all the United States " — that is, it must be uniform as regards any particular article in all places; that whisky or any other commodity, for example, shall not be subjected to Federal taxation at one rate in one State and at a different rate in another State, but that different articles may be subjected to dif- ferent rates, provided they are uniform as between differ- ent places and different States ; as it obviously " could not have been the intent of the' framers of the Constitution that the Government in raising its revenues should not be allowed to discriminate in respect to articles which it de- sired to tax." * In the case of the several States of the Federal Union, to which the Federal constitutional requirement in re- spect to uniformity of taxation does not apply, the same question — i. e., as to what constitutes uniformity — has been also a troublesome one, but different in its manifesta- tion. The provisions relating to taxation in the Constitu- tions of these several States generally start with the idea, expressed or implied, that taxes must be uniform; and a strict construction of this language in a tax statute, operative in only one State, and where the Federal limita- tion of uniformity as respects place does not apply, might be construed as restraining the authorities of a State from imposing any different rate of taxation on the manufacture or sale of liquors and the manufacture and sale of other merchandise, or on the land and the business of the agri- culturist. These difficulties in the way of construction have, however, been largely obviated by recognising that when in the statute of a State the words " taxes must be uniform " are used, the word " uniform " does not mean, as in the Federal Constitution, uniformity as to " place," but uniformity " with regard to the subject of the tax "; * Lectures on the Constitution of the United States, Justice Miller, pp. 240, 241. EQUALITY UP BURDEN. 325 an interpretation in full conformity with the principle before enunciated, that uniformity of taxation consists in the making of the burden of taxation equal upon all sub- jects which are in the same field or sphere of competition; or, as has been also expressed by Justice Samuel F. Miller, ^ - , "different articles may be taxed at different amounts, ij^QcuuJ-rrry^^ provided the rate is uniform on the same class everywhere, \ I with all people and at all times. Take, for instance, the case of a license: if everybody in any particular class is re- quired to pay a certain license — if all lawyers are taxed twent3'-five dollars a year, all merchants one hundred dol- lars, and all saloonkeepers two hundred dollars — then the license taxation is uniform, because it imposes the same burdens upon every man of the same class, who comes within a circle of well-defined limits. . . . This interpre- tation," he adds, " may be a little strained, but probably it has arisen from the necessity of enabling the Legisla- tures to levy taxes according to common sense, if not alto- gether with regard to strict uniformity." * The opinions expressed by the State courts of the United States when this question of uniformity of taxation has been practically brought before them, is indicated by reference to the following decisions: " The Constitution of the State of Pennsylvania pro- vides (Article IX, section 1) that ' all taxes shall be uni- form upon the same class of subjects within the territorial limits of the authority levying the- tax, and shall be levied and collected under general laws.' In June, 1885, an act was passed by the Legislature imposing a tax of three mills on the dollar on mortgages., moneys loaned or invested in other States, money capital in the hands of individual citi- zens, and other classes of property. The act did not extend to corporations, which were taxed at a similar, in some cases at a higher rate, under a statute of 1879. The act of 1885 was opposed on the ground that it violated the constitutional rule of uniformity, but it was declared valid by the Supreme Court of the State, which held that sub- stantial uniformity had been obtained. " A decision in New Jersey turned upon a constitu- tional provision that ' property shall be assessed for taxes * Miller, ibid., pp. 241, 242. 326 THE THEORY AND PRACTICE OF TAXATION. under general laws and by uniform rules, according to its true value.' In 1884 the Legislature of the State passed an ' act for the taxation of railroads and canals/ which imposed a tax upon the lands and tangible property used by railroad and canal companies and their franchises, and touching no other property. The constitutionality of this law was questioned by most of the leading companies, but was affirmed by the State Court of Errors and Appeals, which held that as the law was a general one, framed in general terms and restricted to no locality, it operated equally upon a whole class of property, whose character- istics enabled it to be dealt with separately. The court further declared, that as a previous act had secured the companies against being required to pay more than their full share of tax, a substantial uniformity was thus se- cured." These and other like decisions of the State courts of the United States show that in order to sustain a tax law under the requirement of generality or uniformity it is not necessary that all property should be taxed, and that a State has the right to select property for taxation at its discretion. Of course, discrimination may result from the exercise by the State of the power of dividing the objects of taxation into classes, but while persons of the same class and property of the same kind are subjected to an equal burden, the constitutional requirements as to uni- formity seem to be satisfied. The fourteenth amendment of the Constitution of the United States, which prohibits any State from depriving any person of property " without due process of law," is also in conformity with the principle enunciated in the above citations; for taxation without jurisdiction, and therefore without the possibility of the correlative return of any protection as compensation, would obviously be an arbitrary exaction and not due process of law. But if property is otherwise (than by taxation) taken by the Government (as by the so-called law of " eminent do- main "), full and fair pecuniary return must be made for its value. This is a principle as old at least as constitu- tional government, and is so important that it is incorpo- rated in the fundamental law of every State in the Federal Union. Article Y of the Constitution of the United States TAXATION AND MORALITY. 327 also provides that private property shall not be taken for public use without due compensation. It is clear, there- fore, that there must be a line between the taking of private property for public use by the law of eminent do- main and by taxation. But how can that line be drawn except by the rule that rightful taxation means uniformity of burden on competing vocations and competing property? The following decision by the Supreme Court of New Jer- sey is clearly in conformity with this conclusion: " A tax," it said, " upon the persons or property of A, B, and C indi- vidually, whether designated by name or in any other way, which is in excess of an equal apportionment among the persons or property of the class of persons or kind of prop- erty subject to taxation, is, to the extent of such excess, the taking of private property for a public use without com- pensation. The process is one of confiscation and not taxa- tion." (.Township Committee of Heading, 35 N. J., p. 66, 1873.) Fifth. Taxation should not be employed as an agency or for the purpose of enforcing morality, or as an instru- mentality for correction or punishment. The punitive or moral idea has probably always en- tered to some extent as an element in all those taxes which have been levied on luxuries, and more especially on all those forms of luxury which are regarded as frivolous or as mere insignia of wealth and title, such as hair powder, wigs, coats of arms, carriages, etc. But when a govern- ment assumes to inquire what are the articles the con- sumption of which is prejudicial to the interests and well- being of its people, and then embodies the results of such inquiries into its measures of revenue; so that while pro- viding means for the support of the state it also prescribes how the citizen ought to live, dress, eat, or drink, the re- sult is always ineffectual for purposes of revenue, and far more so for the promotion of morality. Examples illus- trative and confirmatory of these conclusions are so nu- merous as to make a selection of them not a little difficult. The following have been cited by the late Sir Morton Peto: " A tax on dice in Great Britain, repealed in 1862, had the ludicrous result of producing for many years a revenue of five shillings per annum from a license of thirty to forty pounds a year on the business of manufacturing 328 THE THEORY AND PRACTICE OF TAXATION. them. Another provision of law was that every person having dice unstamped by the revenue officials in his pos- session was liable to the penalty of five pounds for each pair! But stamped dice could not be obtained. Every one who wanted dice, even cabinet ministers and revenue officials, purchased square pieces of ivory for a few pence and marked them for themselves. As regards packs of cards, the regulations imposed by a number of complicated acts of Parliament were so stringent that legally cards could scarcely be made or sold. N^evertheless, for many years cards were hawked about the streets unstamped and without a license; and the manufacture of cards for ex- portation was so flourishing that nearly half a million packs were estimated to be surreptitiously made for exportation at the time the obnoxious taxes were repealed." Sixth. No tax should be levied the character and extent of which offer, as human nature is generally constituted, a greater inducement to the taxpayer to evade rather than pay. The justification and wisdom of the above maxim find support in a lesser degree from argument than from ex- perience, although the deductions from abstract reasoning ought alone to constitute its sufficient indorsement. It has been pointed out by Herbert Spencer that ideal men are possible only in an ideal state; and, conversely, that a perfect social state is possible only when every unit has achieved perfection. As this condition has not been at- tained, and until the " millennium " arrives is not likely to be, the inference is legitimate that a large proportion of mankind are not " decently honest," inasmuch as in every variety of business where opportunity for the perpetration of fraud exists, much labour is expended in guarding against dishonesty. This is specially exemplified in the case of railroads, " where tickets have to be dated, punched, and carefully collected to prevent their being used again by the masses." , But it is in matters of taxation that the largest amoimt of irrefutable evidence is to be found in support of the above maxim. Thus in the case of smuggling or the eva- sion of duties on imports, the experience of all govern- ments and of almost all countries is to the effect that when sufficient inducement in the way of gain from a violation of the law is offered, such statute can not be UNMORAL TAXATION. 329 executed even when penalties as severe as death have been made contingent on individual arrest and conviction. But it has been reserved for that nation whose people claim to be the most law-abiding and intelligent, to furnish the most confirmatory evidence on this subject — namely, the United States — the Congress of which in 1865 imposed a tax on distilled spirits amounting to more than fifteen hundred per cent on the then average prime cost of pro- duction. The result was, that the Government was only able in 1868 to collect the tax on less than seven million gallons out of an annual product of certainly not less than fifty million gallons; which last, sold as it undoubtedly was at the current market price (tax included), left to the credit of popular corruption at least $80,000,000. The United States is confessedly one of the most pow- erful of nations and governments, but its entire military force can not crush the illicit traffic in refined opium, un- der a temptation of the realization of six dollars contin- gent on every pound of this commodity that is successfully smuggled into the country. 22 CHAPTEK XV. NOMENCLATURE AND FORMS OF TAXATION. PART I. The most simple form of taxation is a poll or capitation tax. Both terms may be regarded as identical in use and meaning, but the former is probably more frequently used in tax treatises and discussions. What is a Poll Tax? — In a strictly economic sense the essential requisite of a " poll " or " head " tax is that it be laid on all polls or heads, and be unvarying in amount. A varying poll tax would be an arbitrary exac- tion, and would not be sustained for a moment as a proper exercise of the right of taxation, if laid without reference to a man's ownership of property. So soon, however, as the amount of the tax exacted is made dependent upon the amount of the property owned, the tax ceases to be a varying poll tax, and becomes a tax on the property itself. The popular idea of a poll tax in the United States is an annual tax, small in amount, uniform as respects rate, and applicable only to adult male persons. Such conceptions are not, however, in accord with historical experience, which is to the effect that uniformity in assessment has never been an essential or even usual feature of this form of taxation, but as a rule the tax has been intentionally rated to the person assessed according to his rank and station and supposed property. The " poll " or " capitation " tax of history has, therefore, been rather an " income "' than a ■ per capita tax; and the poll tax of the United States finds few precedents in history. Under the Byzantine Empire a so-called universal poll tax was substituted in lieu of almost all the tithes, customs, and excises which had before been relied on for revenue; and this substitution and its 330 POLL OR HEAD TAX. 331 influence was regarded by Hume as one of the chief causes of the decadence of the Eoman state.* The first so-called poll tax in England was granted in 1377, and from that date down to the time of Queen Anne was an important source of revenue, and, not being uni- form, except in its incidence per capita, gave rise to great popular dissatisfaction, both by reason of its amount and inequality, and also by the inquisitorial methods employed for its assessment and collection. At first (1377) the rate was fourpence on every head, male and female, above four- teen years of age. Subsequently, under the reign of Eichard II, in order to avoid the unfairness of subjecting all — rich and poor, noble and serf — to such a uniform tax, a more equitable system was introduced, the taxpayers being classified by reference to rank, condition of life, and property, the rate ranging from six pounds thirteen shil- lings for dukes and archbishops, to two pounds for barons and knights, and three shillings fourpence on those of " least estate." The retention of the former uniform rate of fourpence on all married labourers and upon all single men and women above fourteen years of age, who were presumed to be without estate, was, however, a cause of great dissatisfaction among the masses, and the attempt to collect it undoubtedly constituted the prime cause of the famous "Wat Tyler' rebellion " of 1381. In the case of the last poll tax authorized in England under Queen Anne a like attempt at classifying persons was continued; the rate commencing at one shilling per annum on all persons worth more than fifty pounds, and rising to ten pounds for peers of the realm, both spiritual and temporal. One curious provision of this final enactment was, that in all cases Catholics were to pay double the rate imposed on Protestants. Bachelors and widowers without children were also subjected to special rates. Some writer has re- marked that such exactions could only have been designed and authorized by a government of misanthropes; for if one with a view of escaping them abandoned single blessed- ness, he only involved himself in greater difficulties; for there was a tax upon marriages, a tax upon births, and, if the health of the victim broke down under these ex- * See ante, p. 96. 332 THE THEORY AND PRACTICE OF TAXATION. actions, a sum varying from three to thirty florins, accord- ing to his station, had to be paid before his sorrowing relatives could bury him. These taxes on marriages were enforced in England from 1695 to 1705, and during the first five years of their continuance yielded an average annual revenue of about two hundred and fifty thousand dollars. It was noted that their continuance had the un- desirable effect of increasing the number of marriages by irresponsible persons, and in a manner devoid of all so- lemnity. The rates imposed in England as late as 1706 on bachelors and widowers contracting marriage varied according to the class in life to which they belonged; from thirty pounds to twenty-five pounds on the elder sons of the higher orders of nobility to twelve shillings on per- sons possessed of an income of fifty pounds per annum. Within a very recent period a petition, numerously signed, has been presented to the French Chamber of Deputies asking that a special tax on bachelors be estab- lished in France, and recalls the fact that the French revolutionary Convention of 1789, and some of the old republics, established such a tax. The petition further stated that the number of bachelors in Paris is nearly half ^^ a million, while the number of married men is not more iN^ \> I than 379,000 ; and " that such a tax ought to be doubly "- ^ ' welcome in France: first, because it will increase the de- clining population of the state by inducing bachelors to . marry; and, secondly, because it will help to make up a 11 growing deficiency in the national budget." In Switzer- land, in the assessment of an income tax and taxes on dwelling houses, certain deductions allowed to married persons with families are not allowed to bachelors or child- less married people. Legislation looking to the taxation of bachelors has also been seriously proposed of late in several of the States of the Federal Union. In Illinois, for example, a bill has been introduced in its Legislature imposing a uniform tax on all single men, sound in mind and body, above thirty- [ two years, wiio are not able to show that they have pro- ' posed marriage three times — and been rejected. The pro- ceeds of the tax are to go toward establishing a home for worthy and indigent single women above the age of thirty- eight. COLONIAL POLL TAXES, 333 A Missouri bill makes the tax progressive, increasing by successive increments as the bachelor persists in his state of single blessedness. In modern times (1848) an English Governor of Ceylon — Lord Torrington — undertook to repeat the experience of his countrymen of near five centuries before, by im- posing a poll tax of three shillings per annum, or one week's labour, valued at three shillings, from every man, rich or poor, in the colony. This exaction, in point of in- equality, was worse than the poll tax of Wat Tyler's time, inasmuch as it made the average income of the poorest labourer the standard according to which the rate of taxa- tion was to be established for all. There was also another curious feature connected with this experience. The Cin- ghalese priesthood were held liable to pay this tax, either in money or a week's work, when their religion required that they must neither perform work nor possess property. The result was a revolt attended with much bloodshed, an abandonment of the tax, and the recall of the governor. In one of the states of Central America a poll tax was recently required to be paid monthly; all adult male in- habitants of the several towns and cities being obliged to present themselves at the municipal treasuries and pay their dues in person. In the colonial period of our history the poll tax was enacted by nearly all the North American colonies at one time or another. In Virginia and Maryland it was for a long time the only direct tax; and in the latter State it was imposed upon all free men and free women, and upon all free children over twelve years of age; and was rendered particularly odious and burdensome from the circumstance that its payment was required in tobacco, a given number of pounds to the head, the value of which commodity was not constant, but varied with supply, which at times was intentionally restricted, with the intent of augmenting its market price. There was, however, another side to this experience. The poll tax in the two States named was almost a measure of necessity. Land was of small value, for there was in the new colonies little distinction between improved and unimproved lands. Slaves w^ere not taxable a-s personal estate, but belonged to the land and figured as real property; and the personal estates of the planters 334 THE THEORY AND PRACTICE OP TAXATION. were comparatively small. Polls were therefore the most available measure of taxation, and tobacco was the cur- rency of the day. All bills and charges were made out in so many pounds of tobacco; all lawyers' and court fees were so determined; the parish and county levies were fixed in weights of tobacco; and the minister drew as his salary so many pounds of tobacco from each parishioner, without respect to the market value of the crop. It accordingly happened that a poll levy might be excessive one year and nominal the next; with lawyers, ministers, and clerks rejoicing in abundant means one season and reduced to starvation point the next. Unequal, in proportion to wealth of the payer, as such a poll tax was, its inequality was furthermore greatly aggravated Ijy fluctuations in the exchangeable value of the medium in which it was payable. During the colonial period also, in North America, men's persons were included in the schedules of property made in reference to taxation; and instead of having a fixed sum, as was subsequently the rule in assessing a poll tax, the value of the poll was rated according to the earn- ing capacity of the individual; and if he was old and in- firm, or in any way disabled, the value of the poll was placed at a small amount. Possibly by reason of English and American colonial experiences, and perhaps from an infiltration as it were, down through the ages, of the fact that in Greece and Eome the poll tax was exacted only of the people of subju- gated provinces, and was therefore regarded as a mark of inferiority or slavery, this tax in modern times has not been in accord with public sentiment, and in most coun- tries has now been abandoned. The last poll tax in Eng- land was enacted in 1689. Like all its predecessors, it was always unpopular and was regarded as unsuited to the peo- ple of England. It was repealed in 1698, and " henceforth this form of tax passed into the list of taxes tried and never again to be imposed in England. What minister," said Henry Fox in 1748, " would presume again to suggest the hated hearth money of the Stuarts, or the poll taxes of the reign of William III ? " * In the United States the poll tax formed, in 1895, a * Dowell, Taxation in England, vol. ii, p. 49. OPPOSITION TO POLL TAXES. 335 part of the tax system of twenty-six of the States and Ter- ritories, and was not recognised in twenty others, and in some of the latter its levy is prohibited by constitutional provisions. In New York a general law for the incorpora- tion of villages confers upon its trustees the power to raise money by levying a poll tax. From a theoretical or purely economic point of view the present popular opposition and adverse sentiment to the poll tax in the United States do not seem to be warranted by any very good reasons. The arguments made use of by those opposed to its continuance are not derived from old- time precedents, or warranted by the experience of foreign countries, inasmuch as its assessment in the States of the Federal Union has always been inconsiderable in amount, and has rarely involved in its collection any inquisitorial or arbitrar^measures. The one most deserving of attention has been, that it practically imposed a property qualification upon the right of suffrage by making its payment a pre- requisite to the act of voting, a money payment of even so small a sum as two dollars per annum in Massachusetts and one dollar in Connecticut being regarded in that light. But in answer to this it may be said that paupers are dis- franchised not because they are vicious or illiterate, but, because of their inability to support themselves or aid in supporting the State, it is held that they ought not to be allowed a voice in the government of the State. To be con- sistent, therefore, the advocates of the abolition of the poll tax as administered in New England ought also to connect with it — i. e., its abolition — an extension of suf- frage to the inmates of poorhouses who, otherwise quali- fied for its exercise, are now debarred from it exclusively by a lack of property qualification. On the other hand, a leading argument in favour of its continuance is that the majority of citizens who pay no direct State taxes upon property of any kind, but who are self-supporting and not paupers, ought not to be exempt from directly contribut- ing to the support of the government, and this argument may be amplified and illustrated as follows : Thus, there is no citizen, be he ever so humble, who is not vitally in- terested in the preservation and welfare of the civil society of which he is a member ; and it is of the first importance, more especially as the tendency of the age seems to be 336 THE THEORY AND PRACTICE OP TAXATION. i> antagonistic, that each member of society should be en- couraged to realize at all times his personal interest in the well-being of the State. To the rich man society comes and exacts a contribution in some proportion to his means, and as a consequence he has inducements to directly in- terest himself in the fiscal management of the govern- ment. To the poor man, who is otherwise rarely directly confronted with the tax gatherer, society comes also, and, in common with all citizens of a certain age, asks a very small annual contribution for the support of the State, because each citizen is interested in its existence and wel- fare, has a measure of responsibility resting upon him, and should be made to realize that responsibility. In the fact, therefore, that the poll tax touches directly every citizen and is an effective agency for awakening him to a sense of his political duties and responsibilities, and so better qualifies him for the exercise of the right of suf- frage, is to be found the true reason for the incorporation of a small annual poll tax into every correct S3^stem of State taxation. As has already been pointed out, a poll tax, having re- gard solely to the person and not to his property, is the only tax to which the term personal can be rightfully applied. | It is the essence also of every free and just gov- \ernment that every person — the most humble as well as the most exalted — is equal before the law, and has a right to invoke the sovereignty of the State in all its fulness for the protection of his person. Keeping these two points in view, it would further appear that a poll tax (assessed equally upon all citizens, and free from all dis- crimination, represents the most perfect equality of service, and is the only tax which a citizen can pay which can be regarded in the light of a reciprocal for the service which the State renders to him in protecting his person, all other taxes being in respect to property or business. As the Constitution of the United States also excludes from representation " Indians not taxed," it would seem to imply that its authors regarded the exercise of suffrage by a citizen that was not a pauper and paid no direct tax, as an anomaly not likely to occur under a government founded upon equal public rights and responsibilities, and also that a citizen who did not pay any direct tax to the SUFFRAGE AND POLL TAXES. 337 State was not likely to have any more correct idea or measure of his true relation to the State than a wild Indian. If, however, public sentiment in any community is so adverse to the levy of moderate poll taxes that their col- lection is not and can not be enforced with any degree of imiformity and equality, as is reported to be the case irrj, many States, then the advisability of their abandonmenf ^ can not well be questioned, for the want of respect for a^^ ^ law, which always results from the maintenance upon the /^ statute-book of any law which a community will not re- gard or permit to be enforced, is an evil that far outweighs any possible good that can come from its continuance. Fur- thermore, the statement is probably warranted that in no instance in history has it been possible to enforce a perma- 15 nent tax against which by common consent the public has P revolted.* *^' In considering the feasibility of its continuance it should not be overlooked that the tax upon property can be collected because the State holds a confiscatory power over the property to the extent of the tax. But the tax upon the non-property-holding polls can not be collected except through the consent of the assessed person, unless resort is had to the old law of imprisonment until payment is made — a remedy not likely to find favour. The recent experiences of Massachusetts and Pennsyl- vania are especially worthy of note in this connection. The Constitution of Massachusetts, adopted during the Eevolu- tion, limited the suffrage to "every male inhabitant of twenty-one years of age and upward, having a freehold estate within the Commonwealth of the annual income of three pounds, or any estate of the value of sixty pounds." This restriction was abolished in 1821, but payment of a poll tax was still required before a man could vote. In recent years, however, this form of taxation has become so unpopular in this State, mainly by reason of a general belief that politicians, without distinction of party, were in the habit of collecting and disbursing large sums for * In illustration of this, attention may be called to an exposi- tion of the reasons why the California tax on mortgages haa been inoperative. — Plehn, in the Tale Review, March, 1S99. 338 THE THEORY AND PRACTICE OF TAXATION. the purpose of influencing or bribing voters by payment of their poll taxes, that in 1891 an amendment to the Con- stitution of the State was adopted which, while retaining the previous obligation of the payment of an annual poll tax, abolished such payment as a prerequisite for voting. The result was that before the adoption of this amendment from fifty-two to flfty-nine per cent of the poll tax due in the city of Boston was collected year by year; but since then the percentage of collection has f ajl en below fort y- four per ce nt. Many of the city's' own employees figure among the delinquents, and it has been found necessary to place hundreds of poll bills in the hands of the city treasurer for the deduction of the amount due from their wages. Leaving out the persons who can not pay without great sacrifice, it is stated that Boston is still losing above 'o Qe hundred thousand dollars yearly in revenue from fail- ure to collect the taxes upon polls that can and should pay. And this, in a modified form, is probably the situ- ation throughout the State of Massachusetts. In Pennsylvania the State Constitution makes the pay- ment of a State or county tax, at least one month before election, a prerequisite to the exercise of suffrage; and as the poll tax involves the smallest amount of tax that a citi- zen could pay, it was expected that almost every man would pay it. But, in point of fact, it was found that thousands of citizens neglected to do so, and the political campaign committees, irrespective of party, recognising this fact, have adopted the policy of furnishing voters whom they desired to influence with receipts for the payment of their poll taxes ; and this practice has attained to such magni- tude in recent years, that the two leading party organiza- tions in the city of Philadelphia alone purchased in the year 1894 over ninety-five thousand such receipts. Ob- viously this is a form of bribery which is forbidden by the spirit if not by the letter of the law; and to meet such a situation of affairs the Legislature of Pennsylvania has re- cently (1897) enacted a law forbidding the payment of a poll tax by any other person than the elector against whom such tax is assessed.* * Durinof the American colonial period some attempts were made to compel the exercise of suffrage by imposing a fine on citizens RECEIPTS. V 339 ^- .t^^L.^\^J. FOOR-FIFTHS PAK NO POLL IMES Number of "Shy" individuals in Boston Increases Yearly — Mayor Plans Appeal to Large Employers. The number of persons assessed for a poll tax in Boston who fail to pay is increasing every year. Mayor Fitzger- ald is at work on a plan to appeal to the public service corporations and large business Jiouees that employes will be urged to contribute $2 apiece to the city treasury. Hy the last report there were 183,421 assessed polls and only 32,460 paid. If the city was able to collect the entire sum it would amount to $366,842, but the city received only $64,920. Ward 6 shows the lowest percentage and ward 11 at the Back Bay makes the best showing. The following table shows the as- sessed polls and the number who paid, as well as the figures showing the money assessed and collected, and may prove interesting: Polls. No. paid. Pr. Ct. Ward 1 7,369 1,552 21.06 Ward 2 6,317 871 13.78 Ward 3 4,210 739 17.55 Ward 4 4,103 704 17.15 Ward 5 4,176 658 15.75 Ward 6 10,537 695 6.595 Ward 7 6,076 533 8.77 Ward 8 10,089 949 9.40 Ward 9 9,006 615 6.83 ■R'ard 10 8,625 1,556 18.00 Ward 11 6,218 2,466 39.67 Ward 12 7,593 1,239 16.32 Ward 13 6,954 525 7.55 Ward 14 6,416 913 14.23 Ward 15 5,771 776 13.44 Ward 16 6.459 1,273 19.71 WardlT,. 6,926 858 12.39 "U'ard 18 6,837 770 11.26 AVard 19 8,029 1.181 14.71 Ward 20 12,276 3,207 26.12 Ward 21 7,953 2,043 25.68 Ward 22 8,275 1,663 20.09 Ward 23 7,165 2,727 38.06 Ward 24 9.283 2.297 24.74 Ward 25 6,758 1,651 24.43 Total 183,421 32,460 17.697 horities above referred to principle essential to the state — that the power of hr police purposes, but be \evenue to meet legitimate c^ a tax receipt, but expects -7 ^ f r is a bad citizen. He is, -j <^,;^'Z, t and who holds the value^. " ^ <:>> —PJiiladelphia Times. <^ ^"^ white and coloured races '•♦^^-jl 9^ •ontingent on the former y, ^ c^ nues to a large degree, *^ ;nts to the Federal Con- is of full legal right and jj the fine imposed in Mary- > tMion having been one hun- <, ^.■he adoption of the Federal'^ Tiiacter is believed to liave-^ bill 1889, when Kansa.s City ®*i tax of two dollars and a A vote at a general election, before the State courts of tance by a Superior Court the enlightenment of the State to compel its voters «if the State can do so the I After enumerating many fre done to maintain good -^^^ ^ that he could see no legal ^ ^^ ^ er for the purpose of secur- ,T ' >-' blic sentiment and the elee- -"'^ ^'~- public oflfiees. The position / ^ ^ ^lit not an unreasonable one. '^.. y'\^ t ^ type of government is at- Tr^s^ 5:e, and that vote is counted ^j' Jf |) the Supreme Court of the ^*^ • ',eclared unconstitutional, the CC ■ss' pws: "Taxes may be levied," " Jiving a money value to the 'does not necessarily have to , services, and vice reraa, and ,xes are upheld ; but who can lie of a vote? It is degrading . such an idea. The ballot of lid the destiny of the nation th the election of next fall in vie*, appears to the writer that while; Mr Draper announces himself a revi-" sionist he proposes action that will ' comfort the hearts of the "stand-pat- ters " He is ready to wait for revi- sion till the Republican majority m Congress favors it. It is not likely that the Republican majority in Con- gress will favor revision during the present administration. Therefore the result of Mr. Draper s policy will be exactly the same as though he announced himself a 'stand- patter." Is this not so? _,^_ ^^ ._ Boston, April 10, 1906. PAIR PLAY. 338 THE THEORY AND PIi8£'~Be^use we are told that wehav, accomplished nothing is no reason T-Ti. the purpose of influencing .{rEre^- °"' '' '*'' '''""'' ''*" '"''l of their poll taxes that in U p^l^.t^jis ^speech.^ ma^de be^for^e^^a^ R^e. Stltution Ot the btate was a announcement of the tariff policy o| the previous obligation of ti ^-^ %'\^r%'rl%'^s''vlvm\oUcy% tax, abolished such paymeni is worth while to consider U carefully. The result was that before tl ^il from fifty-two to fifty-nine ] "*'" the city of Boston was coll then the percentage of coif four j)er cent. ]\Iany of tl among the delinquents, am to place hundreds of poll treasurer for the deduction wages. Leaving out the pc, great sacrifice, it is stated t ^ oQe hund red thousand dol la ure to collect the taxes u| pay. And this, in a modif ^ation throughout the State In Pennsylvania the Sta ment of a State or county election, a prerequisite to t. the poll tax involves the sm; zen could pay, it was expectt pay it. But, in point of fac of citizens neglected to do . committees, irrespective of have adopted the policy of desired to influence with rec poll taxes; and this practic. tude in recent years, that th tions in the city of Philade year 1894 over ninety-five t viously this is a form of bribi spirit if not hv the letter of situation of affairs the Legisla cently (1897) enacted a law i poll tax by any other person tl such tax is assessed.* * Durinor the American colonial } to compel the exercise of suffrage April Weddings Intendinff purchasers of flue PORCELAIN and CUT GLASS will find extensive exhibits of the choice things to be seen in this line, equal to the best, among which are : China Service Plates. Bouillon Cups and Saucers. Ramekins and Stands, attractive features of table service at ladies' lunch parties. Grape Fruit Plates, a new table requisite. China Sorbet Cups with stands. After-Dinner Coffee Sets. Turkish Coffees in metal frames. Chocolate Sets. Jardinieres and Pedestals. Tall China Pitcher Vases. Guest-Room Water Sets, pitcher^ match box, candlestick and glass tumbler on tray. . Sideboard Flagons and Stems. English Rock Crystal Glass, ir stemware, vases, cologne bottles etc. Liqueur Sets. Creme de Menthe Glasses anc Decanters. , , , ...i Cocktail Glasses, gold edges witl I ™ i** 4-Vk<^ Ktf-kTirIc \Vtyy-L t-5 o.O/£^'CVUt/i/WVNAt^ A^'" V-^ivCfc/rP^^ < ABUSE C^F Ti^ RECEIPTS, f 339 Neither of the judicial authorities above referred to seem to have grasped the great principle essential to the continuance of every truly free state — that the power of taxation should not be invoked for police purposes, but be strictly limited to the raising of revenue to meet legitimate tJ^ state expenditures. cs^^ " The man who will not buy a tax receipt, but expects _^ ^ ? his party to purchase it for him, is a bad citizen He is,*^ k^c^ in effect, a person who is bribed, and who holds the valu of his vote at a very small sum.'! — Philadelphia Times. The antagonism between the white and coloured races of the Southern States, mainly contingent on the former toleration of slavery, still continues to a large degree, although both races, by amendments to the Federal Con- stitution, have been placed on terms of full legal right and neglecting to vote at regular elections; the fine imposed in Mary- .- land on citizens in default of such action having been one hun- 5 dred pounds of tobacco. But since the adoption of the Federal"^ Constitution no legislation of like character is believed to have-^^i taken place in any of the States until 1889, when Kansas City > adopted a charter provision imposing a tax of two dollars and a v half on each citizen who should fail to vote at a general election.' ^ This provision coming up for review before the State courts of ^ Missouri, was affirmed in the first instance by a Superior Court C judge, who took the ground that " in the enlightenment of the o present age it is in the power of the State to compel its voters , to exercise the election franchise, and if the State can do so the > city is invested with the same power." After enumerating many Z!^ ^ a- things of an arbitrary nature that are done to maintain good ^ •« ^ municipal government, the judge said that he could see no legal ^ ^V" ^ objection to the use of the taxing power for the purpose of sccur- jT • ?^ ing a full and perfect expression of public sentiment and the elec- V^ ^^ tion of competent and worthy men to public offices. The position v S ^ was an advanced one, he admitted, but not an unreasonable one, C^ >\ c in view of the fact that " the highest type of government is at- "^--^v tained when every voter casts his vote, and that vote is counted^- ^ £T just as it is cast." On an appeal to the Supreme Court of the^"^ ■ i. State, the provision was, however, declared unconstitutional, the Cf -sT language of the decision being as follows: "Taxes may be levied," ^ "" it said, " in money or in services having a money value to the -r.,^ public, and he who pays in money does not necessarily have to Sf^ pay more or less than he who pays in services, and vice verm, and it is upon this principle that these taxes are upheld ; but who can estimate the money value to the public of a vote? It is degrading to the franchise to associate it with such an idea. The ballot of the humblest in the land may mould the destiny of the nation for ages." vi* 340 THE THEORY AND PRACTICE OF TAXATION. £^^ eqviality. In no one respect does this antagonism more ■^ '*' persistently manifest itself than in opposition on the part of the white citizen voters to the exercise of free and con- '\ current suffrage by the negro citizens. Yet, in view of f^^W the restraints imposed by the Federal Constitution in re- spect to political or legal discriminations against the negro 1 race, any change in the way of relief from the situation -< ^ by State enactment has been regarded as impracticable. c i A recent constitutional convention of the State of Missis- f* sippi seems, however, to have at last most ingeniously solved "^' this difficult political problem, by enacting -that every citi- zen (white or black) of established age shall pay a poll "^ , tax, the non-payment of which shall exclude him from t ' k voting; and the collection of the tax out of exempt or ^ ,^^ non-taxable property — i. e., the possessions mainly of the poorer classes — was also denied. The intent of this pro- vision was therefore manifestly not to raise revenue, but to exclude negroes from voting by reason of non-payment of the poll tax; and by a like covert purpose the com- mission of a list of petty crimes which white men do not generally commit, such as thievery, arson, and obtaining j___^ money under false pretences, was also made a disquali- _? V^ fication of voting; while robbery, murder, and other robust' crimes which are practised chiefly by white men were not included. " Within the field of permissible action under the limitations of the Federal Constitution, the Mississippi convention swept the circle of expedients to obstruct the exercise of the franchise for the negro race." — Ratliff vs. Beale, Mississippi Reports. Of other terms employed to indicate different forms or methods of taxation, and a clear understanding of the meaning of which is essential to any correct discussion of the subject, the following are the most important : Direct and Indirect Taxes. — Taxes are generally characterized or classified as being either direct or indirect; but these terms, although in common use, are somewhat in- definite, owing to the inability of economists to agree as to their exact meaning; while in the United States this indefiniteness has been increased by the circumstance that its Supreme Federal Court has felt compelled by the lan- guage of the Federal Constitution to assign to the term 1 DIRECT AND INDIRECT TAXES. 341 " direct," as applicable to taxation, a " legal " rather than an economic definition. In a general sense the term direct is applied to those taxes which are demanded from the particular persons who it is intended or desired shall pay them ; and indirect to those which are demanded from a person with the ex- pectation and intention that he shall indemnify himself for payment of the same at the expense of some other person.* There is, furthermore, marked distinction, founded on sound philosophy, between a direct and indirect tax, which, if concisely expressed, will constitute two unimpeachable definitions. Thus an indirect tax, whoever may first ad- vance it, is paid voluntarily^ and primarily (in the sense of ultimately) by the consumer of the taxed article. On the , — -. other hand, a direct tax has always in it an element of com- f^^^^*^ ^*^ 'pulsion; not necessarily on the person who advances the ^r^j^^^-i^ ^ tax in block, but on the person who is compelled to use or -zzHif^ consume the taxed property or its product. For example, there is nothing compulsory or unequal in an ordinary license tax. If the license is high, no one is compelled to engage in a business covered by its legal requirement; and few persons will until the average profits of the taxed business by the regular laws of competition finally reach the * " In the assessment of indirect taxation, and such as is in- tended to bear upon specific classes of consumption, the object itself is alone attended to without regard to the party who may incur the charge. Sometimes a portion of the value of the specific product is demanded at the time of production — as in France, in respect to t*he article of salt. Sometimes the demand is made on entry, either into the State, as in the duties of import; or into the towns only, as in the duties of entry. Sometimes the tax is demanded of the consumer at the moment of transfer to him from the last producer — as in the case of the stamp duty, and the duty on theatrical tickets in France. Sometimes the Government re- quires a commodity to bear a particular mark, for which it makes a charge — as in the case of the assay mark on silver and a stamp on newspapers. Sometimes it monopolizes the manufacture of a particular article or the performance of a particular kind of busi- ness — as in the monopoly of tobacco and the postage of letters. Sometimes, instead of charging the commodity itself, it charges the payment of its price — as in the case of stamps on receipts and mercantile paper. All these are different ways of raising a revenue by indirect taxation : for the demand is not made on any person in particular, but attaches upon the prod\xct or article taxed." — M. Jean Baptiste Say, Treatise on Political Economy, 1821. 342 THE THEORY AND PRACTICE OP TAXATION. average profits of other like employments or investments. A tax on commodities like whisky, tobacco, fermented liquors, oleomargarine, playing cards, dice, and the like, can always be avoided as a primary tax, or can be paid at discretion. But there is nothing voluntary in the payment of a tax upon all real or personal property, or on the in- come of such property. Human beings can not subsist without some forms of personal property, and therefore a tax upon all personal property or its income is of necessity compulsory and not voluntary. Any general assessments of personal property on or by reason of its income, as well as assessments on real estate, are unavoidable in their nature, and therefore, from a philosophic or economic point of view, are typically direct taxes.* fThe presence or absence of the principle of compulsion as constituting the essential difference between a direct and an indirect tax has not, it is believed, been before gen- erally recognised by economists. And yet it is clearly in- volved or comprised in the definitions given by acknowl- edged authorities on the subject. Thus M. Leroy-Beaulieu, in his Traits de la Science des Finances, characterizes those taxes "as direct which the legislator intends should be paid at once and immediately by him who bears their burden. They strike at once his fortune or his revenue, and every intermediary between him and the treasury is suppressed." McCulloch {Principles of Taxation) describes a tax "to be direct when it is immediately taken from property," and indirect " when it is taken from its owners by making them pay for liberty to use certain articles or exercise certain privileges." ]\[. Say defines a direct tax to be the " abso- lute demand of a specific portion of an individual's real or supposed revenue." {Political Economy, p. 461.) In the assessment of direct taxes a proportionality is generally sought between the person who pays and the value of his property, or ability to pay. Thus, in the taxa- tion of watches, which are popular subjects for direct taxa- tion, the proportionality between the owner who pays and the amount of property rated is recognised and maintained, by imposing, as in the city of Philadelphia, a tax of one * See Alexander Hamilton's brief in the Carriage case, Hamil- ton's Works, vol. vii, p. 848. OBJECTIONS TO INDIRECT TAXES. 343 dollar on watches of gold and one of seventy-five cents on watches of silver. In the assessment of indirect taxes the maintenance of any proportionality between the taxpayer and his fortune is not regarded. The idea of a personal assessment, which is characteristic of direct taxes, further- more does not apply to indirect taxes, and the person upon whom the incidence of such taxation primarily falls may be regarded as advancing rather than paying the tax, which is ultimately paid by a consumer, not as a tax, but as a part of the market price of a commodity. In other words, the general effect if not the avowed object of an indirect tax is to place its burden in a round- about way on the person who ultimately bears it. Taxes on imports, or customs dues ; most internal revenue taxes ; " octroi " taxes, or taxes levied by municipalities on com- modities — mainly articles of food — brought within their limits from without; stamps and fees for registering or verifying documents, are typical examples of indirect taxation. The objections to this form of taxation are so great as to warrant their characterization as evils. In the first place, they prevent the taxpayer from knowing what he pays, by mixing up the price of an article with the tax, as has been already noticed. Secondly, they enhance the cost of a commodity to the consumer to a degree (often largely) in excess of the original burden of the tax. Thus, if an importer of sugar, salt, wool, coal,, or metals pays taxes on these commodities when they enter the territory of another country (as, for example, that of the United States), he adds them to the first or invoice cost of the importation. On this aggregate he calculates and adds interest and profits when he sells to a wholesale dealer; and this process is repeated by every smaller dealer or retailer through whose hands the commodities pass on their way to final consumption: and as the number of such intermediaries is greatest in the case of articles sold by small retailers, the final burden of the tax is greatest on the very poor, whose necessities compel them to buy in very small quantities.* There is thus a very * Some years since, at the instance of the writer, the late Charles L. Brace instituted an examination to determine the dif- 344 THE THEORY AND PRACTICE OF TAXATION. real and close connection between indirect taxation and pauperism. In dealing ^yith the relative influence of direct and in- direct taxation, Mr. Gladstone, when Chancellor of the Exchequer, took the position in a parliamentary discus- sion in 1859 that " the distinction between them involves the question between rich and poor. All classes pay in- direct taxation: the middle and wealthy pay direct; but in- direct taxes press much more seriously on the labouring population."' An instructive comparison of the method and influ- ence of direct and indirect taxation may be instituted by supposing the two systems to be put into practical opera- tion under similar circumstances, for effecting a purpose which all are willing to admit is most desirable or neces- sary. For example, a town meeting is held to provide means for building a bridge. The direct and honest way would be to assess and levy an equitable tax, adequate to provide for the proposed expenditure, on the property of the citizens of the town. An indirect way, as exemplified by the tariff (omitting the complicated machinery for ap- praising merchandise), would be to provide that the store- keepers of the town should charge, on account of the pro- posed expenditure, an excess over general prices to the ex- tent of two cents a pound on sugar, twenty-five cents more per yard on woollen cloth, five cents more for each tin pail or cup, and, keeping an account, return the results of the extra prices paid on the above-mentioned and other like commodities by their consumers, to the town treasury. Would it not be evident that under such a method of pro- cedure the wealth of the town would in a great degree ference in price to individual consumers of coal bought in compara- tively large and small quantities. He reported that, as a rule, when coal could be delivered at private residences in the city of New York (at the time when the investigation was made) for four dollars and a half per ton, its cost to the people whose poverty compelled its purchase by the " bucketful " was at least twelve dollars per ton. And yet when subsequently a philan- thropic capitalist proposed to remedy this grievance of the poor by selling coal bought in small quantities at greatly reduced rates, his attempt did not meet with the full approval of the people whom he desired to serve, by reason of an inference by them that the project must in some way be a scheme for the promotion of private gain rather than public good. BURDENS OP INDIRECT TAXATION. 345 escape taxation for the construction of the bridge, and that its expense and burden would fall mainly upon the poor; inasmuch as the average amount of consumption of sugar, cloth, and tin by the citizens of the town, and the average per capita taxation contingent on the same, would have no just or uniform relation to their ability to pay for the same? A man with ten thousand a year income will not probably consume ten times as much sugar as one with one thousand a year. In the case of imported commodities charged with im- port duties, not only is the price of the imported commodity enhanced directly by the duty, but the price of a much larger quantity of competing product of domestic origin is increased to approximately the same extent. Thus, in the case of iron and steel, the average difference in the prices of these commodities in England and the United States during the ten years from 1878 to 1887 inclusive, occasioned by the imposition of indirect customs taxes by the latter country on such a comparatively small propor- tion of its domestic consumption as was imported, increased the cost of the total consumption of these products in the United States during the period mentioned, to the extent of at least $550,000,000. Such an increase represented an average of $55,000,000 per annum in excess of the cost of a like quantity to consumers in Great Britain during the same period ; an aggregate, according to the census data of 1880, in excess of the entire capital invested in the iron and steel industries of the country, including all its mines of both coal and iron. An incident also illustrative of the character of an in- direct tax was afforded some years ago when it was proposed in Washington to ex-Governor Warmoth, of Louisiana, as representative of the sugar-producing interest of that State, to substitute a bounty on domestic sugars in place of the protection afforded by the then tariff (taxation) on the importation of foreign sugars. The suggestion was re- pelled with no little warmth, on the ground that such a substitution would be most prejudicial to the domestic sugar industry. " The people," he said, " know that a bounty is a tax, and as soon as they found out its amount would insist upon its repeal, and thus the sugar interest would lose both the protection of the tax on foreign com- 23 346 THE THEORY AM3 PRACTICE OF TAXATION. petitive imports as well as the botLnty." How far subse- quent events harmonized with this foreci =t by Mr. War- moth is worthy of brief notice in this eo^^ection. Con- gress in 1891 entirely repealed all the tariiT (tax) on the importation of raw sugars, and to compensate the domestic producers of sugar for the abrogation of the protection which had been previously given them, authorized the pay- ment by the Federal Grovemment of a bounty of from one and three fourths to two cents per pound an their product. In a little more than four years subsequently, when the effect of the bounty — aggregating over $30,000,000 and representing nearly the whole cost of producing the sugar entitled to bounty — had been fully recognised by the public. Congress repealed the act authorizing its payment without restoring the former protective duties; and with such a pronounc-ed approval of its action on the part of the people of the United States as to render it almost certain that no Congress will hereafter authorize the direct payment of bounties by the Federal GrOvemment for any purpose.* The Eelative Buedex on Taxpatees of Direct A>rD LsTDiEECT Taxation'. — Any discussion of this subject would be incomplete that failed to notice the estimates of the relative burden on taxpayers of direct and indirect taixa- tion by persons well qualified by study, and administra- tive tax experience, to express an opinion. It is not a matter of dispute that the cost of collecting * The fundamental qnestion mxol-ved. in this sugar-bounty mat- ter has never been passed upon directly by the Supreme Court of the United States: but the disbursement of the money voted by Congress for the payment of the sugar bounties having been ■withheld by the Comptroller of the United States Treasury on the ground that the appropriation was unconstitutional, the case came up before the United States Court of Appeals of the District of Columbia, which sustained the opinion of the Treasury official, and was adverse to the claim that ~ the general wel£ire ~ clause of the Constitution might be stretched to encourage the production of a commodity by a bounty. '' If to Congress be conceded." it said. " the power to grant subsidies from the public revenues to all objects it may deem to be for the general welfare, then it follows that this discretion renders superfluous all the special delegations of power contained in the Constitution, and opens a way for a flood of socialistic legislation, the specious plea for all of which has ever been ' the general welfare." " For further notice of this celebrated case see ante, p. 299. COST TO THE CONSUMER. 347 direct taxes is, as a rule, much less than is the case with indirect taxes, and that of the receipt contingent on the former the largest proportion accrues to the Government. Thus in Prussia, where the administration of taxation may be characterized generally as despotic, the cost of raising revenue from direct taxes has been reported at four per cent and of indirect at twelve per cent. Under a direct tax system everybody knows how much he really pays, and if he votes for war or any other expensive national luxury, he does it with his eyes open to what it costs him. If all taxes were direct, taxation would be much more apparent than at present, and there would be a continuous popular demand, which at present there is not, for economy in public expenditures. In England it has been estimated that for every fifty millions of indirect taxes paid into the exchequer, seventy millions are finally taken from consumers; and M. Guyot, late French Minister of Public Works, has recently shown, by a series of statistical diagrams, that the octroi system of indirect taxation in France adds on an average twenty per cent to the cost of goods to consumers over and above the tax.* In New Zealand, where a comparatively small population and limited and definite sources of revenue have afforded extraordinary facilities for making an analysis, an expert has recently calculated that for every million and a half collected through the customs the people of that colony have paid not less than a million and two thirds. In 1851 a committee of the Liverpool (England) Financial Eeform Association published a statement that a careful investigation instituted by it showed that the difference between the net amount paid into the exchequer from indirect taxes and the gross amount taken through or in consequence of this system from the taxpayers, was not less than an average of thirty-seven per cent ; and added that the evidence that had led to this conclusion " can neither be controverted as matter of fact, nor strengthened as a matter of argument." * It seems incredible, he is reported as graphically saying, " that Frenchmen, usually so sensitive to ridicule, can quietly submit to be ' sweated ' and ' plucked ' like fowls, without crying out against this antiquated method of indirect taxation only so long as they are kept blind to the tax." 348 THE THEORY AND PRACTICE OF TAXATION. In 184G lion. Robert J. Walker, then Secretary of the Treasury, in accordance with instructions from the United States Senate to report the extent to which the price of domestic products was enhanced by the then existing duties imposed on the import of competing commodities, sub- mitted the following statement : " The revenue from im- ports last year exceeded twenty-seven millions of dollars, of which, twenty-seven millions are paid to the Govern- ment upon imports, and forty-four millions in enhanced prices of similar domestic articles. This estimate is based upon the position that the duty is added to the price of the import and also of its domestic rival. If the import is enhanced in price by the duty, so must be its domestic rival, for, being like articles, their price must be the same in the same market." * In a debate in the Constitutional Convention of the State of New York in 1867-68, the late Hon. George Opdyke, a member, and one of the best economic and fiscal authorities of his time, stated that his investigations had led him to the conclusion that consumers of imported arti- , cles in the United States are " charged with at least fifty per cent in addition to the duties actually received by the Government." As the result of a careful study of the subject, based on the rates of duty imposed by the tariff law of March, 1883, Hon. William M. Springer (for a long time a prominent member of Congress) was led to the conclusion that the average increase in the prices of domestic commodities due to the duties imposed on the import of competitive products had not been less than $556,000,000 for every year of the twenty years next precedent to 1883, " making an aggre- gate of over eleven billions of dollars, not one dollar of which went into the national Treasury." (See North American Review, vol. cxxxvi, No. 319.) The experience of the indirect taxation of commodities also shows that they favour the concentration of business in a few hands, or the creation of monopolies. Of this the * Senate Document, First Session, Twenty-ninth Conofress, 1845-'46. This estimate was founded on an apparently careful invest icfation of the prices " of sixteen leading domestic articles and the manufactures thereof, similar to those on which the pres- ent duties (1845) are imposed." MONOPOLIES AND INDIRECT TAXES. 349 experience of the internal revenue system of the United States has furnished some curious examples. Thus a tax was imposed in 1864 on matches at the rate of one cent per package of one hundred or less; and, although com- paratively insignificant, it yielded at one time, by reason of the immense number of matches consumed, an annual revenue of over $3,500,000, which sum the manufacturer was obliged to advance by purchasing and affixing stamps to each package as a prerequisite to selling. To manu- facturers furnishing their own design for the stamp, the Government allowed a discount of ten per cent on stamps of an aggregate value in excess of five hundred dollars pur- chased at any one time, and sixty days' credit to such manu- facturers as could ofl^er satisfactory security (i. e., in the form of United States bonds) for their payments. Under such circumstances small manufacturers with a limited capital were crushed, and the business of manufacturing concentrated in a very few firms, which raised the retail price of matches to an extent considerably in excess of the amount of the tax. In later years (1883), when it was proposed to repeal this tax, the singular spectacle was af- forded of the larger manufacturers strenuously exerting themselves to influence Congress to prevent the repeal, and asking that they might continue to be taxed. Their efforts were, however, unavailing. The tax was abolished, and the retail price of matches immediately declined all of sixty per cent — i. e., from fifteen cents to six cents for six boxes. Many years ago the late Henry C. Carey characterized indirect taxation in the following forcible and figurative language: "The whole system of indirect taxation," he said, " is mere petty larceny. It is an attempt to filch that which can not be openly demanded. It is one of those ' inven- tions ' of man by which the few are enabled to grow rich at the expense of the many, and is therefore greatly favoured by that class of men who prefer living by the labour of others to living by their own. The man who plunders a city is of the same species with the highway robber. The one who imposes indirect taxes is of the same species with the chevalier d'industrie. All belong to the genus of great men. All are equally destitute of manly or generous feeling. The plunderer of cities selects those 350 THE THEORY AND PRACTICE OP TAXATION. which are weak and defenceless, and the collector of in- direct taxes selects the commodities used by poor men who can not defend themselves ; and where the system most pre- vails, men are most weak and cheap and food most dear." * And yet Mr. Carey's name, more than that of any other citizen of the United States, is identified with a system of raising revenue which is based exclusively on indirect taxation. Mr. Henry George, in one of his essays, also thus forci- bly makes clear a leading characteristic of the indirect taxes levied by the Federal Government : " Propose," he says, " to abolish, or even reduce, one of these taxes, and Wash- ington will be filled with lobbyists begging and working for its extension. What does this mean? It means that these taxes yield revenue to private parties as well as to the Government." Carlyle was not far out of the way in characterizing legislators who advocate indirect taxation as having a pur- pose, " that those who are not hungry should suppress those who are. The pigs are to die — i. e., be subject to taxation — no conceivable help for that; but we, by God's blessing, will at least keep down their squealing ! " * H. C. Carey, Past, Present, and Future, pp. 464, 465. " So long as it (indirect taxation) shall be permitted to exist, de- population, and the system of large revenues, raised by means of indirect taxation, to be squandered by those who live by man- aging the affairs of others, must continue. So long as it exists, the planter and farmer must continue to give a large portion of their small product in exchange for a small quantity of clothing. So long as it exists, every attempt at the establishment of freedom of trade must be a failure. With its correction, every obstacle to the establishment of perfect freedom will disappear, and the tariff will pass out of existence. The interest of every farmer and planter, and of every labourer and mechanic, is directly concerned in the adoption of a measure that shall be calculated to promptly pro- duce the effect desired — i. e., repeal of indirect taxation — but it is not more his interest than his duty. So long as the present system shall continue, trade of every kind must be subject to A'iolent fluctuations which enable the few to enrich themselves at the expense of the many, and enable gambling speculators to live in palaces and ride in coaches by aid of indirect taxation levied upon the hard-working mechanic and honest trader, ruined by changes in the value of their property. It is therefore the bounden duty of every man desirous to promote the great cause of morality, justice, and of truth to unite his efforts with those of his neighbour for the early accomplishment of this great object " (pp. 471, 472). OPPOSITION TO DIRECT TAXES. 351 The question of the relative merits of the two systems of taxation under consideration has long been — since the days of Jeremy Benthara — a subject of discussion, with a trend of popular sentiment unmistakably in favour of in- direct, or it should rather be said in opposition to direct, taxation.* What satisfactory explanation can be given for a con- clusion so clearly adverse to public interest? John Stuart Mill has attempted it as follows : " The feeling is not grounded on the merits of the case, and is of a puerile kind. An Englishman dislikes not so much the payment as the act of payment. He dislikes seeing the face of the tax col- lector and being subjected to his peremptory demand. Per- haps, too, the money which he is required to pay directly out of his pocket is the only taxation which he is quite sure that he pays at all. That a tax of two shillings per pound on tea, or of three shillings per bottle on wine, raises the price of each pound of tea and bottle of wine which he consumes by that and more than that amount can not indeed be denied. It is the fact, and is intended to be so, and he himself is perfectly aware of it; but it makes hardly any impression on his practical feelings and associations, serving to illustrate the distinction between what is merely known to be true and what is felt to be so." f * " We find, as the result of our examination and contrast, that direct taxation is, in every essential feature, vastly superior to our present method; that the former accords with justice, econ- omy, and all the other requirements of a sound policy; while indirect taxation violates every principle on which leojislation should be based. It must be owned, however, that notwithstand- ing the weighty objections to the one and the economy and perfect fairness of the other, there are few of our citizens \vho are de: sirous of making the proposed change. Direct taxation is a phrase that grates on the nerves of all. Men start at its sound as though it Avas a portent of evil ; sometliing which had impressed them with deadly fear. They seem to regard it as deeply imbued with the spirit of tyranny, to say the least, if not as the most forbid- ding impersonation of that monster. So unpopular is this method of taxation that an aspirant for public station or honours would as soon think of committing high treason as propose or advocate it; and if his ambition were bounded by the present, he would be right, for he could not more effectually destroy his popularity." — Treatise on Political Economy, hii George Opdi/ke. The tendency has more recently been toward direct taxes in every country except Great Britain. t Mill, Principles of Political Economy, book v, chap, vi, § 1. 352 THE THEORY AND PRACTICE OF TAXATION. Mr. Mill also expressed the opinion that men's minds are so little guided by reason on this subject that if it was attempted to raise all the imperial re^nue of Great Britain by direct taxation, the dissatisfaction on the part of the people at having to pay so much would be extreme. Speaking on this subject in the House of Lords in 1860, the Earl of Derby said that " by making the whole revenue of the United Kingdom depend upon direct taxation the pressure would be so odious that wars would be avoided, because no party would incur the odium of carrying them on." There can be no doubt that high direct taxes, making evident to the most unobservant citizen the excess of burden imposed upon him, have been the prime cause of the re- pudiation of public debts in the United States, and the arrest or ruination of internal improvements of great im- portance. Mr. George Opdyke, in his Treatise of Political Econo- my, advanced the idea that the phenomenon of preference for indirect taxation in the United States might be ac- counted for in part by the fact, that the unjust manner in which taxes were levied by Great Britain on her Ameri- can colonies engendered in the public mind of their people " a deep-seated hatred of every form of taxation ; and the direct being its most visible or sensible form, it has been mistaken for the worst — an impression that was strength- ened when the most unpopular of our Presidents (the elder Adams) recommended this policy, and when the opposing political party, seizing the occasion to profit by public prejudice, represented it as the worst form of tyranny." * * An acute economic student and observer writes as follows on this subject: "I have been very much struck by the apathy of taxpayers to the increase of taxes in their most direct form. Take Philadelphia, for example. Nearly every man owns a house there, and yet there seems to have been no objection to the grossest municipal extravaerance, entailinoj heavier and heavier burdens every year. The city to-day levies about ten times as much per head as it did thirty or forty years aofo. The exact figures would be easy to get, and would certainly point a moral adverse to your vieAV that direct taxation is twin brother to public economy. I am inclined to look for an explanation to the fact that real estate values have steadily risen, so that after all the increase of taxation has been easily met." EXTRAVAGANCE AND DIRECT TAXES. 353 An economic phenomenon in connection with this sub- ject goes far to support the idea that political economy can not be an exact science, inasmuch as it is largely or wholly based on human action, concerning which nothing certain and invariable can be predicated. Thus the argument and evidence are complete that it is not a wise, humane, or perhaps a moral policy for a state created or maintained for the purpose of promoting the interests of its people to adopt a system of indirect taxation for the raising of reve- nue ; and, furthermore, that it is contrary to human nature for a people to desire or be willing to pay more for any service or commodity than it is intrinsically worth; or, what is the same thing, perform more work in return for the same than is a fair equivalent. And yet both govern- ments and the people in all countries and at all times (in- cluding the present) have shown a preference for this sys- tem of taxation over any other. One explanation of this curious inconsistency is as fol- lows: It is and ever has been the aim of all governments to avoid responsibility and occasion for popular criticism in respect to their financial policy; and a direct tax is an annual reminder to their citizens or subjects of the burden of government, and prompts them to hold the gov- ernment to a strict accountability. Under a free or popu- lar form of government a general system of direct taxa- tion would practically call for an annual judgment of the voters on the fiscal policy of an administration in power, and such a tightening of the purse-strings as would reverse such policy in case of its popular disapproval. But with a system of indirect taxation, as a tariff on imports, a gov- ernment can undertake the most unnecessary and extrava- gant measures and obtain revenue sufficient to defray its contingent expenditures without general popular disap- proval. Indeed, the best defence that can be offered for the con- tinued resort to indirect taxation is, that with the present large demands on the part of all civilized states for reve- nue to meet increasing fiscal obligations, mainly incurred for war expenditures, past and present, and the unwilling- ness of the people to pay direct taxes, it would be practically impossible to maintain the modern government without large contributions from people of limited resources; and 354 THE THEORY AND PRACTICE OF TAXATION. that this purpose can only be accomplished by taxing them indirectly. On the other hand, it may be replied that if direct taxation was alone made the agency for obtaining revenue, unnecessarily large expenditures through the re- sistance of the masses would not be possible. In like man- ner, if the present indirect taxes levied on imports by the United States were to be replaced by direct taxes, collected in money or in kind from purchasers for final consumption, on whom the burden in both cases finally rests — if every person buying silk or sugar were stopped by a government tax gatherer at the door of the place of purchase and thirty per cent of his purchases taken in kind in one case and fifty per cent in the other in payment for taxes, it is safe to say that such a system would not continue operative any longer than would suffice for the people, through legal methods, to compel its modification. One explanation — i. e., of inconsistency — on the part of the people who pay taxes is, that although the benefits derived from the insti- tution of government (which practically can not exist with- out taxation) are of the first importance, they are not so very obvious, nor so striking, as to be readily recognised and appreciated by the masses, who are accordingly apt to look with complacence upon a direct (personal) demand for a tax in the light of a compulsory payment, for which no equivalent is returned. Indeed, this feeling is so strong that it has become an almost popular maxim in all coun- tries that " there is nothing which a person so hates to do as to pay taxes," in case they are direct. But " by the in- genious plan of taxing articles on which incomes are ex- pended, rather than openly demanding a portion of the income itself, the amount of taxation is concealed from the mass of taxpayers, and its payment is made to appear in some measure voluntary. The indirect tax being gen- erally advanced rather than paid, as has been already shown, in the first instance by the importers, the ultimate purchasers for consumption confound the tax with the natural price of the commodity. No separate demand being made upon them for the tax, it escapes their considera- tion, and the article which they receive seems the fair equivalent of the sacrifice made in acquiring it. Indirect taxes have also the advantage of being paid by degrees, in small portions, and at a time when the commodities are DIRECT TAXES IN DEPENDENCIES. 355 wanted for consumption, or when it is most convenient for the consumer to pay them." * In the attempt, furthermore, of civilized rulers to main- tain a civilized government over an uncivilized people, there seems to be no practical method of compelling such a people to help maintain a proper and desirable govern- ment except through a resort to indirect taxation. Thus, in British India, a country of low civilization, small ac- cumulation of wealth, and under such climatic conditions as necessitate the minimum of clothing, shelter, and food, the only way by which the mass of the native population can be compelled to contribute anything whatever, apart from a tax on land in the form of rent, toward the support of a government whose beneficent and civilizing influence has become a matter of history, is by the taxation of salt, the consumption of which is a necessity to all, and the pro- duction and distribution of which can in a great measure be controlled. In the British island and colony of Jamaica, populated mainly bv emancipated blacks and their descendants (557,- 133 out of a total of 580,804 in 1881), who own little or no land, and consume little of food other than what is produced almost spontaneously, the problem of how to raise revenue by any form of taxation for defraying the neces- sary expenditures of the Government has been one of great embarrassment. For the year 1884 these expenditures averaged three dollars and forty cents per head of the en- tire population, and of this amount an average of about fifty cents per head could only be obtained from any in- ternal taxation, and this mainly through the indirect agency of licenses and stamps, and not by any direct assess- ment. The balance of required revenue was obtained from a special tax on some set manufacture, and from export and import duties. A similar state of affairs in Mexico, heretofore noticed somewhat in detail (see page 139), would also seem to necessitate a resort to a system of in- direct taxation. Attention is here also particularly directed to a fact that has escaped the notice of many economic and fiscal authorities and writers, and that is the remarkable change * J. R. McCulloeh, Taxation and the Funding System. 356 THE THEORY AND PRACTICE OF TAXATION. that has taken place within the last fifty years in the Brit- ish tax system, whereby, through an extensive substitution of direct for indirect taxation, the burden of tax incidence has been shifted to a great extent from the community at large to the propertied classes. Thus, in 184:l-'42, indirect taxes yielded seventy-three per cent and direct taxes twenty- seven per cent of the total imperial revenue, but in ISDS-'OG indirect taxes yielded fifty-two per cent and direct taxes forty-eight per cent. Is not the inference warranted, that in the change in the incidence of British taxation above noted is to be found at least a partial explanation of the remarkable and progressive increase, in comparatively re- cent years, in the consumption of the various commodities that enter into the living of the labouring classes of Great Britain, and is it not also singular that the above facts and their possible inference do not as yet seem to have attracted the attention of those most interested in social economics? CHAPTER XVI. NOMENCLATURE AND FORMS OF TAXATION. PART II. The nature and scope of the " legal " and wholly anom- alous definition (to which reference has been made, see page 341) that has been given in the United States by its Supreme Court to a direct tax,* and the interesting judicial and historical circumstances in connection therewith, are substantially as follows : The Constitution of the United States provides that " representatives and direct taxes shall be apportioned among the several States according to their respective num- bers " — that is, population — " and excluding Indians not taxed." The origin of the idea thus incorporated in the Constitution of apportioning direct taxes according to representation, or population, rather than upon property, is not certainly known, and has been made the subject of speculation. Hamilton, subsequent to the adoption of the Constitution, suggested that the writings of the French economists of the eighteenth century, with which a num- ber of the prominent members of the Constitutional Con- vention were familiar, were its source. These held that " agriculture was the only productive employment, and that the net product from land, to be found in the hands of the landowner, is the only fund from which taxation can draw without impoverishing society." They were ac- * Chief-Justice Chase on more than one occasion judicially inti- mated that the definition of direct taxes by political economists can not be used satisfactorily for the purpose of construing the phrase in the Constitution of the United States. Thus, a tax on the circulation by banks of State bank notes was held not to be direct (Veazie vs. Fenno, 8 Wallace, 533—546), and so also of a tax on incomes of insurance companies (Pacific Insurance Com- pany IS. Soule, 7 Wallace, 433). 357 358 THE THEORY AND PRACTICE OF TAXATION. cordingly led to class taxes habitually as direct when laid immediately upon the landowner, and as indirect when laid upon somebody else, but in their opinion destined to be borne by the landowner ultimately. Precedents for levy- ing taxes by apportionment were also to be found in the French taille reellc, which was a tax on the income of real property and laid by apportioning a fixed sum among the provinces and requiring from each its quota. The English land tax, established under William III, embodied a like provision.* Be this as it may, the distribution of property (wealth) among the people of the American States at the time of the adoption of the Federal Constitution, as shown by the debates in the Constitutional Convention, was, very curi- ously, such that an apportionment of taxes according to population and representation was not inequitable. When the subject was under discussion, Roger Sherman, of Con- necticut, said he " thought the number of people alone the best rule for measuring wealth as well as representation " (Elliot's Debates, v, 297). Mr. Gorham, of Massachusetts, " supported the propriety of establishing numbers as the rule. He said that in Massachusetts estimates had been taken in the different towns, and that persons had been curious enough to compare these estimates with the respect- ive numbers of people, and it had been found, even in- cluding Boston, that the most exact proportions prevailed between numbers and property" (ibid., 300). Mr. Wilson, a leading member from Pennsylvania, said that, " taking the same number of people in the aggregate in the western settlements of Pennsylvania and in the city of Philadel- phia, he believed there would be little difference in their wealth and ability to contribute to the public wants " (ibid., 301). Dr. Johnson, of Connecticut, "thought that wealth and population were the true, equitable rules of representation; but he conceived that these two principles resolved themselves into one, population being the best measure of wealth" (ibid., 303). And when the vote came to be taken in the Federal Convention on the propo- • For further discussion of this subject, see paper by Prof. Charles F. Dunbar, contributed to The journal of Economics, for July, 1889, and entitled The Direct Tax of 1861. FEDERAL DIRECT TAXES. 359 sition that direct taxation ought to be proportioned to representation, it passed without opposition (ibid., 302). In the five occasions— 1798, 1813, 1815, 1816, and 1861 — in which the Federal Government has established a gen- eral system of direct taxation, there has been no essential and radical difference of opinion in respect to the methods and instrumentalities by which the provisions of the enact- ments could be made effective for the purpose of raising revenue. The amount of money desirable to raise was first determined. Then the population of each State was taken, according to the latest preceding census, and the proportion of tax proceeds respectively due was calculated.* A statute was then passed declaring that each State should pay to the Federal Treasury so" much money, according to its ascertained proportionate liability of the aggregate amount which the entire Union of the States was required to raise. In each of the first four cases of such a system of taxation the several States were empowered to assume or assess in their own way the sums for which they were severally as- sessed and liable to pay into the national Treasury. In the case, however, of the levy in 1861, eleven States openly in insurrection against the Federal Government, one loyal State, and one Territory (Utah) refused or neglected to pay their assessment ; whereupon a law was passed by Congress authorizing the appointment of special officials, whose duty it was to go into such States as soon as it was practicable and levy the proper assessments, seizing and selling real property whenever it became necessary to enforce payments of the amount required. And these provisions of law were enforced by threat or action to such an extent that about $2,800,100 were collected up to 1870, out of an aggregate quota of $5,153,891 due from all the States that adopted ordinances of secession ; the total amount assessed on all the States having been $20,000,000. The confusion attendant on the settlement after the war of the unpaid liabilities of the impoverished insurrec- tionary States to the Federal Government, on account of the direct tax of 1861, finds further illustration in the cir- * Up to and including the direct tax of 1861, its imposition was scrupulously made in accordance with the understanding of the framers of the Constitution. Thus, the ratio of the State of New York in 1861 was returned at $2,602,918|, 360 THE THEORY AND PRACTICE OF TAXATION. cumstance, that the Comptroller of the United States Treasury decided in 1883 that the sum of $35,555, appro- priated b}^ an act of Congress to refund to the State of Georgia money expended by it in 1777, or one hundred and six years previously, for the common defence in the War for Independence, should be paid to the Treasurer of the United States, " to the credit of Georgia on account of direct taxes charged against the State." The Supreme Court of the United States also decided in 1887 (United States vs. Louisiana, 37, 123) that the direct-tax law in 1861 did not create any liability on the part of a State to pay the tax ; and that the apportionment merely designated the amount to be levied upon the property of individuals in the several States, without any liability attaching to the State in its political and corporate character. " This de- cision finally left the unpaid quota of the direct tax of 1861 in precisely the same position as any other tax assessed upon individuals, which the United States has been unable or has neglected to collect in full." * At the time when it was proposed to enforce the tax on defaulting States by the seizure and sale of land, a doubt was expressed whether the tax in question was, in its essence, " a tax on the land and all the various estates into which the fee may have been divided, or was a tax on the owner of the land and levied on the interest of the owner in it, and on no other subordinate or incorporeal interest. But no tax was ever collected or any land sold under the act of seizure and sale.'" — Hillard, Law of Taxation. But, apart from a unison of opinion as to the methods by which a direct tax should be levied and collected under the Federal Government, the determination of what is a direct tax has not been an easy matter; and the question came up for solution before the United States Supreme Court shortly after the adoption of the Constitution, or in 1794, in a case that has become historic in the annals of American jurisprudence. Congress having imposed a tax on pleasure carriages — or chariots, as they were then termed — its collection was resisted by one Hylton, of Virginia, on the ground that * Dunbar, Direct Tax of 1861, Quarterly Journal of Economics, July, 1889. THE CARRIAGE TAX. 361 such a tax was a direct tax, and had not been apportioned among the States, as required by the Constitution.* The court held that the tax in question was to be considered as a tax on the expenses of living and not a direct tax within the meaning of the Constitution, as the evils which would attend its apportionment according to population would be so great " that the Constitution could not have intended that an apportionment should be made." " The Constitution," said the Court, " evidently contemplated no taxes as direct taxes, but such as Congress could lay in proportion to the census. A tax on carriages can not be laid by the rule of apportionment without very great in- equality and injustice. Suppose two States, equal in cen- sus, to pay eighty thousand dollars each, by a tax on car- riages of eight dollars on every carriage, and in one State there are one hundred carriages and in the other one thou- sand. A, in one State, would pay for his carriage eight dollars ; but B, in the other State, would pay for his carriage eighty dollars." (Opinion by Justice Chase, 3 DalL, 171.) These, and other decisions of the United States Su- preme Court, have accordingly been regarded as affirming, that within the meaning of the Constitution of the United States there are only two forms of taxation that can be considered as direct — namely, a capitation or poll tax, sim- ply, and without regard to property, profession, or any other circumstance, and a tax on land ; and that no other taxes can be regarded as direct by the Federal authorities. It is also worthy of note that since the decision in the car- riage case in 1796, Congress, in the few instances in which it has imposed a tax which it recognised as direct, has never made it applicable to any objects other than real estate and slaves. The following additional memoranda are pertinent to this discussion : While the carriage case was pending before the United States Supreme Court in 1796, Mr. Madison, who participated in the convention that framed the Con- stitution, wrote to the effect that the action of Congress in imposing this tax was constitutional, but that he doubted whether the court would so regard it. Hamilton, who * Hylton vs. The United States, 3 Dallas, 171. 24 362 THE THEORY AND PRACTICE OF TAXATION. appeared as one of the counsel for the United States in this case, also left behind him a legal brief in which he says: " What is the distinction between direct and indirect taxes ? It is a matter of regret that terms so uncertain and vague on so important a point are to be found in the Constitu- tion. We shall seek in vain for any antecedent settled legal meaning to the respective terms. There is none. We shall be as much at a loss to find any disposition of either which can satisfactorily determine the point." In his argument on behalf of the Government in the carriage case, Hamil- ton, however, mentioned such taxes which should be con- sidered as direct; namely, direct capitation taxes, taxes on land and buildings, and general assessments, whether on the whole property of individuals, or on their whole real or personal estate.* And in rendering the decision in the income-tax case of Springer vs. United States, Justice Swayne also added to our historical information on this subject by remarking, that " the question of what is a direct tax is one exclusively of American jurisprudence," which is the same thing as saying that the system of American taxation is so peculiar, that the question involved has never been made a subject of legal controversy and discussion under any other or foreign system of taxation. This statement of Judge Swayne is one of a number of illustrations that will confront the student of the exist- ing American system of taxation — if, indeed, it is worthy of being called a system — showing how the makers and ad- ministrators of tax laws in the United States have drifted, as it were, into uses and practices which long usage has made to appear almost as of self-evident validity, but which find no precedent in the experience or system of other countries, and no solid foundation in any correct economic philosophy, f •Works of Alexander Hamilton (Lodge's edition), vol. vii, p. 328. t Since the statement of Judge Swayne (above referred to) was made, a decision has been rendered by the Privy Council of Great Britain, in which the recognition of direct taxation and its method of incidence by British jurisprudence is taken for granted; for in concurrence with a decision rendered by the full bench of judges concerning an opinion of one of their members, wherein he says, in speaking of a point that had been raised, that a tax must be general in order to be a direct tax, they reject that view, DIRECT INCOME TAXES. 363 There were also two reasons and two points of view in the Hylton case on which the judgment of the court might have been predicated. One was that Hylton possessed one hundred and twenty-five carriages, which warranted the inference that they were hackney carriages, kept and used for hire, and that the tax levied on each carriage ultimately fell on the consumer and not on the owner (Hylton) him- self; or, in other words, the tax in question was a tax on transportation, and, as such, capable of transference to the person carried, and therefore, when imposed on the car- rier, was an indirect and not a direct tax. Another point is, that a tax on carriages has not the compulsory element which pertains to all direct taxes, as their ownership and use are optional, which is the special characteristic of all indirect taxes. Substantially the same question involved in the car- riage case came up again (in 1874) before the same court (Springer vs. United States, 12 Otto, 103 U. S. Eeports, p. 856), when a citizen of Illinois resisted the payment of a national income tax on the ground that such a tax was a direct tax; and not being levied in the manner pre- scribed by the Constitution, was not legal and valid. From an economic point of view such a tax, as has been before shown, is and always has been regarded as a direct tax; and on the hearing the plaintiff adduced in support of his position the testimony, as found in their writings, of almost every acknowledged authority on political economy or finance in the English language — Adam Smith, Ricardo, Mill, Wayland, Brande, Say, Perry, as well as the Encyclo- paedia Britannica and almost every other cyclopgedia or dictionary of English or American origin.* The court, however, held as before, that under the definition of a direct tax, as expressed in the Constitution, the income tax was inasmuch as it " would deny the character of a direct tax to the income tax of this country — Great Britain — which is always spoken of as such, and is generally looked upon as a direct tax of the most obvious kind ; and it would run counter to the common understand- ing of men on this subject, which is one main clew to the meaning of the Legislature." * In all the debates in the British Parliament it is doubtful if any British statesman can be named who has ever spoken of an income tax as other than a direct tax. The same may be also affirmed of French authors and statesmen. The following 364 THE THEORY AND PRACTICE OF TAXATION. not direct but indirect, and accordingly that its imposition was not unconstitutional. The following was the exact language of the Court : " Our conclusions are that direct taxes within the mean- ing of the Constitution are only capitation taxes, as ex- pressed in that instrument, and taxes on real estate; and that the tax of which the plaintiff complains" (i.e., a direct tax) " is within the category of an excise or duty." Whether warranted or not, the drift of public opinion in the United States has been, that the decision of its Su- preme Court in the Springer case in 1874, and, to a certain extent, in all previous cases touching the constitutionality of an income tax, was made under the pressure of an ap- parent political necessity. Had the decision been to the citations of the opinions of various recognised authorities are illus- trative : " The taxes which it is intended should fall indifferently upon every species of revenue are capitation taxes." — Adam Smith. James Mill, under the title of " Direct taxes, which are de- signed to fall upon all sources of income" says, " Assessed taxes, poll taxes, and income taxes are of this description." — Elements of Political Economy, p. 267. J. R. McCulloch divides his work on Taxation into two parts: Part I, on direct Taxes, and Part II, on indirect taxes; and under the head of " Direct Taxes " he treats of " taxes on property and income." Dr. Lieber, referring to the different modes of levying taxes, says : " The first way is direct — to determine from the statement of the parties concerned, or from official information, tlie net income of persons. This kind of taxes are called direct." — Encyclo- pcedia Americana. " Taxes are either direct or indirect. A direct tax is one Avhich is demanded from the very persons who it is intended or desired should pay it. Direct taxes are either on income or expenditure. . . . Most taxes on expenditure are direct, being imposed not on the producer or seller of an article, but immediately on the con- sumer. . . . The window tax is a direct tax on expenditure, so are taxes on horses and carriages." — Jolin Stuart Mill, Political Economy, vol. ii. When Sir Robert Peel brought forward his plan for an income tax in 1842, he said: "Indirect taxation has reached its limits, and can no longer be relied on. My plan is this, to levy an income tax," etc. — Parliamentary Debates, Iri, 1^28; Ann. Rey., 181)2, 7', 73. And Lord John Russell said in reply : " To resort to the des- perate measure of an income tax in such circumstances is nothing less than to proclaim to the world that your resources are ex- hausted, that indirect taxation has reached its limits." etc. — Par- liamentary Debates, Ivii, 86, 1^7; Ann. Reg., 18.^2, 77, 75. INCOME TAX OF 1894. 365 effect that the income tax was a direct tax, and any method of levying it other than that prescribed by the Constitution — i. e., according to population — was unconstitutional, the Government would have been forever practically deprived of an effective instrumentality for raising revenue which might be most desirable in cases of emergency. Immense sums which had been paid under protest as income taxes would also have been pressed for repayment in case the decision had been otherwise, to the serious embarrassment of the national Treasury. In harmony with the above decisions, the United States Supreme Court has decided that neither taxes on distilled spirits (United States vs. Singer, 15 Wall., Ill), nor suc- cession duties on the devolution of title to real estate (Scholey vs. Eew, 23 Wall., 331), nor taxes on the notes of State banks (Veazie Bank vs. Fenno, 8 Wall., 533), nor taxes on the receipts of insurance companies from premiums and assessments (Insurance Company vs. Soule, 7 Wall., 433) are direct taxes; but that all such taxes are imposts and excises, and subject, therefore, to the requirement as to uniformity, but not subject to the requirement of appor- tionment. Important, interesting, and instructive from a consti- tutional, legal, and economic point of view, as was the ex- perience of the United States in respect to direct taxation, prior to 1894, the sequel of events and experience in respect to this question and its involved problems has been no less important and worthy of narration. By an enactment of Congress, August 18, 1894, estab- lishing an income tax for the United States, a tax of ttuo per cent was imposed on the gains, profits, and income of persons derived from any kind of property, including rent and the growth and produce of lancls, and profits made upon the sale of land if purchased within two years. Every element that could make real or personal property a source of value to an owner was taxed. An excise duty was also imposed upon income derived from any profession, trade, employment, or avocation. The tax upon persons gen- erally was not upon their entire income, but on the excess over and above the sum of $4,000. All persons having in- comes of $4,000 or under were exempt. The whole burden of the tax, it was estimated, would fall on less than two 366 THE THEORY AND PRACTICE OF TAXATION. per cent of the population of the country. That the Gov- ernment practically conceded that such a feature of the act was pre-eminently class legislation is evident from the following extract from a statement made in a brief by the Attorney General of the United States: "Congress," he says, "has adopted as the minimum income for the pur- pose of taxation the limit of $4,000. This limit may be said to divide the upper from the loiver- middle class, finan- cially speaking, in the larger cities, or to divide the middle class from the wealthy in the country districts." * As might have been expected, the provisions of this enactment, which could not be fairly considered pertinent and relevant to a just and equitable system of income taxation, occasioned much dissatisfaction among business men and the financial authorities of the country generally ; and measures were at once initiated to test before the proper legal tribunals — i. e., the courts of the United States — the constitutionality of the statute. The most important and immediate representatives of this action were the Farmers' Loan and Trust Company and the Con- tinental Trust Company, of New York — two of the largest trust companies in the United States. It is also worthy of note in this connection that the above-named companies, before taking any steps to test the validity of the act in question, complied with all its provisions; no collector of internal revenue or any public officer of the United States having been made a party, or any injunction sought from the courts to restrain the collection of the tax. The basis of action of the above-named parties, as rep- resented by some of the most eminent members of the legal profession in the country,f was substantially as follows: Each of them, and a large number of other like organiza- tions — insurance companies, saving banks, and trusts — hold as investments of capital stock, earnings, and profits, and as trustees for minors, widows, individuals, copartnerships, and corporations too numerous to mention, resident in the United States and elsewhere, large amounts of real estate, * Brief on behalf of the United States (by Mr. Olney), p. 85. t Messrs. Joseph H. Choate, Clarence A. Seward, William D. Guthrie, Benjamin H. Bristow, David Wilcox, and Charles Steele. For the United States, James C. Carter and Richard Olney, the Attorney General. STATES PROTECTED FROM EXACTIONS. S6l situated in the various States of the Federal Union, and amounting in aggregate value to hundreds of millions of dollars. The rents and income of this real estate, also annually amounting in the aggregate to large sums, are col- lected and received by the above-mentioned organizations, and held by them in their various fiduciary capacities. The first point of importance under such a state of affairs to which attention is asked is, that taxes levied or laid by the Federal Government are recognised and ad- mitted (in virtue of repeated decisions and assumptions of the United States Supreme Court) to be typical forms of direct taxation, and as such under a clear and care- fully worded provision of the Federal Constitution must be apportioned among the several States according to their respective population.* On this point, therefore, there could obviously be no legal contention. It is now well recognised that this provision of the Con- stitution, after full discussion and careful wording on the part of its framers, was adopted in order to protect to the States, which in entering into union were surrendering to the prospective Federal Government so many sources of income, the power of direct taxation, and so preclude a combination of States from exacting tribute from other States, f * " Representatives and direct taxes shall be apportioned among the several States which may be included within this Union ac- cording to their respective numbers." — Constitution of the United States, Article I, section 2. t " The founders anticipated that the expenditure of the States, their counties, cities, and towns, would chiefly be met by direct taxation on accumulated property, while they expected that those of the Federal Government would be for the most part by indirect taxes; and in order that the power of direct taxation of the Gen- eral Government should not be exercised except on necessity, and when the necessity arose should be so exercised as to leave the States at liberty to discharge their respective obligations, and should not be so exercised unfairly and discriminated as to par- ticular States or otherwise by a mere majority vote, possibly of those whose constituents were intentionally not subjected to any part of the burden, this qualified grant was made. Those who made it knew that the power to tax involved the power to destroy, and that the only secui'ity against the abuse of this power is found in the structure of the Government itself. In imposing a tax the Legislature acts upon its constituents. This is in general a sufficient security against erroneous and oppressive taxation, 368 THE THEORY AND PRACTICE OF TAXATION. The next point of contention in order of importance in the case as presented to the United States Supreme Court was, Did the provisions of the income-tax act of 1894, im- posing a tax of two per cent upon the gains, profits, and income derived from all kinds of property — including rent and the gains and profits accruing from the growth, profits, or sale of land — involve and create a tax which must neces- sarih^ be deemed a direct tax on real estate (land), and which not being apportioned (levied) according to the provision of the Constitution render the entire act impos- ing an income tax unconstitutional and void? The precise or original question involved, it was ad- mitted, was one on which the Federal Government had really never been heard,* and was first brought before the United States Supreme Court for a hearing and adjudica- tion in April, 1895. On that occasion the court held that the provisions of the act of August 15, 1895, were uncon- stitutional, so far " as they purport to impose a tax on the rent or income of real estate." It was, however, equally divided on the following questions, and expressed no opin- ion in regard to them : (1) Whether the void provisions invalidated the whole act; (2) whether, as to the income from personal property as such, the act is unconstitutional as levying direct taxes; (3) whether any part of the tax, if not considered as a direct tax, is invalid for want of uniformity. The court, early in its history, adopted the practice of requiring, if practicable, constitutional questions to be heard by a full court, in order that the judgment in such eases might, if possible, be the decision of the majority of the whole court. And as the court was not full, at the first hearing in April, and as four judges did not concur in the opinion then rendered, a rehearing was granted by the court in the month following (May 6th, 7th, 8th) ; in and they retained this security by providing that direct taxation and representation in the lower House of Cono^ress should be ad- justed on the same measure." — Chief -Jnstice Fuller. * None of the previous decisions of the court " discussed the question whether a tax on the income of personalty is equivalent to a tax on that personalty; but all held real estate liable to direct taxation only so as to sustain a tax on the income of realty on the ground of being an excise or duty." — Chief-Justice Fuller. ARGUMENT FAVORING TAX. 369 the announcement of which the Chief Justice remarked that " the importance to the Government of the new views of its taxing power can hardly be exaggerated." In advocating the constitutionality and rightfulness of the provisions of the income tax of 1894, the then United States Attorney General, Hon. Eichard Olney, on behalf of the Government, made in part the following argument : " What is this " (contested) " tax in its true value and essence ? It is an assessment upon the taxpayer on account of his money-spending power as shown by his revenue for the year preceding the assessment. It is not a property tax in any sense or of any sort. Yet this is the sort of tax which is called a tax on real estate for no other reason than that last year's rents form a part of the yardstick by which this year's money-spending capacity is measured ! A greater error, I submit, could not easily be justified. My Lord Coke is quoted to the effect that a grant in fee of the profits of land passes the land itself. Other cita- tions are always interesting, and state a rule of law which is indisputable and of universal acceptance. But what is their relevancy to the case in hand ? They relate to grants taking effect in future — to grants taking effect from the date or delivery of the deed, or from the probate of the devise, and carrying all after-accruing rents as a matter of course. But what this case is concerned with is rents that have not only become due, but have actually been received by the land- lord. Does any one pretend that rents thus received would pass by a grant of the estate that has yielded them? Of course not, and why? Because, by falling due and being collected, they have become severed from the realty, and have become personal property — money in the landlord's pocket, like any other money. iSTothing is gained, however, by belittling or evading an argument, and I have no in- tention of doing either. The strength of the plaintiff's claim is in the proposition that the value of land is in its use; that rents are the pecuniary equivalent of the use, and that, therefore, to tax rents is in substance and effect to tax the land itself. This is what may be called a fetch- ing proposition. How much truth is there in it, and how much of applicability to the present case? There is this much of truth in it : that a tax upon rents to become due — to accrue in the future — may well be deemed a tax on the 370 THE THEORY AND PRACTICE OP TAXATION. estate itself. Such accruing rents are like growing crops, an inseparable part of the land, and whatever is a charge upon them is necessarily a charge upon the land. But the proposition stated has no application whatever to the pres- ent case, because the tax it has to do with is a tax in respect to rents already due and collected, and in all prob- ability either spent or transformed into other tangible prop- erty. How can a tax in respect to such rents be said to be a tax upon the real estate producing them? When they become due and are paid, just as when crops are harvested ; when either process is complete, a new and distinct item of property comes into existence, and the landlord's prop- erty realizes a corresponding accretion." In rejoinder the counsel for the appellants maintained that under the income-tax enactment in question (i. e., of August 28, 1894) a tax was imposed upon income "de- rived not merely from business, but also expressly upon that derived from property, and therefore directly upon the property producing the income, whether real or per- sonal." Notably is this the case with a tax upon " rents " and the " growth and produce of land." It taxes every element of value of the land which the owner can realize from third parties. It must be clear that a tax upon what gives the land value is a tax upon the land itself. In the words of Hamilton, " What in fact is property but a fiction without the beneficial use of it ? " In many cases, indeed, the income or annuity is the property itself. As one of the justices said in the Hylton case, " Land, independently of its produce, is of no value." It scarcely needs argument to establish that anything which affects every element that gives an article its value, in the eye of the law, affects di- rectly the article itself. In illustration of this many de- cisions, mainly of the United States Supreme Court, were cited, of which the following are examples : In Brown vs. Maryland, 12 Wheaton, it was held by the United States Court that a tax on the occupation of an importer is the same as a tax on imports, and was there- fore void. In Weston vs. Charleston, 2 Peters, it was held that a tax upon the income of United States securities was a tax upon the securities themselves, and equally inadmissible. In Almy vs. California, 2-4 Howard, it was held that a REJOINDER AGAINST THE TAX. 371 duty on a bill of lading was the same thing as 'a duty on the article which it represents. In Cook vs. Pennsylvania, 97 United States, it was held that a tax upon the amount of sales of goods made by an auctioneer was a tax upon the goods sold. In Kailroad Company vs. Jackson, 7 Wallace, it was held that a tax upon the interest payable upon bonds was a tax not upon the debtor, but upon the security, the bonds. In Philadelphia Steamship Company vs. Pennsylvania, 123 United States, it was held that a tax upon the income received from interstate commerce was a tax upon the commerce itself, and equally unauthorized. " If a man seized of lands in fee by his deed granteth to another the profit of those lands to have and to hold to him and his heires, the whole land itselfe doth passe; for what is the land but the profits thereon'?" (Coke upon Littleton, the accepted rule of law in every court in Eng- lish Christendom.) A devise of the interest or of the rents and profits is a devise of the thing itself oiit of which that interest on those rents and profits may issue (Patterson vs. Ellis, II Wen- dal). It seems clear, therefore, that the weight of judicial opinion as expressed in the judgments of the highest courts, both in the United States and England, was to the effect that the tax imposed under the United States act of August, 189-i, on the income from the use, profits, and sales of land was a direct tax, and, not being apportioned in accordance with a strict provision of the Federal Constitution in respect to the levy and collection of said tax, was necessarily un- constitutional and void.* Apart from the leading element in this celebrated case, and on which the final decision of the court was mainly based, was that provisions in the act of 1894 establishing * The following rejoinder by one of the counsel for the appli- cants (Mr. Choate) to a portion of the argument made by the Attorney General (Mr. Olney), and before cited, is pertinent and instructive, as respects the much-vexed question as to the situs of property for the purpose of tax administration: " The Attorney General says, ' When a man has got the money in his pocket it is no longer rent.' One thing I would say about that is. that if you are going after rent as money, the tax is on personal property, and should be apportioned. But the answer 372 THE THEORY AND PRACTICE OF TAXATION. an income tax, being in the nature of direct taxation, and the same being not assessed in accordance with the require- ments of the Federal Constitution, were void in effect. The constitutionality of the entire act was also questioned on the ground that it violated the constitutional require- ments that " all duties, imposts, and excises shall be uni- form throughout the Tnited States." Thus, for example, it taxed the income of certain companies and associations, " no matter how created or organized," at a higher rate than the income of individuals and partnerships derived from precisely similar property; and denied to individuals deriving their income from shares in certain corporations and associations the benefit of the exemption of $4,000 granted to all other persons interested in similar property and business, and the like. These features of the act of 1894, although constituting most important and instruc- tive contributions to the general subject of " taxation," are not, however, so pertinent to the immediate subject under consideration as to require at present any extended dis- cussion. Conclusion. — As the result of the hearing and dis- cussions involving the constitutionality of the income-tax statute of August 28, 1894, the United States Supreme Court, a majority of its members concurring, gave judg- ment as follows : 1. We adhere to the opinion already announced, that taxes ox real estate being indisputably direct is that the tax does not go after the rent as money in the tax- payer's pocket. The act of 1894 (section 27) specifies the rents as a cardinal part and element of this income return, and every man who goes up to make return has to state under oath what rent he got last year. This fiction — this difference between the name and the thing, between the substance and the shadow, urged by the Attorney General — is that, though you can not tax rent, you can tax the money in the owner's pocket received from rent. If there is one factitious argument, one pretence of a reason, one attempt to make a distinction without a difference that this court has uniformly stamped upon with all its might, it is just that. The court has repeatedly decided that such an argument is wholly unsound. What did the court mean, in Brown vs. Maryland, when it held that a tax on the occupation of an importer is the same as a tax on imports and is therefore void? It is the source, the substance, that the act strikes at, that the court always looks to, and always has looked to, in any form and ease that has ever come before it until now." DECISION OF THE COURT. 373 TAXES, TAXES ON THE RENTS OR INCOME OF REAL ESTATE ARE EQUALLY DIRECT TAXES. 2. We are OF THE OPINION THAT TAXES ON PERSONAL property, or on the income of personal property, are likewise direct taxes. 3. The tax imposed by sections twenty-seven to thirty-seven, inclusive, of the act of 1894, so far as it falls on the income of real estate and of per- sonal property, being a direct tax within the mean- ING OF THE Constitution, is therefore unconstitu- tional AND VOID, because NOT APPORTIONED ACCORDING TO REPRESENTATION. AlL THOSE SECTIONS, CONSTITUT- ING ONE ENTIRE SCHEME OF TAXATION, ARE NECESSARILY INVALID. A brief word more is desirable to complete the record of the curious and instructive experience of the United States in respect to the enactment and administration of direct taxation. Theoretically an almost ideal system, especially if made universal in its incidence and exclusive of all indirect taxes, its application under a dual form of government, such as exists in the United States, with a practical denial of resort to arbitrary action in collection, such as exists in all despotic governments, and an accepted rule that neither the " nation " nor the forty-five " States " shall tax an instrumentality of the other, will be necessarily most per- plexing. These and other like circumstances, more espe- cially the inequalities and inefficiencies contingent on the act of 1861, therefore, render it almost certain that direct taxation will not hereafter be resorted to by the Federal Government until all other means of relief for its treasury have been exhausted. With the decision of the United States Supreme Court in 1896 against the taxation of land incomes remaining unimpaired, as it probably will be unless the Federal Constitution is practically reconstructed, the enactment by Congress of another income tax which will not reach more than half the incomes designed to be reached, will probably not be attempted. When it is also considered that it will be an impossibility to separate the part of incomes of great corporations which they derive from real estate, when they necessarily use real estate in common with other property in order to derive any income. 374 THE THEORY AND PRACTICE OF TAXATION. the enormous expense and interminable litigation contin- gent on any attempt on the part of the Government to enforce such a law will be almost beyond estimate. " Real " and Personal Taxes. — Direct taxes are also spoken of, and in fact classified, as real and personal taxes. "Rear' taxes (Latin res, thing), or taxes on realty, as is the general expression, are taxes on property — generally on things naturally characterized by immobility — without reference to the pecuniary condition of the owner, and hence without taking his debts into account. A tax on land or real estate — houses and land — is a typical tax on realty; and a tax legally assessed upon such property ' rests, or is a lien upon it, irrespective of its ownership. Business taxes are regarded as real taxes, as they are taxes on pursuits or occupations rather than on persons. The same is true of taxes on capital and the rental value of land or buildings.* The restriction on the levy of direct taxation imposed by the Constitution of the United States on the Federal Government does not apply to the States. Personal taxes are taxes on persons. A poll or " capi- tation " or " head " tax, implying a uniform payment from every poll or head of some portion or all the population of the State, would be a typical personal tax. Strictly speak- ing, therefore, a personal tax can be no other than a poll tax levied under the above conditions. What are usually called personal taxes are taxes assessed or rated to a per- son, not as in the case of a poll tax because he is a person or citizen, but in virtue of the movable property — furni- ture, clothing, vessels, carriages, animals, money at in- terest, stocks in corporations, bonds, or negotiable instru- ments and the like belonging to him. It is the individual that the law regards as the objective rather than his per- sonal property — which may not be tangible or visible — on enforcing the tax ; the property being resorted to for the purpose of ascertaining the amount of tax which its owner should pay. An income tax is regarded as a personal tax because it is assessed on the income that gathers about a person irrespective of its source — rents, interest, profits. * " Real estate for the purpose of taxation shall include all lands within this State, and all buildings or other things erected on or affixed to the same." — Statutes of Massachusetts. REAL AND PERSONAL TAXES. 375 salaries, and the like. A tax on land is a tax on realty, while a tax on a mortgage is a personal tax, which is equivalent to affirming that the former is a thing, while the latter is only the representation or shadow of the thing. In levying taxes on realty the owner, as a rule, is not allowed to offset or reduce its valuation by the amount of his outstanding indebtedness; but in the case of the taxa- tion of personal property such an offset is generally per- mitted, on the ground that a man should be taxed only upon what he owtis and not upon what he owes; and even when not allowed by law, the circumstance of indebtedness is almost always taken advantage of by persons assessed, for reducing valuation in making returns to the tax offi- cials of the value of their property. In assessing an in- come tax a deduction is allowed for interest paid on mort- gages, and such business expenses as lessen income. Per- sonal expenses, as house rent, cost of living, and the like, can not, on the other hand, be properly deducted from income before it is taxed, because income is sought for and exists for the purpose of defraying such expenditures. By the income-tax law of the United States, enacted in 1865, and also in 1894, deductions were allowed from the amount of taxable income, of all taxes paid within the 3'ear, of all interest paid on indebtedness, and the rent or rental value of any homestead actually occupied by the taxpayer. One of the most curious features of recent tax experi- ences in the United States has been the extent to which this practice, or right of reducing valuations of personal property for taxation by debts, has been made the oppor- tunity for evading taxation. Thus, by the very structure of the Federal Government, its various instrumentalities, as heretofore explained,* are necessarily exempted from all taxation by the States of the Federal Union. Eecognising this, it has been the habit of individuals to effect credit purchases to a greater or less amount of United States securities a short time previous to the time fixed for tax returns or valuation, and then offsetting the debts thus in- curred against valuation, evade the taxation on their per- * See Chapters XI and XII. 376 THE THEORY AND PRACTICE OF TAXATION. sonal property to which they would otherwise be sub- jected.* And for such moral wrong there would appear to be no legal remedy on the part of the State, except by the commission of a greater wrong — namely, the prohibi- tion of the offsetting of all debts in tax valuations ; or, what is the same thing, the im])osing of a discriminating bur- den of taxation upon persons who, for any cause, may be in debt — a denial of equity which public sentiment in every free country will not long tolerate. A further proof and illustration of this averment may be found in the fact that years ago the Constitution of Ohio provided that credits, or evidences of indebtedness, should be subject to taxation by a uniform rule ; and the Supreme Court of Ohio subse- quently decided that this did not allow any offset of debts owed against credits owned. But popular opinion was so adverse that by common consent this clause of the Consti- tution, as interpreted by the court, was entirely disregarded in making up tax valuations. In old English history the division of property into real and personal was wholly unknown ; and all laws regulating this species of property, with a view to taxation or inherit- ance, are of comparatively modern origin, f It is also in- * When the Ferleral Government effected in November, 1894, a loan for $50,000,000, a premium was paid on no inconsiderable amount for the privilege of purchase, or investment, so large as to net to the purchaser an abnormally low rate of interest — 2.5 per centum. The explanation of this action was that, apart from the recognised value of an unquestionable security, the investment carried with it an exemption from a national income tax of two per cent, as well as from State and municipal taxation ; so that the rate of interest accruing to the purchaser was not as low as it might have seemed to be. and by the holders and managers of trust properties was generally regarded as satisfactory. t The first authorization of local taxation in England was for the maintenance of the poor, and occurred in the reign of Eliza- beth. At that time it seems to have been assumed that there was no personal property in the kingdom capable of being assessed, and that real property was alone valuable property. Hence it was enacted (43 Elizabeth, cap. 2) that overseers should be appointed Avho were to raise, by taxation of every inhabitant, parson, " and of every occupier of lands, houses, tithes impropriate, propriations of tithes, coal mines, or salable underwoods in the said parish," moneys for the relief of the poor. No mention was made of per- sonal property, and it is probable that every kind of property then known Avas mentioned in the act. When fresh burdens were necessary the principle adopted by the act of Elizabeth was con- LEGAL DISTINCTIONS. 377 teresting to note that probably full one fourth of all the so-called personal property of this country — namely, all railroad, steamship, telegraph, telephone securities — did not have an existence fifty years ago. As is the case with direct and indirect taxes, the line of demarcation between real and personal property, and consequently between real and personal taxes, is very in- definite, and some very nice and curious points in connec- tion therewith have been established by usages, or court de- cisions. Thus an apple on the tree is real estate, but when fallen upon the ground it becomes personal property. Run- ning water accumulated in a pond is real estate, though the owner is not permitted to invest it with the peculiar at- tribute of real estate — namely, stability — by permanently arresting its flow. In some States the engines, water wheels, shafting, and even belts of factories are real estate, while looms and lathes are personal property. Stone in the quarry is real estate, but when thrown out by a blast and made ready for market it becomes personal property. Hop- poles, not standing, have been decided to be real estate, but wood cut and corded for sale is personal property. A statue exhibited for sale in a workshop is personal prop- erty, but when placed upon a permanent foundation (al- though not fastened to it), as an ornament in front of a house, has been held to be a part of the realty. Chairs in a theatre and screwed to the floor, as they can not stand alone, are considered a part of the realty; but gas fixtures and mirrors, made to order for the house, and attached to the freehold, but removable without injury thereto, are not deemed a part of the realty. Before emancipation in the United States, slaves, who by the Federal Constitution were recognised as persons, were in several of the States declared by law to be real estate ; * and in one State of the Union, Wisconsin, the one species of property which is espe- cially typical of mobility, and is of no value apart from its capability of motion, namely, the rolling stock of railroads, tinned, Avithout miich inquiry or opposition, and owners of per- sonalty have remained exempt from taxation, although personal property has gone on increasing until its value has become much greater than all the real property of the kingdom. * In American colonial days slaves were regarded as belonging to the land, and figured in tax valuations as real property. 25 378 THE THEORY AND PRACTICE OF TAXATION. has been by law made real estate. Shares in the national debt of France, as well as stock in the Bank of France — in- strumentalities which in the United States would be re- garded as personal property in its most typical form — may by French law be made real estate, and as such be admin- istered on. Some years ago the following curious experience oc- curred in one of the Xew England States : A person rented a farm, and on the expiration of his lease attempted to remove from the estate the manure which had accumulated during his holding, assuming that he had the right to it as personal property. The owner of the farm, on the other hand, forbade the removal of the manure, on the ground that it was real estate, and so a part of the farm. The case found its way into the courts, and on its trial the lessee and defendant, who appeared for himself, attempted to sub- stantiate the legality of his proceedings in the following manner: Addressing the judge after the facts in the case had been established, he asked, " Was the hay in the barn personal property ? " Judge : " Certainly." Lessee : " Were the horses and cattle personal property? " Judge: " With- out dispute." Lessee : " Then will your Honour please to tell me how personal property can eat personal property and produce (dung) real estate?" The decision was never- theless in favour of the owner of the farm, or the plaintiff. Subsequently the courts of Xew York decided that manure accumulated in connection with a livery stable, not being an agricultural product pertaining to a farm, was not real estate but personal property. In a case in the State of Tennessee, where a person who had entered a neighbour's field and removed corn on the stalk was prosecuted for larceny, the court held that the offence was not larceny, which is the unlawful taking and carrying away of personal property, but trespass, inasmuch as the corn not severed from the ground was real estate, but would have been larceny if the corn had been gathered or disconnected from the ground previous to its taking. Thereupon a bill was introduced into the Legislature of Tennessee to make it a felony to steal corn from a field under any circumstances. From these illustrations it seems obvious that the dis- tinction between real and personal property and real and DEFINITIONS OF TAXES. 379 personal taxes is, to a very great extent, an artificial and not a natural distinction. The following are some of the other terms used to desig- nate particular forms of taxation, the meaning and tech- nical application of which may not be readily apparent: A franchise tax is a tax on a franchise, or on a right granted by a State to a corporation or association to exer- cise certain privileges. In fact, a franchise is a privilege, and in most cases it is an exclusive privilege, and has an actual value largely disproportionate to the amount of capital invested by the company or corporation upon which it has been conferred.* It has been held by the courts that a franchise tax is not a tax on capital or on real estate, but on privilege, and does not exclude additional taxation on any property covered by the franchise. The terms imposts and "customs'' (Latin " consue- tudines " ) are generally understood to mean indirect taxes on the importation of commodities, while the term duty is more properly applied to a tax upon exports. The origin of all these terms is obscure and involves some interesting features in English history. It appears certain that they were in the first instance applied to ex- actions on trade generally, and not, as was finally the case, on imports and exports exclusively, and were in use before indirect taxes on personal property were recognised in Eng- land. At the outset and for a long period they were also not * The following is a case in point, derived from actual experi- ence: A street railway company in a city of the United States reported the gross earnings of the corporation for 1891 at $1,188,000. Its net earnings were $400,000, or nearly six per cent on a capi- talization of $7,000,000. Its city property tax was only $11,000, or $2.10 on $500,000. It is evident, therefore, that the value of the capital of this corporation was due largely to the value of its franchise. The value of a franchise is an eminently proper subject for taxation, though it is not commonly so regarded. The Supreme Court of Pennsylvania, in a recent case (1894), has held that under the laws of that State it was proper and lawful in ascertain- ing the actual value of the capital stock of a corporation (Sus- quehanna and Schuylkill Railroad Company) to take into con- sideration, as affecting that value, the franchises of the company. Franchises conferred by Congress upon a corporation created by it, to be exercised within a State, can not be subject to taxation by the State without the consent of Congress. — California vs. Cen- tral Pacific Railroad Company. 380 THE THEORY AND PRACTICE OP TAXATION. regarded in the light of taxes, but rather as dues personal to the sovereign, which he had the right to regulate and collect independent of any statute, and which carried with it the further right to restrain at pleasure the import or export of any commodity.* Thus, until the reign of Ed- ward II (1272-1307) the right to tax the export of wool was exclusively a royal privilege ; and the enactment of a statute by Parliament in 1275, limiting the amount that the king could take in respect to the export of wool, skins, and leather — but not denying the privilege — is regarded as the first legal foundation in England of the customs revenue. The controversy between the king and Parlia- ment over customs duties went on, however, with varying phases until finally settled in 1682 ; and from these circum- stances, and also from the fact that customs and duties are unseen by those who finally bear their burden because they are embodied in the prices of commodities, has pos- sibly come about the curious idea that tariffs, or taxes on imports, are not taxes on any one or are any burden on property, but rather some sort of a business contrivance for the raising of revenue, and, if they are taxes at all, then that the foreigner pays them. The term impost is a general expression for any tax, duty, or tribute, but is seldom now applied to any but in- direct taxes on imports. The term excise, though used in the Constitution of the United States, is now almost entirely restricted in use to the tax system of Great Britain ; and even there has ac- quired a far different meaning and application from what it possessed originally. Thus the term was first applied in * It is a curious fact that the old idea that imposts and cus- toms, or the right to impose exactions on trade, were, when first imposed, not regarded in the light of taxes but as dues personal to the sovereign, which he had the right to regulate and collect independent of any statute, has recently found reassertion and Indorsement in the United States Senate by a leading member of that body from New England, that he did not regard the levy- ing of imposts or customs dues on imported commodities as in the nature of taxes; for, if such levies on trade are not taxes, they are simply exactions of a despotic form of government, repre- sented immaterially either by one man or a collection of men, and for whom or for which no rightful claim of representing or being a government by the people or for the people can be pre- ferred. EXCISE DUTIES. 381 England to taxes on manufactured commodities produced and consumed in the kingdom, as beer, cider, soap, glass, paper, and the like, and in contradistinction to duties or customs on commodities of foreign manufacture and im- portation; and this distinction is still officially recognised in the fact that special care has always been taken in all British legislation on this subject to make the excise tax as nearly equal as possible to the customs imposed on the same kind of imported commodities. The term is sup- posed to find its origin also in the circumstance that it was originally the practice to cut off, or " excise," portions of the goods assessed, and take them away in payment of the tax in kind. The first attempt to impose an excise tax in England was in 1525, and failed, as both Houses of Parliament concurred in opinion that it was unconstitu- tional. After the Eestoration, or under Charles II, the attempt was successfully renewed, and the taxes under it were very curiously divided into two classes, and the re- ceipts from the same made personal to the crown — namely, the hereditary excise, so called because granted to the crown forever in consideration or recompense for the aban- donment by the crown of certain perquisites and privileges ; and the tempoi-ary excise, the receipts of which were only granted to the sovereign for life. The tax was, however, always unpopular in England, being regarded as contrary to the spirit and principles of a just government, and on the accession of William and Mary it was greatly modi- fied and reduced; and it is somewhat curious that a term having such an origin and history should have found a place in the Federal Constitution and be thus recognised as a legitimate form of taxation under a free government. In Great Britain at the present time the only commodities on which taxes designated as excise are assessed are spirits, malt, fermented liquors, and chicory, or other substitutes for coffee. But in addition the British system classifies under the head of excise its taxes on railways and a few other minor subjects. The late United States Justice Miller defined an excise tax as " one which is assessed upon some article of prop- erty or money or something which is exhausted in the use. It is one which from its essence and nature must be paid in fact by the buyer, or the last man who buys or uses the 382 THE THEORY AND PRACTICE OF TAXATION. property, because, whoever has it at the time when the tax is levied upon it adds that amount to the selling price when he comes to dispose of it until the property is consumed. It is a tax upon consumption." * In the United States all Federal taxes that are not levied under the tariff and navigation laws are classified under the general designation of " internal revenue taxes." The term toll, formerly in extensive use, and signifying duties on imports and exports, is now nearly obsolete, and restricted almost exclusively in meaning to the charges for permission to pass over bridges, ferries, and roads (turn- pikes) owned by the parties imposing them. The courts have held that railroad fares can not be regarded as tolls. A word in very common use in English history, espe- cially when reference is made to fiscal topics, is that of subsidy; but its former and present signification are very different. Under the earlier English kings, when the in- adequacy of the hereditary or peculiar revenues of the crown to defray its expenditures compelled the monarch to ask pecuniary aid of his subjects, the grants that were made were known as " tenths," " fifteenths," or the like, according as the exaction of such percentages of certain properties were authorized, and also as " subsidies " and " benevolences." The peculiarity of all such grants was that they were always special and extraordinary, and had no place in any regular system of taxation. Thus, of the reign of Henry VIII it is recorded that Parliament granted subsidies occasionally, but the king, having found a readier way of obtaining money, did not need them — the readier way having been the confiscation of all the property of the religious houses, which included more than half of all the land of the kingdom ; and of Elizabeth, that during the forty-five years of her reign Parliament granted twenty subsidies and thirty-nine fifteenths, the balance of needed supplies being obtained from crown lands — as the duchy of Lancaster — and other hereditary revenues. Under the * Lectures on the Constitution of the United States, p. 238. " What is the natural and common or technical or appropriate meaning of the Avords duty and excise it is not easy to ascertain. They present no clear and precise ideas to the mind. Different persons will annex different significations to the terms." — Pater- son, J., EijUon vs. V. 8., 3 Dallas, 111, 176. SUBSIDIES. 383 Commonwealth regular taxes on lands and other forms of property were for the first time instituted in England, and these proved so productive that the old methods of per- centages, subsidies, and benevolences were discontinued, and with their nomenclature disappeared from English fiscal history. At the present time the term subsidy, in place of desig- nating as formerly a grant obtained by the Government from private interests, has come to mean a grant obtained from the Government in aid of private enterprises which it is claimed should be encouraged by the state in the interest of the general public, as, for example, the fostering of shipbuilding and ship-using, and the cultivation and manu- facture of certain commodities. But this modern use of the word " subsidy " can not, it is said, be referred back to any earlier period than the year 1840. Of the many other terms and words used in connection with the subject of taxation, there are very few that seem to require special explanation, and the majority of these, although formerly in extensive use, have now become obso- lete and passed into history — as, for example, gahelle, the term given in France to the tax on salt ; corvee, a compul- sory contribution of labour; and taille, or taillage, a tax on the supposed profits of agriculturists, and the like. The characteristic of almost all modern tax words or terms is indefiniteness ; and probably in no other department of knowledge is there such a lack of exactness in respect to definitions. This to a student may seem at first to be a factor of no little embarrassment, and as assimilating him to the condition of the man who couldn't see the forest because of the multitude of trees; but with the exception of the definitions of iax and taxation, this condition of affairs really constitutes no obstacle in the way of clearly reasoning and determining as to what should be the funda- mental principles of taxation. yj, CHAPTER XYII. THE EXISTING METHODS OF TAXATION. PART I. Subjects of Taxation. — The subjects of taxation, to use a happy generalization of Justice Field, of the United States Supreme Court (Foreign-held Bond Case, 15 Wal- lace), "are persons, property, and business. Whatever form taxation may assume, whether as duties, imposts, ex- cises, licenses, or direct, it must relate to one of these sub- jects, li is not possible to conceive of any other, though as applied to them taxation may be exercised in a great variety of ways." With this postulate we are legitimately led up to the consideration of the ways or methods by which the State or Government, in virtue of its sovereignty, and on the ground of necessity, and solely for its support, taxes or compels contributions from the three above-enumerated subjects, for the purpose of defraying its expenditures. Apportionment of Taxation. — This department of the subject of taxation, while the most practical and there- fore the most interesting, is at the same time the one most obscure, and the one about which there is the most striking difference of opinion among writers on economic and fiscal subjects. The four maxims or canons laid down by Adam Smith in his Wealth of Nations, by reason, as he claims, of their eminent justice and equality, have obtained such world-wide celebrity that they are almost always referred to as of unquestionable authority in all discussions of this subject, and have been thus characterized by an eminent French student and writer (M. Menier) on taxation: " When a legislator," he says, " brinsfs forward a new scheme for taxation, he is always careful to say that it is not in contradiction with even one of these rules; and at 384 V RULES OF TAXATION. 385 the same time he never fails to invoke them as authority during a debate, even when he is actually scheming to transgress them." These rules are four in number, and are as follows: /, 1. " The subjects of every state ought to contribute to the ^/ support of the Government, as nearly as possible, in pro- portion to their respective abilities— that is, in proportion to the revenue which they respectively enjoy under the ^^^"^^ protection of the state." In the observation or neglect of - ^ this maxim consists what is called the " equality or in- equality of taxation." 2. " The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person. The certainty of what each in- dividual ought to pay is, in taxation, of so great impor- tance that a very considerable degree of inequality (I believe, from the experience of all nations) is not near so great an evil as a very small degree of uncertainty." 3. " Every tax ought to be levied at the time and in the manner in which it is most likely to be convenient for the contributor to pay it." 4. " Every tax ought to be so con- trived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state." But although almost universally accepted as the em- bodiment of the highest wisdom, the above four maxims or canons of Adam Smith have been and are, nevertheless, open to some criticism. In the first place, they are so gen- eral in their nature and so lacking in any precise rule or test for application, that they stand in the light of apho- risms ; somewhat as the maxims " Honesty is the best policy," " Never put off till to-morrow what can be done to-day," etc., to which all respect is always given, except the desirable one of practical use in actual eases. In fact, the originators of the very worst forms of taxation now existing might and probably would plead that their methods or practices were based on the ideas of Adam Smith, or were as near in conformity to them as was possible under the existing circumstances. Again, the first maxim or canon embodies two propositions antagonistic to each other, and one of which can hardly be considered correct ; namely. 386 THE THEORY AND PRACTICE OF TAXATION. vf ^\' that every citizen should pay taxes for the support of the \^ Government in proportion to his ability. For if, as almost <^ all authorities are now agreed, taxes are the compensation which persons or property pay to the state for protection, then it of necessity follows that where there is no protec- tion, ability is no just guide for assessment. " Where there is no protection," said Judge Story (in the case of United States vs. Rice, 4 Wheaton, 276), "there can be no claim to allegiance or obedience." And that Adam Smith did not intend to have his first proposition fully accepted would seem evident from the circumstance that he added to it, and qualified it with these other words, " that is, in proportion to the revenue which they [the citizens] respectively enjoy under the protection of the state." Mon- tesquieu, who wrote at an earlier date, also enunciated even more clearly this common-sense and equitable prin- ciple, when he said (see Spirit of the Laws) that " the public revenues ought not to he measured hy the people's abilities to give, hut hy what they ought to give." " And what they ought to give," as has been remarked by another f writer, " can, of course, be only measured by the benefit they are to derive." Discriminating Taxation. — The proposition that " the subjects of every state ought to contribute to the sup- port of the Government in proportion to their respective abilities " embodies also and inferentially favours the policy of discriminating taxation, and finds popular ex- pression and justification in the assertion that the rich man needs more protection from the state than the poor man, has more interests to be guarded, and it is there- fore right that he should pay more in proportion to his fortune. " It is just," says Sismondi, the Italian econo- mist, " that all should support the Government in return for the protection it gives to their persons and properties, in proportion to the advantages society guarantees to them, and the expenses which it incurs on their account." But the question is pertinent, to whom or to what class of its members does society afford the most protection or render the most service? Is there any standard by which such proportionality can be even approximately deter- mined? To these questions Mr. John Stuart Mill has made the following answer: h'X^h'ti^ M-*^, iuji-d^^ Uo. jU^(^ vwt^Z' DISCRIMINATING TAXATION. 887 " It can not be admitted," he says, " that to be pro- tected in the ownership of ten times as much property is to be ten times as much protectedyi Whether the labour and expense of the protection, or tne feelings of the pro- tected person, or any other definite thing be made the standard, there is no such proportion as the one supposed, nor any other definable proportion. If we wanted to esti- mate the degrees of benefit which different persons derive from the protection of Government, we should have to con- sider who would suffer most if that protection were with- drawn; to which question, if any answer could be made, it must be that those would suffer most who were weakest in mind or body, either by nature or by position. Indeed, such persons would almost infallibly be slaves. If there were any justice, therefore, in the theory of justice under consideration, those who are the least capable of helping or defending themselves, being those to whom the protec- tion of Government is the most indispensable, ought to pay the greatest share of its price; t he reverse of the trnp id pa of distributive_ justice^ wliich consists not in imitating but in fe^ressmg^the inegualities an^l wrongs, of Nature. Gov- ernme~nt inust be regarded as so pre-eminently a concern of all that to determine who are most interested in it is of no renl importance. If a person or class of persons receive so small a share of its benefit as make it neces- sary to raise the question, there is something else than taxa- tion which is amiss, and the thing to be done is to remedy the defect instead of recognising it and making it a ground for demanding less taxes." M. Menier, of France, widely known as a manufacturer of chocolate, but who has shown himself to be an economist of repute and a most valuable member of the French Chamber of Deputies, in a comprehensive treatise on taxa- tion {Ulmpot sur le Capital, Paris, 1874; English trans- lation, London, 1880) re-enforces the conclusions of Mr. Mill respecting the popular theory of discriminating taxa- tion by different though not less forcible arguments and illustrations, taking as a text the following remark of M. Leon Faucher, another distinguished French writer on economic subjects : " It seems just that he who, thanks to his talents, to his property, or his capital, procures for him- self and his family the enjoyments of luxury should pay Ufi 388 THE THEORY AND PRACTICE OF TAXATION. to the state a tribute proportionately more considerable than he who has only the produce of his daily labour to nourish and bring up his family." " To those," says M. Menier, " who do not reflect, nothing seems more simple than this proposition. A minimum of wants is spared taxation. In proportion as income increases the tax in- creases. Let us see the consequences. " A principle is or is not. A principle recognised as true ought never to be given up, whatever may be its apparent dangers. Once admitted, it must be submitted to, followed out to the end, and its consequences accepted. If by fol- lowing out its consequences we perceive that we are get- ting at the absurd, we must return to the principle, and subject it again to the touch of observation. There are many who content themselves with stopping halfway, not daring to advance, and afraid to turn back to discuss the principle on which they have long relied. They are the inventors of compromises, who adjourn questions instead of solving them. " But taxation, it is claimed, may be ' wisely progres- sive.' I know no more concerning a ' wise progression ' than I do about a ' wise addition ' or a ' wise multiplica- tion.' A progression is or it is not. If it is insignificant, then it is a delusion. The inequality it aims at destroying subsists intact. If a true progression in taxation is estab- lished, here are the results we obtain : We will suppose, for example, that the tax ought to be trebled when the income is doubled ; then a tax of 10 francs on 100 francs of income would rise to 200 francs on 3,000 francs, to 600 francs on 4,000 francs, to 1,800 francs on 8.000 francs, to 5,400 francs on 16,000 francs, to 16,200 francs on 32,000 francs, to 48,600 francs on 64,000 francs, and to 145,000 francs on 128,000 francs. I conclude that the principle that ends in such a consequence can only be false. What ! the tax would one day exceed my fortune ! I should be the debtor of the fiscal system that had absorbed more than my revenue. Then it would be for my interest not to aug- ment it ! I shall have accumulated only for the treasury, and the more I acquire the more rapidly I shall be de- spoiled. . . . That system may suit Utopians and retro- grade people who completely absorb the individual in the state, but it will not suit those who, relying on facts, think MOOTER'S RULES OF TAXATION. 389 the greatness and wealth of the state ought to proceed from the development of individuals. It may suit those who seek equality at the basis, but not those who seek equality ^(^ at the summit. The theory of progressive taxation is a P vestige of the old prejudice that regarded M^ealth as an '*'*^f'Ut£' evil, as a sort of theft from the rest of the country, and ^^kTj that it would be equitable to make the rich man atone or^^^^'''^^^ make reparation for the possession of his fortune and his/^(V^^ pleasures. In warlike civilizations, where wealth wasA-^ ,^^, based on violence, it is not difficult to understand the legiti- v. 7^"^> macy of this prejudice; but it finds no warrant in our ^'V industrial civilization, where all wealth, to be legitimate, must be based on the appropriation of natural agents to our wants. But the partisans of a wise progression in taxation have foimd means of escaping from the absurdity of the above consequence — namely, confiscation. They pro- pose that above a certain figure the progression shall stop. Under such a system they would favour him who has but little money; but they would favour still more him whose wealth exceeds a certain limit. If you have £4,000 a year, you pay the maximum of the progression ; if you have more than £-1,000, the progression vanishes. A principle which ends in such consequences does not exist." * M. Menier's Eules. — To establish a system of taxa- tion which will be equitable and effective without involving the principle of progressive or discriminating taxes, M. Menier regards the following constructive rules as funda- mental : 1. Taxation should never be laid on circulating capital, " since every tax that obstructs circulation impedes produc- tion in a geometrical ratio." 2. Taxation should be levied on the commodity ; never on persons. 3. Taxes should never impede the liberty of labour. 4. Every tax ought to be levied as cheaply as possible. 5. There should be but one sole and single tax — namely, on fixed capital, f * See also the destructive criticism in Say, Les solutions demo- cratiques de la question des impots. Paris, 1886. t M. Menier defines fixed capital as every utility of which the product does not change the identity, as useful machines, in- struments of trade, profitable buildings, improvements of land, and the like. Circulating capital, on the other hand, produces utility only by being transformed. It is represented by three 390 THE THEORY AND PRACTICE OF TAXATION. The True Measuee of the Burden of Taxation ON Production. — In addition to the maxims, or canons, proposed by Adam Smith, another one, first pointed out by Mr. Edward Atkinson, of Massachusetts, is worthy of being added, and may even be regarded in the light of a fundamental principle ; and that is, that the burden or in- jurious effect of a tax on production or exchange is not to he measured by the ratio which the tax may bear to the gross value of the subject of taxation, but rather by the proportion which the tax bears to the profit which might normally or naturally result from undertal-ing a certain line of industry or product. To practically illustrate this, let us take an example. Let us suppose two men, A and B, to start shops for the manufacture of machinery, each with a capital of $30,000, and that each in his operations expends $20,000 for coal and iron, $40,000 in wages, and $4,000 for transportation of the raw materials to the shops for manufacture. The total cost of the annual product of each shop will then be $64,000, or a little more than three times the capital ; and a sale of their respective products, at the net price of $66,000, would yield the owners $3,000, or ten per cent profit. Now, suppose further that under such conditions A has a tax imposed on him of three and an eighth per cent upon the value of his product ; it may be a customs or excise tax, or an increased rate of rail- road freight. This amounts to $3,000 on the $64,000 of product — no excessive burden, it mav be said, and only requiring A to sell his $66,000 for $2,000 additional. But suppose A can not get this $2,000 additional ; and he cer- tainly can not if the other man, B, is exempt from this three-and-an-eighth-per-cent tax, or contrives to evade it, and competes with A in the open market. Then, in such a case, this three-and-an-eighth-per-cent tax upon product manifests itself as ten per cent upon the entire investment and absorbs the entire profits which otherwise might have elements — materials, goods, money. " Facts prove that the sup- pression of circulation is a cause of ruin for the land as for every other source of production. Look at Spain since the expulsion of the Moors, who had carried to so great a height the theory and practice of agriculture. The land, having become the property of a few great families or the clergy, was consolidated. Its circula- tion ceased completely, and production ceased with it." TAXATION ON PRODUCTION. 391 been realized ; so that the business of A first drags, then stagnates, and is finally abandoned; while his workmen are discharged, the village where the shop is located runs down, the artisans, shopkeepers, and professional men connected with it complain of hard times and emigrate from the locality or the country, while the railroad fails to confer all the benefit to the community or profit to its stockholders that might be possible. B, on the other hand, exempt from the tax, keeps on working, and when hard times come con- tinues his sales and the occupations of his workmen by taking -five per cent profits instead of ten, and selling his goods, as he can afford to, at reduced prices to meet tem- porary conditions. Actual practical illustrations of the injustice and disaster consequent on such discrimination in respect to tax burdens and exemptions are afforded on a small scale in the history of much railroad manage- ment, and to a larger extent where two nations with dif- ferent systems of taxation undertake to compete with each other in the sale of the products of their labour in the common markets of the world. We find here an explana- tion also of the immediate beneficial effects which attended the first tentative measures of reform in the British tariff instituted by Sir Eobert Peel in 1842 and 1845, which, although consisting mainly in the removal of numerous small but obstructive duties, nevertheless started British industry forward by leaps and bounds, even before the larger burdens of tariff restrictions were removed in later years. As the characterizations of " poll/' " head," or " capita- tion " taxes, the only possible form of direct taxation on a person, and of the advantages and disadvantages of indirect taxes, through the agency of which the Federal Govern- ment collects the largest proportion of its revenues, have been already pointed out, the field of discussion under this head is practically limited to the existing methods of State or local taxation on property and business, in contra- distinction to national or Federal taxation, or to the sys- tem under which nearly six tenths of all the contributions which the people of the United States make for the sup- port of their governments are assessed and collected. In Great Britain about two thirds of the revenue of the kingdom is from " local " in contradistinction to " na- 392 THE THEORY AND PRACTICE OF TAXATION. tional ■' taxation— £53,000,000 in 1890. Of this amount some £32,000,000, or about three fifths, is raised by rates on the annual value of land and house property in various localities. The next largest source of local revenue is from tolls, dues, etc., from docks, piers, harbours, ferries, and markets, and yields over £7,000,000, or thirteen per cent of the total. The total expenditures for local purposes in 1890 were returned at £67,000,000; the difference between local expenditures and receipts being made up by contribu- tions or grants from the inland revenue department of the kingdom and by municipal loans. The aggregate local debt of the kingdom is about one third of the national debt, and has been mainly incurred for municipal and urban im- provements, such as water and gas supply, markets, tram- ways, parks, libraries, public baths, wash houses, drainage, and other improvements. The purposes for which the proceeds of local taxes are expended in the United King- dom are mainly for poor relief, gas and water supply, schools, police, asylums, etc. In a report made to the Brit- ish Association for the Advancement of Science in 1870 by Mr. Stanley Jevons, it was stated that the methods by which the local taxes of the kingdom were then levied were substantially according to an act passed in the reign of Elizabeth.* Popular Theory of Taxation in the United States stated and examined. — The general idea which constitutes the basis of the system of State or local taxa- tion mainly recognised in the United States (though not in other countries), and generally known and designated as " the general property tax," is founded on the assump- tion that, in order to tax equitably, it is necessary to tax everything; the term everything being at the same time used in a sense so indefinite as to embrace not merely things in the nature of physical actualities other than persons, but also persons, incomes, rights, representatives of property, titles, trusts, conclusions of law, debts, and in short any act of assessing capable of resulting in the obtain- ing of revenue. As a logical consequence of this idea, the * This history of the law aflFecting valuation is told in the first report of the commission appointed to inquire into the subject of local taxation, presented to Parliament in December, 1898. GENERAL PROPERTY TAX. 393 exemption of anj'thing from taxation is furthermore held to be not only impolitic bnt unjust, and if made necessary by circumstances, as something to be regretted. The general property tax for general State purposes exists in all but four of the States of the Federal Union — Delaware, New Jersey, Pennsylvania, and Wisconsin. In Delaware there has been no property tax since 1877, as its expenses are defrayed mainly by licenses and taxes on rail- roads. In New Jersey there is only a school tax on prop- erty, but no property tax for general State purposes. In Pennsylvania the State tax is levied only on personal prop- erty. In Wisconsin the so-called State tax is levied only to defray the interest on the debt, and for the purpose of contributing to the university (one-eighth-mill tax), schools (one-mill tax), and expenditures on account of the insane. But there is no property tax for general purposes. In addition to these four cases a property tax is levied in Vermont only in case the corporation taxes do not suffice to pay the entire expenses of the State. — Seligman, Finan- cial Statistics of the American Commonwealths, 1889* * The statutes of Massachusetts enacted for making this sys- tem of taxation effective, and which have been substantially adopted by most of the States of the Federal Union, thus specify the objects, persons, and property that shall be subject to taxa- tion: Section 1. A poll tax shall be assessed on every male inhabit- ant of the Commonwealth above the age of twenty years, whether a citizen of the United States or an alien. Sec. 2. All property, real and personal, of the inhabitants of this State, not expressly exempted by law, shall be subject to taxation. Sec. 3. Real estate, for the purpose of taxation, shall include all lands within this State and all buildings and other things erected on or affixed to the same. Sec. 4. Personal estate shall, for the purposes of taxation, in- clude goods, chattels, money, and effects, wherever they are, ships and vessels at home or abroad, money at interest, and other debts due the persons to be taxed more than they are indebted or pay interest for, but not including in such debts due any loan on mortgage of real estate, taxable as real estate, except the excess of such loan above the assessed value of the mortgaged real estate, public stocks and securities, bonds of all railways, including street railways, stocks in turnpikes, bridges, and moneyed corporations, within or without the State, the income from an annuity, from ships and vessels engaged in foreign carrying trade, and so much of the income from a profession, trade, or employment as exceeds 26 394 THE THEORY AND PRACTICE OF TAXATION. Equally popular and plausible is the argument by which this assumption, and the administrative system based upon it, is upheld and defended. " Is not all property," it is asked, " either directly or through its owner, protected by the state or sovereignty ? " " Do not all persons owe allegi- ance to the state ? " And if so, " why should not all per- sons and property contribute to the requirements of the state for revenue in proportion to their ability ? " But, popular and plausible as are the arguments and assumptions for such a system of taxation, which, in the ^jvV( Vcase of the United States, has been made operative under ' V*^ \.\'' State, municipal, and local governments over the persons, \^ property, and business of over seventy millions of people, and fortified by a vast amount of adjudication, it will re- quire but little investigation and analysis to satisfy any one who can divest himself from the influence of old prejudices of the truth of the following propositions : First, that the assumption that it is necessary to assess everything in order the sum of two thousand dollars a year; but no income shall be taxed which is derived from property subject to taxation. The statute exempts from taxation the property of the United States and of the State; of the literary, benevolent, charitable, and agricultural institutions or societies incorporated within the State; all property of the common-school districts; the household fiuniture of every person not exceeding one thousand dollars in value, and wearing apparel ; farmers' utensils, not exceeding three hundred dollars in value; houses of religious worship; mules, horses, and neat cattle less than a year old ; swine and sheep less than six months old; and "the poHs and estates of persons who by reason of age, infirmity, and poverty are unable to contribute fully to the public charges." " Xo ship or vessel, unless actually engaged in foreign trade, or in part undergoing repairs, shall be deemed to be engaged in such trade." The statutes of the State of New York to the same effect are more concise, but equally comprehensive. They provide: 1. " All lands and all personal estate within this State, whether owned by individuals or by corporations, shall be liable to taxa- tion, subject to the exemption hereafter specified. 2. " The term ' personal estate ' and ' personal property ' shall be construed to include all household furniture, moneys, goods, chattels, debts due from solvent debtors, whether on account, contract, note, bond, or mortgage, public stocks and stocks in moneyed corporations; they shall also be construed to include such portion of the capital of incorporated companies, liable to taxation on their capital, as shall not be invested in real estate." DEFECTS OP THE METHOD. 395 to tax equitably involves an impossibility, and therefore unavoidable inefficiency, injustice, and inequality in ad- ministration; second, that, as popularly used in respect to matters pertaining to taxation, the term property is made to apply equally to entities and to symbols or non-entities, which is in itself an absurdity ; and, finally, that the out- come of all this is a system which powerfully contributes to arrest and hinder natural development, to corrupt society, and is without a parallel in any country claiming to be civilized. And, in illustration of this latter point, it may be added that, notwithstanding recent discussions and pub- lications, this whole subject is yet so unfamiliar to the people of the United States that probably nine out of ten of its best-informed and collegiate educated citizens, and even members of the bar, take it for granted that the method of assessing and collecting taxes for local and municipal purposes is substantially the same all the world over; and would be greatly surprised to find on investigation that the American system is one of the things that is exclusively American and so little esteemed by the people of other countries as to be for such reasons strictly " non-export- able." Taxation of Real Estate. — Attention is first asked to the defects of this system in respect to the taxation of real property. Here everything, as the term implies, is real, tangible, visible; something which can not be con- cealed ; something which can not, under any circumstances, be removed beyond the jurisdiction of the State, except by transfer to the Federal Government; something concern- ing which the laws and decisions of the courts harmonize rather than conflict. In the valuation of real property, furthermore, it is possible to apply such tests and verifica- tions as will restrict the errors of estimate within compara- tively narrow limits. It would also seem as if the law as it exists upon the statute books of most of the States was sufficiently clear and explicit in its declaration and man- date. Thus the language of the statute of the State of New York is as follows : " All lands within this State, whether owned by indi- viduals or corporations, shall be liable to taxation. The term ' land ' shall be construed to include the land itself, all buildings, structures, substructures erected upon, under, 396 THE THEORY AND PRACTICE OF TAXATION. or above, or affixed to the same; all wharfs and piers; all bridges; all telegraph lines; all surface, underground, or elevated railroads and the iron thereon; all mains, pipes, and tanks laid or placed in, upon, above, or under any public or private street or place; all trees and underwood growing upon land ; and all mines, minerals, quarries, and fossils in and under the same." In most of the States of the Federal Union the tax laws require that the assessment of all property shall be at its full and fair cash value ; and the judicial authorities of the United States have furthermore held that the require- ment of approximative equality inheres in the very nature of the power to tax, irrespective of any constitutional or statute provisions. In the State of New York each assessor on the comple- tion of his official labours subscribes an oath of which the following is the material portion: " We do severally depose and ^wear that we have set down in the foregoing assessment roll all the real estate in , according to our best information, . . . and that we have estimated the value of said real estate at the sums which a majority of the assessors have decided to be the full value thereof." And the law further provides that " every assessor who shall wilfully swear false in tak- ing and subscribing said oath, shall be guilty of and liable to the penalties of wilful and corrupt perjury." It is difficult to see how language, other than this, could be made more clear and explicit ; and it is accordingly evi- dent that if the law fails in its execution, as it certainly does, the fault is not in the statute but in its adminis- tration. Let us now see what are the acknowledged facts in re- spect to the valuation of real property in New York and other States where the observance of substantially like con- ditions are imperative. In some instances in New York the valuation of real estate for taxation is reported as low as twenty per cent of its real value. In a majority of cases in the country the rate varies from twenty-five to thirty-five per cent, and rises in the cities to fifty and possiblv sixtv per cent of the maximum. In one case, mentioned in the report of the State assessors n 1879, two adjoining counties of the State ASSESSMENT OP REAL ESTATE. 397 made a difference of twenty thousand dollars per mile in assessing the same railroad. In short, there can not prob- ably be foimd a single instance in the whole State, unless possibly in the case of certain unoccupied lands, the prop- erty of non-residents, where the law as respects the valu- ation of real property is fully complied with, and where the oaths of the assessors are not wholly inconsistent with the exact truth. The official reports of other States abound with like reports of flagrant inequalities in the assessment of real property. As a rule, where assessors are dependent for their tenure of office on political favouritism, there is no pretence, notwithstanding their oath, of complying with law.* When, as is often the case, a State tax is appor- tioned to the several counties of the State, and by the counties to their respective towns, there arises a double competition between assessors of counties in the aggre- gate and of the towns for making the lowest possible valu- ation of property, especially real estate. In a large number of States (twenty-one in 1890) an attempt has been made to correct the undervaluation of property rightfully subject to taxation by creating boards of equalization, with power to raise or lower the valuations of county officials, with a hope of securing substantial uni- formity; but this measure has not been successful, and the most intelligent members of such boards have recorded their opinions that it is impossible under the present systemy to effect any ju,st distribution of the incidence of taxation. * " The strife between counties to reduce assessments has not ceased, and in all probability will not, as lon^ as assessors are elected, or selfishness be a passion in the human breast." — Report of the California State Board for the Eqtialization of Taxes, 1885-'86. I CHAPTEE XVIII. THE EXISTING METHODS OF TAXATION. PART II. Taxation of Personal Property. — Great, however, as may be the inequalities in the valuation and assessment of real property, those which obtain in respect to personal are so much greater as to almost preclude the idea of com- parison. In the incipient stages of society, when property con- sisted almost or quite exclusively of things tangible and visible — lands, buildings, slaves, horses, cattle, ships, house- hold effects, and implements — when railroad shares, bonds and mortgages, certificates of deposit, and all the multi- farious forms of credits and evidences of debt, by -which we are enabled to-day to secure interests in land or in visible, tangible personal property in the possession of others, were absolutely unknown,* and when the rate of taxation was comparatively small, the theory under con- sideration was not impracticable in its application, and, under most circumstances, afforded but little opportunity for the working of injustice in respect to arbitrary dis- criminations in assessing. For when personal property was of a visible and tangible character there was no opportunity to conceal its ownership and to avoid the tax. Each mem- ber of the community furthermore took a sufficient interest in his neighbour's affairs to see that justice was done in this regard. This kind of friendly interest found expres- sion in Ehode Island in a law that was passed in 1673, by which it was provided that, under certain circumstances, a citizen might be required " to give in writing what pro- * Of the evidences of wealth owned by one of the richest fami- lies in the United States, almost the whole did not have an exist- ence as recently as the year 1840. 898 EXTRATERRITORIAL TAXATION. 399 portion of estate and strength in particular, he guesseth ten of his neighbours, nameing them in particular, hath in estate and strength to his estate and strength." It is only fair to add, however, that this law was intended to pre- vent tax-dodging, and only required a man to guess with respect to the relative size of his neighbours' estates to his own, when he himself was suspected of having under- valued his own estate. Very curiously this ancient law and practice find expression to this day in Rhode Island in the circumstance that no citizen of that State is qualified to vote upon any proposition to impose a tax, or for authoriz- ing the expenditure of public money, that has not paid a personal property tax six days preceding such day of vot- ing. Lists of persons who are or may be qualified to vote generally are published and placarded before election, with prefixes to each name, showing the electoral qualification of its representative on the list, whether the same is depend- ent on real estate or personal property taxation. Any per- son who shall take down or destroy this list once placarded is liable to a fine of three hundred dollars, or three months' imprisonment. Then again very little of a citizen's property was situ- ated without the territorial Jurisdiction of the taxing power, or indeed without the territorial limits of the hamlet, town, or city in which the citizen lived. Then a man could not very conveniently live in one place and do business in an- other. Within a century an English court has declared a contract invalid which stipulated that one of the parties thereto should do an act in London and Oxford the same day, because the stipulation involved in this particular an impossibility. Now the distance involved could be trav- ersed in about an hour. The nature of property, as well as the means for moving it, was also such as to render all transportation difficult, and rapid transportation impossi- ble. The discrepancy in taxation as respects different places was also so small that no great advantage could be gained by shifting one's residence or property for the sake of evad- ing taxation; and the difficulty and inconvenience of so doing were so great that the temptation could hardly have existed. But even in the most simple condition of society the practical application of what may be properly termed the " infinitesimal " system of taxation must have been al- 400 THE THEORY AND PRACTICE OF TAXATION. ways attended with great difficulties, for the reason that it involved and necessitated personal inquisitions, than which there is nothing in gov^-nment that men more dislike and resist; and, in the language of a committee of the French National Assembly of 1789 (of which Talleyrand and La- rochefoucauld were members), the recognition and prac- tice of which, by any government, is something inconsistent with, and antagonistic to, the maintenance of a free people. It is not generally known, furthermore, that Alexander Hamilton, as a member of the conventions which framed the Constitution of the United States and the first Consti- tution of Xew York, gave all his influence in favour of the restriction of all internal or local taxation to visible, tan- gible objects, and to the assessment of these specifically, and by some uniform and simple rule. The language used by him in one of his papers on this subject is as follows : " The genius of liberty reprobates everything arbitrary or discretionary in taxation. It exacts that every man, by a definite and general rule, should know what proportion of his property the State demands. Whatever liberty we may boast in theory, it can not exist in fact while (arbi- trary) assessments continue." * Again, had nothing come down to us in English history from the time of Edward III, other than one of the assess- ment rolls of that period (when there was little or no prop- erty capable of taxation but what was visible and tangible), the evidence would be complete that the mass of the Eng- lish people were but little better than slaves; for the mere inspection of such rolls shows that their preparation in- volved such an inquisitorial scrutiny into domestic life, such a seeing, handling, enumeration, and minute valua- tion of everything in the household, from the utensils of the kitchen to the furniture of the bedchamber, as to make personal freedom, or a sense of self-respect, on the part of the taxpayer who submitted to such a scrutiny, almost an impossibility, t * The Continentalist, No. VI, in Works of Alexander Hamil- ton (Lodge's edition), vol. i, p. 270. t A copy of an assessment roll of the time of Edward III {1329-'67) given by Lingard, in his History of England, contains a list of articles, down to a towel and a bench; and the historian notes that in the returns are carefully mentioned the very rooms INTANGIBLE PROPERTY. 401 And in this connection it is instructive to again refer to the famous insurrection of English yeomen and peasants under " Wat " the Tyler, in the reign of Richard II, the successor of Edward III, which originated directly in the attempt of a tax-gatherer or assessor to ascertain, by brutal personal examination, whether a daughter of " Wat's " had attained the age of puberty, and in consequence had so be- come liable to enrolment for capitation assessment. But to whatever extent simplicity in the elements of property simplified the original methods and ideas in re- spect to local taxation, the problem involved rapidly changed, and became more and more intricate as increas- ing population, and increasing commerce, and intercom- munication, required that property should, to a great extent, be put into a condition to admit of being readily mobilized, in order to allow of its most profitable use and application. Thus a large part, in fact the larger part, of what is to-day termed " personal property " in every civilized state is of the most intangible character, and in great part invisible and incorporeal : such, for example, as negotiable instru- ments in the form of bills of exchange, state, municipal, and corporate bonds, and the multiplied forms of evidence of indebtedness, certificates of stocks, copyrights, patents, legal-tender notes, etc., all of which, if entitled to the name of property, is, through a great variety of circumstances, constantly exposed to fluctuations in value, frightful in amount, and incalculable in their suddenness, and under the influence of which wealth vanishes as if by the wave of a magician's wand. It is offset or measured by indebt- edness which may never be the same one hour with another ; is easy of transfer, and, as essential to using, is in fact con- tinually transferred from one locality to another, and from the jurisdiction of one state to the jurisdiction and laws of another and a different state; is here to-day, gone to- morrow ; is burned, sunk at sea, lost in mines, patents, rail- ways, factories, trading associations, and in a thousand other different ways. It has been recently said that five men who do business in Boston can together control or dis- in which the articles were found, and that there were no exemp- tions except one suit of clothes for each person, which were sup- posed to be included in the tax levied on the poll or person. 402 THE THEORY AND PRACTICE OP TAXATION. pose of an amount of property which equals one fifteenth of the entire assessed valuation of that city; and that they could, if they pleased, carry round the evidence of the existence of that property in their coat pockets, or, accord- ing to popular theory, the property itself. For the purpose of ascertaining the amount of taxable personal property owned by individual citizens two methods have been employed in the United States : 1, In several States, such as Massachusetts, Connecti- cut, and Illinois, the taxpayer is required to give each year to the assessor a detailed and verified statement, carefully itemized, of all the personal property owned by him or under his control and of every kind, sort, and description. This method is generally known as " the listing system." In several of the States the principle that a State can only tax that which is within its territorial jurisdiction is ignored, and even visible tangible property situated outside of the taxing State is required to be returned for the pur- pose of taxation. 2. The other and more general method of ascertaining taxable personal estate is that which is exemplified in the State of New York, by which the assessor guesses at the personal property of the victim, and places him upon the list at such a figure as either his information or imagination sustains him in considering to be that which justly repre- sents the personal estate of the taxpayer.* In view of the fact (made certain by all experience) that very few returns of personal property, even when sup- ported by oaths, are worthy of implicit credence, the posi- * " In a ease involvinjj the assessment of personal property, in one of the courts of this State a few years ago, an assessor in one of our cities testified that his method of ascertaining what personal property a taxpayer owned was to examine the direc- tories, the county clerk's office, and papers relative to estates of deceased persons; and when he lacked definite information, to guess at the assessment from the place of business or of residence occupied by the taxpayer. If the tax was cheerfully paid for two or three years, the personal assessment would then be ' marked up.' This process of increasing the personal assessment went on until, as the witness graphically said, the taxpayer ' squealed.' when the amount was finally fixed at what the taxpayer would bear without swearing it off." — Address on the Taxntinn of Per- sonal Property, hy Jvlien T. Dnvies, before the Manhattan Single Tax Club, January, 1891, Neio York. ASSESSING PERSONAL PROPERTY. 403 tioEL of the assessor who honestly desires to enforce the law is one of great difficulty and embarrassment. For, in the absence of some superhuman power which will permit that to be seen which to ordinary vision is invisible, and to know what, through the exercise of ordinary reason, can not be known, any attempt on his part to obtain independ- ent cognizance of such commercial and financial instru- mentalities for the purpose of valuation and assessment is, on its face, an impossibility; and if the co-operation of the person to be assessed is to be invited or relied on, two of the most powerful influences that can control human action — love of gain, or the unwillingness to part with property, and the desire to avoid publicity in respect to one's private affairs — immediately unite to oppose and pre- vent such co-operation. A resort to personal inquisition, with the accompanying machinery of oaths, " dooming," and penalties, is next in order ; under which the State, ignoring all rules enacted for the protection of debtors in the ordinary collection of debts, pursues the citizen for the collection of what it claims to be a debt, with no better result, in nine cases out of ten, than the impairment of the public sense of both justice and morality. But it is claimed that each individual owes the State annually a certain sum of money in the way of taxes, pro- portioned to his entire property. If he voluntarily pays, he escapes arbitrary measures. If he declines to pay, or tries to avoid payment, he has no just cause to complain if he is regarded in the light of a criminal, or if the same arbitrary measures are used to collect his tax as if it were a debt owing by one citizen to another. Let us examine this averment. If the defaulting taxpayer is to be regarded as a crimi- nal, and as such placed in the worst possible light, he cer- tainly ought not to be deprived of the privileges of a crimi- nal, which are a right to a public investigation according to the rules of evidence adopted by free and enlightened communities, a right to be heard before condemnation, and the right to be presumed innocent of having property subject to taxation until the fact is ascertained otherwise by legal proof. But under the existing tax laws of most of the United States there are not accorded to the taxpayer 404 THE THEORY AND PRACTICE OF TAXATION. the privileges of a criminal; for no tax can be assessed on a large proportion of the personal property of the State according to any rules of legal evidence that any common law court would adopt. No assessor, under the laws of New York, for example, in assessing personal property, can act judicially. The law gives him no power to obtain legal testimony of a character that is admissible in court; he must act the part of an arbitrary despot against an incul- pated taxpayer, or not act at all, and his conclusions for acting must be reached at best by the testimony of those who have no means of knowing anything, in a legal sense, about the subject-matter under investigation. It seems clear, therefore, that any attempt to tax without legal evi- dence is an act of usurpation or despotism, wholly antago- nistic to the principles of a free government, and that it is a mockery to characterize such acts as, in any sense, judi- cial proceedings. Nor does the right to reduce or regulate the assessment by the oath of the taxpayer relieve the law, in any degree, of its unequal and despotic character; for every individual holding public office knows that oaths, as a guarantee of truth, in respect to official statements, have ceased to be of any value. The assessments made according to the oaths of parties, furthermore, are not made according to legal evidence, upon examination and proofs; but ac- cording to the will and secret caprice of each taxpayer, instigated by his selfishness and the natural depravity of human nature. Each taxpayer, under the present rule, becomes, therefore, the interpreter not only of the law but of the fact, and makes a secret interpretation of both, and we have as many interpreters of the law as there are num- bers of taxpayers; and also an indefinite multiplicity of assessors; for each person who unfairly reduces his own assessment arbitrarily assesses thereby some other of the community for the difference. Could or would any people apply the same rules for the collection of debts? Is there any one who has so much confidence in human nature that he will propose a law that a person who is sued shall be discharged from all claims of indebtedness if he will make oath, interpreting both the law and the fact him- self, that he owes the claimant nothing? Is it believed that under tariff laws the government could get sufficient revenue to pay for its collection if the importer was per- HONESTY OF RETURNS. 405 mitted to offset debts against the value of his goods ; or if the law was peremptory that his oath alone should be given, and that there should be no legal examination, in- spection, or proof of the value or character of the impor- tations ? In whatever aspect, therefore, we regard the present! popular system of local taxation in the United States, it\ is arbitrary and in violation of the principles of constitu- i tional government. If the assessor acta* he acts solely by his despotic will, and without any reference to legal proof or evidence, such as is enforced in recovering private debts ; ; and if the taxpayer, by his oath, becomes the arbiter, his will is supreme and not subject to investigation or control. It is a system, in short, that violates all the laws of evi- dence, the growth of centuries in civilized countries ; that makes secret that which should have publicity, and proceeds ' upon a basis that could not be recognised for one moment in the collection of debts, or in the trial of persons accused) of the most heinous of offences. Such, then, are the difficulties which all experience has shown to be attendant upon every attempt to tax personal property of an intangible and invisible character, and which all who have investigated the subject acknowledge to be in- superable. As not a few, however, who are ready to make this acknowledgment nevertheless insist that all personal property that is visible and tangible and can not be con- cealed, but can be reached effectively and equally, ought to be taxed ; and as the drift of popular sentiment in the United States at the present time favours this assumption, it is important to next consider the nature and extent of the results attainable by intelligent and faithful assessors acting in conformity with it. As the experience, however, of the States that have en- acted the most precise and stringent methods of taxation proves beyond question that the returns of the owners of visible, tangible personal property, even when supported by oaths, will not, as a rule, afford a basis for the correct valuation and assessment of such property, the further as- sumption is warranted that the attainment of such a result in even an approximate degree must depend on the personal visitation and inspection of the most intelligent and honest assessors. And here at the very outset of the 406 THE THEORY AND PRACTICE OP TAXATION. prospective investigation its inherent insuperable difficul- ties begin to manifest tliemselves. Thus a large proportion of the so-called personal prop- erty of every highly civilized country which is not intan- gible and invisible, and which requires only ordinary per- ception for recognition and valuation, is in the nature of instruments or subjects of commerce between states and nations; such as railroad machinery, ships, steamboats, immense stocks of fl-aw and manufactured products accumu- lated in store for the sole purpose of movement, or actually in transitu. As a matter of fact the granaries for no small portion of the surplus stock of the world's cereals are at the present time ships and railroad cars in the process of movement to the points of greatest demand for consump- tion. What shall be the situs of all such things for assess- ment? If actual location is to be determinative, then a product of grain, or merchandise, which, in movement for a market, or conversion into other forms, may happen to be in Illinois in April, in Ohio or Massachusetts in May, in New York in July, in New Jersey in August, and in Connecticut in October, will be liable to five separate taxes in one and the same year ; for the laws of each of these States require their assessors to return, for taxation, all such property as at the periods mentioned may be actually within the sovereignty and jurisdiction of the taxing au- thority. If, therefore, the existing system of taxing visible and tangible personal property in the United States is to be continued and made equitable and effective, the first essen- tial step for the purpose of making it such, by preventing evasions and avoiding duplicate taxation on one and the same persons and property, is for all the States to agree that all their assessors shall make their visitations, inspec- tions, and appraisements for the purpose of assessment on one and the same day, as, for example, the first day of April. The following probable forecast of the result has been made by a recent writer : " On the appointed day, all over the country, a swarm of assessors must besiege the factories, mills, shops, and stores for the purpose of making an honest valuation of all merchandise on land. This valuation must be completed in one day; or otherwise Smith's valuation being com- ASSESSMENT DAY. 407 pleted on April 1st, while Jones's is left to April 2d, there will be a midnight exodus of easily portable goods from Jones to Smith, so that one assessor shall find little of value in the possession of Jones on April 2d. No help must be asked in the work of valuation from the owners or clerks; for if that is done, the assessor might just as well accept the sworn returns of the owners, as is done now, with the most ludicrous and inequitous results. As it is evident also that it would be impossible for the owners themselves to make such a valuation in one day, even with the aid of all their clerks, there must be a number of assessors employed, exceeding all the number of persons em- ployed in holding and selling merchandise. The work might, however, by extreme diligence be done in a rough M^ay by two million local assessors. As it would take them at least three days to tabulate, copy, and file their returns, besides the one day occupied in valuing, each would serve at least for four days ; and if paid at the rate necessary to procure men competent for the task, the lowest cost of such an assessment, independent of printing and station- ery, could not be properly estimated at less than forty million dollars. " Again, on ' assessment day,' there would be universal concealment of all articles of small bulk and great value. Watches, jewels, gold, money of all kinds, and every like conceivable thing would vanish from sight. Men would walk about stuffed with valuables. Old stoves, pots, and pans would be filled with money and jewels. Valuable goods which could not be hidden would be covered with dust or otherwise made to look almost worthless. In every mill and factory manufactures would be kept in an un- finished state, as far as possible, until assessment day had passed. A thousand devices would be resorted to in order to reduce the apparent value of the things which the assessor would inspect, or to prevent him from seeing them at all. " In order to make this plan of official valuations suc- cessful, the assessors must enter every room in every house and strip naked every man and M^oman whom they suspect of concealing taxable property. This is the only way in which visible, tangible personal property ever was or ever can be fairly, equally, and effectually taxed. 408 THE THEORY AND PRACTICE OF TAXATION. " And, when all this was done, the system would none the less fail. It could not be made even approximately cor- rect. Every article would be valued very much too high or very much too low. Nor would the average produce any fair result. The goods of Jones would be appraised at two hundred per cent of their real value; the goods of Smith at ninety per cent ; and the goods of Brown at fifty per cent. • Jones would thus l)e cheated heavily, and Smith moderately, for the sole benefit of Brown." * On the other hand, if the fiction of law, that personal property follows the owner, is to govern, then all such I property may be taxed where it is not, and be exempt from taxation in the place where it actually is, and where it shares in the benefits that flow from the protective ex- penditures — police, fire department, etc. — which are inci- dent and necessary to the locality. Or, as is very often and perhaps most usually the case, the same property is sub- jected to double taxation; and as a proof that this latter supposition, which seems on its face an absurdity, is a matter of constant experience, it may be mentioned that some years since, and probably at the present time, a well- known publishing house was regularly taxed in Cambridge, Mass., for so much of its stock in trade as was kept in store and permanently employed in business in New York city, although it was admitted that the same tangible, visi- ble property was at the same time regularly taxed by the New York authorities ; and, furthermore, when a protest was made to the Massachusetts authorities against the continuance of this injustice, the decision was rendered, that under existing Massachusetts statutes the plundered taxpayer could have no remedy except by change of busi- ness or change of (State) residence. Again, if a foreign banker subscribes to any of the State or municipal loans of the United States, the bonds or other evidences of indebtedness which he receives in ex- ; change for his money are exempt from taxation by reason I of his nonresidence ; but if a resident widow or maimed \ soldier be moved by the desire for security to purchase a 1 little of the same loan, the small rate of interest which * Taxation of Personal Property, Impracticable, Unequal, and Unjust. By Thomas G. Shearman. New York, 1895. FARMERS' AND MERCHANTS' TAXES. 409 such investments generally carry will be made still smaller ^ to all such persons, by reason of an annual tax of from one > to two or a greater percentage imposed on the holders, for ' the simple reason that they are residents; although the protection afforded to the latter is in no degree different ' from or greater than that afforded to their more fortunate and rival foreign competitors, who reside where such taxes . are not imposed; all of which is equivalent to saying offi- | '"^^ cially that whenever an American loan, particularly de- I ' . ' sirable for trust investments, is created, it shall be sacredly reserved for foreigners, or that bad portion of citizens of , the United States who have no scruples about cheating the assessors. Local subscriptions to local indebtedness, with the augmentation of interest in the locality which would necessarily follow, are therefore discouraged; while to the American citizen who ventures to subscribe, residence is made an offence and coupled with a penalty. In the case of agriculturists, who constitute more than half the population of the country who follow gainful occu- pations, their personal property, consisting mainly of farm animals, implements, and farm products, is always readily open for inspection, and has a nearly uniform value throughout the country. The personal property of farmers is accordingly more completely reached and more accu- rately valued by honest assessors than the property of any other class of the population. Consider next the case of merchants. " What assessor, however honest and competent, can personally value all the stock of even one store, not to say the stock of all the stores in his district? Fancy an assessor making a personal appraisal of the stock of fifty drug stores, a hundred dry- goods stores, and as many groceries ! In one store there are hundreds of different articles at different prices, by the yard, or the pound, or the gallon. Bales of goods lie side by side ; some worth four cents a yard, some ten cents, some two dollars. The difference between goods worth one dollar a yard and those worth two dollars is often imperceptible to the eye of any one but an expert. But how can an assessor have time even to open all those bales, to look at them, much less judge accurately of their value? All the assessors of New York city could not approximately value the stock of one of its great drygoods merchants without 27 410 THE THEORY AND PRACTICE OP TAXATION. relying upon the word of his clerks. Therefore the stock of merchants and manufacturers would be assessed upon the valuation given by themselves, as in fact it is now. Thus the assessment of ' visible and tangible property/ in these important cases, is made and must be made in exactly the same manner as the assessment of bonds, notes, and other invisible property, resulting in a double or treble burden upon the simple and truthful as compared with their unscrupulous neighbours." And, finally, as regards so much of other " personal property " as is tangible and visible, and clearly within the territorial jurisdiction of the taxing power, such as articles of personal adornment, clothing, furniture, works of art, musical instruments, books, etc., shall we assume that we have here a class of articles on which it is desirable to levy taxes? Of course, the popular answer will be in the affirmative; for are not all these objects, it may be asked, the very ones best fitted to sustain taxation? and are they not in great part luxuries rather than necessaries? But how, it may be asked, are you going to tax them ? for it is reasonable to suppose that if they are to be taxed, it is to be by a system that works equitably, and not by a system which, by taxing A, and letting B, C, and D escape, brings the law into contempt ; and, by making the sense of the commission of a wrong on the part of the State the excuse for the commission of another wrong on the part of the individual, gradually undermines the morality of a community that does not wish to be dishonest. An even approximately correct valuation of the above- enumerated articles is, however, a matter of great diffi- culty, and none but an expert can effect it. In very many houses there are many articles, like bedding, carpets, pic- tures, glass, porcelain, and the like, which exhibit few out- ward indications of undue value, and yet whose cost was very many times greater than similar articles in ordinary use. In fact, in proportion to the wealth of the taxpayer would be the failure of the most honest assessor to esti- mate the true value of his property. Some years ago a State tax commission in Illinois, with a view of aiding assessors to discover and rightly assess property of the character under consideration, recommended to the State Legislature the enactment of a statute whereby every EXEMPT PERSONAL PROPERTY. 411 woman of " full age and sound mind," either directly or by her representative, should annually return to the assess- ors a statement of the value of all the jewelry, household furniture, and all other property in her possession; but these recommendations never received any higher consid- eration from the public than that of being denounced and laughed at. And most naturally; for what woman would tell her age or the amount and value of her jewelry and finery, and more especially to a stranger invested with brief official authority as an inquisitor and assessor? Again, a very large part of what is termed " personal property " is, through the necessities, policy, or organiza- tion of governments, made exempt from taxation; as, for example, all instrumentalities and property of a govern- ment — national. State, or municipal — ^especially the bonds, notes, currency, and certificates of indebtedness issued by the United States. The several States also generally exempt or lightly tax the deposits and surplus of savings banks, the accumulations of mutual insurance companies, the property of charitable, religious, or educational organi- zations, and also a comparatively small amount — but large in the aggregate — of personal property in the form of household furniture, clothing, working tools, vehicles, and animals, and the produce of farms not sold but consumed by the producers ; and that the present tendency of State legislation is furthermore to continually enlarge the list of exempt property. The aggregate money value of such exemptions can not be accurately stated, but there is reason to believe that they include about one fifth of all the per- sonal property of the United States.* * The New Jersey State Board of Taxation, in their annual report for 1895, call attention to the fact that, out of the total amount of assessed property in that State in 1894, nearly ten per cent, or $72,786,571, was exempt from taxation. The amount of tax exemptions in Newark, N. J. (a city which within recent years has been nearly bankrupt by excessive indebtedness and taxation), is reported for 1897 at $18,076,568, made up in part as follows: Churches, $4,081,750; private schools, $196,900; city property. $4,924,950; cemeteries, .$89.3,800; charitable institutions, $1,231,700; public parks, $4,654,867. Soldiers' and sailors' widows have exemption to the amount of $523,675 ; firemen, $79,445 ; the National Guard, $36,475. Ihese figures do not include the railroad exemptions, which are under the charge of the State Tax Com- missioners. 412 THE THEORY AND PRACTICE OF TAXATION. Taxation of the Instrumentalities of Commerce, — Extensive as has been the foregoing review of the in- herent difficulties attendant on the attempt to equitably and efficiently tax personal property, the results of taxing the instrumentalities or objects of commerce are especially worthy of additional notice in this connection. A little reflection ought to abundantly satisfy that to tax the instrumentalities or objects of commerce in one locality, and to exempt the same from all direct taxation in another, will clearly not permit the former to enter a common market on an equal basis for competition with the latter. And yet this unjust discrimination is exactly what does result from the attempt of a majority of the States of the Federal Union to tax all such instrumentali- ties or objects under the general head of personal property, and the exemption of the same classes of property from any corresponding assessment in the British provinces of North America, and in all foreign countries with which the United States enter into extensive commercial intercourse and competition. Boards of trade and commercial con- ventions may pass " deploring " resolutions concerning the decay of American commerce, and committees of Congress may continue to investigate the same subject, but so long as ships, engaged in the carrying trade on the free ocean, and owned in Canada, England, France, Germany, and Hol- land, are not directly taxed, and ships engaged in compe- tition in the same business, and owned in Portland, Boston, Baltimore, New Orleans, and San Francisco, are taxed, and taxed heavily, commerce will incline to move in the paths which are made easy and profitable to it. The dif- ference in cost of a single penny per bushel in laying down grain at Liverpool may alone be determinative of the question whether millions of bushels shall be supplied by the wheat fields of the United States or those of Eussia, India, or Hungary. " As a rule, the States of the Federal Union tax ship- ping as other property is taxed, regardless of the fact that the other leading maritime nations usually impose no taxes on shipping as property, but tax only the actual earn- ing of shipping; assuming doubtless, and correctly, that from the very nature of its use shipping can not fairly share in the benefits which accrue from State and munici- INSTRUMENTALITIES OF COMMERCE. 413 pal taxation for public purposes. In short, when a vessel is fulfilling the function for which it is built, it is navi- gating the ocean, remote, except during brief stay in port, from the fields and purposes to which State and local taxes are applied." Only one State — Delaware — exempts shipping from all taxation ; New York and Alabama exempt so much of their shipping as is engaged in foreign trade; Massachusetts, New Hampshire, and Connecticut tax the earnings only of their shipping in foreign trade ; and, under decision of the United States Supreme Court, Pennsylvania imposes no tax on its shipping in interstate or foreign trade. All the other States tax all classes of vessels as personal property, making no distinction between those engaged in foreign and domestic trade. The comparative burden of taxation on shipping in the United States and the maritime states of Europe finds practical illustration in the following examples : The city of Portland, Maine, levied more taxes in the year 1893 on its shipping (63,206 tons, valued at $909,000) than the Cunard Company paid to Great Britain in the same year on a valuation of their ships of nearly $9,000,000. The taxation of shipping at Charleston, S. C, is five times heavier than that levied by Great Britain or Germany. During the year 1893 the city of San Francisco levied taxes to the amount of $85,675 on its shipping, a sum within $600 of the combined taxes paid during the same year by the Cunard Line, the Hamburg-American Line, the North German Lloyd, and the Compagnie Generale Transatlantique of France to their respective Governments ; their combined shipping comprising upward of 700,000 tons of the best steel and iron steamships valued at upward of $58,000,000. And in addition to this oneroiis and (in comparison with other countries) discriminating burden of taxation on shipping, the income-tax act of 1894 imposed an additional and new tax of two per cent on the earnings of shipping in excess of $4,000, which would have fallen mainly on that portion of the United States merchant marine — i. e., the great American steamships — which is most exposed to foreign competition, and which it is re- garded as especially desirable to nationally foster. On the other hand. Great Britain, Germany, France, 414 THE THEORY AND PRACTICE OP TAXATION. and the Netherlands tax only the earnings of shipping — i. e., an income tax. Austria in 1894 suspended for five years all taxation of its vessels engaged in foreign trade. Under this system of vessel taxation by the great mari- time countries of Europe it is, furthermore, to be noted that the ownership of a ship that is idle and not earning does not entail any burden of taxation; but in the United States it makes no difference whether a ship be at work or idle, profitably or unprofitably employed, she pays taxes all the same. The experience of the several States in respect to the taxation of vessels affords, however, a very striking illus- tration of the facility with which obnoxious taxes are evaded in the United States, or shifted upon those who are less able to bear them, and is thus related in the Ee- port of the United States Commissioner of Navigation for 1894: "It is relatively an easy matter for the owner of several vessels to form a partnership with the resident of another State in which low taxes are imposed on ship- ping, and by allowing the vessels to stand in the name of such partner to escape the endeavour of the law to tax him more than his competitors in navigation are taxed. Thus, some years since, the authorities in Chicago decided to tax the shipping owned at that port on its full insurable value at the rate fixed for municipal taxes. The vessel owners of the city, in self-defence and to enable them to continue in business against competing ports, were com- pelled to make nominal transfers of their property, and thousands of tons of shipping, doubtless owned in Chicago, appear on the records of the National Bureau of Naviga- tion as owned in other States. Though in the number and tonnage of its entries and clearances Chicago ranks with the greatest ports of the maritime world, yet its apparent rank as a ship-owning port is insignificant." It is important also to notice how changes in the meth- ods of doing business, in the facilities for transporting persons and property, and in the constitution of society and standards of morality, antagonize and nullify the popu- lar ideas concerning taxation of personal property. Formerly (as has been already pointed out) a man could not conveniently live in one place and carry on business in another. But now men may live and be taxed STANDARD OF MORALITY, 415 at places where the taxes are light and do business every day in a city twenty, thirty, or fifty miles distant where taxes are high, and there be exempt from all taxation. And yet how are you going to prevent a citizen from decid- ing for himself where he will live and where, under the laecepted fiction of law that personal property follows the jowner, his personal property shall be taxed? Formerly, to bargain for the sale of goods in a place not farther removed than New York is from Boston or Philadelphia, transport them there, and receive the proceeds of the sale, was an affair of weeks. Now a man living in Boston may bargain for a sale of thousands of dollars' worth of goods in New York, transport them there, and receive his pay in the space of a single day. Nay, more. A man may acquire property and part with it at places on the opposite side of the globe with the greatest ease and security within the space of a few hours. A change in the standards of morality has been alluded to as antagonizing methods of taxation. Thus, not very many years ago, every man knew, at least approximately, the amount and kind of property of all his neighbours, and knew that his neighbours knew the same in respect to himself. " He was willing to admit, under oath or otherwise, ' what everybody knew ; and he would hardly dare to drive six cows to pasture every morning and swear in the afternoon that he had none." But now let us see from an indisputable experience of very recent date how the conditions of property and of morals have changed. Previous to January 1, 1889, the State of Connecticut, in accordance with common practice, taxed personal prop- erty in the form of bonds and notes from one to two or more per cent, wherever it could be found. The result was that the State from the outset could never reach for assessment but a small fraction of such property, although every citizen was required to annually submit a list to the assessors and make oath that he had included in it all property of the character in question; and this fraction, furthermore, tended to rapidly decrease. Thus, in the so- called grand list or aggregate valuation of the State for the year 1855, the value of the notes, bonds, and money at interest made subject to assessment constituted about ten per cent of the entire taxable property of the State. 416 THE THEORY AND PRACTICE OF TAXATION. In 1865 it was about seven and one half per cent; in 1875 a little over five per cent, and in 1885 about three and three quarters per cent; and yet during the period covered by these statistics it is probable that the amount of State, railroad, municipal, and farm-mortgage bonds owned by the citizens of Connecticut increased to an extent equal to at least one half the valuation of all the other property in the State returned and made subject to taxation. In 1855 the inhabitants of eighty-one towns of the State did not own a single mortgage bond. Not a bond was returned as owned in the rich city of Meriden. The twenty thou- sand inhabitants of the thriving city of Waterbury by their united efforts managed to scrape together only seven hun- dred and fifty dollars in bonds. So far as cash is con- cerned, there was never a community since mankind emerged from a state of barter that got along with so little. In 1889, however, the Legislature of Connecticut modified her former statutes, and provided that the owners of all notes and bonds who would register them with the State Treasurer, and agree to pay in advance a tax of one fifth of one per cent per annum for a period of five years, should be exempted from all further State or local taxation on the same. Jfote now the results. The law in question went into operation on the 1st of August, 1889, and between that date and the 1st of January succeeding, something over $30,000,000 of bonds and notes were registered under the modified assessment,* of which the treasurer in his report to the Legislature says, " Probably at least three fourths have never paid any taxes whatsoever." Here, then, within five months was uncovered to the taxing power a quantity of what the law makes property in excess of $22,000,000, and returns are still being received in large volume. The conclusion, therefore, seems to be that there is a good deal of conscience in the highly moral State of Connecticut which can be induced to cheat and forswear on a two-per-cent tax, that can not be bribed on a tax of one * For succeeding years the amounts registered with the State Treasurer were returned as follows: 1890, $33,654,335; 1891, $24,- 792,509: 1892, $.39,473,988; 1893. $12,418,673; 1894, $20,507,396; 1895, $18,533,543; 1896, $21,159,161. Why the large difference in the receipts of the above years occurred has not been satisfactorily accounted for by the State officials. EXPERIENCE OF CONNECTICUT. 4,17 fifth of one per cent; or that a tax of from one to two per cent on bonds and notes in Connecticut is sufficient to nearly tax out of existence all conscientious scruples of its people in respect to the violation of law and the perpe- tration of fraud in respect to matters of taxation.* In view of these facts the following answer, made some years ago by a man of New England birth and education, but of unenviable character and influence, to a question as to his father's honesty, has no little of point and appli- cation : " He is honest as the world goes. He won't tell a lie for twelve and a half cents " (the New England nine- pence), " but he will tell eight for a dollar." • In 1897 the Legislature of Connecticut, not satisfied with the unexpected large amount of notes and bonds returned for taxation at the rate of one fifth of one per centum per annum when volun- tarily paid in advance, doubled the rate of tax to two fifths of one per cent, or four mills on the dollar. What will be the result of this fiscal policy is yet to be determined; but it is to be regretted that the original experiment could not have been longer continued. CHAPTER XIX. THE EXISTING METHODS OF TAXATION. PART III. Distinction between " Real " and " Personal " Property Artificial and not Natural. — As a further help to the understanding of the subject, it is important to here call attention to the circumstance that the distinc- tion between real and personal property is, to a very great extent, an artificial and not a natural one, and that there is not only no common or accepted rule for their definition and distinction, but, on the contrary, a great diversity of statute enactment by the different States of the Federal Union and by foreign governments on the subject. (For abundant illustrations in proof of this statement, see page 374.) " The statute laws on the subject of taxation in the United States," says Mr. Hillard, in his Law of Taxa- tion, " is as voluminous as the constitutional provisions are few and concise." With a general similarity, the laws of the different States are very diverse; and so numerous and frequent are the changes that the author disclaims any responsibility in his book for the implied statement that " the law of any particular State, however recent, is now in force." The attempt, therefore, to recognise in a system of laws a distinction in respect to the so-called personal property that is perfectly arbitrary, and which forty-eight sover- eign States of the Federal Union may alter at pleasure, is very likely to give a general result somewhat akin to that obtained by an artist who, in painting a landscape, selected a cow as his fixed point of perspective. If the cow had remained quiet, the picture might have been satisfactory; but as the cow walked off, the details of the picture were not harmonious. 418 LAND AND PERSONAL PROPERTY. 419 Value Eelations of Land and Productive Capi- tal. — One curious phenomenon attending the remarkable changes that have talcen place within the last half century in the conditions of production and distribution of wealth, has been the more rapid increase in all countries of high civilization of that portion of their national wealth repre- sented by the so-called personal property than in that portion represented by the value of land. Thus, in Great Britain, at the commencement of the present century, the value of land was believed to represent about forty per cent of the aggregate wealth or property of the kingdom. At the present time it probably does not represent more than twenty-five per cent of such aggregate. In the United States the increase in recent years of personal prop- erty has been so remarkable as to entitle it to be regarded as phenomenal; and it can not be doubted that in highly civilized and densely populated States, like New York, Massachusetts, Ehode Island, etc., the aggregate of prop- erty classed as " personal " is greater in actual value than the aggregate of " real " property. In the great American cities the value of personal property probably closely ap- proximates the English proportion. A recent report of the Boston Business Association expresses an opinion that the value of the personal property of that city is three or four fold that of its realty ! And yet the amount of personal property made available for tax assessments shows every- where a remarkable decrease ; and this, notwithstanding a great concurrent increase in population and in the as- sessed value of real estate. It may also be regarded almost an economic axiom, that universally the market value of the aggregate of land and that of the aggregate of other productive capital are equal ; and for the reason that the market value of land is merely the reflection of the value of the productive capital placed upon it and its immediate vicinity. It would therefore seem to be certain that the decline in the valuations of personal property, above noted, is not real, but simply represents the failure and utter in- efficiency of the existing laws which have been enacted with a view of assessing and collecting taxes upon such property. The following are some of the most striking illustra- tions of the decline of tax valuations of personal property 420 THE THEORY AND PRACTICE OP TAXATION. in recent years in the United States: Thus, in 1866, the valuation of the city of Cincinnati, Ohio, for purposes of taxation was, realty $66,454,603, personalty $67,218,101. In 1892 — twenty-six years after — the tax vahiation of the real estate of the city was $144,708,810, while its personal property had decreased to $44,735,670; or, in other words, while the personal property of Cincinnati returned for taxation in 1866 was greater than the returned amount of real estate, the amount returned in 1892 was only about a quarter as much as the real estate; and yet during this quarter of a century the city of Cincinnati nearly doubled its population, and undoubtedly increased its wealth in a far greater proportion. In the city of Boston the value of the realty returned for taxation in 1868 was $287,635,800, and of personalty $205,937,300. In 1890 the correspond- ing figures were, realty $619,990,275, personalty $202,- V. 051,525, a disproportionate gain of realty of $417,^938,750. ^\r / In the State of Massachusetts in 1862 personalty was t>\/ assessed at $309,000,000 to $552,000,000 of real estate, or y / in the ratio of fifty-six per cent of the latter. In 1891 the r /• personalty was $556,000,000 to $1,679,000,000 of real estate, or in the ratio of thirty-three and a third per cent. That is, the personalty of the State in twenty-nine years increased only $243,000,000, while the real estate increased $1,123,000,000, or nearly five times as much in the same time. " This simply means that more and more personal property, under the rigid tax system of Massachusetts, escapes taxation. The real estate can not have increased in value without an increase in personal wealth with which to increase the demand for it. Eeal estate does not make a demand for itself." In 1870 the personal property of the entire State of Massachusetts returned for taxation repre- sented an average of $345 per capita. It will be noted that the above exhibits represent the lengthened experience of the two States which adhere most closely to the infinitesimal theory of taxation; have a sys- tem of most comprehensive and explicit laws, framed by officials and enacted by legislators who believe in their theory, and a system of arbitrary administration that finds no parallel, except in thoroughly despotic countries, and is wholly antagonistic to the principles of a free government. The experience of other States, where, under substan- UNTAXED PERSONAL PROPERTY. 421 tially the same provision for the taxation of personal prop- erty, the administration is less rigorous, is also most in- structive. In Jersey City, IST. J., the tax valuation in 1892 of realty was $78,176,000, and of personalty $6,539,750. In 1870 the valuation of realty in the city of Brooklyn, N. Y., was $183,689,000, and of personalty $17,559,980. In 1893 the corresponding valuations were $486,497,000 realty, $17,559,000 personalty; and of the latter only $7,078,000 was assessed against individuals, the remainder being prop- erty of banks and corporations. Of the entire property of JBrooklyn taken cognizance of by its tax officials in 1893, only 1.35 per cent of the whole was personalty proper. In 1870 the entire value of the personalty of the city of New York, including bonds, jewels, pictures, furniture, bric-a-brac, etc., was put down by its assessors for taxation at $281,142,696 ; in 1893 the corresponding valuation was $370,936,000, of which less than half was personal estate proper, the remainder being various forms of corporate property, although it is reasonably certain that less than twenty men, residents of the city, held personal property in excess of this amount. In 1870 the personal property of the entire State of New York returned for taxation represented an average of $99.13 per capita. In 1893 this average had fallen to $68.75 per capita. In Connecticut, in 1855, as before shown, State stocks, railroad, city, and other bonds, and money at interest constituted about ten per cent of the aggregate assessed valuation of property of the State. In 1885 the corresponding proportion for taxation was three and three fourths per cent. Similar illustrations drawn from the recent tax experi- ences of nearly every State in the Union might be indefi- nitely multiplied, and in the most western States of the Union, where the com.munities are mainly agricultural, the opinion of officials is also to the effect that personal prop- erty, as a rule, exceeds realty, and to a great extent escapes assessment and taxation. Another curious and interesting feature of the situation is that in all those States where the most minute and thor- ough system of questioning with respect to the ownership of personal property prevails, investigation shows that, 422 THE THEORY AND PRACTICE OF TAXATION. notwithstanding the acknowledged great increase in wealth in the form of personal property in recent years, the skill of its owners in concealing it has grown more rapidly; or, in other words, in every State in which a vigorous attempt has been made to reach and assess all the personal property of its citizens, a smaller percentage of such prop- erty is taxed to-day than was effected under operation of laws a quarter of a century ago. Kesults of Eecent Administrative Experiences. — A notice of some comparatively recent administrative experiences in attempting to successfully enforce taxation of personal property is especially pertinent at this point. In 1879 California proposed a new Constitution. It was drafted in accordance with what was supposed to bo the interest of the agricultural voters of the State, and was by them ratified, the merchants, commercial and financial interests being almost unanimously arrayed in opposition and voting against it. Under this Constitution and the laws made in pursuance of it, the results have been thus summarized : " Not only were bonds, money, and credits taxable, without any deduction on account of debts, except from credits, and then only such debts as were due to residents of the State of California, but holders of stock in corporations were avowedly and intentionally subjected to double taxation; first, upon the corporate property, and again upon the capital stock, which is merely their evidence of title to that property. It was supposed, alike by the friends and enemies of the new Constitution, that under its operation personal property of every description would be thoroughly reached, and at any rate that whatever was by any chance overlooked would be more than made up by double taxation upon that which was found. The actual result has been to falsify all the predictions of both the friends and enemies of the Constitution — for it has done no good, and very little harm, except in promoting fraud — for the reason that the capacity of the patriotic taxpayer to commit perjury and the susceptibility of assessors to bribery have been altogether underestimated." Some of the results have been positively ludicrous. " If the assessment returns are to be believed, in nine tenths of California there is not a pound of butter; in four fifths of the State the sheep do not produce any wool ; fifty coun- EXPERIENCE OF CALIFORNIA. 423 ties have quantities of beehives, but only four have any honey ; personal property is vanishing from San Francisco ; loans of money are becoming unknown in the rest of the State; bonds of cities and municipalities of all kinds are not held within the State to an amount equal to one sixth of the county bonds outstanding alone ; and, finally, money has been smitten by a pestilence, two thirds of all that there was before the adoption of the Constitution having already taken to itself wings, and the remainder being evidently on the way. One of the great objects of the new Constitution was to tax railroad, telegraph, and telephone companies to the last cent of their value. The actual re- sult has been that telegraph and telephone companies are now assessed for the cost of less than their bare poles, or about sixty-five dollars per mile. The railroad companies resisted taxation for one or two years, at the end of which, by a singularly simultaneous impulse of virtue, some thirty boards of supervisors directed their district attorneys rigorously to prosecute the railroad companies to the uttermost of the law. Thirty district attorneys forthwith hauled the railroad companies before the magistrates of justice. With equal promptness the thirty boards of su- pervisors met, and, without any consultation with each other, passed resolutions directing the district attorneys to compromise all suits at sixty per cent of the amount claimed ; and the thirty district attorneys obeyed before the State officers could put in a protest." It was anticipated that the new order of things would increase the burden of taxation on the city of San Fran- cisco, and especially on personal property and money at interest. What actually happened is shown by the follow- ing figures: In 1880, before the new laws became opera- tive, the city of San Francisco paid taxes on a valuation of $68,58fi,000 of personal property not money, and on $19,747,000 of money at interest or otherwise. " In 1886, after the law had been operative for five years, it paid on a valuation of $48,705,000 of personal property, a decline of one third, and $6,188,000 of money, a decline of two thirds. In 1894, after the law had been in operation for fourteen years, it paid on a valuation of $56,130,000 of personal property, a decline of $12,454,000, and $7,100,000 of money at interest, a decline of $12,647,000. 424 THE THEORY AND PRACTICE OF TAXATION. It was naturally supposed that the new Constitution would have great influence in increasing the assessment of personal property in the form of tangible, visible merchan- dise, and of bonds and credits. But the assessors of San Francisco found less of merchandise to tax in 1886 in that city than they did in 1880; and less in 1894 than they did in 1880, while the value of bonds returned by its citizens declined from $3,311,000 in 1880 to $449,000 in 1886. The total increase in the valuation of merchandise for bonds and credits for taxation in the fourteen years from 1875 to 1889 was less than one per cent. The most recent, important, and incontrovertible record, however, of administrative experiences on this subject is to be found in the report of a tax commission authorized by the Legislature of Ohio, composed of four eminently qualified citizens — two Eepublicans and two Democrats — and presented to the Governor of that State in December, 1893. It is no exaggeration to say that, since the days of the French monarchy under Louis XVI, no report has been or could be made more discreditable to the people of any country claiming to be civilized, honest, and law-abiding. The report first shows that Ohio has " the most efficient and minute scheme " of listing in duplicate " all classes of property " — dogs specially included — " which has been de- vised in any State." " Every citizen is bound under oath to make a complete return of his property," embracing all forms of personalty. " If he declines to make the oath required by law, a penalty of fifty per cent is added." This listing system in Ohio is characterized by the commission as like " the assessment list used in Germany in mediaeval times (1531)," which it further asserts "has been aban- doned everywhere in Europe." The statute provides that a designated official " may through the probate court call before him the citizen and examine him if he suspects that the return is not a complete one " ; and in addition to all this the law empowers each county to contract with such persons — "tax inquisitors" — who may give informa- tion as to any personal property that has been " improperly withheld from the returns " ; and who shall be " rewarded " to the extent of twenty per cent of the amount of tax " re- covered through their efforts." From a large amount of evidence collected by the com- PERSONAL PROPERTY IN OHIO. 425 missioners and officially published by the State, the fol- lowing selections illustrate the efficacy and workings of this system and its statutes : For the year 1891 the gross amount of revenue col- lected in the whole State of Ohio through the operation of the tax inquisitorial law was about $750,000, or about two per cent of the entire taxes of the State. For the nine years from 1885 to 1893 inclusive, during which time this act was operative in Hamilton County, which is mainly the great and rich city of Cincinnati, the whole amount of taxes paid by its citizens was about $50,000,000, of which less than $400,000 accrued through the operation of this agency. It is probable, however, that through its moral influence the taxpayers were induced to make larger re- turns of personal property than they would otherwise do. On the other hand, the commission reports, as a general effect of the " tax inquisitor law " in city countries that when a man of large wealth is made to pay through its agency he leaves the State; but in the country counties, as the man of means is not able to sell his property and remove from the State, he is forced to remain and pay the tax. Again, the laws of Ohio require that all moneys owned by its citizens shall be annually returned for taxation. For the whole State the tax commission reports that there was on deposit in the year 1892 to the credit of individuals in national. State, and private banks, and exclusive of moneys redeposited by one bank with others, at least $190,- 000,000, "and probablv a much larger amount." Of this $190,000,000, there was returned in 1893 for taxation a little over $38,000,000. In connection with this experi- ence the commission calls attention to the following other extremely significant facts: "Of this estimate of $190,- 000,000, about 128,000.000 was deposited in the banks of the five counties containing the cities of Cincinnati, Toledo, Cleveland, Dayton, and Columbus. These same counties, however, returned for taxation only $6,088,096, while the remainder of the State, having about $70,000,000 in bank deposits, returned over $32,000,000. In the spring of 1892 there were on deposit in the various banks (national. State, and savings) of the city of Cleveland about $63,- 000,000. Of this money there was returned for taxation 28 )( 426 THE THEORY AND PRACTICE OP TAXATION. in that same year only $1,800,593 ; and about half of this sum was derived from the townships outside of the city." The final conclusions of the commission were that "while in the country counties" (of Ohio), "where the • assessor is personally acquainted with the circumstances of the taxpayer, and knows his wealth, the taxation of in- tangible property is perhaps feasible, it is in the city coun- ties " an utter failure. The general property tax has be- come in the city counties " (of the State), " to a very con- siderable extent, a tax upon tangible property only; and that no appreciable part of the intangible property exist- ing in the city counties is reached by our method of taxa- tion." i The net result of all the comparisons made by the /Ohio commissioners between city and farming districts / finally goes to prove that ilie tax upon personal property I makes farmers pay from four dollars to seven dollars where I it mahes the residents of large cities pay one dollar. Speaking generally of the effect of this Ohio scheme of taxation the commission further says : " The system as it is actually administered results in debauching the moral sense. It is a school of perjury. It sends large amounts of property into hiding. It drives capital in large quantities from the State. Worst of all, it imposes unjust burdens upon various classes in the com- munity: upon the farmer in the country, all of whose property is taxed because it is tangible ; upon the man who is scrupulously honest; and upon the guardian, executor, and trustee, whose accounts are matters of public record. These burdens are unjust because by the system as admin- istered these people pay the taxes which should be paid by their neighbours." And the commissioners finally add that " these conclusions are in accord with all current authori- y ties on the subject." * ' That this claim of accordance on the part of the Ohio commissioners is fully warranted, attention is next asked to the conclusions of other State commissions which within a comparatively recent period have also officially investi- gated and reported upon this subject. Thus, a tax com- * See Carver, The Ohio Tax Inquisitor Law, in the publieationa of the American Economic Association. STATE TAX COMMISSIONS. 427 mission of New Hampshire in 1876, after recognising the inefficiency of the existing laws for the taxation of personal property and " their corrupting and demoralizing influ- ences," " frankly admit that they are unable to frame any law to which a free people would submit, or should be asked to submit, that will bring this class of property under actual assessment more effectually than it now is." An Illinois commission in 1886 asserted that the existing sys- tem " is debauching to the conscience and subversive of the public morals — a school for perjury, promoted by law." A Connecticut commission in 1887 reported that " the results of an investigation of nearly three years into the workings of our tax system have brought us to the conclu- sion that all items of intangible property ought to be struck out of the list. As the law stands it may be a burden upon the conscience of many, but it is a burden on the property of the few, not because there are few who ought to pay, but because there are few who can be made to pay." A West Virginia commission in 1884 asserted that "the payment of the tax on personalty" (in the State) " is almost as voluntary, and is considered pretty much in the same light as donations to the neighbouring church or a Sunday school." In Massachusetts, where the law admits no offset of / j ^ debts against visible and tangible property, and is regarded ' ^^^^^^JK, as complete, and where its execution is acknowledged to be ^ JXt most arbitrary and inquisitorial — some towns publishing e'ach year every known item of each man's personal prop- erty, even down to the family pig and a string of sleigh bells — the most intelligent officials admit that their sys- tem is a comparative failure ; and almost a complete failure as to reaching evidences of indebtedness, which, as before shown, constitute in modern times so large a part of the personal property of every civilized community. In the State of New York, where the letter of the tax laws in respect to the subjects of taxation is nearly the same as in Massachusetts and Ohio, but the administra- tion less stringent, and where the aggregate of personal property nearly or fully equals in value the aggregate of real property, the proportion of the former returned for taxation is not in excess of one fifth of the total assessed valuation; while in the great city of New York, with a 428 THE THEORY AND PRACTICE OF TAXATION. ,^ Y/ / population of over a million and a half, not one per cent of her citizens stand upon the books of the assessors as pos- sessing any personal property subject to taxation other than shares in banking institutions. In Wisconsin the State appears to have drifted into the same condition of things as in New York, and the attempt to tax personal property has been practically abandoned, except in the small villages and rural districts. In Georgia, which is reported to be well served by its taxing officials, its comptroller asserts that in respect to the mere article of merchandise which can be seen and handled, not fifty per cent is returned for taxation, and that in the city of Savannah in 1886 not ten watches were subjected to taxation. """"" ^' ~To complete this record of experience it is desirable to add that there is not a single economist or financier of note, either in the United States or Europe, who upholds the " infinitesimal " or " general property " tax as a desirable or essential feature of any fiscal system, its characteriza- tion by M. Leroy-Beaulieu, the celebrated French econo- mist, being that " a cruder instrumentality of taxation has rarely been devised." Again, in every country on the globe where a direct tax on personal property in the hands of individuals has been laid, the system has exhibited the same features of badness. No experience in any country has suggested any practical improvements of it. It has never been improved ; Zit has never grown better ; it has always, under all circum- stances, exhibited a tendency to grow worse, fit is a fact creditable to the superior intelligence of other lands that 1^ '^ it no longer is found in any civilized country on the globe, the United States alone excepted; and in this country it is no longer found in Pennsylvania, New Jersey, and perhaps some other States. Prof. E. A. R. Seligman, of Columbia University, who has written much on this subject, sums up the result of his investigations in the following language : " It will be no exaggeration to say that the general property tax in the United States is a dismal failure. Every country also, with the exception of Holland and the States of the Fed- eral Union, has abandoned this system of tax as something wholly impractical. In recent years in both England and V REFORM IN TAXATION. 429 France the necessity of raising increased revenues has drawn especial attention to the subject of local taxation; but in neither of these two countries has any prominent speaker or writer advocated the direct taxation of personal property, or even alluded to the subject, except to scout the very idea of such a proposition." * And yet, notwithstanding this record of disastrous and discreditable experience, and the opposition to the almost unanimous judgment of all whose investigations warrant the expression of opinion, the strength of popular prejudice in the United States in favour of the infinitesimal system of taxation is so great as to make the substitution of any better system a matter of very great difficulty, and perhaps a present impossibility. " Although all Europe, as already pointed out, has tried and discarded taxation of personal property, our own people have grown up under the opposite system. Every State tries to tax it. No American has any personal experience of a system which does not pre- tend to tax it. The proposition to dispense with such taxa- tion, therefore, strikes every American as an experiment. Few Americans know or care anything about the experi- ence of other nations." There is, however, at the present time, some gratifying evidence of a change in popular sentiment in favour of radical tax reforms. Thus, in October, 1897, the grand jury of the county of New York made a presentment on the siibject of taxation under the following circumstances : A complaint was made against the tax officials, charging undervaluations of property, and therefore perjury, but the grand jury finds in effect that the State laws are of such a character that assessors are almost inevitably led into blunders, and it recommends a general revision of * Holland, by reason of her immense national debt, the largest, comparatively, of any country, has been obliged to maintain a most vigorous and extensive system of taxation in order to raise revenue sufficient to the wants and- requirements of the state. But it has been prominently brought out, in recent years, that the decadence of Holland dates almost from the hour when taxes were imposed on manufactories, commerce, fishing industry, and moneyed capital. Business went elsewhere, and with the decline of business the ability to pay taxes diminished, and the burden of taxation augmented. See Journal des ^ficonomistes, November, 1871; also Principles of Political Economy, J. R. McCuUoeh, pp. 470, 471. 430 THE THEORY AND PRACTICE OP TAXATION. the tax laws imposing upon the State the duty of assess- ing personal property, so that local expenditure may be paid by real-estate taxes alone, and the " question of con- tinuing or abolishing personal taxes " be " fought out on State lines." A special tax commission, appointed by the Governor of Massachusetts, and coniposed of men of wide financial ex- perience and business ability, after careful study of this subject, reported in October, 1897, in favour of the entire exemption of personal property and the substitution of other agencies (to be hereafter noticed) for the collection of revenue. A fact of historical interest which ought not to be over- ."' looked in this connection is that whenever a system of in- finitesimal taxation (or a general property tax) has been .■^ projected, its authors have been led, as it were, by instinct to the conclusion that its execution, with any degree of ■ effectiveness, must depend upon the employment of extraor- dinary and arbitrary measures. Thus, the old Romans, who first notably established the taxation of personal prop- erty at the periodof the decadencfi— oJ the empire , and who were~iaof~Eoubled with any restrictions of a consti- tutional character, or any very nice notions about personal liberty or general morality, clearly perceived this, and ac- cordingly invested their tax officials with the power of administering torture as a means of compelling informa- tion (answering questions) and enforcing payment; and that the tax officials were not backward in using the power with which they were invested is proved by a variety of evidence. Thus, Zosimus, who wrote in the fifth century a. d., states that the period of the tax collection upon general industry " was announced by the tears and terrors of the citizens, who were often compelled by the impending scourge " to meet their obligations ; and Gibbon, in treat- ing of this feature of Roman history, in a measure justi- fies the proceeding in the following language : " The secret wealth of commerce and the precarious profits of art and labour are susceptible only of a discretionary valuation ; and as the person of the trader supplies the want of a visible and permanent security, the payment of the im- position, which, in the case of a land tax, may be obtained \ \^^ \^^ VaaX/^ Sf^ ' ^^ AWYVvt/ -VVi ,f DOOMING IN MASSACHUSETTS. 431 by the seizure of property, can rarely be extorted by any other means than those of corporal punishment." And it is also especially worthy to note that in every instance in which attempts have been made of late in the United States to remedy the recognised imperfections and inequalities of existing systems of local taxation, the per- sons intrusted with the duty, possibly without knowing, and probably without caring, what were the experience and custom of the old Romans, have been led by their instincts and intuitions to go as far in the torture direction for the obtaining of taxes on personal property as the con- ditions of our modern civilization and the state of public opinion would allow. The' most curious and confirmatory evidence of this is to be found in a method of procedure adopted in the city of Boston, Massachusetts — a method which has no parallel except in the records of the middle ages and of the Inquisition, and constitutes in itself a satire upon any claim to the enjoyment of a wholly free and enlightened government. For failing to obtain satisfactory information about the private affairs of any individual the chief assess- ors and their subordinates in that city, to the number of some fifty, meet in secret session in a large upper chamber set aside for the purpose, and appropriately termed the " dooming chamber," when the citizen in question, without being present either by counsel or in person, is arbitrarily doomed to the payment of any sum which a majority of those present may think proper, and from which " doom- ing " there can be no appeal. The following record of the actual working of this system may be thus illustrated : During the year 1889 the whole amount of taxable personal property which the as- sessors of Boston were able to discover, exclusive of bank stock, was $39,000,000, of which amount $14,570,000, or thirty-seven and a half per cent, was returned as visible, and $27,650,000 as invisible. Being dissatisfied with this result, which was all that was justified by any facts which the assessors could state, they proceeded to multiply it four and a half times by a mere guess. In their " dooming " chamber they guessed that personal propertv, other than bank stock, ought to be valued at $186,000,000; and the citizens of Boston were compelled to pay taxes upon that X 432 THE THEORY AND PRACTICE OF TAXATION. amount. Could anything be more monstrous or absurd than a system of taxation which, even when administered by phenomenally honest and competent men, produces such results? The Use and Value of Oaths as an Adjunct of Taxation. — Consideration is properly asked in this con- nection to the use and value of oaths, an increase in the number and stringency of which is often regarded as essen- tial to effective and equal taxation. It is the all but unani- mous opinion of officials who of late have had extensive experience in the administration of both the national and State revenue laws that oaths as a matter of restraint, or as a guarantee of truth in respect to official statements, have in a great measure ceased to be effectual ; or, in other words, that perjury, direct or constructive, has become so common as to almost cease to occasion notice. In fact, there has come to be a feeling in the community that an oath in respect to matters in which the Government is a party is a mere matter of form, of mechanical procedure, and that its violation, especially with a mental reservation, and when the interest of other individuals is not spe- cifically affected, does not in itself constitute a crime. The fact that the assessors of almost every State every year make oath that they have valued all property at its actual value, when they know they have not, constitutes one proof of the truth of this assertion. The everyday entry of goods at the customhouse at undervaluation constitutes another; the enormous frauds committed in recent years under the internal revenue laws of the United States, which in the case of distilled spirits entailed a loss in a single year of over $130,000,000, and in which the taking of false oaths was at every step an essential feature, constitutes a third ; while of individual examples, which every assessor of ex- perience can detail, the record would be almost inter- minable. During the past few years the low tone of commercial morality in the I'^nited States has been a fact generally recognised and much commented upon ; but it has not, that we are aware, been made a subject of inquiry by those to whom the guardianship of public morals is particularly intrusted. How far the existing system of laws relating to taxation — national and State — are justly chargeable DODaERS OF TAXATION. 433 with the results to which reference has been made, or how much in the division of responsibility is to be set down to the account of those who violate the law, and how much to those who, forewarned of the weakness of human nature, deliberately make laws which especially lead men into temptation, are yet unsettled questions. A point of great interest and importance in this connec- tion, though often overloked, is that even if all the States of the Federal Union should entirely exempt personal prop- erty within their territory and jurisdiction from taxa- tion, it would nevertheless, owing to the dual nature of the Government of the United States, be subject to a large measure of heavy and disproportionate taxation. Thus, the expenditure of the Federal Government, which repre- sents taxation, was in 1896, including the cost of revenue collection, in excess of $445,000,000, not one cent of which was derived from taxes on real estate.* The aggregate of annual taxation by States, counties, cities, municipalities, and the District of Columbia for the same year is esti- mated by reputable authorities to have been about $400,- 000,000, of which at least one fifth was assessed or was col- lected from personal property. If real estate paid all th State taxes, personal property therefore would still be paying all the United States Government taxes, or a large excess of its equitable share of any or all national taxation ^A claim that any personal property owner is justified in protecting himself against such extortion in any and every ^ legal way has much, therefore, to be said in its favour. When such protection can not be effected legally, he has only to leave the State for others that are not extortionate oppressors of capital. But who can not perceive on re- flection that personal property (capital) must be largely used by its owners and at fair rates at their residence; and that the home of such capital will show the benefit in increased local business, increased population, and in creased value of real estate by its use? Why, then, so much overrighteous talk of personal property owners dodg ing taxation? Logical and ingenious as have been the arguments in opposition to the legal exemption of personal property Real estate pays no Federal Government tax. 434 THE THEORY AND PRACTICE OF TAXATION. from taxation, the citation and consideration of the un- disputed experience of all countries, people, and ages are all that is necessary to refute and disprove them. There was a time when nearly all men believed and taught that the world was fiat, and when the few who lisped to the contrary exposed themselves to a charge of religious heresy and punishment. But a comparatively short navigation experience effectually put an end to all controversy on this subject ; and it is doubtless only a question of time when II. personal property will be exempt from governmental taxa- ^ tion, because no system has ever been devised, .£ir. is likely ^ to be, whTcli will enable a state to tax it with any approach totihiformity and equity. Origin and History of the General Property Tax. — The idea that in order to tax equitably it is necessary to assess everything capable of resulting in the obtain- ing of revenue is not original with the American people. Its inception dates back to the dawn of civilization, and its development may be regarded as in the nati;re of an economic evolution. In the incipient stages of society, as already pointed out, property consisted exclusively of things tangible and visible — lands, buildings, cattle, slaves, agricultural products, household effects, and implements — and what was exacted by rulers or chiefs of their subjects was arbitrary proportions of such kinds of property or of personal service, and was not in any proper sense taxa- tion, but tribute. For thousands of years there were no credits or material evidences of indebtedness, as there are none at the present time among barbarians or half-civil- ized people; for a knowledge of letters, of the art of writing, and a somewhat durable and portable material to write upon were essential prerequisites for their exist- ence, the earliest evidence of the recognition of anything like a mortgage being the inscriptions on certain clay tab- lets excavated from the ruins of the ancient cities of Baby- lon and Assyria, which were evidently the highest results of long and slowly developing civilization. In fact, in the early stages of society there was no important form of capital other than landed property and the instrumentali- ties, including slaves, for its cultivation, and so far as the system for obtaining revenue for the rulers or state merited the name of taxation, it was practically a " land " tax. ORIGIN AND HISTORY. 435 As civilization advanced, slavery gradually broke down ; trade or trattic between individuals or adjacent communi- ties extended and became commerce ; free labour appeared ; capital developed and multiplied the forms of visible, tan- gible property. Then the system of obtaining revenue began to have the characteristics of a general property tax; and as the coincidence of great value with small bulk in some forms of tangible, visible property favoured concealment, some methods of obtaining revenue from property other than mere inspection became necessary, and were obtained by the Eomans in the latter days of their empire by en- dowing their assessors and taxgatherers (as before shown) with the power to administer torture to unwilling tax- payers, a method that was followed and perpetuated until within a very recent period by the rulers of most Asiatic countries; and in later days, when credits came into exist- ence and extensive use, and titles to property and evidences of indebtedness were regarded as property, although in- tangible and invisible, a method for discovering and assess- ing the same, as approximate to actual torture as a higher civilization would sanction, was everywhere adopted. And how such methods continue to exist and their practice be regarded with favour in states and communities claiming to be in the highest degree civilized and enlight- ened, finds proof and illustration in the following circum- stance: In 187 A the Legislature of Massachusetts created > a commission of three persons to inquire into the expedi- /I ency of amending the laws of that State in respect to taxa- ^^r> tion, and placed at its head the chairman of the Board lA of Assessors of the city of Boston, a gentleman long identi- rQ tied with, if not the originator of, the idea of making an ^^ arbitrary, irresponsible " dooming chamber " an essential feature of tax administration. At the outset this com- mission was evidently impressed with the necessity of vindicating the "infinitesimal" or "general property" tax system, then and at the present time especially favoured and fully exemplified in their State. And they set about it in the following manner : with the Declaration of In- dependence before them, maintaining it to be in the nature of a self-evident truth that " all men are endowed by their Creator with certain inalienable rights," and " that among these are life, liberty, and the pursuit of happiness," the f 436 THE THEORY AND PRACTICE OF TAXATION. ^ commission gravely announced that " the individual per- son" (in Massachusetts) '^ has no individual rights except that to his own righteousness," thus laying a sure founda- tion in justification for a recurrence in Massachusetts to the torture tax system of the ancient Romans if its tax administrators should consider it expedient. After the dissolution of the Roman Empire and the subsequent reconstruction, as it were, of government and society in Europe during the early feudal period, and when land was practically the only form of wealth, the payments exacted for the support of the governing powers — "kings, barons, knights, etc. — were essentially and almost exclusively in the nature of land taxes; and the terms " danegeld," a charge on lands at so much per hide, or an area of about one hundred acres; " scutage" a charge on tenants in lieu of military service; " carucage," a charge on "plough lands"; " tqlUage" (from the French tniller, to cut off), a charge on the tenants of royal manors, and the like were designations of the different forms of such assessments at different periods. As civilization advanced and was accompanied, as at a more primitive period, with an increase in the forms of personal property, a combina- tion of taxes on land and movables, or a general property tax system, developed and was adopted by all the nations of western Europe with all the despotic adjuncts which seemed necessary to make its enforcement successful. The ultimate result of such a system was what might have been anticipated. From a very early period it occasioned great popular dissatisfaction. In Milan, Italy, as early as 1308, it was enforced with such severity " that the assessment book was known as the libra del dolore." In Florence it became so honeycombed with abuses and the load of taxa- tion fell with such crushing force on the small owners of property that imminent popular revolution and disorder compelled its essential modification. As wealth increased, evasions of the tax increased in a greater proportion in every community, leaving the burden of the system, as now in the United States, on that class of the population — mainly the agricultural — that are least able to bear it. Sir Robert Cecil stated in 1592 that there were not five men in London assessed on their goods at two hundred pounds (one thousand dollars) ; and Sir Walter Raleigh stated ABOLISHED IN EUROPE. 437 in 1601 that "the poor man" (in England) "pays as much as the rich." In Florence in 1495 only fifty-two persons paid the tax on trade capital, although the amount of such capital must have been immense. Marshal Vauban, of France, who wrote on taxation about 1700, stated that the faille personnelle was assessed only on the poorest classes. The result has been that as the difficulty of assessing visible personal property and the impossibility of reaching invisi- ble and intangible personalty became apparent, the tax was gradually modified, and finally abolished in all European countries, except possibly Switzerland and Holland, where its nature has very little of its original and typical char- acter. One of the first acts of the French National Assem- bly in 1789 was to abolish it entirely. A provision for taxing personal property under a nominal land tax con- tinued to exist on the statute book until 1833, when, through constant exemptions and systematic evasions, the annual revenue accruing from the same had run down to the sum of eight hundred and twenty-three pounds (four thousand one hundred and fifteen dollars). It is also interesting to note that the people of Europe have been so long exempted from a general property tax that their leading writers on economic or fiscal subjects rarely discuss it or even seem to have any knowledge of its characteristics or historical experience.* ^^ '' " The United States is the only civilized country that . ' q 'gives no heed to the world's uniform record of experience, and thinks it desirable to tax both property itself and its shadow. * To those desirous of a fuller record of the historical experi- ence of the general property tax than has been here given, refer- ence is made to an exceedingly interesting and valuable essay on the subject by Prof. E. R. A. Seligman, of Columbia University, published in Essays on Taxation, New York, 1895. i ^ CHAPTER XX. DOUBLE TAXATION. One of the inevitable characteristics of a " general property tax " is the opportunity afforded for inflicting double taxation — i.e., taxation at one and the same time on the same person or property, or taxation of the same prop- erty a second time in the same year — an opportunity which the believers in this system vigorously defend, and its ad- ministrators as a rule gladly take advantage of to prac- tically enforce. These opportunities exist mainly through two assumptions, neither of which is warranted by either reason or justice, and is alike antagonistic to any equitable and intelligent system of taxation : the first, in respect to the situs of personal property, and the second, as to origin and nature of property ; and to these, in the above order, attention is next invited. Personal property for purposes of taxation is popularly divided into two classes — namely, things movable, tangible, and visible, and things wanting in corporality or bodily presence, and therefore, as a rule, intangible and invisible. To the former has been given the general name of " chat- tels," and to the latter that of " credits " ; under which latter name or title are included not only book accounts, bills payable, promissory notes, bonds, mortgages, deeds, bank deposits, certificates of indebtedness, and the like, but also shares of corporate stock, and possibly shares in any partnership. Adopting a popular theory, that credits are property, their aggregate value in all civilized countries can not, probably, be reasonably estimated at less than one half of the aggregate value of all chattels and real estate. Situs of Personal Property. — As has been already pointed out, it is in the nature of an economic axiom and a fundamental legal principle that the power of every state 438 SITUS OP PERSONAL PROPERTY. 439 to tax must be exclusively limited to subjects within its territory and legal jurisdiction. This economic axiom and legal principle is recognised in nearly all countries claim- ing to be civilized ; the principal exceptions being in the States of the Federal Union, where it is violated in respect to both theory and practice — more especially in the State of Massachusetts, the statutes of which define personal estate for purposes of taxation so as to include " goods, chattels, money, and effects, wherever they are; ships, public stocks and securities, stocks in turnpikes, bridges, and moneyed corporations, within or witJiout the State." Thus, for example, if a resident of Massachusetts owns a cow which is bodily in another State, that cow is properly taxed in the State where the animal is; but Massachusetts, p >- s owners of shares in corporations chartered and located inr ^ Massachusetts are taxed through the corporation, and their*^ ^ shares are free from any further taxation. But if the^ ^ same persons are shareholders in corporations created and,_^" established by other States, and the real and personal prop-C^* erty of which are fully taxed where situated, they are^ " subject to a second tax in Massachusetts on the assumed ^ local value of the interest of their citizens in such extra- territorial corporations. Under this system, moreover, the same property may ^^=5"" be, and often actually is, subjected to not merely double \ ^^^ but triple taxation, which sometimes practically amounts ^ v^ to confiscation. Thus personal property belonging to a*^ v citizen of Massachusetts, but located in Chicago, would.,;^/'^^ 2 be properly taxable there, because within the territory and J t under the protection of the taxing power. It would, how- ever, be taxable to the owner in Massachusetts because of his personal residence in that State ; and the owner would also be liable to taxation in Massachusetts by reason of his income from the same property. The following case of actual and comparatively recent experience constitutes both proof and illustration of the accuracy of this statement: A lady of a Western State, for the sake of availing her- self of certain educational advantages, removed to a town in Massachusetts near Boston, and benefited the town by building a fine residence therein. Her property, which was ^ r r I 440 THE THEORY AND PRACTICE OF TAXATION. held by a trustee in Indiana, was taxed to him by reason of his legal holding in that State. The property itself, mainly in another State, was taxed there, and properly, by reason of its location; but at the end of her first year's residence the lady was horrified to learn that a third tax on her income was demanded of her by the tax laws of Massachusetts. " And this," the person communicating these facts adds, " will, if enforced, be a decree of my per- sonal banishment from the State as effectual as that which the State formerly launched against Eoger Williams and the Quakers." Can any one doubt that human nature, as ordinarily constituted, will protest against, and success- fully evade such lawsFJ Would it not be well in discussing this subject to mention also that it was a question of taxa- tion that gave liberty to the American colonies, and that the principle that the people of Boston and their ministers once mainly relied upon to justify their destruction of im- ported tea, which they regarded as unjustly taxed by even a small amount, was " that resistance to tyranny was obedi- ence to God " ? The claim or argument, however, with the advocates of such an unjust system now set up in its defence is not a theological one, but that personal property (more espe- cially what is termed in law choses in action, or credits, titles, notes, bonds, mortgages, which are in their nature incorporeal, and therefore invisible and intangible) has no sihts away from the person or residence of the owner, but is deemed to be present with him at the place of his domicile. This rule or fiction of law originated, according to Savigny, in Eome, and acquired the designation of " mohilia 'personam seqnuntur" ; but its applicability to property was never held to extend beyond Eoman territory. Subsequent- ly it became a device of international comity, which the Supreme Court of Vermont (Catlin vs. Hall, 12 Vermont, 152) has declared was subsequently "adopted from con- siderations of general convenience and policy, and for the benefit of commerce " ; and which, according to every prin- ciple of common sense and equity, was never invented with a view of its being used as a rule to govern and define the application and scope of taxation, or was intended to have any other meaning than that for the purpose of the sale, distribution, and other disposition of property any TANGIBLE PROPERTY TAXED. 441 act, agreement, or authority which is sufficient in law where the owner resides shall pass the property in the place where the property is; and more especially to facilitate the dis- tribution of decedents' estates, by enabling parties to dis- pose of their property without embarrassment from their ignorance of the laws of the country where it is situated.* How comparatively recent, moreover, has been the extra-territorial application of the rule or principle under consideration to taxation, is shown by the fact that the first English colonists and lawmakers who came to America do not appear to have brought with them any of the narrow and illogical views which have characterized their descend- ants. Thus, for example, one of the earliest laws of the Massachusetts colony reads as follows : " No man shall he rated here (Massachusetts) for any estate or revenue he hath in England, or in any forreine partes, till it he trans- ported thither." {Massachusetts Historical Society Collec- tions, vols, vii and viii, page 213.) And in the first pro- vincial codes of Pennsylvania especial care was taken to confine taxation to land, and a very few articles of per- sonal property of a visible character, as slaves, horses, and cattle, and to exempt from taxation debts, accounts, mer- chandise,! and all other items susceptible of concealment. * " No fiction," says Blackstone, " shall extend to work an injury; its proper operation being to prevent a mischief, or remedy an inconvenience, which might result from the general rule of law." At any attempt to misapply a fiction, it falls within, and is terminated by, that other authoritative maxim of logic and the common law, cessante ratione Icc/is, cessat ipsa lex. Another great authority in law, Lord Mansfield, says: " Fictions of law hold only in respect of the ends and purposes for which they were invented; when they are urged to an intent and purpose not within the reason and policy of the fiction, the other party may show the truth." t In a report of the law committee of the Common Council of the city of Philadelphia, submitted February 16, 1871, we find the following historical review of the tax laws of Philadelphia, under the government of William Penn and his successors in the colonial government : "These laws were framed to avoid repeating errors (in re- spect to the taxation of personal property) which had been proved by long experience in Great Britain and the Continental countries to be inquisitorial in their nature, and by concealment, evasion, and perjurv demoralizing to the people. We find the Provincial Council (1683) first determining that 'a publick tax on land ought 29 442 THE THEORY AND PRACTICE OF TAXATION. and which would necessitate inquisitorial methods for as- sessment. And it was not until 1844, when the State had become financially embarrassed by large expenditures, that any change was made in such system. But in later days, when laws came to be made by legislators who could not conceive that anything more was involved in taxation than the raising of a given amount of money, the discriminating rule in respect to the situs of real and personal property was generally adopted and has resulted in the before-men- to be raised to defray the publick charge,' and the enactment of 1700, fixing county rates and levies (whicli law was not enrolled), is believed to have been not larger in the subjects of county rates than in the act of 1724, which were real estate, horses, cattle, sheep, negroes, and a poll tax. It will be noticed that the personal estate here enumerated was visible property not susceptible of conceal- ment, and that debts, accounts, merchandise, and ships are no- where mentioned. In the several enactments that followed in 1795, 1799, and 1834, the subjects of county levy were substantially the same, sheep and slaves being omitted in the last act, and officers added to the last two, and it was not until 1844, a period when the State, by large expenditures, had become embarrassed, that, by the act of 29th day of April, 1844, mortgages, money owing by solvent debtors, stocks, household furniture, public loans, watches, etc., were made taxable for county purposes. The at- tempted enforcement of this act was so injurious to the people, by driving capital and industrial establishments from the State, and so evaded in returns, that by common consent the law re- mained on the statute book a dead letter until the consolidation of the city. "At that time (1854) the question was again discussed, and although the councils of the city had the power to impose the tax rate upon all the subjects of taxation, in the thirty-second section of the act of 1844 we find, by the first ordinances, they limited the levy to real estate, furniture, horses, cattle, and pleas- ure carriages, and so continued until 1864, when an act was passed empowering the city to levy taxes on all the subjects of taxation contained in that section of the act of 1844, a power which they possessed before, but had not exercised. " Since that time the authority of the city to levy a tax on mortgages, stocks of Pennsylvania corporations, and occupations, has been repealed. In considering the enlargement of the subjects of levy in this city, the fact must not be lost sight of that the State does not impose any tax on real estate for vState purposes, but derives all its revenue from corporation stocks and loans, mer- cantile license, tavern licenses, collateral inheritance, etc., and it is estimated that of the gross receipts for 1870 ($6,336,603) more than two fifths of the amount ($2,600,000) was derived from the prop- erty and business interests of the citizens of this city." ARBITRARY TAKING. 443 tioned absurdities. Another involved absurdity is that those States which adopt in their systems of taxation the rule of taxing property beyond their sovereignty or terri- torial jurisdiction, by reason of the possession of its owner, do not follow to a logical conclusion the principle they have'' adopted; for they do not hold that real estate, as well as personal property, follows the domicile of its owner for taxation. But for this distinction no good reasons can be given, although pretexts, claiming to be reasons, may. One claim, however, is obviously as good as another. A robber who should draw romantic distinctions between watches and purses would fail in business. If we are to be robbers in practice, let us, at least, secure some grace by honesty in our professions, and admit that what we thus take is not a tax received as the just recompense of a benefit con- ferred, but a compulsory levy, having its cause in our greed and its justification in our power; and as these reasons are as good for a large levy as a small one, and the whole of a man's estate is greater than its part, why not take the whole? Still further, if it is right to tax a man in Massa- chusetts, who has come for a lengthened stay from another a State or a foreign country, for the property he has left |[ behind, why not the man who has come for a week ? If ' Jv . we are to do business upon the principle that " migh t -OuV r Q^'V'-yM m akes ri ght," would it not be a brilliant stroke to station ourselves It all the avenues of ingress to a State, and cry " Stand and deliver ! " to the passengers ? From the above j^^^ c-«uW citations and arguments, the conclusion would seem to be /j inevitable that when a State assesses property situated be- yond its territory and jurisdiction, and which its laws and processes are not competent or able to either reach or pro- tect, or assesses one of its own citizens in respect to such property, the act has no claim to be regarded as taxation, but is simply arbitrary taMng, in no respect different in principle from confiscation. It will also be interesting here to recall some of the antecedents of this fiction of law, that personal property, irrespective of its situs, follows the owner for the purpose of taxation. Its prototype was the ancient taille, or tax of servitude, imposed on persons originally bondmen, or on all persons who held in farm, or lease, or resided on lands of the suzerain, and from which proprietors or suzerains ^^ 444 THE THEORY AND PRACTICE OF TAXATION. of the land were exempt. And as no vassal could at will divest himself of servitude or allegiance to his lord or suzerain, so the obligation to pay taxes always remained upon him as a personal servitude, whatever might be the location of his property. In other words, the condition of the masses all over Europe during the middle ages was not unlike the condition of the slaves in the United States previous to emancipation. They (the slaves) had property in their possession, and spoke of themselves as owners of property, but in reality their property followed the con- dition of the servitude of their persons, and both persons and property belonged equally to the masters. [The taille, furthermore, as a badge of servitude, was supposed to dis- honour whoever was subject to it, and degrade him, not only below the rank of a gentleman, but that of a burgher, or inhabitant of a borough or town ; and " no gentleman, or even any burgher," says Adam Smith, " who has stock, will submit to this degradation."] Now, the idea embodied in the word servitude is an obligation to render service, irrespective of or without compensation ; and the idea upon which the taxation of personal property in this country has been based is, that the property owes a servitude to the State where the owner resides, irrespective of its actual location, in virtue of the obligation which its owner, as a citizen, may owe to the State by reason of the protection which the State gives him in respect to his person. Again, in old times, the division of property into real and personal was wholly unknown ; and under the common law all property was classed as lands, tenements, heredita- ments, and goods and chattels. " In the course of time, however, leases of land for a term of years were classed as chattels, and were distinguished as chattels real; while other chattels, which did not savour of lands, were called chattels personal, ' because,' says Lord Coke, ' for the most part they belong to the person of a man, or else for that, they are to be recovered by personal actions.' And Black- stone tells us that ' chattels personal are property, and, strictly speaking, things movable, which may be annexed to, or attendant on, the person of the owner, and carried about with him from one part of the world to another ' ; and as instances he mentions money, jewelry, garments. Personal property, in fact, consisted almost entirely of CHANGES IN LAWS. 445 such things as could be, and actually were, carried about with the person of the owner, or could be easily secreted. And Blackstone also tells us that the amount of the per- sonal estate of our ancestors was so trifling that they entertained a very low and contemptuous opinion of it; and that our ' ancient law books do not, therefore, often condescend to regulate this species of property.' Nothing of an incorporeal nature, as credits, bonds, and mortgages, certificates of stock, was anciently comprehended within the class of personal chattels, and in fact there were few or no such instrumentalities for representing or facilitat- ing the exchanges of property. It was otherwise as to lands or real property, as to which ' incorporeal heredita- ments ' occupied a conspicuous place from the earliest times. Such was personal property in the early history of our laws. It was of comparatively small importance, and its laws were few and simple; while real property, being of a fixed and permanent nature, was regarded as immeasurably more valuable, and was governed by laws of its own, of the most intricate and abstruse character. And because of the feudal tenure by which lands were held/ arose the notion, which became a fiction of the law, that] property, merely personal, always attended the person of its owner; while lands, tenements, and hereditaments, being fixed and immovable, and of infinitely more con- sideration, were held, from their very nature, as well as from motives of political policy, to have a situs of their own, from which they derived their laws and incidents, wholly regardless of the domicile of the owner. Growing out of the same reasons, it was also the prevailing opinion that, while immovables were exclusively governed by the law of locality, movables were controlled, according to the same maxim, by the law of the domicile of the owner, and not by that of its situs." In the changed condition of wealth and property, such a fiction, however suitable and useful in primitive times, would now, in many cases, work the greatest injustice, and impair the supremacy which every government should maintain over everything within its territory, both on the ground of public expediency and the private interests of its citizens. And, according to Wharton {Treatise on the Conflict of Laws, 1872), this fiction of law has been universally abandoned upon the 446 THE THEORY AND PRACTICE OP TAXATION. continent of Europe, except in cases as to rights in respect to personalty which sprang from marriage and succession, and would not, furthermore, in Europe, find a place in any discussion of the principles of taxation, except possibly ^in a review of curious tax experiences, and for the reason I that nowhere, except in the United States, is there any sys- item of extra-territorial taxation, or any tolerance given to the ideas upon which it is founded. «- , J This question of extra-territorial taxation has been ^ >>Taised repeatedly before the highest courts of the United ^ K^ States, and its illegality in respect to visible, tangible prop- ^Y^ erty is believed to have been in every instance affirmed. ^^ Thus in the State of New York, up to the years 1861-'63, the rule of assessment of personal property ap- pears to have been in accordance with that now recognised in Massachusetts — viz., that it follows the owner under all circumstances; but in that year a case of much im- portance was carried up to its Court of Appeals under the following circumstances : One Hoyt was taxed in the city of New York for personal property, and resisted the taxation on the ground that, although he had personal property outside of the State, he had none within the State in excess of his just debts and liabilities; the property in question without the State being capital employed in busi- ness in New Orleans, and farm stock and household fur- niture in New Jersey, each taxable by local law in the States where situated. The Court of Appeals decided the assessment to be illegal, and held (Comstock, C. J.) that the property was actually situated in other States, in other sovereignties, protected by their laws and taxable there, and therefore it ought not to be subject to a second taxa- tion in New York. The court also, in rendering the decision, used the fol- lowing language : " There seems to be no place for the fiction " (that personal property follows the owner) " in a well-adjusted system of taxation. In such a system a fundamental requisite is that it be harmonious, but har- mony does not exist imless the taxing power is exerted with reference exclusively either to the situs of the prop- l erty or to the residence of the owner. Both rules can not \ obtain, unless we impute inconsistency to the law and \ oppression to the taxing power. Whichever of these rules DISAPPEARANCE OP THE FICTION. 447 we find to be the true one, whichever we find to be founded in justice and the reason of the thing, it necessarily ex- cludes the other; because we ought to suppose, indeed, we are bound to assume, that other States and governments have adopted the same rule. If, then, proceeding on the true principles of taxation, we subject to its burdens all goods and chattels actually within our jurisdiction with- out regard to the owner's domicile, it must be understood that the same rule prevail everywhere. If we proceed in the opposite rule, and impose the tax on account of the domicile, without regard to the actual situs, while the same property is taxed in another sovereignty by reason of its situs there, we necessarily subject the citizen to a double taxation, and for this no sound reason can be given." In further support of its position the court made use of the following illustration : " A citizen, a resident of Massachusetts, may own a farm in one of the counties of this State, and large wealth belonging to him may be in- vested in cattle, in sheep or horses, which graze the fields, or are visible to the eyes of the taxing power. Now, these goods and chattels have an actual situs as distinctly as the farm itself. Putting the inquiry, therefore, with refer- ence to both, ' Are they real estate, and personal ? ' so as to be subject to taxation under that definition. It seems that but one answer can be given to this question, and that answer must be according to the actual triith of the case. If we take the fiction instead of the truth, then the situs of these chattels is in Massachusetts, and they are not within this State. The statute means one thing or the other; it can not have double or inconsistent interpreta- tions; and as this is impossible, so we can not, under and according to the statute, tax the citizen of Massachusetts with respect to his chattels here, and at the same time tax the citizen of New York in respect to his chattels, having an actual situs there. In both cases the propertyX must he within the State, or there is no right to tax at aZ?."l / Since this decision by its highest court, personal prop- /erty, though owned in the State of New York, is not tax- ^ able to its owner there, provided it is capable of and has a /^ permanent situs away from the owner or his domicile. /•' The United States Supreme Court (Hayes vs. Pacific Mail Company, 17 Howard, 713) decided that the situs 448 THE THEORY AKD PRACTICE OF TAXATION. of a vessel for State taxation is only at the port where it is registered, and not where it may happen to be. In the case of The City of New Albany vs. Meekin (3 Indiana Reports, 481), the defendant was a resident of New Albany, and was assessed for personal property in respect to a steamboat enrolled at Louisville, Kentucky, and which touched only occasionally at New Albany. It was held that the tax was illegal, the Supreme Court ob- serving that " the only question we have to consider is whether the boat or the defendant's share is within the city." It is also an interesting circumstance that this legal controversy concerning the situs of a ship for the purpose of taxation has almost its exact counterpart in the records of English law; case after case having formerly come up before the English courts in which the question involved was. Shall the ship or her owners be taxed at the place of the vessel's registry, or at the domicile of her proprietors? The ultimate decision was, that the only situs of a vessel for taxation is the port of her registry, and this decision was recognised in practice until Parliament and the people arrived at the conclusion that it was for the interest of the nation that ships should no longer be taxed directly in any manner. The United States Supreme Court, in the case of the Northern Central Railroad vs. Jackson (7 Wallace, 262), also affirmed the principle that two States can not tax at the same time the same property, nor can a State tax prop- erty and interest lying heyond her jurisdiction. The rail- road corporation in question, extending from Baltimore in Maryland to Sunbury in Pennsylvania, was the result of the consolidation of four railroad companies, one in- corporated by the State of Maryland and three by the State of Pennsylvania. The latter State imposed a tax of three mills per dollar of the principal of each bond issued by said road, which tax the company, at their office in Balti- more, deducted from the coupons of the bonds of said consolidated road held by Jackson, an alien, resident in Ireland. The court, by Mr. Justice Nelson, decided ad- versely to the tax, on the ground that the bonds were issued upon the credit of the line of the road, a portion of which was within the jurisdiction of the State of Maryland, and THE QUESTION OP SITUS. 449 that the security, bound and pledged for the payment of the bonds and of the interest on them, embraces the Mary- land portion of the road equally with that portion situated in the State of Pennsylvania ; respecting which condition of affairs the court used the following language : " It is apparent, if the State of Pennsylvania is at liberty to tax these bonds, that to the extent of this Mary- land portion of the road she is taxing property and interest beyond her jurisdiction. Again, if Pennsylvania can tax these bonds, upon the same principle Maryland can tax them. This is too apparent to require argument. The consequence, if permitted, would be double taxation of the bondholder, and its effect is readily seen. Thus a tax of three mills per dollar of the principal, at an interest of six per centum, payable semiannually, is ten per centum per annum of the interest ; a tax, therefore, by each State, at this rate, amounts to an annual reduction from the coupons of twenty per centum; and if this consolidation of the line of the road had extended into New York or Ohio, or into both, the deduction would have been thirty or forty. If Pennsylvania must tax bonds of this descrip- tion, she must confine it to bonds issued exclusively by her own corporations. Our conclusion is, that to permit the deduction of the tax from the coupons in question would be giving effect to the acts of the Penns3dvania Legislature upon property and interests lying beyond her jurisdiction.''^ Again, the national (United States) bank act acknowl- edges, and the courts of the United States have so held,\%y^PuU(V that a bank has a situs and its shares a situs where the I /->> Xn bank is located, and not where the stockholders reside. I \ Vv***^ The national bank act, therefore, discards the usual State t \\^ principle of taxation, that personal property follows the ( r'V^'*^ owner. A debt incurred for stock in a corporation has recently (1897) been held by the Appellate Supreme Court of New York as non-taxable, because the assets represented by the stocks are assessed and taxed. But are credits, in any or all of the various forms in which they are exemplified, property? This question brings us face to face with another of those curious anom- alies of opinion and practice that characterize this whole subject of taxation. 450 THE THEORY AND PRACTICE OP TAXATION. In most of the States of the Federal Union credits are generally regarded as property, and are made the subject of taxation at the residence or domicile of their owner, and are held to embrace all debts due from solvent debtors, whether on account, contract, note, bond, or mortgage, and stocks in moneyed corporations, irrespective of the place where such securities may be at the time the assess- ment shall be made. In States, however, like New York, which reject the assumption that the situs of movable, visible, personal property for taxation follows the owner irrespective of its actual location, and accept the decision of its own courts, that the situs of such property for taxa- tion is where it is, and independent of the domicile of its owner, the opposite rule is held to apply to credits. On the other hand, in all other countries of high civili- zation, credits are not regarded as property in the sense of an actuality, and are not subjected to direct taxation. In France, which is at the present encumbered with a greater national debt than has ever before been borne by any nation, and where almost every expedient for raising reve- nue to defray its extraordinary national expenditures has been resorted to, no attempt or even a proposition has been made to tax credits. It is, therefore, of the first impor- tance that the American public, and especially that por- tion of it that enacts tax laws, shall have a clearer and more correct idea of the nature of property than it now possesses ; and that there shall be eliminated from all such laws the idea that extensively prevails in the United States, but in no other country, that " nothing " can be " some- thing," if a statute will only so provide. That there is some warrant and defence for such an idea is to be found in the fact that there is not a unity ^of opinion among economists on this subject; and that in common parlance and dictionary use the term " property " is made applicable to the qualities, rights, and titles of " things " equally with the things themselves. Thus, ac- cording to the ancient though still existing law of Scot- land, what is termed " real property " in England is termed " heritable rights " in Scotland, and what is termed " per- sonal property " in England is termed " movable rights " in Scotland. Ancient usage is, however, no warrant for the continued use of definitions not applicable to new DEFINITIONS OF PROPERTY. 451 conditions, and the acceptance of which as authority for conduct is provocative of immorality, injustice, and un- sound fiscal policy. Prof. H. Dunning Macleod, a dis- tinguished English economist, who has many adherents, has vigorously advanced the idea that everything that can be bought and sold is property, and assigns to the old Greek philosopher Aristotle the honour of its original con- ception; but without mentioning that at the period at which Aristotle lived there was practically nothing bought or sold except things tangible and visible, and that credits were practically unknown. Attractive as this idea may be in theory, it needs but practical application to demonstrate its absurdity. Thus, when the Church sold " absolution " from sin, did the buyer, to quote from old Wycliffe, " have property in ghostly goods, in which no material or property may be regarded as inhering " ? Service, again, is bought and sold; but when its purchase, as in the case of the hire of incompetent or dishonest persons, results in the impair- ment or complete waste or destruction of property, is it entitled to be regarded as property? When a ticket to a theatre or concert is sold and bought, can the temporary right to a seat, or the brief sense of pleasure which the purchaser receives in return, and which he can not per- petuate without renewed buying, and can not transfer to another person, be entitled to be called property ? " When socialists and communists," says Professor Macleod, " wish to destroy property, it is not the material things they wish to destroy, but the exclusive right which private persons have in them." If this assertion is warranted, the question is pertinent. Why is it, when socialists or communists have the opportunity to destroy property, they rarely proceed against property over which private persons have exclusive control — like private dwellings — but rather against monu- ments or buildings, and constructions which are acknowl- edged to be public as respects use and control? Again, Professor Macleod further holds that not only is the right to a thing, which is not at the time of sale in existence, but is to be acquired in the future, property; but also that a mere pmviifip to deliver a commodity is property of the same general nature as money and an actuality. 452 THE THEORY AND PRACTICE OF TAXATION. The Foreign-held Bond Case: a New Chapter of Progress. — Any review of this general subject of " double taxation " would be imperfect that failed to particularly call attention to a decision of the United States Supreme Court which, although of the first importance as touching the correct administration of a free and intelligent govern- ment, has thus far attracted little attention, even among members of the American bar. The subject in question, furthermore, illustrates the historical principle that changes in free governments have more often been effected through the decisions of their highest courts than by direct legislation. Thus it is known to all who have examined the theory and practice of local taxation in the United States, that a hundred years ago or less, the lawmakers of England entertained very gen- erally the same opinion in regard to this subject which is yet popularly accepted in this country, namely, that in order to secure exact justice and equality it is essential to attempt to subject all property of the taxpayer — real and personal, tangible and intangible, visible and invisible — to one uniform rate of valuation and assessment; al- though it must then, as now, have been evident to every one on reflection that, in order to attempt to do this, it would be necessary to endow the assessors with more than mortal powers of perception, so as to enable them to see what was invisible, and measure what was intangible and incorporeal (debts and credits, for example) ; and that, in default thereof, any practical application of this theory must result in rank absurdity and injustice. And yet it is curious to note that the change in English taxation, when it came about, was not due to any such process of reasoning on the part of the people, or to any positive sentiment on the part of the state, but rather to a series of legal decisions by its courts, which gradually under- mined the whole system of British local tax assessment, until it tumbled down, as it were, imperceptibly, and gradually became replaced, from necessity, by a theory which approximated more closely to the principles of sound political economy and the dictates of common sense. Thus, one of the first of the old-time maxims which gave way under these decisions was the fiction of law that all property for the purpose of taxation followed the per- FOREIGN-HELD BOND CASE. 453 son or domicile of the owner (in virtue of which real estate was once taxed, under the British system, where the owner resided, in place of where the property was situated, used, and protected), and its replacement by the more rational principle that for all purposes of assessment the situs of property is where the property actually is ; while other de- cisions of a similar character, following one another by intervals of years, forbade the taxation, for local purposes, of all evidences of national indebtedness, or " consols " ; affirmed the situs of a vessel for taxation to be at the port of its registry, irrespective of the domicile of the owner; and declared that all negotiable instruments are chattels personal, and the like; until the British system of local taxation, like the French, Belgian, and German, has come to be based on the assessment of comparatively few objects, and the avoidance in assessment, to the greatest possible extent, of all personal inquisition and arbitrary treatment. A case in question determining definitely, as it would appear, the hitherto questionable situs for State taxation of all that large class of personal property comprised under the general term " negotiable instruments " — i. e., State, municipal, railroad, and other corporate bonds, circulating notes of banking institutions, promissory notes payable to bearer, etc. — is reported in the fifteenth volume of Wal- lace, under the title of State Tax on Foreign-held Bonds, and in brief may be thus stated: The State of Pennsylvania, by a law passed in 1868, required the officers of every company, except banks or savings institutions, incorporated and doing business in that State, to retain a tax of " five per cent " upon every dollar of interest paid by such company to its bondholders or other creditors, and to pay over the same to the State Treasurer for the use of the Commonwealth. The plaintiff in this specific case — the Cleveland, Painesville, and Ashta- bula Eailroad Company — denied the legality of the tax, and, appealing to the State courts, alleged, among other things, the following in support of its position: " That the greater portion of the bonds of the company having been issued upon loans made and payable out of the State to non-residents of Pennsylvania, citizens of other States, and being held by them, the act in question, in au- thorizing the tax upon the interest stipulated in the bonds, 454 THE THEORY AND PRACTICE OF TAXATION. so far as it applied to the bonds thus issued and held, im- paired the obligation of the contracts between the bond- holders and the company, and was therefore repugnant to the Constitution of the United States and void." The several State courts of Pennsylvania, however, aflfirmed the validity of the tax; but the case having then been carried on writ of error to the Supreme Court of the United States, the latter in December, 1873, reversed the judgment of the State courts, and decided in favour of the plaintiff ; the opinions of the court, as expressed by Mr. Justice Field, being substantially as follows: I. The power of taxation of a State is limited to per- sons, property, and business within her jurisdiction; all taxation must relate to one of these subjects. II. The tax laws of a State can have no extra-territorial operation; nor can any law of a State inconsistent ivith the terms of a contract made with and payable to parties out of the State have any effect tipon the contract while it is in the hands of such parties or other non-residents of the State. III. Bonds issued by a railroad company are property in the hands of the holders, and when held by non-residents of the State in which the company was incorporated are property beyond the jurisdiction of the State. It will be observed under the third head (the language above quoted being the official prefatory syllabus of the decision) that the court lays down the rule that negotiable bonds are property, not in the place where issued, as was claimed by the authorities of Pennsylvania, and not at the domicile of the owner irrespective of actual presence, as was generally claimed by the State tax officials, but in the hands of the holders at the place where the bonds are actually situated, whether the holders be actual, bona fide owners or otherwise. And the following is the exact lan- guage in which the decision was expressed : " It is undoubtedly true that the actual situs of personal property Avhich has a visible, tangible existence, and not the domicile of its owner, will in many cases determine the State in which it may be taxed. The same theory (i. e., the actual situs determinative) is true of public securities consisting of State bonds, and bonds of municipal bodies, and circulating notes of banking institutions; the former, LIMITATION OF TAX JURISDICTION. 455 by general usage, have acquired the character of, and are treated as, property in the place where they are found, though removed from the domicile of the oivner ; and the latter are treated and pass as money wherever they are." If, now, there is any meaning in words, and if the authority of the United States Supreme Court in defining the powers and jurisdiction of the States is as absolute as is generally supposed, it is clearly evident that the first clause of the above-quoted opinion effectually estab- lishes the unconstitutionality and illegality of the theory and practice of Massachusetts and other States, namely, that in virtue of jurisdiction over the person and domicile a State has a right to tax so much of the visible, tangible, personal property of its citizens — i. e., horses, cattle, stocks of goods, money, bullion, and the like — as may be without its territory and jurisdiction: the law of Massachusetts, for example, defining personal property for the purpose of taxation to be " goods, chattels, money, and effects, wherever they are." * If it be objected that the court, by using the expression " in many cases," does not make its rale absolute and un- qualified, the answer is that the exceptions, when under- stood, will be found to be of a character which proves and strengthens the rule, rather than antagonizes it. Thus, as has been already noticed, the United St-ates Supreme Court has decided that the situs for taxation of vessels which move about on the high seas or navigable inland waters must be at the home port where they are owned and registered; and it also stands to reason that the situs of such property as railroad cars, or other chattels which as a condition of using are perpetually in transitu, in order to avoid duplicate taxation and conflicting statutes, must be taxed, if taxed at all, under the head of the franchise of the company or owners. But in all cases where fixity or permanence are conditions of using, it may be unquestion- * In IMassachusetts, within the last half century, a citizen has been threatened with arrest and imprisonment for objectinf? to pay taxes in that State on goods located in a store in San Fran- cisco and paying taxes thereon in the State of California. Bullion in the vaults of the Bank of England has also been taxed to citi- zens of Massachusetts as personal property within a comparatively recent period. 456 THE THEORY AND PRACTICE OF TAXATION. ably affirmed that the court intended to make no exception in its rule for determining where visible, tangible, personal property may be taxed, and where, also, it is of necessity exempted from taxation. It ought to be superfluous, but in view of existing opin- ions and practices it is nevertheless expedient to say that the reason of this rule is founded upon a circumstance alike conformable to law and common sense, which is that taxa- tion and protection are correlative terms; or, in other words, according to the political theory of our govern- ments, national and State, and, in fact, of every govern- ment claiming to be free, that taxes are the compensation which property pays to the State for protection; or, as Montesquieu, in his Spirit of Laws, has it, and as the United . States courts have again and again expressed it, that "the public revenues are a portion that each subject gives of his property in order to secure and enjoy the re- mainder." When, therefore, a State like Massachusetts assesses property situated beyond its territory and juris- diction, and which its laws are not competent or able to either reach or to protect, or assesses one of its own citi- zens in respect to such property, the act has no claim to be regarded as taxation, but is simply arbitrary taking, or confiscation, and a procedure which the United States Su- preme Court has, at least in the case under consideration, declared to be unconstitutional, and therefore illegal and unwarranted. The court having thus affirmed the situs for the taxa- tion of personal property which has a visible and tangible existence, has now taken a further step forward, and in the second clause of the opinion above quoted asserts that " the same thing is true of public securities consisting of State bonds, and bonds of municipal bodies, and circulating notes of banking institutions"; namely, that their situs for assessment and taxation is wholly irrespective and apart from any whereabouts of the owner or his domicile, but is where the securities actually are. So much, then, is so clear that even the most obstinate of assessors under the present arbitrary system will find it difficult, in respect to the items specified, to interpret the law and rule of action otherwise. But it is to be observed that negotiable railroad bonds are not, in the opinion quoted, specifically mentioned. BANK NOTES AND SECURITIES. 457 That they, however, follow the same law as municipal and State bonds, and were intended by the court to be in- cluded in the same category, is, however, obvious, for the following reasons : 1. The subject-matter of the case and of the decision was a railroad bond. 2. The character of a railroad bond as a negotiable in- strument is in all respects the same as a State or municipal bond. 3. The reason which undoubtedly led the court (as it must every unprejudiced reader who thinks upon the sub- ject) to the conclusion that State, municipal, and railroad bonds and bank notes follow the same rule, in respect to their situs for taxation, as other personal property of acknowledged visible and tangible character is that the property of all such instruments runs with the instru- ment, wholly irrespective of the residence of the owner, and consequently, in respect to title, passes by delivery. By public securities, also, the court undoubtedly meant all negotiable securities which are payable to the public — that is, to bearer wherever he may be; or, in other words, a public security, from its very nature, is subject to no previous equities between the original parties creating or issuing it, and the sum agreed to be paid is a liquidated and adjusted sum which must be paid to the public — that is, the holder ; and the situs of such property from necessity follows the instrument to the public, and can be nowhere else than where the instrument actually is. On the other hand, if the instrument was subject to equities, the prop- erty might be where the parties creating it or owning it resided. And if this position is not correct, dealings in all such securities, or upon the stock exchange, or in open market would be impracticable; inasmuch as the purchaser would be obliged to institute an investigation as to whether the title for each specific bond vested in the vendor or some other person; and as there is no registration of the transfer of such property, as there is in the case of real estate, the investigation must be practically impossible. So, also, in the case of circulating notes of banking insti- tutions : if their title did not pass by delivery, or, in other words, if their situs as property was not under all cir- cumstances accepted as in the hand of the holder, their 30 458 THE THEORY AND PRACTICE OF TAXATION. use as money would be impossible; and the courts, recog- nising this principle most fully, have always held that in cases where negotiable instruments or money have been stolen, and in consideration for value received have come into the hands of innocent third parties, the title to such property in the hands of the holders is perfect and irrev- ocable. Again, the circumstance that State, municipal, and rail- road bonds, and all other strictly negotiable instruments, even warehouse receipts payable to bearer, are subject to attachment by legal process only at the place where they actually are, and without regard to the whereabouts of the owner or his domicile, of itself also clearly defines and limits the situs of such property for taxation ; for clearly a State which has the power to make a legal attachment operative against a given property has also the power to tax such property; while, on the other hand, a State which through lack of possession and jurisdiction, can not attach a specific property, certainly can not enforce its tax laws against it, or give protection in case its rights or the rights of its owners are violated. And, again, can the right to tax personal property exist in a State from which the property is so confessedly absent that there is neither right, power, nor possibility of passing title to it within the terri- tory of the State by delivery ? That the view thus taken respecting the situs of nego- tiable instruments, and especially of railroad mortgage bonds, for taxation, is in strict conformity with the opin- ion of the Supreme Court, is also evident from the fact that in summing up the court held that not only was a mortgage bond issued by a railroad chartered by Pennsyl- vania, and in the hands of a non-resident, property out of the State, and as such beyond the jurisdiction of the tax- ing power of the State, but also that the State could not tax such property even when owned by a citizen and resi- dent, unless the bond was at the time of assessment actually within the territory of the State. And as this point is a most important one, it is desirable to ask attention to the exact language of the court establishing it. " We are clear," says Justice Field, " that the tax can not be sustained ; that the bonds, being held by non-resi- dents of the State, are only property in their hands, and EFFECT OF THE DECISION. 459 that they are thus beyond the jurisdiction of the taxing power of the State. Even where the hands are held by resi- dents of the State, the retention by the company of a por- tion of the stipulated interest can only be sustained as a mode of collecting a tax upon that species of property in the State. When the property is out of the State, there can he no tax upon it for which interest can he retained. The tax laws of Pennsylvania can have no extra-territorial operation." The decision of the United States Supreme Court, of which an analysis has been above given, ought therefore to be regarded as constituting a real chapter of progress in American local taxation; because, by contributing power- fully to break down the present popular system, which, founded on an erroneous and impracticable principle, never has been and never can be executed with justice and effi- ciency, the time is thereby hastened when a better system shall be accepted and inaugurated. The logic of this de- cision, moroever, will not only pervade courts — State and Federal — but will be felt in legislative halls, and be im- pressed upon the conscience of the people. The court itself, in referring to the tax under consideration, says with great point and truth: "It is only one of many cases where, under the name of taxation, an oppressive exaction is made, without constitutional warrant, amounting to little less than an arbitrary seizure of private property. It is, in fact, a forced contribution levied upon property held in other States, where it is subjected, or may he subjected, to taxation upon an estimate of its full value.'' But this new decision teaches us that all personal prop- erty, if taxed at all, must be taxed in the city or town where found, and not elsewhere. The injustice and oppression are also the same as in the case of State exterritorial taxa- tion when the tax is levied upon a person for property not within the district where the property is actually located and protected. It is only a degree of oppression, and this authoritative opinion of the United States Supreme Court can not fail to give a new impulse to the feeling that taxa- tion without protection is merely legalized brigandage.* * See an essay on Double Taxation in the United States, by Francis Walker, published in the Studies in History, Economies, and Public Law, Columbia College, New York. CHAPTER XXI. WHAT IS PROPERTY; One of the greatest obstacles in the way of framing a correct system of general taxation is the different and wholly antagonistic opinions that popularly prevail as to the real nature of what constitutes its chief objective in respect to administrative action, namely, " property." This point finds full confirmation and illustration by refer- ence to the several definitions that have been given to this term by various recognised authorities, and have been ac- cepted to a greater or less extent as authoritative by a gen- eral and even educated public. Thus, as before noted, a widely accepted definition of Professors Macleod, Perry, and others is, that everything that can be bought or sold is property. Thus, even the random ideas of an anarchist are a form of wealth at present, just as the " goaks " of Artemus Ward used to be — because they have exchangeable value, and will bring a certain number of dollars to him, or to the reporter or interviewer who gives his notions to the public. So the beauty of an actress, the nimble legs of a dancer, the vocal sweetness of an opera singer, are also forms of wealth, since they have an exchangeable value when utilized. And hence the folly of the socialists, who suppose that by dividing property, or equalizing the dis- tribution of land, they can secure equality of wealth, since diversities of human faculty and opportunities would in- stantly begin to make this imperfect distribution more un- equal than before. Thus the Greek philosopher Aristotle, speaking of the division of land among all the citizens of his time, has the credit of shrewdly saying, " Either all kinds of property must be equalized, or all must be let alone." According to Webster's Dictionary, that " to which one has a legal title " is property. And in a report of a 460 NATURE OF PROPERTY. 461 recent lecture, a leading American theologian is credited with saying to an assemblage of divinity students that " he adopted as the basis of his discussion of property the ' profound and perfect ' definition of the Roman Catholic theologian Brownson, namely, that ' property is communion with God through the material.' And to realize and apply this definition is the great duty of the Christian teacher." * A more rational conception of the exact nature of prop- erty, or rather of what property consists, would, however, seem to lead to this conclusion, namely, that property, at least for the purpose of taxation, is always a physical actu- ality, tvith inhering rights or titles, the product solely of labour, and is always measured in respect to value and for exchange by labour. Thus, for example, a fish free in the ocean is not prop- erty; but when it has been caught through the instrumen- tality of labour it becomes property. Property, further- more, can not be created except by an application of labour of some kind to material substances, which because they are substances and in order to be substances must have both a corpus, or an entity, and a situs, or a situation. Human labour incorporated in things, and thus saved to those who acquire the things, is also what constitutes value or capital ; and nothing can be capital but the existing results of previ- ous labour, which can contribute to man's enjoyment and well-being. It is interesting also to note in this connection how the etymology of the Latin words possesses and possideo, name- ly, po and sideo, to sit by or on, and from which in turn we have the English word possession — the common defini- tion of property being something possessed — curiously har- monizes with and confirms the conclusion that property must be always a physical actuality. For it is clear that it is only a material something, a visible and tangible entity, that one can sit down on, and not an invisible, intangible nothing, the fiction of law or of the imagination. A limitation, little recognised by legal writers and au- thorities, on the exercise of the right of eminent domain (the name given to the power inherent in state sovereignty * " The term property denotes a ripfht over a dctenninative tJiirifl. Property is the right of any person to possess, use, enjoy, and dis- pose of a thing." — Eaton vs. Boston, 51 N. H., 50 Jf. 462 THE THEORY AND PRACTICE OP TAXATION. of making a compulsory purchase of private property for public use), also sustains the correctness of the definition of property as above given ; inasmuch as this right is never conceded or made applicable to other than an actuality, and never to a mere representative of something that is not material. Thus one of the illustrations of Roman juris- prudence handed down by Tacitus was to the effect that an emperor was not allowed to appropriate the right to carry a stream of water through the lands of a private individual, but did pay damages for the injuries thereby accruing to the lands. All investigation on this subject can therefore, it is be- lieved, lead to but one conclusion, and that is that prop- erty is always " embodied or accumidated labour.^' And as political economy does not and jurisprudence ought not to take cognisance of clidieaux en Espagne, these are the only senses in which political economy and the law can legitimately reason about proj)erty.* * The statement is frequently made that all value is the product of labour. Adam Smith says, " Labour is the fund which originally supplies a nation with its wealth." McCulloch says, " Labour is the only source of wealth "; and all the early writers, in one form or another, say the same thing. Accepting under such circum- stances an entire misconception of the true meaning of the word lahonr, the popular mind has been drawn to the conclusion that hand labour or muscular exertion is the producer of all value; and has added the corollary that hand labour is therefore entitled to the entire value thus produced. But when closely examined, the true meaning of the word labour will be found to be. all that. a man can do, either uith his muscle or his hrain. On this crude misconception of the meaning of words, philanthropic systems have grown up, under which the weaker ones have lost heart, and the stronger ones have grown desperate, because the hard sense of humanity does not accept their theories. Also, through their influ- ence, these ideas have reacted and are reacting on the labourers themselves, with rather lamentable results. Thus it is a very general complaint of the present time that the ordinary workman, the person commonly understood by the word " labovirer," puts so little mind into his or her work that it is perfunctory to the last degree; concerns itself very little with results, but expends its efforts in a function whose sole end is to escape blame or actual discharge, and to get along with the least possible exertion; when the fact is, that the three functions of capital (which is accumu- lated labour), labour (in the muscular sense), and management (or brain power) must as a rule act conjointly, in order to insure the best results. " In more recent times, a truer appreciation of this word has arisen, but even yet has not been so absorbed into the LABOUR AND PROPERTY. 463 Examples of property which is apparently not the result of accumulated or of any labour, and so militating against these conclusions, will doubtless suggest themselves : such, for instance, as a diamond found upon the seashore, land squatted upon and obtained by pre-emption, bank stock, patent rights, copyrights, annuities obtained by gift or pur- chase, franchises, monopolies, and debts; but an examina- tion will soon prove that the objections embodied in them are more specious than real. Thus, in the case of the dia- mond accidentally picked up, which is perhaps one of the most striking of all the examples that can be adduced in favour of the position that property can come into exist- ence without the agency of labour, it may be said : first, that an exceptional fact like this can not constitute an ade- quate basis for the enunciation of a principle; and, next, that the value of this accidental diamond is solely deter- mined by and represents the value of the labour which has been required to obtain all other existing diamonds. The moment the fact ceases to be exceptional, the moment dia- monds can be had in abundance by merely picking them up, that moment their value will simply represent the cost of the physical effort requisite to pick them up. Again, if land squatted upon has any value as property whatever in the first instance, it is because it is the embodiment of the labour required to discover it, to conquer it, to defend and protect it; to effect all of which, taxes, which are the results of labour, may have been paid for centuries. If it acquires any additional value beyond this, after it has been squatted upon, it will be simply because the results of labour have become connected with it, or the value of other land or other property the products of labour, for the use of which labour competes, are reflected upon it. In 1620 the land upon which the city of Boston stands could have been bought for a string of sea shells; in 1894 its value for as- sessment as property for taxation was probably in excess general fund of knowledge as to bear practical fruits ; and it needs to be constantly dwelt upon, set forth, reiterated, and explained, until it shall become a common possession of those who think." The reason why more attention has not been given to tliis subject by the earlier economists has been assigned to the fact that they drew their illustrations from a very primitiA'e life, where the bow and spear figured prominently. — Addrrnf^. American SoGial Science Association, 1893, hy F. J. Kincishnry, LL.D. 464 THE THEORY AND PRACTICE OP TAXATION. of $900,000,000. But in both instances the valuation was determined by one and tlie same standard : in the first, by the amount of labour required to collect and string the shells; and in the second, by the amount of labour and capital — which is the result of labour — which has been embodied in the land or become connected with it. Take away the labour and its accumulated results, and the site of Boston will be worth no more at the present time than it was in 1628, when William Blackstone first obtained it. Analyze next the alleged property in bank notes. The coin in the vaults of the banks, the vaults, the building, the books, the furniture, and other physical actualities — the results of labour — employed in transacting the business of banking, are the real property of the bank. The bank stock, so long as the bank exists, is merely a right to receive dividends. The creation of a bank obviously does not create any property. The notes discounted by the bank over its counter are inchoate titles to the debtor's property or to his rights to property; and the notes issued by the bank are inchoate titles to the bank's property or to its equitable rights to property. The bank, apart from its physical actualities and machinery, is simply a ledger recording credits and debits. But credits and debits are only con- venient forms of bookkeeping, or the records of transfers of property and of rights, titles, and interests in property pre-existing. Credits and debits, moreover, stand to each other in the relation of an equation. There can be no credit without a debit, and no debit without a credit ; strike out one side of the equation, and the other disappears of neces- sity. If there were no creditors there could be no debtors, and, vice versa, the moment debtors cease to be debtors, that same moment creditors cease to be creditors.* Copyrights and patents are simply legislative enact- ments to protect pre-existing property. A manuscript, a painting, or an invention is the joint product of physical and intellectual labour, which the copyright or patent right protects, the same as other forms of law protect other visible and tangible property from robbery and spoliation. The * The Supreme Court of Alabama has recently decided that when a bank in that State owns real estate the same is not liable to taxation as a part of its capital stock. COPYRIGHTS AS PROPERTY. 455 relation which these instrumentalities sustain to property is clearly indicated by asking the question, whether there can be such a thing as a patent granted for what has never been reduced to a physical actuality; or a copyright given for the flight of fancy of a poet not embodied in the materiality of a manuscript or in the pages of a printed book. John Milton sold Paradise Lost to Samuel Sim- mons, bookseller, for five pounds ready money; but Gray's " mute, inglorious Miltons," who only imagined and never wrote, could never have obtained a copyright or any money oifer whatever — no, not even reputation — for their imagin- ings, though for all that the world knows they might have been infinitely superior to the Milton who became glorious because he was not mute, in all that relates to mental at- tainment. " A person can read from a book, can quote from it, use its ideas in speaking and writing, and even attempt to pass them off as his own, and he will find no legal obstacle to such action. But the moment he tries to duplicate the material form in which the ideas appeared, that moment he passes from the realm of the intangible to that of the tangible " ; for the book, which is the concrete thing in which the author has embodied his ideas, is an entity, and because an entity representing embodied labour is prop- erty which the law will protect to the owner, and can also legitimately tax, if it will. There have been repeated de- cisions by the courts * that there can be no property in ideas — until, for example, an author through a copyright, or an inventor through a patent, has put his ideas in such * Some years since an action was brought in a United States court hy one Kortenhaus acrainst the American Watch Company, of Waltham, Mass., to recover royalties on an improvement in stem-Avindinff watches that he made, and which, he averred, the defendants had put to use without his consent and without award- ing him any compensation therefor. The plaintiff swore that he had submitted his invention to the company's inspection with the view of selling it, but it refused to piu'chase, and he discovei-ed afterward that the company had adopted the improvement, and that he had made the mistake of not patenting it. The court dis- missed the action, and riiled that there was no right of property in an idea as an idea, and that it could only be made property by letters patent. Had, however, a patent been secured upon the im- provement, its value as property would have been undoubtedly very considerable. 4:66 THE THEORY AND PRACTICE OP TAXATION. tangible form that the Government can put its stamp upon them. It is also exceedingly curious to note how Shakespeare, whose range and accuracy of knowledge were so wonderful, clearly perceived, and as clearly expressed, the whole essence of modern political economy and jurisprudence in respect to this immediate problem, when, in the following lines from A Midsummer-Night's Dream, he says : " The poet's eye, in a fine frenzy rolling, Doth glance from heaven to earth, from earth to heaven, And, as imagination bodies forth The forms of things unknown, the poet's pen Tvuns them to shapes, and gives to airy nothing A local habitation and a name." In other words, according to Shakespeare, as well as accord- ing to political economy and common sense, however bril- liant may be the imagination of the poet or inventor, he has no property in his ideas or imaginings until he has reduced them through labour to an actuality. And then the value of the actuality produced for the purpose of exchange or sale, provided there is a copyright or a patent to prevent use without compensation, will be just in pro- portion to the effectiveness or desirability of the labour exerted upon or embodied in it. The standard for measur- ing the value of the work of a Shakespeare, a James Watt, and a street sweeper is one and the same. Again, an annuity, like bank stock, is a right to re- ceive property, the result of previously accumulated labour, and its transfer by sale or bequest is simply a transfer of an equitable right; and a right of this character, in turn, is not property, but a title to pre-existing property. So, also, in respect to franchises, which, although often spoken of and regarded as property, are clearly nothing but rights. Thus, for example, a franchise of a railroad is simply a right to operate a road in a particular manner ; and a legis- lature can not and does not create a railroad by creating or granting a franchise. At the same time, the value of a physical actuality may undoubtedly be increased by a fran- chise which gives a right to use such actuality in a particu- lar way. A monopoly, also, like a franchise, is valuable, but its value consists in the fact that it gives to certain persons privileges that are taken from others, and the TITLES TO PROPERTY. 467 making of a monopoly no more creates property than does the making of a franchise. Some persons, whose opinions are worthy of respect, have raised a point in discussing this question, that there is a distinction to be recognised between property and capi- tal; and that both in law and political economy the latter does not necessarily conform to the definition that has been here given to the former. But can there be such a thing as capital which does not represent a physical actuality in the sense of embodied labour? Capital is the interest of a person in embodied labour over and above his debts, or his interest in legal or equitable rights to embodied labour, and can have no value, and is merely imaginary, except it has the right, title, or power to command em- bodied labour, or to exercise dominion over property the result of labour. All that we labour and toil for is era- bodied labour. We will not give our labour for the " base- less fabric of a vision," or our accumulated labour for the dreamy creations of a Berkeley or the imaginary castles of poets, except so far as they make them manifest in material forms or writings. By some, also, the forces of Nature are regarded as property; but they are not so until dominated over and subjugated by man; and then only do they acquire value and become negotiable and subject to proprietorship. Gravity and electricity, as free forces, are incapable of sale and taxation ; nor can they, in any rational view, be con- sidered as property. According to recent decisions of the\ courts of the United States, electricity is not a manu- 1 factured product, and electric-light plants do not manu- 1 facture it, but only distribute it. What are Titles to Property? — But while political economy recognises nothing as property except physical actualities, the law, for the sake of convenience, has so long treated titles as conveying the same ideas as propert}^ that the profession and the public have very generally come to regard the two as equivalent or identical. Consideration is, therefore, next asked to this point. Property being embodied and accumulated labour, it becomes endowed, in all places where the rights of labour are recognised, with the attributes and incidents of titles or evidence of just ownership or possession — inchoate, legal. 468 THE THEORY AND PRACTICE OP TAXATION. or equitable — which inhere in the property, follow it, and form a component part of it wherever found. The fact that the ownership, interest, or title of a non-resident, as, for example, a bond and mortgage title to his debtor's property in another state or country, can be extinguished in the real and personal property of the debtor, by attach- ment or other process of law in the state where the debtor resides, and where his visible, tangible property has a situs, also leads up to and establishes as a principle of law that titles or incumhrances are connected with the owner, hut inhere in the property, where the property is actually situ- ated, as incidents, form a part and are inseparable from it, and include the equitable title or right of the creditor in the debtor^s unsold and unincumbered property, hut are not themselves property. Some economists befog themselves on this subject, as before shown, by first defining property as anything that can be bought and sold, and then, since a title — as, for example, a deed — can be bought and sold, accept the inference that a title is necessarily property. But let us analyze this definition and assumption. The creditor can, without doubt, sell and deliver a deed to a farm, but what is sold in such instances is the farm, in- cluding a right — namely, a right to have dominion over it. But it may be rejoined that a right of dominion is property. Let us, therefore, carry the analysis a little further. If a farm in California is property in the State where it is and where it is taxed, any right or title to the same farm, held in New York or England, be it in the nature of a deed, a mortgage, a partnership interest, or any other form of title, can not be the property; for the same thing certainly can not be property in two separate States and jurisdictions, and in two distinct forms and manifestations, at the same time. On the other hand, if it be assumed that the title to the farm is the property, and, as such, can be rightfully taxed where it (the title) is, then it stands to reason that the subject of the title, the farm in California, ought not to be also regarded as property and taxed in New York or England. In other words, if the title to the farm is property, then the farm is not really in California at all (unless the owner of the title resides there), but goes out of that State in the pocket of the in- dividual who walks off with the title to it. We have all DEEDS AS PROPERTY. 469 heard of si;ch concentration of meat that all that is valu- able in an ox for food can be put into a quart can; but such a concentration of property as is here supposed is something much more remarkable; and admits of a man having a drove of oxen in his hand, ten acres of woodland in his hat, a church with a steeple in one coat pocket, and a four-story brick block and a mill privilege in the other.* It is also important to note that while a deed to realty, properly executed and recorded, is regarded as the highest form of title, we have the decision of the United States Supreme Court (Fletcher vs. Peck. 6 Cranch, 87) that a deed is but an " executed contract " on the part of the * As the promulgation of ideas that are not in harmony with long-accepted lines of thought generally provokes controversy and expressions of dissent, which in turn often result in promoting self- education, the author, with a view of furthering such a result, would here ask attention to two letters, voluntarily written, when his views respecting the relations of titles to property were origi- nally advanced by him (some years since) as a contribution to economic science ; the first written by an eminent professor in one of the leading colleges of New England; and the second by an eminent merchant of New York, whose knowledge of economics was mainly the result of a long experience in practical business and financial transactions of great magnitude. No. 1. "My Dear Mr. Wells: " You are misled by the term titles, and are not only wrong, but, what is worse, are wrong in a superficial way. " The real question relates to the nature of credit. " I buy a piece of land for five hundred dollars and give my simple note for value received. The title to my land is my deed. My note has thereafter no connection whatsoever with the land, but it has value nevertheless. The bank buys it as a piece of property and holds it till maturity for the sake of the difference between its face and its price — i. e., for the discount. Your philos- ophy does not account for this proceeding; mine does. " Your assertion is that things of value must have a ' physical quality.' I deny that utterly; nothinq has value by means of a mere physical quality. Does not my annual service to the college have a value? I get, at any rate, twenty-five hundred dollars a year for it. I render no ' physical quality ' whatsoever. " My note is worth nearly or quite five hundred dollars, but it is not a title to anything; it is a claim on me. So are all credits — claims merely, not titles at all. " You say if such things are value we might multiply values indefinitely. No ; because we can not sell them indefinitely. So far as we can sell we make values. Even land and merchandise won't sell notes, with all their physical quality. Physical quality has / 4T0 THE THEORY AND PRACTICE OP TAXATION. grantor, not to resume the right in the thing granted; and if, therefore, a State can tax extra-territorial contracts, it may tax her citizens on deeds of land in other States. This analysis of the meaning of property, from both an economic and legal point of view, might be prosecuted with interest and profit to a much greater extent ; but from what has been presented it would seem clear that nothing can not be something; or, in other words, that property is always a physical actnaUty, which has become valuable or property by some form of labour, and can not be created by mere paper documents, except to the extent of the value of the paper and the writing or printing upon it. Or, in other words, a title to property, a representative of property, can no more be property than a shadow can be a substance : and if this conclusion be true, then it would seem to follow, of necessity, that the act of making debts, bonds, verbal or written contracts, notes, book accounts, mortgages, ware- house receipts, titles, certificates of stock, or any form of salable or traiisfcrable rights, is not a creation or produc- / ^ tion of any new property, but simply an exchange, by eon- Qvj tract or operation of law, of the rights and titles of parties in pre-existing property ; and that any tax on any of these <^ rights or titles is only another form of burdening the prop- nothing to do with it. The only possible test of property is sale. The reason why credits are more limited in their use than com- modities and services is simply that they relate to future time, which is less certain than past and present time. " Yours truly, ." With a desire to obtain an opinion on this interesting economic question from the merchant, the foregoing note was referred to his consideration by permission, and elicited from him the follow- ing rejoinder: No. 2. " Professor seems to ignore the fact that debtors hold all their property which is not mortgaged or encumbered, as trustees to pay their creditors generally, and it is this same prin- ciple which gives vahie to unsecured credits. " But the professor says, ' So far as we can sell we make values.' Does he mean that a counterfeit which is so good that it can be sold is a creation of value? Would a credit sell at all if it was not an inchoate right to the unsold and unencumbered property of the debtor? Of what value is a claim on a man if the claimant has no rights on the debtor's property? Such a claim would be no better than a claim on the northeast wind." TITLES INSEPARABLE FROM THINGS. 471 erty which is the subject of the rights or titles. But some, in answer to the assertion that rights, debts, and titles are not property, for if they were we might make property by making rights and titles, might reply, " But we do make property in that way every day." But we can not do this indefinitely because we can not sell the title indefinitely; and why not? Let us, therefore, stop and think about it, and ask ourselves why we can not sell titles and credits indefinitely. We can sell property in the sense of em- bodied labour indefinitely. Why not titles and credits? The answer is simply that when we buy a title or credit we pay for and in a legal and economic effect buy the physical actuality, or right of dominion over it, which the credit or title represents, and nothing more. The moment one undertakes to sell titles or credits in excess of or sepa- rate from the embodied labour they are supposed to repre- sent, we call the act swindling. Fancy a member of the legal profession appearing in court to defend such a per- son for selling a title, separate from an actuality, on the ground that such a title was property because he was able to sell it, and that somebody not keen was persuaded to buy it ! Would the plea caveat emptor avail in such a transaction ? In other words, when the title does not inhere in the physical actuality, we give it a bad name, and the most imaginative do not call it property. A title which is really a title is never suspended or in abeyance. If a thing is embodied labour, some one, or a number of persons, has some form of title or dominion over it, and the title is inseparably allied to the thing; and therefore the sale of the title is* the sale of the thing, because they are one and inseparable. Embodied labour, therefore, embodies all forms of title to the embodied labour. Credits and titles of themselves have no value, and separated from the things they represent, they can not honestly be sold at all. Who will buy them? We know the character of the men who will sell them, and their representatives will always be found in penal institutions. If some other name be given to embodied labour than property, it will not diminish its power to satisfy human wants ; and if, on the other hand, we call credits and titles property, they can not be eaten, or made of themselves in 472 THE THEORY AND PRACTICE OF TAXATION. any form to satisfy wants, but they can represent things which will satisfy wants. It is interesting also to note that when attempts have been made to claim salvage for the recovery of bills of exchange, or other titles of prop- erty, from wrecks, the courts have decided that salvage in such cases is not allowable; and, therefore, have prac- tically held that credits and titles are not property, but mere rights to property, and in the case of negotiable in- struments, when destroyed by fire or otherwise, the right under the destroyed instrument still remains, and can be enforced in courts when identified. Actualities, not Fictions, the Legitimate Sub- ject OF Taxation. — Enact such laws, also, in respect to taxing titles as we may, experience will prove that taxes can not be practically levied on imaginary things, or legal fictions, because it is some physical actuality, in the sense of embodied labour, that must, after all, and in the end, pay all taxes. Also, " taxes are generally demanded in money, and any tax law will be understood to require money when a different intent is not expressed" (Judge T. M. Cooley). If Legislatures have the power of creating fiat property — that is, imaginary or fictitious property — it is beyond their power to make it pay taxes, for nothing less than omnipotence can make something out of nothing. On the other hand, let us consider for a moment the converse of this proposition — namely, that titles are prop- erty, and, as such, ought not to he exempt from taxation. If this is so, then it would seem to follow that, by making titles, we can make property; and that when a man mort- gages his farm for ten thousand dollars, the community have ten thousand dollars' worth of real estate and ten thousand dollars' worth of personal property, where, before the execution of the mortgage, there was only the specified value of the real estate. On the other hand, when the mort- gage is paid off, ten thousand dollars' worth of personal property is destroyed, and by a parity of reasoning the State must be to that extent the poorer. A clear compre- hension, then, of the facts, that property is embodied labour ; that property can alone suffice to pay taxes ; that rights, titles, and credits are but the representatives of property; and that, having subjected the property to taxa- tion, there is no sense or equity in again assessing its ACTUALITIES AND TAXATION. 473 representative, will at once divest the problem of taxation from many embarrassments which now seem to invest it, greatly simplify it, and go far toward the determination of sound and fixed tax principles. Important decisions touching the question here under consideration that have recently been rendered by courts of high repute are also here worthy of notice. Thus, in Cali- fornia, the Supreme Court of the State has had before it the vexed question of taxation of mortgages, and the judges have decided, in accordance with justice and com- mon sense, that, as mortgages do not in any way increase the body of wealth in a community, any tax laid upon them is laid upon a fictitious value; is in so far an imposition upon the taxpayer, and, inasmuch as it represents a second tax on real estate already taxed in the hands of the owner, is " double " taxation within the meaning of that term in the Constitution of California and other States. In 1875 the following case came before the Supreme Court of New York (General Term) under the following circumstances : The administrators of a citizen being taxed by the proper tax authorities of the State for a large amount of personal property, put in a schedule of personal assets consisting mainly of certificates of stock in various railroad and mining companies, with a plea for abatement. The court, after consideration, through Noah Davis, P. J., rendered the following decision : " We are of the opinion also that the commissioners erred in including in their assessment the stocks of corporations created by and under the laws of other States. Such corporations are taxable, and we must presume, in the absence of proof, that taxes in their respective home States are duly assessed and col- lected upon their capital stock or property. The stocks in such corporations, held by individuals here, are simply representatives of capital or property employed in business in other States, the title of which is vested in and controlled by the artificial person created by and residing in such States. They represent an interest which is or may be- come a membership in the corporation and evidence of a right to participate in divided profits and in the ultimate dividend of surplus after the payment of debts and obliga- tions of the corporation. The stock certificates are not themselves the property, but are evidences of the rights 31 474 THE THEORY AND PRACTICE OF TAXATION. just mentioned; to be possessed, enjoyed, and enforced under and in confoi-mity with the laws of the State which created tlie body corporate." Tlie views thus expressed respecting the inconsistency and undesirability of directly taxing titles, credits, obliga- tions of indebtedness, and instrumentalities of exchange are so generally and thoroughly accepted by the statesmen, financiers, and economists of Europe, that no recognition of this form of taxation can, it is believed, be found in any of their fiscal systems. In England the very idea would be scouted ; and in France, where the need of great reve- nues is most imperative, and resort has been had to almost every other device and expedient for collecting contribu- tions from its people, the taxation of titles and credits has never been contemplated. Some years since (1879), when the State of California adopted a new Constitution, and, in virtue of the statutes subsequently enacted under it, made subject to additional taxation bonds, moneys, promis- sory notes, certificates of indebtedness, and shares of stock in corporations otherwise taxed, the utter absurdity of such action was thus strikingly demonstrated in one of the San Francisco papers by the following humorous illustrations : " A has a horse ; B has nothing, but is honest and in- dustrious. B buys A's horse and gives his promissory note for one hundred dollars. The horse previously taxed as property in A's hands is now taxed as property in B's hands, and A is taxed — just as much as he was before — on B's note, which is property also. That is to say, the new Constitution holds that by a mere stroke of his pen, B, who has nothing, and can give himself nothing, can in- stantaneously create as much property for others as others may happen to think that he will some day be able to acquire. Truly the performance of the man who causes two trees to grow where but one grew before is of so little comparative benefit that he might be justly censured for a sin of omission. " Let us suppose that B had given not a written but an oral promise. Ought not A to be taxed on that? If Hot, why not? Because an oral promise is not an evidence of debt ? not a ' credit ' ? * But how if there were wit- * Promises, according to Professor McLeod, are property. A CALIFORNIAN EPISODE, 475 nesses? Oral promises are credits, however; nay, even implied promises are. You have to pay — the courts will make you pay — your tradesman's account whether you have ever passed your word or not. " Now a ' credit,' be it promissory note, mortgage, certificate of deposit, or what you will, is not only not property, but is proof that the holder has parted with prop- erty that he once had. His paper credits, which merely certify that in consideration of certain advantages (in- terest, freedom from cares of management, etc.) he has surrendered his property to another, have no function but that of enabling him at some future time not to resume his own, for it is no longer his, but to acquire its equiva- lent from the present owner. The more a man has of these things, which it is proposed to tax as property, the poorer he is — not necessarily poorer than a man with none, but poorer than himself was before he got them. It was only by surrendering them that he can become again as wealthy as he was. " Is he then to escape taxation, living at his ease on his interest, while the man who pays it bears the expense of government for both? Let us see if under the present system the latter does anything of the kind. X wants a thousand dollars of Z, for which he can afford to pay, say, sixty dollars a year. But if the State government is going to exact from him ten dollars, he can afford to give Z but fifty, with which that person must be content, or X will either get the money from another or not take it at all. It is clear, therefore, that the lender really pays the tax, the borrower being unaffected directly; what he pays to the State he would otherwise have to pay to thej lender. Indirectly he is affected thus : Taxation of the principal, by reducing the interest, reduces also the volume of borrowable money by driving a part of it into more profitable investment, and the scarcity so created tends to restore the rate of interest, the cause thus counteracting its own effect, as the slackening in the speed of a steam engine is the agent that increases its velocity. " Eeverting to the matter of the horse, we find that quadruped in the possession of B and a note for one hun- dred dollars in the hands of A. Relying on B's payment of the note, A purchases a hundred dollars' worth of fiour 476 THE THEORY AND PRACTICE OF TAXATION. from C, giving his note. C knows that A is good for the amount, and gives his own note for a hundred dollars for a barrel of whisky to D, who then feels rich enough to pur- chase a thousand cigars, at ten dollars a hundred, from E, satisfying him with a note. At the end of a month D's hos- pitable friends have burned all that gentleman's cigars ; C, in one protracted, solitary revel, has gone through his bar- rel of whisky like a rat through a water pipe; A's family and retainers have consumed his flour like a flame in flax; and B's charger, broken by the weight of the financial su- perstructure reared upon his patent person, lies deadwise on the plain, with daisies at his head and at his feet. But he has left a legacy of taxable ' solvent credits ' that does honour to his memory better than a monument of brass, and " * Nothing beside remains round that colossal wreck ! ' " Working for a dead horse is, however, proverbially disheartening, and it is some years before B has put by enough money to discharge his debt to A, and has thereby rendered him unable to pay C, whose habit of being supinely drunk has made the expensively befriended D whistle in vain for the wherewithal to pay E. But finally B hands a hundred dollars to A, who hands it to C, who hands it to D, who hands it to E ; and four hundred dol- lars' worth of taxable property, on which the government of this State had been living, like St. Simon Stylites on his capital, vanishes into thin air; for the notes go to the kitchen stove, and the new Constitution made no provision for taxing the ashes. " Charles Young takes a pig in payment for his paper — like for like. Being a Jew, Mr. Young has conscientious scruples against eating pork, so he sells his pig to a butcher, taking his note. The butcher, finding the ani- mal more than usually intelligent, thinks it would be wrong to hide the light of its political sagacity under a bushel of salt, and sells it alive to Clitus Barbour to repre- sent that statesman, who helped to launch the new Con- stitution. Clitus gives his note for the pig. Becoming jealous of its rivalry, he sells it to Governor Kearney (tak- ing his note), whose parlor it graces for a season, but, being detected in an indiscretion, the Governor sells it to MONEY PROPERTY. 477 General Howard, who gives his note. General Howard wants this pig to write letters favouring the new Con- stitution; but, as it scorns to prostitute its intellect that way, its less scrupulous owner parts with it to the con- gregation of Metropolitan Temple, whose pulpit it now fills, they giving their note and a benediction. " The foregoing pig is now represented by five promis- sory notes and a benediction not taxed. None of these notes bear interest, nor are they of any benefit to their holders except as they may enable them, at a stated time, to get something of the same value as something previously renounced. The various notes make a trail of papers like that left by the ' hare ' in the boys' game of ' hare and hounds.' Now comes the assessor under the new Consti- tution, and, in obedience to a righteous provision taxing property used for religious purposes, assesses that porker in the bosom of the church. Then he strikes the paper trail extending out through secular spaces into an editorial office, and, having assessed the grunter where it is, he again assesses it where it was last, and again where it was the time before, and so on through the whole series, until that not very valuable flitch of bacon, which has ' dragged at each remove a lengthening chain ' of ' solvent credits,' has been the innocent cause of six payments into the State treasury. Beyond Mr. Young the assessor does not trouble himself to go, for on the ranch of a granger who is so intelligent as to exchange pigs for his papers the pachy- derm's trail consists of tracks in the mud, and these the new Constitution neglected to declare to be property." Money Property. — But, after all, says some objector, "notwithstanding your many and plausible arguments — • your statement that all the world except the United States have done away with the old, atomic, inquisitorial system of taxation — I do not like your proposed reforms, and for the reason mainly that they exempt ' money property ' ! '* It is most important, therefore, to inquire what is " money property," and also its relations to local taxation. All capital or property is accumulated labour, labour being the source of all property. Hence any attempt to excite prejudice against capital or property, or to attack either, is an attack upon labour itself. " Moneyed property " is generally understood to mean 478 THE THEORY AND PRACTICE OP TAXATION. evidences of debt, which are not in a strict sense property ; but rights to property, or assignments of property, accord- ing to the amount of interest of the creditor. Wpiat is a Mortgage? — A mortgage may be defined to be a species of conveyance of property — generally real estate — for the security of a debt, generally created by a loan of money, and can not be regarded as a complete, but rather a conditional or quasi-title of the property covere'd by the conveyance. It is not so much property as a deed; and neither is property except to the extent of the value of the paper and the labour of writing or printing it, and still both are very valuable as conveying rights to property. The property is the real estate conveyed or mortgaged, and a tax on the land and another tax on the deed, or a tax on the land and another tax on the mort- gage which covers the land, will in effect be a double tax on the land. This tax may be made a quadruple tax: first on the land, then on the deed of the land, then on the mortgage which is on the land, and then on the lease which the landlord may grant to the tenant. The following curious instance of hardship in taxing mortgages actually occurred in one of the counties of cen- tral Xew York under the existing system : A worthy farmer and his wife, finding themselves becoming incapacitated through age from taking practical care of their little farm, sold it for five thousand dollars, and allowed the pur- chase money to remain in the form of a mortgage, with the expectation of living on the interest paid annually by the purchaser from the profits of the farm. The town being very small, the fact of the sale and the considera- tion paid became known to every one, and the assessors were compelled, in opposition to their usual practice, to tax the old man to the full amount of the mortgage, as personal property. But the year in which this was done happened to be a year in which the town, anxious to avoid a draft of men for the army, to which the old man was not liable, put up the rate of taxation to more than the legal rate of interest, in order to provide sufficient money to purchase recruits. The result was that the poor old man and his wife found that not only was all their in- come from the mortgage swept away by the tax collector, but they were even obliged to go out for days' work, in TAXATION OF INDEBTEDNESS. 4^9 order to pay a balance of taxation and provide means of support ; and this, too, while the identical farm for which the mortgage was given was taxed at one fifth its true value, and other investments of other citizens of an in- visible and intangible character undoubtedly escaped taxa- tion altogether. And this we call equality in taxation. To Tax Indebtedness is to Tax the Borrower. — If any one doubts that a tax on indebtedness is a tax upon the borrower, or the property which the indebtedness covers, that question can be easily solved by an honest, uniform tax on all State, county, town, and city bonds hereafter issued, by making them all subject to an annual tax of one, two, or more per cent, and by providing that the tax shall be deducted at the time of the payment of the interest. Is there any one who believes that these bonds will sell in the market at the same high rate that they would command if by law they were free from taxation? We can also test the effect of an honest, uniform tax upon mortgages by providing that mortgages hereafter made shall operate to reduce for assessment the valuation of the land mortgaged to the amount of the mortgage, and that the mortgagor shall pay the tax on the mortgage, and deduct the tax from the principal or interest, when paid to the mortgagee. But who believes, under such a law, that any money would be loaned at the legal rate of interest ? A somewhat curious piece of practical evidence, in sup- port of the truth of the above position, in respect to the taxation of mortgages, has been afforded by an experi- ence of New Jersey. This State exempted, in 1869, all mortgages from taxation in certain of her counties and cities which lie contiguous to New York city; but this legislation, although operating to draw capital away from New York and into New Jersey, was not primarily effected for any such reason, but was brought about in this wise: New Jersey, in the first instance, enacted an honest, uni- form law of taxing mortgages, and one, moreover, which could with the utmost certainty be executed, and similar in principle to that above suggested ; namely, that the person giving the mortgage should pay the tax on it, and deduct the tax from the principal or interest in settling with the creditor. The result was that all mortgages fall- 480 THE THEORY AND PRACTICE OF TAXATION. ing due were immediately foreclosed, and as no new loans, moreover, could be made, the inhabitants of the growing counties near the city of New York, wishing to borrow money on land, or to sell land, found themselves in an uncomfortable position; so much so, that if the law taxing mortgages in this section of New Jersey had not been promptly repealed by the Legislature, the issue would soon have become a predominant one in the State elections; and hence the explanation of one of the most curious statutes in the history of American legislation which made one tax law for one part of the State and another and a different one for the remainder.* But the point of chief interest in respect to this whole tax experience to which attention should be especially directed, is, that it did not take the citizens of New Jersey a great length of time to find out that a borrower of money on a mortgage paid the tax, and that the lender was the tax collector, and only paid his part of a diffused tax, as all other persons living, consuming, buying, or selling in the State must pay; and that if the borrower could not legally pay the lender a rate equal to other net profits of investments, he could not borrow. A little experimental legislation in other States will, therefore, effectually explode the vague theory that taxes uniformly levied do not diffuse themselves ; and al- though it is true that the persons or property primarily taxed do not charge the entire tax over to others, this very fact nevertheless shows that the tax is diffused with absolute equality upon the persons who originally may pay the tax, and upon those who finally bear their por- tion of it. Loans on Mortages prohibited in Eome. — Momm- sen, in his History of Eome, states that at one period the lending of money in that country on mortgages was pro- hibited, and it is apparent that a uniform taxation of * " And all mortgages upon estates, chattels, or personal prop- erty, taxable by law within said counties of Hudson, Union, Essex, and the city of Brunswick. Middlesex County, and the county of Passaic, except the townships of West Milford, Pompton, and Wayne, for State, county, township, and city purposes, shall be exempt from taxation when in the hands of any inhabitant, cor- poration, or association residing or located in said counties or cities." (Approved April 2, 1869.) — Laws of New Jersey, 1869, p. 1225. GOVERNMENT BONDS. ^ 481 mortgages would amount to a prohibition as effectual as the prohibition which existed under the Koman law. The Roman patricians, in their legislation, wished to prevent the common people from becoming an independent yeo- manry, and owning and acquiring real estate through the facilities of borrowing upon mortgages. No chimerical attempt had then ever been made to tax money at interest, and this purpose of having the soil cultivated on shares or by dependent tenants could best be obtained by a prohibition of all mortgages. Now, it needs no argument to show that a system of onerous taxation of mortgages must have a tendency to re-enact the Roman policy, and that it is undoubtedly the true interest of the state, on both political and eco- nomical grounds, to encourage occupiers to become owners, who always give better attention and protection to their own property than to the property of landlords. Purchasers of Government Bonds not practical- ly EXEMPT FROM TAXATION. — The purchasers of United States, State, and municipal bonds or securities, which are nominally exempt from taxation, are in effect taxed, and uniformly taxed in the high ' price which they are obliged to pay for these securities by reason of their ex- emption from taxation. It is not only a sound principle of political economy that a tax upon money at interest is simply a tax upon the borrowing price of the bor- rower, causing an increased rate of interest, or a reduced price to be obtained for the obligation given; but this principle has been adjudicated by the highest court of che country, so far as a court of last resort can adjudicate a great principle in economic science. Thus, in the case of Weston vs. The City of Charleston (2 Peters, 449), the Supreme Court of the United States, through Chief-Jus- tice Marshall, held that " a tax on Government stock is a tax on the power to horroiv money on the credit of the United States." If, therefore, we except the borrower from taxation in the form of a decreased rate of interest, we grant him no special exemption or advantage, for his property, which is covered by the debt, has already in other forms been taxed, and the exemption will diffuse itself in the form of lower rate of interest, which will be the means of producing a higher price of labour, land. 482 THE THEORY AND PRACTICE OF TAXATION. and personal property, until the exemption is completely diffused. Who will then be injured by taking the tax from money at interest? It is probable that he who now adds the tax to the rate of interest, and charges the borrower, and does not pay it to the State, may lose by the change. He will be obliged to enter the open money market and pay the market rate, as the purchasers of Government bonds now do, for evidences of debt that will be free from taxa- tion in the hands of all persons; and the laws of trade will regulate his investment as they daily regulate the price of Government bonds, and will bring down his securi- ties to a rate of interest not much above the rate paid by the national Government. The exemption applied to United States bonds, which is of no practical benefit to the present purchasers, in consequence of the increased price of the bonds, would be of no benefit if applied to the holder of other securities in an established and perma- nent system, except in freedom from the uncertainties and irregularities attending the exercise of arbitrary and irreg- ular power. If the exemption is an exemption of every- thing of the same class, it is perfectly equal and fair, and its effect is diffused and equated; and the tax on another article, taxed in lieu of the exempted class of articles, is likewise equated and diffused, and if invisible and im- ponderable evidences of debt can not be taxed equally no injustice will arise if they are all free from primary taxation, and if the taxes of a permanent system are im- posed on other things subject to positive and fixed rules of assessment. The daily price of United States bonds, therefore, is a constant lesson that an exemption of a security from taxation is an exemption of the borrower, and the same law of political economy will rule in respect to both private and public debts. Each State has, there- fore, the power to put its borrowers on an equal footing with the General Government, and without injustice or inequality toward the borrower or the lender. The Old and New Ideas in Taxation. — The first at- tempt made to tax money at interest was instigated against money lenders because they were Jews; but the Jew was sufficiently shrewd to charge the full tax over to the Chris- tian borrower, including a percentage for annoyance and risk; and now most Christian countries, as a result of TAXATION OP MONEY. 483 early experience, compel or permit the Jew to enter the money market, and submit, without let or hindrance, his transactions to the " higher law " of trade and political economy. But a class yet exist who would persecute a Jew if he is a money lender, and they regret that the good old times of roasting him have passed away. They take delight in applying against him, in taxation, rules of evidence admissible in no court since witches have ceased to be tried and condemned. They sigh at the suggestion that all inquisitions shall be abolished; they consider oaths, the rack, the iron boot, and the thumbscrew as the visible manifestations of equality. They would tax pri- marily everything to the lowest atom; first for national purposes, and then for State and local purposes, through separate boards of assessors. They would require every other man to be an assessor or collector, and it is not probable that the work could then be accomplished with accuracy. The average consumption of every adult in- habitant of the United States is at least two hundred dollars annually, or in the aggregate $1,500,000,000 ; and this immense amount would fail to be taxed if the assess- ment was made at the end of the year, and not daily, as fast as consumption followed production. All this com- plicated macliinery of infinitesimal taxation and mediae- val inquisition is to be brought into requisition for the purpose of taxing " money property," which is nothing but a myth. The money lender parts with his property to the borrower, who puts it in the form of new buildings, or other improvements, upon which he pays a tax. Is not one assessment on the same property sufficient? But if you insist upon another assessment on the money lender, it requires no prophetic power to predict that he will add the tax in his transactions with the borrower. If a tax of ten per cent was levied and enforced on every bill of goods, or note given for goods, the tax would be added to the price of goods, and how would this form of tax be different from the tax on the goods ? " Money property," except in coin, is imaginary, and can not exist. There are rights to property of great value. The right to inherit property is valuable; and a mortgage on land is a certificate of right or interest in the property, but it is not the property. Land under lease is as much 484 THE THEORY AND PRACTICE OF TAXATION. " money property " as a mortgage on the same land ; both will yield an income of money. Labour will command money, and is a valuable power to acquire property, but is not property. If we could make property by making debts, it can not be doubted that a national debt would be a national blessing. Attacking the bugbear of " money property " is an assault on all property ; for " money property " is the mere representative of property. If we tax the representative, the tax must fall upon the thing represented. CHAPTER XXII. TAXATION OF CHOSBS IN ACTION. In addition to the review of the celebrated Foreign- held Bond Case * decided by the United States Supreme Court in 1893, it is proposed to call attention here to additional and interesting features of this case which have not been hitherto noticed in this connection. The court having decided the situs for taxation of negotiable instruments — railroad bonds, etc. — took occa- sion also to affirm the taxable situs of such other personal property., or evidence of indebtedness, as is generally in- cluded under the term choses in action, using in so doing the following language: " But other personal property, consisting of bonds, mortgages, and debts generally, has no situs independent of the domicile of the owner, and certainly can have none where the instruments, constituting the evidence of debt, are not separated from the possession of the owner." As thus expressed, the reasons given by the court for separating for taxation the situs of the two classes of personal property under consideration are so clear, and so in accordance with common sense, as hardly to require any further explanation; and, therefore, it seems only necessary to assist the reader, who, if a taxpayer, is cer- tainly interested in knowing the tax liability of his prop- erty, by recalling that while, in the case of negotiable instruments, the title to the property runs with the instru- ment and passes by delivery, in the case of bonds, mort- gages, and sales made to particular persons, and thus non-negotiable, the title, on the other hand, does not run with the instrument, but exclusively with the person of the owner; so much so, that the attachment of a mort- * Ante, p. 453. 485 486 THE THEORY AND PRACTICE OF TAXATION. ;^.\^ \i \/» gage, or the possession by theft or finding of a note pay- able to a person, does not in any degree alienate or impair its original and legitimate ownership. The decision of the court, therefore, brings all classes of personal property under one harmonious and consistent rule for the purpose of taxation, legal attachment, and protection, by affirming that their situs as property is only where they are; which in the ease of visible and tangible objects and negotiable instruments, is dependent, from the very nature of things, upon actual and not constructive presence, and in the case of choses in action upon the domicile of the owner; and in thus deciding, the court simply followed English precedents of long standing and the highest character.* It may, however, be objected that the practical effect of this decision has been to relieve all negotiable instru- ments from taxation, inasmuch as, removed beyond the territory and jurisdiction of the State in which their owner resides, they will not, by reason of easy conceal- ment (for which safe-deposit companies in the larger cities of most of the States now offer great facilities), be easily cognizable by the assessors of the locality in which they are deposited. But admitting the objection in full force, as in all reason we must, what then ? The Supreme Court has given its opinion clearly and unmistakably; and until this opinion is reversed, it constitutes the legitimate rule of action for both assessors and taxpayers. But suppose it were possible to reverse the opinion in question, would it be expedient to do so? Would it be desirable to aban- don the plain common-sense view that the situs for the taxation of all personal property is where the law pro- tects it, and where alone an assessment and a legal attach- ment against it can be enforced, and in its place make situs depend on visibility? And if visibility, what degree Vof visibility? Shall a diamond, a bar of gold, or a rail- * Lord Ellenborough, in King's Bench (Neilage vs. Holloway, Barnwell and Allison's Reports, 318), having decided that a nego- tiable note was a chattel personal and not a chose in action; Lord Abinger, that all foreign government bonds payable to bearer have a sittis where they are actually situated ; and the House of Lords, that registered stocks and bonds of the United States and of the several States not passing by delivery, are not negotiable instru- ments, and therefore not taxable as goods and chattels. TAXATION OP MORTGAGES. 487 road bond, belonging to A. B., residing in Boston, but openly displayed in a Jeweller's or broker's window in Philadelphia, be taxable in Pennsylvania, and a similar diamond, gold bar, or bond of the same owner, deposited in a drawer of the same shop or office and not so readily visible, be taxable in Massachusetts? Shall we make the situs of property for taxation depend upon the keenness of perception or visual organs of an assessor? Or shall we not, rather, admit that the attempt to raise revenue by taxing such property as negotiable instruments which from their very nature are in a high degree intangible and invisible, and thus easy of concealment; which, passing by delivery, are here to-day and somewhere else to-mor- row; which are not taxed in any other highly civilized country, and which are in great part, even in this country, specifically exempted by law — i. e.. United States bonds, legal tender, national bank notes, etc. — is in itself an ab- surdity and a wrong; inasmuch as to enforce a levy from one man for one species of property, because through his honesty, ignorance, or inability to escape he can be laid hold of, and allow identically the same description of property in the possession of another man to escape because of varying circumstances beyond the control of the assessors, is not taxation in any sense, l)ut simply arbi- trary taking. The court itself, in rel'orriug to tlic tax under consideration, said with great point and truth : " It is only one of many cases where, under the name of taxa- tion, an oppressive exaction is made, without constitu- tional warrant, amounting to little else than an arbitrary seizure of private property. It is, in fact, a forced con- tribution levied upon property held in other States, where it is subjected, or may be subjected, to taxation upon am estimate of its full value." Decision of the Supreme Court of California on THE Taxation of Mortgages. — Any review of the history of local taxation in the United States would be imper- fect which failed to notice a notable and interesting de- cision given in May, 1873, by the Supreme Court of Cali- fornia in regard to the taxation by its State authorities of real-estate mortgages. The question was one that for a considerable time had greatly interested the people of California, and the drift of popular sentiment of San iS: 488 THE THEORY AND PRACTICE OF TAXATION. Francisco seems to have been most unmistakably in favour of their taxation. But how to do it, and at the same time not increase the burden on the borrower, who had mortgaged his land as security for a loan of capital to improve or stock it, was a problem that not a little troubled the lawmakers in Legislature assembled. One proposition brought forward contemplated a deduction from the amount of land tax of the assessment on the mortgage; but as the lands of California were found, as a rule, to be taxed far below their value, and the mort- gages for a value far in excess of the assessor's appraise- ment of the land they covered, it soon became apparent that this scheme was to a greater or less extent equiva- lent to exempting the land and taxing the mortgage. An- other proposition, embodied in a bill introduced into the Assembly, was to make void all contracts by which bor- rowers agreed to reimburse lenders in the amount of the mortgage tax ; while others again were exceedingly strenu- ous in favour of trying the pleasing little experiment — which no community having once tried ever desires to repeat — of providing that the person giving the mort- gage should pay the taxes upon it, but be at the same time authorized to deduct the tax from the principal, or interest, in settling with his creditor. Pending these dis- cussions, however, the Supreme Court, which had the ques- tion before it on a suit to which one of the savings banks of San Francisco was a party, rendered a decision, that in virtue of a clause in the Constitution of the State re- quiring all taxation to be equal and uniform, the taxation of mortgages was unconstitutional and illegal; inasmuch as to tax a given property and then tax a mortgage on it, which mortgage is not in itself property, but, like a deed or lease, is a species of conveyance or acknowledgment of a conditional interest or right in the property, is not equal and uniform taxation, but an unequal and double tax on the property mortgaged. The importance of this decision, considered as an act reformatory of the popular theory of local taxation, does not require to be proved and illustrated ; but as it was unquestionably a step in advance of any heretofore taken by either our Federal or State courts, and as, by reason of it, not only were mortgages exempted from taxation MORTGAGOR PAYS TWO TAXES. 489 in California, but also all promissory notes and other evi- dences of indebtedness, it is desirable briefly to ask atten- tion to the reasoning by which the court was led to its con- clusions. The opinion was given by the Chief Justice — Crockett — who, after reviewing the history of the case, is reported to have used the following language: " I come now to the point, whether a tax on land at its full value, and a tax on a debt for money loaned, secured by a mortgage on the land, is in substance and legal effect a tax on the same property. We all know, as a matter of general notoriety, that almost universally, by a stipulation between parties, the mortgagor is obliged to pay the tax both on the land and on the mortgage. Practically he is twice taxed on the same value, if he has still in his possession the borrowed money to secure which the mortgage was made. The law taxes in his hand both money and land; and by his stipulation he is required to pay tax on the mortgage debt, and also, if the money has passed out of his hands into the possession of some other taxpayer, it is taxed in the hands of the latter, so that the money bears its share of taxation, and the land its share, in the hands of whomsoever they may happen to be. " It is very true that a voluntary agreement on the part of the mortgagor to pay the tax on the mortgage debt can not improve its situs. The State was no party to the contract, and is not bound by stipulation mter alias. The burdens of taxation can not be shifted from those on whom the law imposes them by stipulations be- tween private persons ; but in the absence of such a stipu- lation, an inexorable law of political economy would im- pose upon the mortgagor the burden, in a different form, of paying the tax on the mortgage debt. Interest on money loaned is paid as a compensation for the use of the money, and a rate of interest as agreed on is the amount which the parties stipulate will be the just equiva- lent to the lender. If, however, by the imposition of a tax on the debt, the Government diminishes the profit which the lender would otherwise receive, the rate of interest will be sufficiently increased to cover the tax, which in this way will be ultimately paid by the borrower. The 33 490 THE THEORY AND PRACTICE OF TAXATION. transaction would be governed by the same immutable, inflexible law of trade by reason of which import duties on articles for consumption are ultimately paid by the consumer, and not by the importer. The rate of interest on money loaned is regulated by the supply and demand which govern all articles of commerce; and the burdens imposed by law in the form of a tax on the transaction, which would thereby diminish the profits of the lender, if paid by him, will prompt him to compensate for the loss by increasing to that extent the rate of interest de- manded. // his money ivoiild command a given rate of interest without the burden, he will he vigilant to see that the borrower assumes the burden, either by express stipu- lation, or in the form of increased interest. This is the\ law of human nature, which statute laws are powerless to suppress, and which pervades the whole of trade governed by the law of supply and demand. Nor would the enact- ment of the most stringent usury laws produce a different practical result. Human ingenuity has hitherto proved inadequate to the task of devising usury laws which were incapable of easy evasion; and wherever they exist they are, and will continue to be, subordinate to that higher law of trade which ordains that money, like other articles of commercial value, will command just what it is worth in the market, no more and no less. x\ssuming these prem- ises to be correct, and I am convinced that they are, it results that it is the borrower, and not the lender, who pays the tax on borrowed money, whether secured by mort- gage or not ; but if secured by mortgage, he is taxed not only on the mortgage and property, but on the debt which the property represents and which is held as a security for the debt." * * Of the soundness of this decision there could probably be no more convincing illustration than the statement that upon its an- nouncement the savings banks of San Francisco gave notice that they would immediately reduce the rate of interest on their loans secured by mortgages by the amount of the tax on the mortgage. And the Alta-California of May 9th, in commenting upon the de- cision, says: "When the news arrived here yesterday morning" (that the Supreme Court had given a decision) "it was not unex- pected; and the idea conveyed by the false rumours set afloat, that the decision was adverse to the savings banks, was accepted as a decision measured by expediency, and not based on sound legal ABSURDITIES INVOLVED. 491 Subsequently the Hibernia Savings Society of San Francisco having resisted under the provisions of the Con- stitution of California the taxation of mortgages given to secure the loan of property, the Supreme Court again met the case fairly and squarely — its language by Justice Wallace being reported as follows : " Mere credits are a false quantity in ascertaining the sum of wealth which is subject to taxation as property, and so far as that sum is attempted to be increased by the addition of these credits, property based thereon is not only merely fanci- ful, but necessarily the imposition of an additional tax upon a portion of the property already once taxed. The taxation thus imposed, nominally upon credits, having resulted in the double taxation of money, the additional tax must be paid by some one. And here all experience, as well as all settled theories of finance, concur that it is not the lender who pays, but the borrower. The borrower is the consumer; the interest that he pays to the lender is the prime cost of the delay for which he has contracted. If the Government, by the imposition of additional taxes, increase the cost, the borrower, being the consumer, must pay for it." The court, through Justice McKinstry (the Chief Jus- tice's opinion being in concurrence), enumerated, as fol- lows, some of the absurdities to which an attempt to in- clude choses in action in the definition of property would necessarily lead : " Supposing," he said, " that the necessaries of Gov- ernment required a tax of one hundred per cent on all values, or. what would be the result of such a tax, an appropriation of all the property in the State — it is plain that the State would receive no benefit from evidences of debt due by some of her citizens to others, and payable out of the tangible property which the State had already taken. " The Legislature may declare that a cause of action principles. Special despatches received changed the result; and when it became evident that the banks and the mercantile com- munity had triumphed, a general feeling of satisfaction Avas every- where noticeable. Merchants, bankers, and taxpayers generally received the news with the feelings of men who felt relieved from a terrible incubus." 492 THE THEORY AND PRACTICE OF TAXATION. shall be taxed, but a cause in action can not pay the tax; and this because it has, and can have, no value independent of the tangible wealth out of which it may be satisfied. " It may be possible- in every case to show that the debtor has paid the tax assessed to his creditor. But it admits of mathematical demonstration — if other property in the State has been assessed at its value — that the money which shall ultimately satisfy the debt (if it ever is satis- fied) has paid the tax. If it were practical to assess all the property in the State at the same moment of time, it would be clear to every mind that an assessment of a credit was an attempt to transfer to it a value elsewhere assessed. If a debtor was found to be the owner of one thousand dollars, and is assessed for that sum, and his creditor is found to be the owner of his note for one thousand dollars, and is assessed for a like sum; and if the day after the visit of the assessor to the creditor the debtor shall pay his note, it is clear that this same value has been twice taxed; since the debtor has parted with his money, and received only that which is certainly not taxable property in his hands, and which can never afterward be assessed. When a debtor pays his debt, he does not abstract or de- stroy any portion of the taxable property of the State ; the aggregate of values remains the same." — Opinion of Jus- tice McKinstry* Suppose, " were such a thing possible, that the entire tax rolls exhibited nothing but indebtedness. Taxation under such circumstances would, of course, be wholly fanciful, as having no actual basis for its exercise." — Opinion of Chief -Justice Wallace. * See the article by Carl C. Plehn, on the Taxation of Mort- gages in California, in the Yale Review, May, 1899. CHAPTER XXIII. THE CASE OF KIRTLAND VS. MOTCHKISS. The above designation has been popularly given to one of the most important questions that has ever come before the legal tribunals of this country, and the record of which has been heretofore so difficult of access that it has not attracted the attention it merits, but which it is to be hoped will prove at no distant period a subject of popular interest and future judicial consideration. The particulars of the case are in the main as follows : In 1869, or previous, Charles W. Kirtland, a citizen of Woodbury, Litchfield County, Connecticut, loaned money, through an agent, a resident and citizen of Illinois, on bonds secured by deeds of trust on real estate in the city of Chicago. Each of these bonds declared that " it was made under and is in all respects to be construed by the laws of the State of Illinois," and that the principal and interest of the obligation were payable in the city of Chicago. The deed of trust also contained a provision that all taxes and assessments on the property conveyed should be paid by the obligor (borrower) without abate- ment on account of the mortgage lien; that the property might be sold at auction, m Chicago, by the trustee, in case of any default of payment, and that a good title, free from any right of redemption, on the part of the obligor, might in that case be given by the trustee. An- other interesting feature of the case not to be overlooked was, that pending the proceedings to be next related, the loans as originally made became due and were paid ; when the proceeds, without being removed from Illinois and re- turned to Mr. Kirtland in Connecticut, were reinvested in Chicago by his agent, under terms and conditions as before. 493 494 THE THEORY AND PRACTICE OP TAXATION. These facts becoming known to the tax officials of the town of Woodbury, they added in 1869 to the list of prop- erty returned by Kirtland for the purpose of taxation, as situated within the State, the sum of eighteen thousand dollars; and in 1870 the sum of twenty thousand dollars, to represent the amount of property owned and loaned by Kirtland, in each of these years, as was conceded, without the territory of the State. The sums thus added were subsequently assessed in the town of Woodbury in the same manner and at the same rate as was other property which Mr. Kirtland owned within the State and there situated. Payment of the taxes thus assessed on the amount of these Illinois loans being refused by Kirtland, the tax collector (Hotchkiss), in April, 1873, levied his tax war- rants on the real estate of the alleged delinquent in Wood- bury, and advertised the same for sale; and on petition for injunction to restrain the collector from such pro- ceedings, on the ground of the illegality of the tax in question and its assessment, the case came before the court of last appeal in the State, known as the " Supreme Court of Errors " ; it being agreed by all parties concerned that the only question in the case was whether the bonds owned by Kirtland, drawn in the form and manner stated, were liable to taxation in Connecticut. Case for the Respoxdext. — In the argument before and in the opinion rendered by this court the following were the points mainly relied upon in support of the posi- tion that the petition for injunction in restraint of the col- lection of the tax should not be granted : First, that the statutes of Connecticut explicitly authorized and required the taxation of debts due its citizens from parties out of the State. Second, in respect to the power of the Legislature of Connecticut to authorize and require such form of taxation, it was claimed that there was no provision in the Consti- tution of the State limiting and defining such power of taxation. Third, the following characterization of the nature of a debt or a chose in action, and its suitability as a subject for taxation for the purpose of obtaining reve- nue, was put forward by the counsel for the State as a statement of economic conclusions worthy of full accept- ance. " It [a chose in action] has not a visible, tangible CASE FOR THE RESPONDENT. 495 form. The note, bond, or account even, may be evidence of a debt, but it is not the debt itself. The specific money when loaned, and received by the borrower, is no longer the property of the creditor. It is soon merged in the circulating mass, and the creditor can neither identify and claim it, nor put his hand upon any property pur- chased with it, and say that that is his. The money may be invested in real estate, or manufacturing, or merchan- dising, or speculation. It may prove a profitable invest- ment, or it may in a short time prove a total loss. It is all the same to the creditor so long as his debtor's ability to pay is unimpaired. He has simply a right to receive a given sum of money with interest or damages for its detention. It is a personal right, and accompanies the person of the creditor. The debtor is under a correspond- ing obligation to pay the demand. The right to receive is valuable, and through it an income is derived. That right may ivith 'propriety he taxed. The obligation to pay is a burden, and has never, to our knowledge, been the sub- ject of taxation. It seems, therefore, that the appropriate place to tax money at interest is where the creditor re- sides, and that for that purpose it may with propriety be said to be located with the creditor." * The respondent attached much importance to the analogy " between a money demand, evidenced by a note or bond, and shares of stock in a corporation " ; and to the fact that the United States Supreme Court had de- cided that " shares of stock in national banks are property, separate and distinct from the property of the corpora- tions which they represent, and are taxable " ( National Bank vs. Commonwealth, 9 Wall., 353). Reference was also made to the case of Minot vs. The Philadelphia, Wilmington & Baltimore Railroad Company, in which the United States Supreme Court was held to have recognised a distinction between shares of railroad stock and the capital (property) of a corporation, and in respect to which it was assumed that the court main- tained that the share of a stockholder is something dif- * Reference in this connection is made to the opinions on this general subject expressed by the Supreme Court of California, given in the preceding chapter. 496 THE THEORY AND PRACTICE OP TAXATION. ferent from the capital stock of a company; the latter being the property of the company only, while the former is the individual interest of the stockholder, constituting his right to a proportional part of the dividends when declared and to a proportional part of the effects of the corporation when dissolved after payment of its debts. Regarded in that aspect, it was held to be an interest or right which accompanies the person of the owner and hav- ing no locality independent of its domicile. But whether, when thus regarded, it can be treated as so far separable from the property to which it relates as to be taxable independent of the locality of the latter, was a question which the counsel of the State did not hold to be decided; but there was a strong intimation that the United States Court intended to decide that shares of railroad stock can only be taxed in the State where the owner resides. Case for the Petitioners. — On the other hand, the following is a summary of the arguments and reasons ad- vanced (mainly by one of the most learned and distin- guished members of the Court of Errors of the State, and of the American bar, Hon. L. F. S. Foster, formerly presi- dent of the United States Senate and acting Vice-Presi- dent of the United States), in support of the petition for an injunction in restraint of the collection of a tax upon the plaintiff: " Taxation and protection are correlative terms. Pro- tection to the person is the ground on which the right to tax the person rests. Protection to the business, pro- tection to that portion of the property not taken by the tax, is the consideration or compensation for all legitimate tax- ation on business or on property. The person must be domiciled within the State to be subject to a personal or poll tax ; the business or the property must also be within the territory of the State to confer jurisdiction over them. That the person of the plaintiff is within the jurisdiction, and subject therefore to the taxing power, is apparent from the record. This tax, however, is not imposed on the person; it is imposed on the property of the plaintiff, and as such it must be sustained, if sustained at all. The case does not require any description of the various species of property, real, personal, etc. Eeal property has. CASE FOR THE PETITIONERS. 497 of course, an immovable sitiis, and can never be subject to any taxation except that imposed by the government within whose jurisdiction it is situate. The reason is, that that government is the only one that can afford it protection. Personal property, of whatever it may con- sist, though capable of being transported from place to place, if it be of a visible and tangible kind, would seem, in the nature of things, to follow the same rule and for the same reason — that is, to be subject to taxation by the State within whose jurisdiction it is situate, as that State only has dominion over it, and as that State only can afford it protection. " Now, if the property in question be considered real property, it being in the State of Illinois, any tax upon it by Connecticut would be extra-territorial and void. If it be considered personal property, of a visible and tan- gible character, it is still in the State of Illinois, and so just as much out of the dominion and beyond the juris- diction of the State of Connecticut as though it were real property. If we consider the property to be an in- terest in real or personal property, or a title, inchoate, equitable, or legal, to such property in Illinois, such in- terest, or such title, is no legitimate subject of taxation in Connecticut. The corpus and situs of this property being in Illinois, and subject, of course, to taxation there because within her jurisdiction, no interest in it, no title to it, can be taxable in Connecticut. Such a claim involves one of two absurdities : either that the same property may be in two places at the same time, or that two independent governments can have jurisdiction over the same subject- matter at one and the same time. " But the property of the plaintiff on which this tax has been imposed is not real property, nor is it personal, of the character here considered. It may be well to de- scribe it precisely, that there may be no room for misun- derstanding. " The plaintiff loaned money in the city of Chicago, in the State of Illinois, on bonds conditioned for its repay- ment, and secured by deeds of trust. One of said bonds, and one of said deeds, as a specimen of all, is made part of the record. This bond declares ' that it is made under, and is in all respects to be construed, by the laws of the 498 THE THEORY AND PRACTICE OF TAXATION. State of Illinois, and is given for an actual loan of money [$3,000] made at Chicago, by Charles W. Kirtland [the plaintiff], to Edmund A. Cummings [the obligor] on the day of the date hereof ' [July 17, 1809]. The deed of the same date is a conveyance in fee, by Cummings and his wife, of a lot of land in Cliicago, to Xorman C. Perkins, of said city, to be held by him in trust, as security for the payment of said loan, with power to sell and convey the same, and apply the proceeds in payment of the loan, in case of default on the part of said Cummings to perform the stipuUitions of said bond. It is quite obvious that Cummings has incurred a debt to Kirtland, and that Kirtland has a claim against Cummings. Cummings is the debtor, Kirtland the creditor. Has this debt a situs? If it has, where is it ? In Illinois, or in Connecticut ? The contract to loan was made in Illinois, there the creditor parted with his money, there is the property pledged for its repayment, there the debtor is domiciled, there the trustee. " This seems to indicate Illinois as the situs of this debt. So far as it is a thing having a substantial exist- ence, it is there, and not elsewhere. The Connecticut statute provides in terms, ' that money secured by mort- gages upon real estate in this State shall be set in the list and taxed only in the town where said real estate is situated.' This manifestly recognises the situs of the property pledged as security for a debt, as the situs of the debt. But a debt has no situs. Only a material thing can have a corpus, and only a corpus can have a situs, for it is the location of the corpus that constitutes a situs. A debt is neither visible, tangible, nor ponderable; it has no situs, no corpus. It is a misnomer to call it property. In legal phrase it is but a chose in action, a jus incorporate. It is an equitable title in the property of the debtor, and it adheres, as a title, in the property it represents. It does not follow the person of the owner in his domicile, though he may transfer it there. " These views are fully sustained by the United States Supreme Court, in the case of Brown vs. Kennedy, 15 Wall., 591.* * In this case, which covered a proceeding under the confiscation act of 1862, the United States Court rejected the theory that a SITUS OF A DEBT. 499 " The same court also held to similar conclusions in a number of other cases. Thus, in the case of Pelhara vs. Kose, 9 Wall., 103, a note, the evidence of the credit, not the credit itself, was the thing proceeded against. In the case of Pelham vs. Way, 15 Wall., 196, where the court also held that the proceedings, not having been against either the debt or credit, but only against the material evidence of it, and that material evidence having been out of the marshal's jurisdiction, no confiscation had been effected. " Now, if these decisions," said Judge Foster to his colleagues in the Court of Errors, " are to be recognised as law, how can it be claimed that on this credit, given by Kirtland to Cummings in the State of Illinois, secured by a deed of real estate there situate, held by a trustee resi- dent there, the debtor being domiciled there, the debt made payable there, the laws oi Illinois by express agreement to govern the contract; how (for the question bears re- peating) can it be claimed that there is any subject-matter within the jurisdiction of Connecticut on which to impose a tax? credit has a legal situs where the owner resides, and held tliat a bond and mortgage form of credit could be confiscated by the United States where the mortgage debtor resided, though, in point of fact, the bond and mortgage were never in the State of Kansas where the proceedings in forfeiture took place, and were, in fact, in possession of the owner, in the rebel lines, in the State of Virginia. The court accordingly passed a decree, and ordered that the said bond, mortgage, and credit be condemned and declared forfeited to the United States. The decree also ordered Kennedy, one of the obligors and mortgagors, to pay the debt into the court, for the use of the United States; and in pursuance of the decree the payment was made to the officers of the court. After the termination of the war, or in 1868. Brown, the obligee and mort- gagee in this bond and mortgage, having obtained a pardon from the President of the United States, filed a bill in the United States Circuit Court for the district of Kansas airninst Kennedy and wife, for the foreclosure of this mortgage. The principal defence was, that the mortgage and the debt secured liy it had Ijeen confis- cated under the act of Congress. That, of course, put in issue the validity of those proceedings. It was admitted as matter of fact and agreed, that Brown, the complainant, was and always had been a resident of Virginia, had been a continuous resident of the State from June, 1860, to September, 1865. and neither the bond nor mortgage in question was during any part of that time in the dis- trict of Kansas. 500 THE THEORY AND PRACTICE OF TAXATION. f " That the land in Illinois which is the security for this debt, and of which this debt is the representative, has borne its full share of taxes without diminution on ac- count of this debt is not denied. If the land were in Con- necticut, this would suffice; no tax could be collected on the debt. That the land is in Illinois can not affect the principle. If each State has dominion over the property, real and personal, within its territory for the purposes of taxation — and he must be a bold man who denies it — • that dominion must, from its nature, be exclusive. No other State can have concurrent jurisdiction. Nor does any other State become invested with the power to tax, if the State in which the power is vested omits to exercise that power. Should a State exempt the property, real or personal, within its limits, belonging; to non-residents, from taxation, by what authority could any foreign State impose taxes on such property? The question is purely jurisdictional, and the matter of double taxation is not involved. The point is not whether the State may tax a thing twice, but whether there is anything within its juris- diction that it can tax at all. " Resort must be had to a legal fiction to draw this debt into Connecticut. It does not appear from the record that even the evidences of the debt, the bond and deed, were held in Connecticut." Under such circumstances, it is curious to note, as Judge Foster especially pointed out, to what a singular and absurd hypothesis and procedure the Connecticut au- thorities, as if conscious that they had abandoned reason and were dealing with sentiment, had recourse in order to get a basis and a warrant for their action. They first assumed that there was an imaginary property, separate and distinct from the material property; and then gave to such imaginary property an imaginary silus, thus " going far into the domain of the sentimental and spirit- ual for the purpose of taxation." Bishop Berkeley, it will be remembered, held to the opinion that matter does not exist, and that we only imagine that it exists ; but it is not at all probable that he ever hoped, when alive, that his views would be so practically indorsed, and at so early a day, in the State of his literary adoption. He would have made, moreover, a desirable tax assessor and tax CONSTITUTIONAL QUESTION. 501 collector under the present Connecticut tax laws ; for being logical, even if lie was sentimental, he would doubtless have been willing to take the taxes in the pure product of the imagination. His successors, however, were not only sentimental but illogical; for, not content with assuming that the imaginary is the real, they tried to do what the good bishop never would have sanctioned — namely, take something out of nothing. But, apart from these curious and novel politico-eco- nomic and legal features, this Kirtland case involves con- stitutional questions of the highest interest and impor- tance — as much so, perhaps, as any case ever brought to judicial arbitrament since the formation of the Federal Constitution. The power of the State to tax the business of loaning money, like the power to tax any business transacted within its limits, by way of license or otherwise, whether the money be loaned to parties within or without the State, is unquestionable. But this, however, can not be exercised by a State when the business is done without the State, though it be done by citizens of the State. Citizens of Connecticut transact- ing business in Illinois must, therefore, be subject to the laws of Illinois, and not to the laws of Connecticut. Again, if each State of the Federal Union has dominion over the property and business transacted within its ter- ritory for the purpose of taxation, that dominion must from its very nature be absolute and exclude the dominion of any other State over the same property and business. Again, the sovereignty of coequal States involves a full recognition of the dominion and sovereignty of all sister States; and hence section 1, Article IV, of the Federal Constitution requires that " full faith and credit shall be given to the public acts, records, and judicial proceed- ings of other States." Each State, then, in entering the Federal Union, entered into a contract of non-interfer- ence with the dominion and prerogatives of other States ; and it will not be disputed that the power of taxation is an incident of sovereignty or dominion. The dominion, therefore, of one State for the purpose of taxation over persons, property, business, or the incidents of business, must exclude the dominion of other States over the same 502 THE THEORY AND PRACTICE OF TAXATION. persons, property, business, and incidents of business at the same time. Neither in constitutional law in the United States nor in mathematics can the same property, persons, business, or incidents of business occupy two places and two sovereignties at the same time. Hence, the taxation by Connecticut of credits, choses in action, bonds, notes, book accounts, verbal and other contracts, the incidents of actual business transacted in Illinois, must be in legal effect extra-territorial taxation of such business, and so an infringement and violation of the sovereignty of Illinois ; or else it must be assumed that business does not include its incidents, or the whole its parts. Furthermore, if Connecticut has the power of taxing extra-territorial contracts for the loan of money, she has the power to fix any rate and to discriminate as to the States upon whose citizens the burden shall fall; or she may adopt a rate that shall be prohibitory on con- tracts made by her citizens with citizens of designated States, or citizens of all the States, as her caprice may dictate. And in this way she may obstruct and to a great ex- tent prevent interstate commerce, which the United States Supreme Court in repeated instances (since the Kirtland case) has decided that the separate State governments can not under the Federal Constitution do either directly or indirectly. From these considerations, reasoning, and precedents the conclusions of Judge Foster would seem to have been incontrovertible — namely, that " the plaintiff," Kirtland, " was not liable to taxation " in Connecticut " for debts owing to him in Illinois " ; and inferentially that, al- though possibly warranted by the letter of the statute, the act was an attempt on the part of Connecticut to exercise extra-territorial dominion over persons, contracts, or business, and was, therefore, unconstitutional and void. It would also seem to be clear that if property in action (choses in action) is made by fiction of law an entity, hav- ing a situs in one State separate from the property which it represents in another State, an opportunity for the grossest inconsistencies will be perpetrated, and the most inharmonious, arbitrary, and capricious tax laws and other laws will be enforced by conflicting legislation of FINAL DECISION. 503 States, required by constitutional obligations to " give full faith and credit to the public acts of other States." The Connecticut Court of Errors, however, dissolved the injunction and dismissed the petition, Judge Foster alone out of a full bench of five dissenting. An appeal being next taken to the United States Supreme Court, the latter (in 1879) affirmed the judgment of the Connecticut court, the essential points of the opinion rendered by Mr. Justice Harlan being as follows : " The debt which the plaintiff, a citizen of Connecticut, holds against the resi- dent of Illinois is property in his hands. The debt, then, having its situs at the creditor's residence, and constitut- ing a portion of his estate there, both he and the debt are, for purposes of taxation, Avithin the jurisdiction of the State. It is, consequently, for the State to determine, consistently with its own fundamental law, whether such property owned by one of its residents shall contribute, by way of taxation, to maintain its government. Its dis- cretion in that regard is beyond the power of the Federal Government to supervise or control, for the reason that such taxation violates no provision of the Federal Consti- tution; as manifestly it does not, as supposed by counsel, interfere in any true sense with the exercise by Congress of the power to regulate commerce among the several States ; nor does it, as is further supposed, abridge the privileges or immunities of citizens of the United States, or deprive the citizen of property without due process of law, or violate the constitutional guaranty that the citi- zens of each State shall be entitled to all the privileges of citizens in the several States. " Whether the State of Connecticut shall measure the contribution which persons resident within its jurisdiction shall make by way of taxes in return for the protection it affords them, by the value of the credits, choses in action, bonds or stocks which they may own (other than such as are exempted or protected from taxation under the Constitution and laws of the United States) is a matter which concerns only the people of that State, and with which the Federal Government can not rightfully interfere." * * 100 U. S., p. 499. 504 THE THEORY AND PRACTICE OP TAXATION. It remains but to indicate the legitimate deductions and consequences of this decision, and point out some of the circumstances pertinent to the treatment of the case when it was before the United States Court. In the first place, it decided that debts are property; a legitimate deduction from which is that the creation of debts creates property, and the extinguishment or payment of debts annihilates property; a conclusion which has not received the sanction of the judiciary, or found a place in the tax system of any country other than the United States. Second, the decision next gave a miraculous power to residence, by making it capable of producing property out of nothing. Third, it sanctioned the right of a State to subject its citizens to double taxation in respect to one and the same property, and indorsed the justice and moral- ity of the act. If the situs of the property — in the sense of an actuality — and the owner of a mortgage upon it, are within the territory of one and the same State, and the actuality is fully taxed by it, the separate and duplicate taxation of the mortgage would not be sanctioned except at the demand of the debtor, and which, as equivalent to his asking that the burden of his debt be augmented, he would be not likely to make. But when the actuality and the mortgage are in different States of one and the same nation, as was the situation in the Kirtland case, a differ- ent rule is held to prevail, whereby that which in one State was regarded as an incident of property, and as such prop- erly exempt from taxation, becomes by mere transference to another State actual property, and as rightfully subject to taxation. Fourth. If debts are property, and rightful subjects for taxation, the sphere of the application of this principle should not be restricted to debts created by a mortgage, but should embrace every form of indebtedness created by the loan of capital — as promissory notes, book credits, and policies of life insurance — which are valuable to just the extent that they represent the indebtedness of the com- pany issuing them to the holder of the policy. But if all the forty-five States of the Federal Union or the differ- ent countries of the rest of the world were to undertake to pursue capital in the form of debts due their respective citizens for the purpose of taxation, the resulting inex- CONSEQUEXCES OF THE DECISION. 505 tricable and disastrous confusion would be almost beyond the power of imagination. Fifth. The United States Supreme Court held that there was nothing in the form of taxation involved in this case that interfered with the power of the Federal Gov- ernment to regulate interstate commerce; but if, as was further held, there was no constitutional limitation on the exercise of the power of taxation by the State of Con- necticut, and that the Federal Government can not right- fully interfere with the measure of taxes that a State may impose on credits and choses in action that its citizens may own, it is difficult to see why Connecticut might not impose such taxes on all extra-territorial contracts of pecuniary value as would greatly impair or altogether prevent the commercial intercourse of her citizens with the citizens of other States. Finally, nothing more clearly exhibits the anomalous issues involved in this case than the fact that it could not have come up before any of the courts of England, France, Belgium, Germany, Switzer- land, Italy, or Lower Canada ; for in none of these coun- tries are debts regarded in the light of property, subject to taxation. The following facts pertinent to the history of this case are also worthy of record : When the appeal from the decision of the Connecticut Court of Errors was made to the United States Supreme Court, one of the most dis- tinguished members of the bar of the State of Xew York, who in repeated instances had commanded the respect and attention of the former court, was moved, through his abstract interest in the legal and economic principles involved in the case, to volunteer his services for its future argument and presentation to this high and final tribunal. But on the day assigned for its hearing, serious illness prevented his attendance on the court, and the case in question went before it practically without verbal argu- ment, and mainly on the presentation of a brief. Some years after the decision was rendered, the then chief jus- tice of the court (the late Morrison E. Waite) told the writer, in a familiar interview, that he had no recollection of the case, and expressed much interest in a presentation of the economic points involved in it. Another fact especially worthy of the consideration of 33 506 THE THEORY AND PRACTICE OF TAXATION. those who have been instrumental in enacting and defend- ing statutes in respect to taxation in the United States which find no justification in economic principles, or any parallel in the laws or fiscal systems of other countries of high civilization, is, that since the final decision in the Kirtland case, the State of Connecticut, where it origi- nated, has derived no material advantage from it. Nay more, a somewhat extensive inquiry made of its tax offi- cials renders it doubtful if a single extra-territorial mort- gage has since been made subject to taxation as property in the form of a debt in the State of Connecticut. And the same is generally believed to be true of a vast number of mortgages of real estate — especially of farming lands of the Western States of the Federal Union — which in recent years have been negotiated and sold by the large number of the so-called " loan and trust companies " in the Eastern States. The fact is, the American people, whose interests have called their attention to this form of taxation, regard it as unequal and unjust, and so clearly in the nature of double taxation on one and the same per- son and property, and an exaction, that evasion of it is clearly warranted; the whole record of experience under it constituting another demonstration of the fact that under a popular form of government any law regarded as unjust or unnecessary can not be efficiently executed ; and to avoid the necessity of evasion it has now become almost the universal practice, in executing mortgages in the United States, that if the mortgage is made subject to taxation the mortgagee shall pay the taxes in addition to the interest on the loan of capital represented by the mortgage. Note. — In addition to what may be termed the historiral ele- ments of this celebrated case, the more strictly le^al features of it, as set forth subsequent to the action of the United States Supreme Court, are here pertinent and worthy of consideration: No. 1. This case seems from its very nature to involve questions of conflict of State dominion. It is admitted that Mr. Kirtland. the plaintiff, so far as the question of taxation at issue is concerned, has not been assessed and taxed upon his body, person, poll, or head, or for any substance, the embodiment of labour, and Avhich alone constitiites property, owned or possessed by him within the territory of Connecticut; nor for any business transacted by him within the State. The plaintiff has, however, been assessed and taxed for dealing in money or doing the business of loaning money, LEGAL FEATURES OF THE CASE. 507 by an assessment and taxation of bonds and mortgages made in Illinois — the necessary incidents and evidence of the business of money lending, performed by himself or through a resident agent in the State of Illinois. It is conceded that the loans were actually made at Chicago in the State of Illinois, as the bonds and mort- gages taken state that all the business and acts connected with the loaning and reloaning were actually done, from time to time, there, that the obligations were payable there, and that the contracts of loan were strictly Illinois contracts, to be interpreted as valid or invalid and as to their force and effect according to the laws of that State. The State of Illinois imposes a tax on resident agents making loans in that State; but it is not important to inquire whether in this instance the business of loaning was done through a resi- dent agent or what that State does actually tax, but what she can constitutionally tax by virtue of her dominion and sover- eignty. Illinois can undoubtedly tax, if the tax is not discrimi- nating but uniform on residents and non-residents, all occupa- tions and also all business transacted within her borders. She can tax money dealers or money lenders by license or otherwise, and she can impose stamp or other taxes and to any degree, in her discretion, on all contracts at the time when made within her juris- diction. No other State has concurrent jurisdiction over any legiti- mate subject of taxation within her jurisdiction. Her sovereignty in taxation is absolute except as limited by the national Constitu- tion. But the sovereignty of coequal States involves a full recogni- tion of the dominion and sovereignty of all sister States, and hence section 1, Article IV, of the United States Constitution requires that " full faith and credit shall be given to the public acts, records, and judicial proceedings of other States." This is a compact of non- interference in the dominion of other States in matters of taxa- tion or in reference to other subjects of State dominion. The power of taxation is an incident of sovereignty or of dominion. The dominion, therefore, of one State for the purpose of taxation over persons, property, or business, or the incidents of business, must exclude the dominion of other States over the same persons, prop- erty, business, and incidents of business at the same time. Neither in constitutional law in this country nor in mathematics can the same persons, property, business, and incidents of business occupy two places or sovereignties at the same time. The taxation by Con- necticut of credits, choses in action, bonds, notes, book accounts, verbal and other contracts, the incidents of actual business trans- acted in Illinois, must be in legal effect extra-territorial taxation of a part of such business, or otherwise it must be assumed that the incident is not a part of the principal. The making of con- tracts is of itself a business in the strictest sense, nor can any business exist without the power to make contracts written or verbal. Money can not be loaned imless there is a business of lending money, and for the time being the vocation of a money lender. The amount or duration of a business in a State can have no influence on the question of the jurisdiction of the State over the business or the transaction. A State can tax all sales at auction, including the sales of goods in unbroken packages 508 THE THEORY AND PRACTICE OF TAXATION. owned by nonresidents and just brought into the State and sold by nonresidents or by resident agents (Woodruff vs. Perham, 8 Wallace, 123). In New York mere wandering peddlers are taxable on money invested in business in every town in which they peildle. If actually assessed in more than one town the same year the remedy is to appeal to the assessors (Hill vs. Crosby, 26 Howard, par. 413). It would -seem that business, occasional, transient, or permanent, transacted in a State by a resident or nonresident, by the force of State sovereignty, may be made subject to a uniform rule of taxation. ^ Extraterritorial taxation can have no force in American juris- yVi.^ prudence. Protection and taxation are correlative terms. Protee- y ation. ^ o^ Now, an income tax is the very essence of personal ^ taxation, and although in respect to a specialty of appli- cation it has been decided by the Supreme Court of the United States no t to be a direct tax/lt comes to the ordi- nary taxpayer most directly ; and ^is is the first or one of the most influential reasons why it is not liked. The world's experience is to the same effect in respect to a ^' poll " or " head " tax. This in a popular sense is almost universally regarded as a direct tax, and altogether per- sonal in its incidence. It has accordingly always been ^^ most unpopular. Its collection has been the occasion of cZ great civil disturbances in the world's history, and it has '' ^\ been denied a place by popular vote or constitutional provi- ^ sion, in the tax system of most of the States of the Fed- C eral Union.- ^ A second and more important reason why a general ^^ income tax powerfully antagonizes popular sentiment is "^^^^ that its efficient administration, or revenue productiveness, '\ requires that every person liable to taxation in respect to ^ his annual net gains, profits, or income shall make to a >; Government official an exhibit of the financial condition F' of his estate, business, or profession; for, in default of \ <::^c- 516 THE THEORY AND PRACTICE OF TAXATION. such an exhibit, any basis for assessment must be a mere matter of conjecture on the part of the assessor, with a result devoid of any pretence to correctness or equality. But such an exhibit, necessarily disclosing to a greater or less degree his financial condition to his business com- petitors, and to a curious, gossiping public, no man will willingly make; and he naturally regards it as in the nature of an outrage on the part of the government that seeks to compel him to do it. Hence the successful ad- ministration of an income tax involves and requires the use of arbitrary and inquisitorial methods and agencies, which, perfectly consistent with a despotism, are entirely antagonistic to and incompatible with the principles and maintenance of a free government. Practically, as John Stuart Mill has expressed it, " the fairness which belongs to the principle of an income tax can not be made to attach to it in practice " ; and, " while apparently the most just of all modes of taxation, it is in effect more unjust that many others that are prima facie more objectionable." And again he says, " The tax, on whatever principles of equality it may be imposed, is in practice unequal in one of the worst ways, falling heav- iest on the most conscientious," and " should be reserved as an extraordinary resource for great national emergen- cies, in which the necessity of a large additional revenue overrules all objections." Mr. Gladstone, speaking in 1853, also said, " I believe it" (an income tax) "does more than any other tax to demoralize and corrupt the people." And Mr. Disraeli subsequently in Parliament expressed his agreement with Mr. Gladstone by saying, " The odious features of this tax can not by any means be removed or modified " ; and with these opinions nearly all educated financiers and economists are in complete unison, except a comparatively few persons who, educated in Germany, have embraced the idea that because income taxes are effectively collected in countries having a despotic form of government, they can be equally collected in countries under a popular gov- ernment.* * As the opinions of Enjrlish authorities (above referred to) have been disparaged on the ground that they represent old-time utter- TAXES ON INCOME IN PRANCE. 517 In support of these conclusions attention is asked to the following historical evidence. It is well known that one of the principal causes which led to the great French Kevolution was the inequality (class exemptions) and mul- tiplicity of taxes ; and one of the first acts of the National Assembly of 1789 was to repeal all inquisitorial and arbi- trary taxes of every name and nature.* And although, from that day to this, France, by reason of a national debt greater than that ever borne by any other nation, has been compelled to resort to almost every expedient for ob- taining revenue, it has, theoretically at least, endeavoured to maintain a system of general taxation not inconsistent with the above principle. Under the head of indirect taxation, however, which includes the general direction of the stamp tax, " domainal public land " revenues, customs, duties on imports, salt and sugar taxes, and monopolization of the manufacture of powder and the sale of tobacco and matches, the so-called communes of France have a right to " levy a tax of three per cent on the annual income (interests, dividends, etc.) of personal property, such as French or foreign securities, shares, bonds issued by departments, industrial establish- ments, independent of the stamp or transfer tax, but not affecting the bonds of the state (or rentes), nor associa- tions of partnerships in a collective name, nor private obli- gations, mortgages, and the like." " Religious societies are taxed five per cent on the income of their capital." In 1886 the revenue derived from the above taxes was re- turned at 47,200,000 francs ($9,400,000), representing in 1886 a capital of 1,500,000,000 francs, of which 131,000,- 000 francs represented properties situated in France. The following sentiment or legal principle, laid down ances and imperfect fiscal experiences, attention is here asked to the following? extract from a letter of Prof. Thorold Rogers, late member of the British House of Commons and Professor of Political Economy, University of Oxford, under date of Aujajust 25, 1884: " Nobody defends the income tax. It was first imposed on the tyrant's plea that the administration can not do without it, and it has been continued for the same reason. Every Chancellor of the Exchequer has condemned it in principle and has continued it in practice. It is not wonderful, therefore, that, fortified by these avowals, people who can evade the tax do so." * See ante, p. 117. 518 THE THEORY AND PRACTICE OF TAXATION. by the United States Supreme Court in the case of Boyd vs. United States (116 United States Reports, 631, 632), though often apparently little regarded by the legal pro- fession, would, however, seem in itself to constitute a complete and insuperable barrier against any resort in the United States to the prosecution of arbitrary or in- quisitorial inquiries, which must of necessity be instituted and prosecuted by tax otficials for the obtaining of any personal and warrantable data for the correct assessment of an income tax, the language of the court being as follows : " Any compulsory discovery, by extorting the party's oath or compelling the production of his private books and papers to convict him of a crime or to forfeit his prop- erty, is contrary to the principles of a free government. It is abhorrent to the instincts of an Englishman. It is abhorrent to the instincts of an American. It may suit the purposes of despotic power, but it can not abide the pure atmosphere of political liberty arid personal free- dom." So much, then, for what may be termed the philosophy of an income tax. Consideration of some of its most in- structive experiences is next in order. The old Romans, who never gave much place to senti- ment in their laws or policy, had an income tax in the days of the empire, and they overcame all difficulties con- nected with its administration in the following manner: They authorized their tax officials, in cases where the citizen did not in their opinion make a satisfactory pay- ment, or was suspected of false statements in respect to his income or property, to administer torture ; and the historian Gibbon, in writing about this feature of Roman history, justifies it in a measure in the following language : " The secret wealth of commerce, and the precarious profits of art and labour, are susceptible only of a discre- tionary valuation ; and as the person of the trader sup- plies the want of a visible and permanent security, the pay- ment of the imposition, which in the case of a land tax may be obtained by the seizure of property, can rarely be extorted by any other means than corporeal punish- ment." That the Roman income-tax system was successful as ASSESSMENTS IN FRANCE. 519 respects revenue is probable, but it was also destructive ', of the state; for the testimony of history is that its people i finally welcomed the inroad of the barbarians as a lesser y evil than the continuance of their tax system. __^-^ As already intimated, there has been nothing cor- responding to a general income tax, with personal inquisi- torial features, in the fiscal system of France since the Eevolution of 1789. In place of it, taxes are levied on the indicia or signs which each citizen presents of his possession of income or personal property; and the rents or rental value of the premises he occupies for residence or business, and the doors and windows of buildings, are regarded as such signs or indicia. This tax applies to the doors and windows into streets and courtyards and gar- dens of houses or workshops. In general, all openings giving light or air to houses and buildings for human habitations, shops, workshops, sheds, warehouses, etc., are taxable, whatever their shape, dimensions, or fastening may be. Thus, all openings to afford light to the stairs, to a habitable room opening on a covered yard, of a habit- able house used for rural purposes, or the door of a garden leading to a dwelling, all are taxable. The open- ings to new buildings become taxable as soon as they are habitable. If at the time of making the tax roll some rooms in a new house are not yet habitable, the openings of such rooms are for the time exempt. If the entire front of a room or atelier consists of windows, the num- ber of windows to be taxed is determined by their solid divisions of either iron, wood, or stone. Exempt are the doors . and windows to light or air of barns, sheepf olds, stables, cellars, etc., not intended for human dwelling. Further exempt are doors or gates not locked ; also interior doors of communication from one yard to another. Doors as well as windows of manufacturing establishments are not taxable except to those in the dwelling part. Again, what is called a mohiliary tax of France is gov- erned by the amount of rent paid or the rentable value of the dwelling of the taxpayer. That portion of a house used exclusively for trade or a similar purpose and not for a residence is not counted in the valuation of the rent- able value like a furnished house or a private chapel; but premises or dependencies of dwelling houses, courts. 520 THE THEORY AND PRACTICE OF TAXATION. stables, and carriage houses of luxury, clubs, societies, and Masonic lodges are counted in. In assessing the mobiliary tax it is not necessary that the figures taken as a basis for taxation should be the real rent; it is sufficient that the proportion of the assumed rent, the basis of the tax, and the real rentable value of the dwelling should be exactly the same for all taxpayers ; so that a taxed citizen can convince himself whether he is overtaxed or not by comparing his own rent with that generally charged in his community. The theory which underlies the French system of taxa- tion is that the rent or rental value of the premises occu- pied by the taxpayer as a residence is proportioned to the amount of his property; and this, generally speaking, would seem to be a not unreasonable assumption. At all events, it would seem to possess this great advantage — namely, that the rent payable by every citizen may be readily ascertained, while the amount of his means can not, if he chooses to conceal it.* Note. — M. Yves Guyot, in a report recently made on ques- tions connected with proposals relating to the establishment of an income tax in France, regards the great fiscal wrong in that country to be the inequality of the assessments of real property in the different departments. This is increased by the fact that the French land tax is not levied at the same rate on all prop- erty, but the proportion of the whole amount which is to be paid by each department is fixed by the central authority; the depart- ments allot the quotas to be paid by the several communes, and the communal authorities apportion their quota among the indi- vidual taxpayers. The tax is, to use the French technical term, one of repartitloyi and not of quotite. If it were the latter, each taxpayer would pay in proportion to his property; the rate of the * The following epitome which has been recently made of the burden of taxation imposed upon an honest taxpayer in New York as compared with that which is borne by a man possessed of the same means or income in the city of Paris is believed to be approxi- mately correct: " Let us assume that the property of such an individual, if out of business, consists of personal estate, such as railway bonds and stocks of the value of $100,000, that the net annual income there- from is $5,000, and that the rent paid by such individual amounts to one fifth of his income, equal to $1,000, or that being engaged in business his average annual profits enable him to occupy an apartment of the same rental value. In Paris the party in ques- tion would have to pay as contributions mobllidres about 400 TAXATION OF CAPITAL. 521 tax would be fixed by the Government instead of the amount to be raised from each department. The valuation on which this tax is levied is the net annual value, and was fixed unsystematically and imperfectly from fifty to seventy years ago; the value of real property has changed, but the original assessment is still in force. The result is that some departments pay from six to eiglit times as much as others in proportion to their real annual value. ]\I. Guyot advocates a tax on the capital in place of on the annual value. There is, as he points out, a manifest injustice in taxing the same amount of capital at different rates, according to the mode in which it is invested. In France a capitalist might invest his money in building lots or other land temporarily un- productive, but held for resale at a profit. The investment, yield- ing no income, would practically escape taxation. If the same sum were invested in safe securities yielding an income of three per cent, the tax would be levied on that income, while if placed in business where, though it might temporarily yield twelve per francs, or, say, $80, or, including his door and window tax, which he pays through his landlord, say, $90. If engaged in business or practising a profession, he would have to pay a license tax or patente, which varies from 100 to 1,000 francs (we are speaking, of course, of the mass of the people, and not of merchants or companies occupying very extensive and costly premises, whose patente may run up to several thousand francs, and whose taxes are payable out of the profits of their business, and not out of the income derived from their investments). Such householder thus pays on an average, say, 1,000 francs as the total of his direct taxes. Supposing him to pay the sum of 1,000 francs indirectly in the shape of octroi duties on the provisions consumed by himself and family in the course of the year (and this allowance we con- sider a very liberal one), we find the total amount of his annual taxes, direct and indirect, to be, say, 2,000 francs, or $400; while in New York a person similarly situated would have to pay, if he made an honest and full declaration of his property, about 2.6 per cent on his principal, making, in the present case, his tax amount to $2,600. Even if we assume that the Parisian pays an additional $200 per year on an average in the way of succession and other exceptional taxes, his contributions to the expenses of the Gov- ernment would be at the utmost only $600 in place of the $2,600 levied upon the unfortunate New-Yorker. " In return for what he pays, the Parisian enjoys well-paved and well-cleaned streets, wide and unobstructed sidewalks, shade trees with benches under them for the weary, public gardens kept in beautiful order, etc., while the New-Yorker gets — Avell, the less said on this subject the better. May we not entertain the hope that honest men of all parties will soon unite to secure a better system of taxation and a more efficient administration of the gov- ernment in the most populous and wealthy city of the model republic? or must we accept as a melancholy truth that universal suffrage inevitably results (at least in American cities) in rabid democracy, dishonesty, and dirt?" 34 522 THE THEORY AND PRACTICE OF TAXATION. cent, the loss of the whole would be risked, the owner would pay four times as heavy a tax as in the previous case. The same objections have been frequently urged against the income tax in England, but there a difHculty exists in the way of assessing the capital value of land — viz., that land is generally the subject of letting and seldom of sale. In France, however, not only are there nearly a million sales of land each year, but on every devolution by inheritance the capital value of the land is oHicially registered. The ascertainment of the capital value of _ the entire country would be an easy matter, and such an assess- ment would be of more durable benefit than an official estimate of the annual value, which, necessarily varying from year to year, . would be a much more fluctuating and uncertain basis for taxation than the selling value. The reforms proposed by M. Guyot would increase the land tax in those departments which are undervalued ; and he estimates that ,J a revaluation for taxation would cost ten million dollars, and that it would take tjen_^ars to complete. He thinks the complaint by landowners of overtaxation generally is unfounded ; but he would nevertheless relieve them in the interest of free-trade principles from the vexatious and heavy duties on transfers, which, with legal expenses, make the cost of sales amount to ten per cent of the price paid. This heavy impost prevents sales, and its removal should be supplemented by establishing a simple system of trans- fer on the record-of-title principle. These reforms, which involve equality of taxation and free trade in land, are, in M. Guyot's opinion, essential to the well-being of France, whose greatest wealth consists in her land. Fifty per cent of the population are engaged in agriculture, and, without releasing them from their fair share of the public burdens, they should be placed in such circumstances as will permit land to pass into the possession of those who are most capable of working it to advantage. (Rapport siir les questions relritires a Vimpot sur le revenu. Par Yves Guyot. Paris: Guillaumin & Cie. 1887.) Russia seems to have abandoned the idea of an income tax, and in place of it would appear to have substituted what is known as a " hearth " tax, which is collected from each separate building inhabited, or used for any com- mercial or industrial purpose. An income tax has existed in Austria-Hungary since the beginning of the nineteenth century. It was repealed in 1829, and re-enacted in 1849. This tax is divided into three classes. " Under the first class, the tax in force in 1887 was from eight and a half per cent to ten per cent of net income." Under this class the following income was taxed: income derived from all those trades and oc- cupations which are subject to a license tax; the income of mining and smelting establishments, and the profit EUROPEAN INCOME TAXES, 523 made by the tenants of agricultural lands. In the second class, which includes income from services rendered or labour performed in occupations not subject to a license tax, the rate reported is exceptionally high. Under the thii-d class, which embraces interests from loans, from in- vested capital, savings banks, and life-insurance com- panies, the rate is reported to be ten per cent. The ex- emptions under this latter head are very extensive, and include the pay of officers and soldiers in active service, interest on deposits in savings banks, and a great number of public securities — as five per cent Austrian stocks and bonds, certain bonds of the Tyrol, bonds of all railroads subject to taxation, lottery loans of 1859 and 18G0, and a large number of other corporation securities. Servants are only taxed under the second class and in case their total income exceeds six hundred and thirty florins ($226.16). In case a party subjected to an income tax makes either a false return or neglects to make any, thrice the amount of the tax is imposed, the payment of which, however, includes the tax itself, so that the fine proper is double the amount of the tax. Denmark. — The income tax of Denmark was recently fixed at two per cent of the taxpayer's income. The tax is collected by authorized agents, who are obliged to give ample security for the faithful performance of their duties, for which the}^ receive a remuneration of two per cent on the amount collected, together with an allowance for house rent in return for the obligations imposed upon them of having residences and offices in the taxing dis- tricts. This income tax does not seem to be objectionable in the sense of undue burdensomeness, the only complaints made being in regard to the publicity of the pecuniary conditions of the individuals taxed. Switzerland. — A resort to an income tax for the pur- pose of defraying state expenditures seems to find especial favour in Switzerland, though it does not seem probable that the systems adopted for its enforcement will ever be found satisfactory to the people of other countries. Thus, in the taxation of incomes, the average rate does not generally exceed four or five per cent, but in some can- tons the rates rule as high as seven and even ten per cent. 524 THE THEORY AND PRACTICE OP TAXATION. By a comparatively recent law established in the canton of Valid, which in point of population and wealth ranks third in the Swiss confederation, progressive taxation has been established, and the property of the canton is divided into three classes which are taxed in the following propor- tions : One per cent 1,000 for estates under $5,000 capital value; 1| per cent 1,000 between $5,000 and $30,000, and 2 per cent 1,000 for estates exceeding $20,000 in value. Personal property is divided into seven classes, the lowest class being under $5,000, the highest exceeding $160,000 capital value. The rates of taxation on these classes are to be in the proportion of 1, 1^, 2, 2^, 3, 3^, and 4 per cent 1,000. Incomes from earnings are also divided into seven classes, but in arriving at the net amount to be taxed, a deduction of $80 is allowed for each person legally de- pendent on the head of the family for his support. The result of this is that while a bachelor earning $1,000 a year would pay a tax of $15, a married man with the same income and ten children would pay but fifty cents, and if he had twelve children nothing. The Vaudois law was carried by overwhelming majorities when submitted, as was necessary, to a " referendum " vote of the whole people, and at every subsequent stage of its progress. The only one of the great governments of the world at the present time which can prefer a claim to a large measure of success in administering an income tax is that of Germany, and especially that of the kingdom of Prus- sia ; and the methods by which such success has been at- tained, and which seem to be based on the precedents estab- lished by the old Romans so far as the changed conditions of civilization will permit, ought to be most instructive to those who think this tax can be administered and made notably productive of revenue in the United States. The tax in Germany is levied, as it were, in duplicate, or under two forms : first, by towns and cities, and termed " com- munal " ; and, second, by the state, under the designation of " class " tax. An entire exemption from these taxes is granted only to the very poorest and humblest of the population. " Petty hucksters with a small stock of potatoes, sec- ond-hand clothes pedlers, servant girls earning four dol- lars and twenty-five cents a quarter, pay the communal PRUSSIA AND GREAT BRITAIN. 525 tax, and are also inscribed in the first (or lowest) grade of the class tax." * Every foreigner staying in Prussia more than one year, but with no intent of becoming a permanent resident, must expect to be taxed on his income at the expiration of the first year, although none of the sources of such income may be within the territorial jurisdiction of Prussia. Up to the year 1891-93 the income tax of Prussia was levied by a board of income-tax commissioners, one third of whom were appointed by the authorities and two thirds by the taxpayers. The assessing was done by the board on information and evidence obtainable; and in the ab- sence of authentic proof as to the amount of annual in- come, " circumstantial and hypothetical evidence was ac- cepted." Parties thus assessed might appeal from the conclusions of the board to another tribunal organized for that purpose, whose decision was final. Appeals are not often made to this latter board, as the methods adopted by it to bring unwilling or evasive taxpayers to terms are harsh and inquisitorial in the extreme and most peremptory. The mode of proceeding against delinquent taxpayers is very summary. If after three days' written notice payment fails to be made, a mandate is issued by the tax collector, and the property of the delinquent, espe- cially his household goods, is seized and sold. By another curious provision in the German tax law the collector of taxes is made personally liable for any taxes lost by reason of his failing to mercilessly enforce the collection within a prescribed period. In 1891 some mitigation of the harsh proceedings involved in the assessment of the income tax in Prussia was made by the Government, and now every taxpayer is allowed to make a return. Great Britain. — The idea of a general income tax as a means of raising j'e venue was first embodied in the form of a statute in Great Britain under the administra- tion of Mr. Pitt, in 1798, and was proposed and advocated solely as a means for obtaining additional revenue for the prosecution of the war with France. It imposed a tax of ten per cent on all incomes in excess of £200 ($1,000). After the Peace of Amiens, in 1802, it was repealed on the * United States Consular Reports, Nos. 99, 100, p. 461. 526 THE THEORY AND PRACTICE OF TAXATION. ground that a tax of this character ought to be exclusively reserved for the exigencies of war; and for a like reason it was reimposed on a revival of the war during the fol- lowing year. Subject to various modifications, it formed an important constituent of the fiscal system of Great Britain until after the battle of Waterloo and the peace of 1815, when it was again repealed. After this, nothing more was heard about it until 1842, when Sir Kobert Peel reimposed it as a merely temporary measure — i. e., for a J period of five years. It has, however, since remained a permanent feature of the British fiscal system, although its repeal has been promised and anticipated by various administrations, and in the general election of 187-1 Mr. Gladstone, in an address to the country, especially asked that the confidence and continued administration of the Government be given him on the ground that he contem- plated an early repeal of the income tax. Circumstances, however, have prevented any such action, and in subse- quent years of office Mr. Gladstone has not hesitated to raise the tax whenever the necessity of additional reve- nue for the Government became imperative. That he has regretted his inability to abolish it is evident from his saying, in his financial statement in 1853 : " I think some happier Chancellor of the Exchequer may achieve this great accomplishment, and that some future poet may be able to sing of him : " He took the tax mcay, And hmlt himself an everlasting name." From the outset the income tax has been more odious and unpopular in Great Britain than any other form of taxa- tion. Among statesmen and economists there is hardly any dissent from the opinion that the tax is bad in prin- ciple, because unequal and unjust in its assessment, and incapable of being made equal and just; and this, too, although the administration of the revenue laws of Great Britain — owing to the comparatively small area of terri- tory subjected to supervision, and the fact that the tenure of office on the part of officials is dependent solely on honesty and intelligence — is wonderfully efficient, far more so than can be expected under existing conditions in the United States. The annual reports of the British Com- ENGLISH INCOME TAXATION. 527 missioners of the Inland Revenue always mention exten- sive evasions of the income tax. For the year 1864-'65 the amount of such evasion was estimated to have been equal to about one sixth of the revenue collected under it. The demoralizing effects which are inevitably produced by the habit of making false returns respecting income are regarded by many British authorities as far more deplor- able than those resulting from any inequality contingent on this form of taxation; as the transition from a fraud upon the Government to a fraud upon the public is com- parativelv easy. The reported product of the income tax of Great'Britain for 1893-94 was £15,200,000 ($76,000,- 000) ; an amount beyond the estimate.* * The following incident, which has become a part of English political history, is curiously illustrative of the state of public opinion in England at the time of the first imposition of the in- come tax under the statute of Mr. Pitt, and is derived from the memoirs of John Home Tooke: Mr. Tooke was an Englishman who participated actively in Brit- ish politics during the last third of the last century. He early espoused the side of the Americans in their struggle for liberty, and was persecuted, fined, and imprisoned by the British Govern- ment for publishing an advertisement for a subscription for the widows and orphans of the Americans " murdered by the King's troops at Lexington and Concord." After his release from prison he naturally, and in connection with John Wilkes, made himself politically disagreeable to the Government, and the Government in turn made itself disagreeable to him; and accordingly the oflTice of the commissioners for carrying into execution the act for taxing incomes addressed Mr. Tooke the following letter: " May 3, 1799. "Sir: The commissioners having under consideration your dec- laration of income have directed me to acquaint you that they have reason to apprehend your income exceeds sixty pounds a year. They therefore desire that you will reconsider the said dec- laration and favour me with your answer on or before the 8th inst. " I am your obedient servant, " W. B. LuTTLEY, Clerk." To this Mr. Tooke replied : "Sir: I have much more reason than the commissioners can have to be dissatisfied with the smallness of my income. I have never yet in my life disavowed or had occasion to reconsider any declaration which I have signed with my name. But the act of Parliament has removed all the decencies which used to prevail among gentlemen, and has given the commissioners (shrouded un- der the signature of their clerk) a right by law to tell me that 528 THE THEORY AND PRACTICE OF TAXATION. The United States. — The income-tax experiences of the United States are so little in accord with those of any other people or countries that their consideration with a view of obtaining a practical acquaintance and compre- hension of the whole subject would seem to be best facili- tated by grouping their most important characteristics under three heads — namely, their origin and history and undoubted influence on the political and fiscal policy of the nation. Under the great financial necessities of the Federal Government by reason of the war the attention of Con- gress was directed to an income tax as a source of revenue as early as the summer of 1861; and in that and the fol- lowing year laws establishing such a tax were enacted. Their provisions were, however, so complicated, and the methods authorized by them so inquisitorial, that the Commissioner of Internal Revenue reported in 18G3 that they deprived the tax " of all claims to public favour." The revenue returns under such circumstances were very moderate: $2,741,858 in 1863, and $20,294,000 in 1864. In this latter year a more comprehensive and effective law was enacted, which was followed by better results, the collections to the credit of the income tax rising from $32,050,000 in 1865 to $72,982,000 in 1866, and $66,014,- 000 in 1867. But as the necessity for very large revenues on the part of the Government ceased with the termina- tion of the war, and the spirit of patriotism engendered by the war on the part of the people abated, the collec- tions fell off very rapidly. Thus, between 1866 and 1867 the total receipts on account of the income tax, without anv change in the law, declined from $72,982,156 to $66,- 014,000; and in 1872, with an exemption of $2,000, only 72,949 persons in the United States, out of a population of over 39,000,000, admitted under oath that they were in receipt of any income liable to taxation in excess of the they have reason to believe that I am a liar. They have also a right to demand from me upon oath the particular circumstances of my private situation. In obedience to the law, I am ready to attend upon this degrading occasion so novel to an Englishman, and give them every explanation which they may be pleased to require. I am, sir, your humble servant, " John Horxe Tooke." AMERICAN INCOME TAX. 529 exemption. Those only who were officially and intimately connected at this time with the Internal Revenue Depart- ment of the United States Treasury can form any adequate idea of the amount of perjury and fraud that character- ized and pervaded the country, during the years 1867 to 1872, as the outcome of the then existing system of in- ternal revenue. And American ingenuity was never more strikingly illustrated — not even by the exhibits of the patent office — than it was at that time in devising and suc- cessfully carrying out methods for evading the taxes on incomes and distilled spirits. One curious feature of Federal experience with this tax, the tolerance of which would now be regarded as in- compatible with any just and efficient administration of it, was, that the returns made under it were thrown open to the public; and one commissioner of internal revenue instructed his officials to have them published in the pages of local papers, " in order," as he said, " that the amplest opportunity may be given for the detection of any fraudu- lent returns that may have been made." This idea did not find much favour with the public, who, in fact, dur- ing the later years of the tax, were inclined to regard with great equanimity all successful attempts to evade it. The income tax ceased to form a part of the internal revenue system of the United States after the year 1872. It was, however, made a part of the tax system of several of the States, and the following record (hitherto generally overlooked by the public) of the recent administrative experience of one State ought to be especially worthy of the attention of those who advocate the readoption of this form of taxation by the Federal Government. No State in the Union has a more illiberal, all-pervad- ing system of taxation than Massachusetts, and in no State is the administration of tax laws more stringent y or arbitrary. What Massachusetts fails to accomplish in the assessment and collection of taxes would, therefore, seem to be of little use for any of the other States or the Federal Government to attempt with any anticipation of success. This Massachusetts system finds its fittest ex- emplification in the city of Boston ; and the officials who constitute its department of municipal taxation never in- dulge, as the taxpayers well know, in much sentiment in 530 THE THEORY AND PRACTICE OF TAXATION. the discharge of their duties. The acknowledged repre- sentative of this board for many years never hesitated to say that he recognised but one principle, and that was, that in matters of taxation the taxpayer had no rights which the State was bound to respect; and, as chairman of a State commission which some years ago made a report to the Legislature, and with the Declaration of Independ- ence confronting him with its assertion that it is a self- evident truth that " all men are endowed by their Creator with certain inalienable rights," he also gravely asserted that " the individual person [in Massachusetts] has no inalienable rights except that to his own righteousness." One of the specialties of municipal taxation in Boston, under the supervision of its Board of Assessors, is an in- come tax, and its methods of administration are substan- tially as follows : Taxpaj^ers are required to make a return annually, and in detail, of all their property which the law makes subject to taxation (and that embraces almost everything in Massachusetts except their proprietary in- terests in graveyards) ; and in blanks officially furnished for such purpose there is a special space for a return of every individual's income. If no return is made, then the Board of Assessors meet in secret in an upper room of the City Hall, known as the " Dooming Chamber," and arbitrarily determine the amount of income for which each delinquent shall be assessed ; and from such determi- nation there is practically no appeal. The amount thus assessed for income to the individual is then " lumped in " with the aggregate of his other taxes ; and if a dissatisfied taxpayer wishes to discover what amoimt has been decided upon as his income, the assessors will not afford him any information. Under such circumstances it might natural- ly be supposed that the administration of an income tax in the city of Boston would be an unqualified success. But what are the facts ? First, comparatively few of the taxpayers of Boston make any returns to the assessors of their income. Sec- ond, the returns that are made are not open to the in- spection of the public. There is no law in Massachusetts covering this point, but one of the Boston assessors is reported as saying that if the returns were open to public inspection none would be made, as the chief objection of MASSACHUSETTS SYSTEM. 531 taxpayers to filing returns was tlie fear that tlicir incomes from business or professions might be known. The statutes of Massachusetts, however, provide that the re- turns of each individual's property shall be made by the assessors of every city and town in the State to the secre- tary of the Commonwealth; but inquiry shows that the Boston assessors make no such returns. Third, although the amount annually collected from an income tax in the city of Boston is very considerable — $840,000 in 1893 — it probably represents, according to the Boston Advertiser, " only about one fourth of what is due in the city from incomes." In the face of such an exhibit the question is pertinent, What measure of success do the present advocates of a Federal income tax expect will follow an attempt to expand the Boston system of its administra- tion over an area of country extending from Florida to Alaska? One would naturally think that the lesson of experience which the Government and the people of the United States have already had, would restrain further experimenting with this subject until the next war or the arrival of the millennium. That a free government can not efficiently collect a tax which its people regard as unjust without a resort to des- potic methods that public sentiment in turn will not tolerate is illustrated in this further tax experience of Massachusetts : The State laws require that citizens who are share- Z holders in corporations organized in other States shall be % taxed in Massachusetts on the market value of shares so held ; and such owners are required to make a return under oath of the amount of such property in their possession.* Yet a petition recently presented to the Legislature of the State by representative members of boards of trade and chambers of commerce recites that the law in question " is ineffective and therefore ridiculous, as is proved by the fact that although the market value of shares of for- eign corporations held bv citizens of Bosto"n alone is be- lieved to be over $600,000,000, the amount taxed by the * The tax laws of New Hampshire and Vermont are drafted especially with a view to compelling the disclosure of income. 532 THE THEORY AND PRACTICE OF TAXATION. assessors of Boston was then only estimated at $45,000,- 000; and nearl}' all of this that is known is taxed to the unfortunate people whose estates are in trust." * In the United States the income tax, as enacted in 1863, exempted $600 annual income for each person, to- gether with whatever was paid annually for rent and re- pairs of residence. Five per cent per annum was then levied on all incomes above $600 and not in excess of $5,000; seven per cent on all incomes in excess of $10,000. In the income tax of the United States as it existed at one period there was, therefore, recognised the principle not only of exempting incomes below a certain amount from all taxation, which amount, in order to keep up the appear- ances of equity, was allowed to be equally deducted from all larger incomes ; and in addition a further feature, not generally recognised in other existing systems of income taxations, of " graduating " the assessment by increasing the rate or the percentage on the larger incomes ; a system most exceptional and peculiar, but which on first presenta- tion seemed to find favour as an ingenious and equitable * If any one thinks that this extraordinary tax experience is limited to one section of the country, he would do well to acquaint himself with the recent results of the State of Ohio in attempting to tax money on deposit. Ohio has even a more efficient and minute scheme of taxing all classes of property than Massachusetts. Not only is every citizen bound under oath to make a complete return of his property, but the law, in addition, empowers each county in the State to contract with certain so-called " tax in- quisitors " for the payment of twenty per cent of all taxes collected through their agency on previously assessed property. How suc- cessful this scheme has been in collecting taxes on money on de- posit is shown by the fact, revealed in a recent report of the State Board of Tax Commissioners, that while the amount of money on deposit in the State, national, and private banks of Ohio in 1892, and subject to State taxation, Avas at least $190,000,000, the amount actually returned for ta.xation in the whole State during that same year was but a little over $32,000,000. There is a re- mark that has almost assumed the character of a proverb, that a text suitable to and illustrative of every situation may be found in the Bible. The text that is most applicable, and which ought to be full of instruction to every congressional advocate of the en- actment of an income tax by the Federal Government in time of peace, will be found in the sixth chapter of the First Epistle of Paul to the Corinthians, where the apostle, as if he had the ex- isting situation in view, remarks. !" All things are lawful unto rngj but all things are not expedient." ' DISCRIMINATING INCOME TAX. 533 method of equalizing the burdens of the State between the rich and the poor. The present is therefore an advantageous opportunity for asking whether any income tax which discriminates in any degree is likely, as is often claimed, to constitute the one perfect form of taxation of the future. And at the outset attention is asked to the following considerations, to which popular attention is not always intelligently given : A Federal income-tax system necessarily involves mul- tiple taxation on one and the same income, person, and property. For example, in the United States a citizen of any one State would be liable, in the first instance, to the Federal tax on his income; second, to a State tax on the same income; third, to a tax on the property or business producing the income, in virtue of its location and con- sequent territorial Jurisdiction of the State. In some ^ States — Massachusetts, for example — the State, in virtue ./7v of its jurisdiction over a person, taxes him also for prop-\ '^j a^ erty beyond its territorial jurisdiction and subject to taxa- yQ^ ^ tion in the State where it is an actuality. Doubtless such i duplications in a greater or less degree will be inevitable in the case of all Federal taxation. But where there are so many sources available to the national Government for obtaining revenue, it would seem to be impolitic for it to encroach on those methods which are particularly ap- plicable to the States — as income taxes, taxes on legacies and successions,* which are governed and protected by State laws, and franchises, which are almost exclusively granted by the States and rarely by the Federal Govern- ment. Certainly there would seem to be no warrant in either justice or expediency in unnecessarily favouring such a system of multiple taxation ; thereby increasing the real or fancied grievances of the people in respect to all taxation, and creating, by reason of a sense of injustice, additional temptations on the part of the taxpayer to fraud and evasion. Again, all modern systems of income taxation have recognised the principle of discriminating in favour of persons in receipt of comparatively small incomes, and * See post, Chapter XXVIII. 534 THE TPIEORY AND PRACTICE OF TAXATION. have provided as a fundamental feature of their policy, that all incomes below a certain rate should be exempted from assessment. Such exemptions, except in the case of the United States, have always and until within a recent period been of a comparatively small amount. In Great Britain it is £160 ($800) per annum. No difference is made in England in levying the income tax, though often proposed and advocated, on account of the source whence the income is derived. Whether the income is earned by the exertions of its possessor, or arises from property, so that the recipient is sure of it without the slightest exertion at all on his part, the same proportion has always been deducted from it. In the administration of its in- come-tax system England has abandoned the idea of as- sessing an income derived from multiple sources as a whole to one taxpayer, and in place divides an assessable income into schedules according to its source ; and, in fact, has given to such a system the popular designation of " the stoppage at source plan." Thus at present the sources of income in Great Britain are classified as per- taining to one or more of five schedules — designated as A, B, C, D, and E. For example, the profits or income derived from agricultural industry are classified as under schedule A, and those from manufactures, mines, gas works, and water supplies under schedule D, and the like; and it is only in schedules A and D that the income re- ceiver must make a return of agricultural, mercantile, or manufacturing gains or profits.* The result of a progressive income tax instituted a few years since in Vaud and other prosperous and popu- lous Swiss cantons is reported to have already verified * A recent number of the London Times reports the following additional illustration of the ingenuity of the people of every country subject to an income tax to evade the payment of the same: " There is an argument in favour of the separation of the in- comes of married couples for the purpose of income tax which has not yet been advanced. It is the immoral state of the law as it stands at present. John and Mary, each possessing incomes of less than £ 500, but in the aggregate exceeding that sum, agree to live together as a certain ' advanced ' couple did who made themselves notorious only a short time since. They are both entitled to relief under the act. Should they, however, legalize their union, neither PROGRESSIVE TAXATION. 585 the predictions and prophecies of the European economists. The project has been often discussed in England, France, and other countries, but the tendency of economic discus- sion has always been generally adverse to it, on the ground that such forms of taxation would discourage the perma- nent investment of capital, and encourage capitalists to transfer their capital and business to other and foreign localities. Vaud, however, in particular, determined to ignore the economists and impose the tax, and the inevi- table disturbance of capital is reported to have taken place. One of the chief capitalists of Lausanne, a Swiss tanner named Mercier, employing several hundred workmen, is moving his business from Lausanne to the other side of the lake (Geneva) at Evian. Evian is in French territory, is entitled to any rebate, and they are actually taxed for rendering themselves respectable members of society. And this is in moral England." In the earliest of Mr. Gladstone's budget speeches, that of 1853, he distinctly refused, while admitting that a great deal might be said in favour of taxing incomes at diflferent rates, according as they proceed from property or from skill, to break up the income tax into classes, and to make a difference in the assessment accord- ing to the source from which the income was derived. Mr. Glad- stone's argument, in this instance, applied to the difficulty of dis- criminating between the various degrees of the durability of in- comes; but his definite refusal to "vary the rate of the tax accord- ing to the source of the income "' — on the ground, to use his own words, that " I think that I should be guilty of a high political offence if I attempted it " — may suffice as a sufficient expression of his opinion in favour of a proportional system. In a recent number of the Nineteenth Century Mr. Gladstone referred to his budget of 1853, in which he continued his income tax. and to his proposal, in 1874, to carry on the national finance without its assistance. He refers to the preparations made, through successive reductions of the tax, for its ultimate abolition, and observes that " in 1S74, for the first time since 1845, the opportunity arrived. The nation had its opportunity and took its choice. It may have been wise or unwise; but it was made by competent authority. The result is told in our present expenditure." In general discussions on the income tax, especially those which have characterized the financial debates in the British Parliament, the proposition has been often advanced that it is a hardship that incomes arising from the exertions of a man's brain should be charged at as high a rate as those resulting from invested capital; and during the present Parliament (1896) a motion was made by a leading member that the financial committee of the House may have permission to amend the assessment in such cases. In a de- bate which followed (instituted by Sir John Lubbock) it was 536 THE THEORY AND PRACTICE OF TAXATION. and there is no progressive income tax there. " Up to this time," wrote M. Mercier, in a letter published by the Lausanne papers, " I have paid over 20,000 francs a year in state and town taxes. The new law would raise that figure to 80,000 francs or more. I owe it to my family to withdraw out of reach of what I can not consider other- wise than downright spoliation.'' A recent economist, commenting on this transaction, thus curtly developed the whole subject : " The fact is that a progressive income tax will not work under modern con- ditions. The modern movability of capital has made all the difference. The Florentine democracy taxed capital to stated that " while there was an immense difference, no doubt, be- tween the two classes of incomes, if extreme cases were considered, they nevertheless passed the one into the other by imperceptible gradations. Nor had any satisfactory treatment of investments ever been suggested. Let them take one class — the securities of foreign nations. 8ome were excellent, others, unfortunately, as in- vestors knew to their cost, were almost valueless. An arrange- ment, however, proposed by Sir Robert Peel in 1858 gave a substan- tial relief to those who had precarious incomes. They made their returns on an average of the income during the three preceding years, and, if the amount fell short, a rebate was given on the difference. He urged that they might make an effort this year to induce Parliament and the Government to revert to the old system, Avhich, it was evident, woidd be only fair and a great boon to all those whose income depended upon their own exertions, whether in law, medicine, or commerce." He contended that the rising and successful man was assessed on less than his income, while the man whose income was falling was made to pay on more than his income. The Chancellor of the Exchequer said in reply that " his friend had urged the desirability of returning to the system that existed prior to the passing of the act of 186.5. He seemed to have overlooked the fact that the alteration effected by that act, which he now wished to overthrow, was introduced at the express instance of Mr. Hubbard, who was a strong advocate for lightening the burden of the income tax wherever practicable. Taking the average of a man's income for three years was a plan specially de- vised to meet the difficulty in the way of appeal that would be experienced by business and professional men. He was quite will- ing to allow that system to continue, as he believed that it was, on the whole, fair to both parties. The proposal of his friend, however, while adhering to the form of making a return u]i(m the average, did not in fact carry out that principle at all, for the first year was only to be struck out where the fourth year showed a loss. Surely, therefore, if the revenue was to collect only on the small receipts, the principle of average ceased at once. For this reason he did not feel justified in accepting the amendment." EXEMPTIONS IN GERMANY. 537 death, no doubt, but in the middle ages once a Florentine always a Florentine. Cosmopolitanism was not invented, and a man hesitated long before seeking his fortune among strangers when ' stranger ' and ' enemy ' were almost equivalent terms. All that is now changed. A progressive income tax in England, unless very moderate and man- aged with the utmost circumspection — and even then the experiment would be too dangerous to try — would cer- tainly result in an enormous transference of English capi- tal to Belgium and Germany. If the idea of progressive taxation is feasible at all, it is only feasible in the death duties, and even there the difficulties are formidable enough." * In Germany, the income exemption being very small, nearly the whole population of the country, male and female, are made subject to the provisions of the income tax. According to M. Soetbeer, the German economist, * The rate of tax progression in Canton Vaud is much less heavy in the case of real than in respect to other descriptions of property. The amount of taxation is fixed yearly. It was for the first year, after the law was passed, at the rate of one hundred and twenty per mille on the lowest class of personal property, with exemptions on movable property, tools, kitchen utensils, clothes, and house- hold furniture. A much more intricate arrangement exists for income derived from personal exertions. Sixteen pounds a year is allowed to be deducted from the income, and exempted from taxa- tion, for the head of the family himself, his wife, for each of his children or descendants who are minors, and for each person for whose maintenance the head of the family is legally liable. Thus, a man with a wife and twelve children, possessing an income of five thousand six hundred francs (two hundred and twenty-four pounds) a year, would be entirely exempt from taxation, as also would be a man with a wife and three children and an income from labour of tAvo thousand francs (eighty pounds) a year. It can not be supposed that a low taxation of this character, with all the risks involved of causing capital to emigrate, and of preventing strangers, who, after an interval, are also to be subject to the same tax, from settling in the canton, or from remaining there, with all the diff"erences of class-feeling which it evoked, could have be- come law without calling forth some strong and almost passionate expressions. It has to be remembered that besides the taxation for the administration of the canton proper, those levied for the expenses, which we include under the head of local government, such as roads, watercourses, education, free to all classes in Switzer- land, and carried out with much vigour and cost, are likewise levied according to the same system. We may form some idea o\ the weight of the burden thus imposed. 35 538 THE THEORY AND PRACTICE OF TAXATION. the total income of the classes in Germany who pay in- come taxes is $2,190,000,000, and of this amount fifty-one per cent is owned by people whose incomes range between two hundred and twenty-five dollars and four hundred and twelve dollars. And the Xew York Nation surmises that a similar state of things would be found if an analysis of all classes of income-tax payers were to be made in England. In Austria a new law has been reported by a special Government commission since a previous statement (see this chapter, page 522). At present all persons of Austrian nationality whose annual income exceeds six hundred florins will be liable to a personal income tax which will be levied on a sliding scale. The scale is graduated so that five per cent will be levied on small incomes and as much as six per cent on large ones. Employees whose total incomes are less than six hundred florins per annum are exempt. In addition to the income tax, persons of either sex trading or carrying on business on their own account are subject to an additional impost. The new law is intended to supersede the existing system by the introduction of a general tax on private trading and in- dustrial establishments of all descriptions, a tax on all joint-stock companies and other enterprises legally bound to publish annual balance sheets, a tax on incomes derived from invested capital, and a personal income tax based on a progressive sliding scale. In France, the republic, although groaning under an almost overwhelming burden of debt, has recently refused, by a vote in its Chamber of Deputies of 267 to 236, to reconstruct its income-tax system, with a view of increas- ing the revenue derived from it; and subsequently, by a majority of 289, refused to reconsider its position, al- though the organic law framed for France in 1875 gives the national legislature unlimited power over taxation, direct as well as indirect. During the popular discussion that preceded this legislative action, it is interesting to note that a progressive income tax was not properly re- garded as more oppressive than many other forms of taxa- tion, and as a matter of French experience a heavy income tax — about four per cent — is now levied on French bonds and shares, in fact, on every dividend of a French com- INCOME TAX IN FRANCE. 539 pany, while no income tax is levied on French Government stocks or foreign bonds ; and this apparently unfair treat- ment is accounted for because the revenue derived from French companies can be easily ascertained and the com- panies made responsible for it, while such a result would be impossible in the case of foreign bonds or foreign stocks and shares, and hence the difficulty has arisen of how to compel the taxpayer to pay : as, if the declaration was left to him, it was not unreasonable to suppose he would not declare it, or only declare it in part ; while if left for ascer- tainment by French officials, it was feared that the income tax in France would become a political weapon, which would be freely used against the legislators in power. M. Paul Leroy-Beaulieu, a distinguished French econo- mist, has recently advanced and advocated the view that a state in instituting an income tax for the sole purpose of obtaining revenue, ought not to grade the tax at all, or lay a higher rate on large incomes than on smaller ones; or, in other words, that it is better to tax all in- comes that are taxed at all at one uniform rate; and the reason for this is that the large incomes form so small a percentage of the total that the increased rate adds no great amount to the revenue, while it greatly increases the difficulty of assessing large incomes at their true value. In support of this view he submits in general terms the following results of his careful examinations in Prus- sia, Saxony, and England : In Prussia, where incomes above one hundred dollars were taxed, for the year selected by M. Leroy-Beaulieu, about one fourth of the people were entirely exempt. Of the rest, thirty-five thirty-sixths paid on incomes of from one hundred dollars to seven hundred and fifty dollars. Only one person out of forty-three had more than seven hundred and fifty dollars income. Only a little over four per cent of the total income of the coun- try belonged to persons having an income of from $4,000 to $20,000, and only 1.7 per cent to those having over $20,000 income. In Saxony one fifth of the total incomes belonsred to persons having less than one hundred and fifteen dollars yearly. The incomes of those having less than four hun- dred and seventy-five dollars each aggregated about two thirds of the total income. The great incomes, exceeding 540 THE THEORY AND PRACTICE OF TAXATION. $25,000 to the person, belonged to seventy-three individ- uals, and comprised less than one and a half per cent of the total. In England incomes imder one hundred and sixty pounds, or eight hundred dollars, are not taxed. In the year selected by M. Leroy-Beaulieu 381,000 persons paid income taxes of a total of $750,000,000. Of the contribu- tors 342,000, or about nine tenths, paid on incomes of less than $3,000, but it is noticeable that they were taxed on not much more than a third of the total amount. Thus nearly two thirds of the taxable income belonged to 39,000 persons. One fifth of the total incomes assessed belonged to 1,222 persons, with an income of over $50,000 each. It will be seen that there is a striking difference in the results shown by M. Leroy-Beaulieu's figures in Germany and England. ^luch of this difference is due to the nature of the laws, by which all small incomes in England are free from taxation, but a part of it is to be attributed to the larger fortunes in England. Italy. — There is no income tax in Italy in the sense in which that term is used in England and the United States, but there is a so-called professional income tax which was by an old law fixed at seventeen per cent on half the esti- mated income, and which has been somewhat increased by a new law in which there are variations made according to the sources of income. While Italy is, in fact, poten- ' • vtially one of the richest countries in Europe, and in an- \ cient times was so regarded, its name to a certain extent ■^' ' has come to be synonymous with poverty. The explana- y \,^^^o^ ^^ ^^^^ ^^ ^^^^ ^^^ government is pr odigal and di s- . \/j \ti honest; and in gathering its income the dishonesty of its >M X C\ ofRctals causes its taxation to fall most oppressively on the " \^ li classes which a wise statesmanship would protect, and A^' . '^^ leaving the minimum burden on those who are most ca- ,0^,^ \K pable of bearing its maximum. >>>/ A new feature of the British fiscal system, which in (j-^ a certain sense may be regarded as an increase of the ex- emption under the existing income tax, has recently been sanctioned by Parliament under the name of the " Farm Rating Act," which proposes to mitigate existing agricul- tural depression by relieving farm lands of a large part of their share of local taxation — i. e., as pointed out in EXEMPTION PROM TAXATION. 541 debate in flie House of Commons, by Sir William Har- court, "by taking £2,000,000 ($10,000,000) out of the general taxation of the country," inasmuch as, if certain existing sources of revenue supply less, other taxes must supply more. " This will bring up the total governmental contribution for like purposes to £6,000,000 in 1868, and £11,000,000 in 1892." In a debate on this subject before the Eoyal Statistical Society, it was maintained that an assessment of the English poor rate, to which nearly all other English rates were now mere additions, was origi- nally founded on the principle of ability to pay, and that principle had never been expressly repudiated. But the making of this expenditure a local charge was in itself a negation of the principle of taxation according to ability, and the only question now was whether an attempt should be made to establish in each locality a principle which had been established as regards the nation as a whole. The answer was in the negative. " Speaking very broadly," wrote Mr. Goschen a quarter of a century ago, " in England fifty years ago land bore two thirds of the taxation on real property, and houses and other property one third; the latter now bears two thirds, while the lands bear one third. In France lands bore over two thirds more than fifty years ago, and bear more than two thirds still. Land, in short, is not as a rule highly rated in England, and where it is highly rated what is wanted is a revised assessment." What is Exemption from Taxation? — An exemp- tion is freedom from a burden or service to which others are liable ; but an exemption for a public purpose, or a valid consideration, is not an exemption except in name, for the valid and full consideration, or the public purpose promoted, is received in lieu of the tax. Nor is an ex- emption from taxation a discriminating burden on those who pay an income tax, provided the person or institu- tion benefited by the exemption is a pauper, or a public charitable institution; for then there is consideration for the exemption, and it is justified as a matter of economy, and to prevent an expensive circuity of action in levying the tax with the sole purpose of giving it back to the in- tended beneficiary of the Government. The avoidance of this unnecessary circuity of action is not, moreover, an in- 542 THE THEORY AND PRACTICE OP TAXATION. V ^ i^ jury but a gain to those who pay the tax. ^t can not, however, be seriously claimed that a man having $100,000 of productive capital, and receiving from it $4,000 of annual income, is entitled to receive support from the Government as a public pauper. An income tax which permits of a7iy exemption whatever is a graduated income tax, not by the rate of the tax but by the amount of the exemption, because all incomes below an arbitrary line are entirely exempt from the tax. Again, in treating of an income tax it should be always borne in mind that, when a Government taxes the income of property, it in reality taxes the property from which the income is derived. In England and on the Continent of Europe land is taxed on its yearly revenue, or income value, and these taxes are always considered as land taxes. Alexander Hamilton, in discussing the taxation of incomes derived directly from property, used this language : " What, in fact, is property but a fiction, without the beneficial use of it? In many instances, indeed, the income is the property itself." — Hamilton's Works, vol. Hi, p. 523. As in theory all citizens ought to contribute in propor- tion to their revenue to the support of the Government under which they have chosen to live and to which they ^ look for protection in respect to their persons and prop- '' erty, the exemption of any from an income tax can only be justified on the assumption of the non-receipt by the citizen of an income beyond what is necessary to defray the expenses of a moderate living. In truth, any exe mp- tion und er a general income tax is in principle an act^ pf chanty olTThe parT of the Governme nt ll is interest- ing,~fheref ore, to" iToTe"wHere the authors or special advo- cates of the income tax of 1884 proposed to draw the line in respect to charity and as to the amount of property the possession or enjoyment of which, in their opinion, con- stituted riches. If the law exempts from taxation income from prop- erty to the extent of $2,000, it in effect exempts property to the capital value of $50,000 from taxation, for at pres- ent four per cent is about the average profit of money, land, or other property, over and above all charges and taxes, and at that rate of profit $2,000 will be the annual income value of $50,000. If, however, we assume five per EXEMPTION AND FAVOURITISM. 543 cent as about the present annual average profit on money, land, or other property in the United States, over and above all charges and taxes, then an exemption of $4,000, the rate fixed upon in the income-tax act of 1884, would represent an accumulation, or business, or profession, of the value of $80,000. If we take the rate at which the United States can borrow money — namely, three per cent — then an exemption of $4,000 would represent an accu- mulation of a citizen, invested in United States securities, of $133,333 -)-. And, according to any fair interpretation of the action of the committee which reported in 1894 a $4,000 exemption, a citizen who is worth less than $80,000 of ordinary property yielding income, or $133,000 of prop- erty invested in United States bonds, was a legitimate object for national charity; the above sums representing the dividing line in the United States between those who were entitled to be regarded as poor and those who were entitled to be considered rich. Such an assumption finds no precedent in fiscal history, and was an unwarranted favouritism to nine tenths of the well-to-do people of the country, who were abundantly able to pay any just pro- portion of the taxes which the Government then consid- ered it necessary to impose for its support. Under such circumstances it would be a misnomer to call such ari extortion taxation. It was unmasked confiscation and a burlesque on taxation. In the case of the income tax of 1868, when the amount of exemption was $1,000, experi- ence demonstrated that more than nine tenths of the entire property of the country, and more than ninety-nine hun- dredths of its property owners, escaped payment from this form of taxation. Again, an income tax which exempts $4,000 of income in the United States can not be defended by any rational rule or doctrine, legal or economic, for the property and income exempted would be infinitely greater in the aggre- gate than the property and the income of the same class made subject to the tax. Under this form of an income tax there could be no equality between taxed-producers and non-taxed-producers, and more especially as the non- taxed-producers will be the most numerous and the great- est producers in quantity as a body. No man is a freeman whose industry and capital are y A/ 544 THE THEORY AND PRACTICE OF TAXATION. subject to exaction, and from which his immediate com- petitors are entirely exem])t. (Equality of taxation of all jpersons and property brought into open competition under /like circumstances is necessary to produce equality of con- j'dition for all, in all production and in all the enjoyments I of life, liberty, and property ; and government, whatever .jC name it may assume, is a despotism, and commits acts V of flagrant spoliation, if it grants exemption or exacts a /greater or less rate of tax from one man than from another man, on account of the one owning or having in his pos- . , session more or less of the same class of property which \*^ is subject to the tax. If it were proposed to levy a tax of five per cent on annual incomes below $4,000 in amount, and exempt all incomes above this sum, the unequal and discriminating character of the exemption would be at once apparent; and yet an income tax exempting all in- comes below $4,000 is equally unjust and discriminating. In either case the exemption can not be founded or de- fended on any sound principles of free constitutional gov- ^ ernment; and is simply a manifestation of tyrannical ^ power, under whatever form of government it may be enforced. The great republican principle of equality be- fore the law, and constitutional law itself, alike preclude any exemption of income derived from like property. \ I M. Thiers, in his work on the Rights of Property, thus yV I forcibly condemns confiscation under the name or form *-' I of a graduated income tax : " Proportionality," he says, y^ 1 " is a principle, but progression is a hateful despotism. ^ \ J^\\ • • • To exact a tenth from one, a fifth from another, pjv \,\ and a third from another is pure despotism — it is rob- ^^ ^ bery." * Finally, the principle involved in this question of dis- criminating income taxation is one that affects the founda- tion and continued existence of every free government — namely, the equal itv of al l men before the law . Any ex- emption whatever, under an income tax, be it small or great, except to the absolutely indigent, is purely arbi- trary ; and the principle once allowed may be carried to any extent. Any exemption of any portion of the same class of property or incomes is an act of charity which every patriotic American citizen ought to reject upon principle and with scorn, except under circumstances of / INCOME TAX IN THE UNITED STATES. 545 great want and destitution. Equality and manhood, there- fore, demand and require uniformity of burden in what- ever is the subject of taxation. The Inception ok Origin of the Income Tax in THE United States. — The subject of taxation in the new Government which it was proposed to establish in place of the colonial system which the Kevolution had sup- planted, constituted one of the most important and salient points of interest in the convention which framed the Con- stitution of the United States, and was the cause of much difference of opinion among its members and earnest con- tention between the States. The great source of weakness of the Confederation was its inability to levy taxes of any kind for the support of its Government. To raise revenue it was obliged to make requisitions upon the States which were respected or disregarded at their pleasure. Great em- barrassments followed the consequent inability to obtain the necessary funds to carry on the Government. One of the principal objects of the proposed new Government was to obviate this defect of the Confederacy by conferring au- thority upon the new Government by which taxes could be directly laid whenever desired. Great difficulty in ac- complishing this object was found to exist. The seaboard States were unwilling to give up their right to lay duties upon imports, which were their chief source of revenue. The inland States, on the other hand, were unwilling to make any agreement for the levying of taxes directly upon real and personal property, the smaller States fearing that they would be overborne by unequal burdens forced upon them by the action of the larger States. In this condition of things great embarrassment was felt by the meml^ers of the convention. It was feared at times that the effort to form a new Government would fail. But happily a compromise was effected by an agreement that direct taxes should be levied by Congress by apportioning them among the States according to their representation. In return for this concession by some of the States, the other States bordering on navigable waters consented to relinquish to the new Government the control of duties, imposts, and excises, and the regulation of commerce, with the con- dition that the duties, imposts, and excises should he uni- form throughout the United States; so that, on the one 546 THE THEORY AND PRACTICE OP TAXATION. hand, anything like oppression or undue advantage of any one State over the others would be prevented by the appor- tionment of the direct taxes among the States according to their representation; and, on the other hand, anything like oppression or hardship in the levying of duties, im- posts, and excises would be avoided by the provision that they should be uniform throughout the United States. The Federal Constitution accordingly upon completion divided the taxes that Congress might impose under it into two classes : those which are direct and those which are indirect, or, as the letter of the Constitution expresses it, " duties, imposts, and excises." It also provides that the former shall be apportioned, equally with representa- tion in Congress, among the several States of the Union, according to their respective numbers, that " no capita- tion or direct taxes shall be laid unless in proportion to the census " ; and that the latter class of taxes shall be " uniform throughout the United States." But from the beginning of the Federal Government the determination of the exact legal meaning of the word " direct " as applied in the Constitution to taxation has been one of great difficulty and embarrassment, although the doctrine in England and her colonies, before the adop- tion of the Constitution, was a favourite one, that " taxa- tion and representation should go together." * * The franiers of the Constitution intended that the appor- tionment of direct taxes among the States should be in more exact ratio to the population even than it is possible to apportion the representation. For example: Suppose one representative to every ninety thousand inhabitants, a State might have a large fraction left over; but the apportionment of direct taxes was designed to be Avith mathematical accuracy to the precise number of persons ascertained by the census. After the first apportionment of repre- sentatives had been made in the Federal Convention by estimated population, before an actual census, it was held that the estimate of the population of the different States was not sufficiently accu- rate for the apportionment of a direct tax ; and that, consequently, the General Covernment could not lay a direct tax until a census should have been taken. Elbridge Gerry, of Massachusetts, moved that until a census be taken direct taxation be apportioned to the number of representatives. Mr. Carroll, of Maryland, replied that " the niimher of rejiresentatires did vnt admit of a proportion exact enough for a rule of taxation" (Elliot's Debates, v, 4.51). Mr. Ellsworth " thought such a rule unjust. There was a great differ- ence between the number of inhabitants, as a rule, in this case. MEANING OF DIRECT TAX. 547 All historical data explanatory of the constitutional meaning of the term " direct " have been of an indirect character, and so imperfect that the court has heretofore apparently not regarded them as worthy of consideration. But this condition of things no longer exists; for in the brief submitted to, and in the argument made before the United States Supreme Court adverse to the constitu- tionality of the provisions of the income-tax enactment of August, 1894, by Hon. Clarence A. Seward, a depart- ment of national history which no historian or jurist had ever before completely exploited, was so traversed by him that it is difficult to see how any one can acquaint himself Even if the former were proportioned as nearly as possible to the latter, it would be a very inaccurate rule. A State might have one representative only, that had inhabitants enough for one and a half or more, if fractions could be applied" (ibid., 453). Mr. Gerry's motion was defeated. The convention, after debate, de- cided that direct taxes must he apportioned in the States in more exact ratio to the population than the representatives could pos- sibly be apportioned (Elliot, v, 453). Many of the leading patriots of the Revolution — Patrick Henry among them — were distrustful of granting this power, even with the restriction placed upon its exercise. Massachusetts accompanied her adoption of the Constitution with a resolution, signed by John Hancock, recommending an amendment of the Constitution which should prohibit Congress from levying a direct tax until they should first have made a requisition on the States (I Elliot, 323). The same amendment, Avord for word, was recommended by the State of New York and the State of North Carolina, and similar resolutions were adopted by South Carolina, Rhode Island, and Virginia. In the apportionment of the direct taxes which had been laid by Congress previous to the income tax the ratio to the census was preserved with scrupulous accuracy, and the actual use of the authority up to the time of the imposition of the income tax was in accordance with the understanding of the framers of the Con- stitution. ]\Ir. Madison, who was probably the most active participant and member in the convention that framed the Constitution of the United States, in a letter written after the adoption of the Con- stitution but before the organization of the new Government, and never discovered and its contents made public until 1895, embodies much new information in regard to the intent and purpose of the term " direct '' taxes as used in the Constitution and in regard to the understanding of the people of the United States concerning that term when they adopted the Constitution. It shows, what is extraordinary, " that the term, in the estimation of the men Avho used it, did not refer to the kind, or character, or nature of the tax 548 THE THEORY AND PRACTICE OF TAXATION. with its results and doubt that, although the framers of the Constitution and the people they represented might not fully agree as to a full and comprehensive definition of a direct tax, there was apparently a perfect unanimity of opinion among them that an income tax was a typical example of that kind of taxation. Previous to the adoption of the Constitution there were no Federal taxes, and all precedents for helping to a cor- rect determination of the constitutional meaning of direct taxation must therefore be drawn from the prior experi- ence of the several States. What was that experience? Eecent historical research itself, and that the framers of the Constitution never considered the subject of taxation from the philosophical or politico-economic point of view, but were wrestling with the stern necessities of the question. How shall the people of these several States be induced to pay a Federal tax? "Manifestly, it could be raised by but one of two methods: either itulirectli/, by ' requisitions ' on the several States, as under the still existing Confederacy, or by taxes laid directly by the Federal Government. Duties and excises were not indirect taxes; they were not under discussion or consideration; they were not in the case at all. Indirect taxes were taxes procured indirectly by 'requisitions' on the States; direct tuxes were taxes laid directly by the Federal Government. The framers of tlie Constitution evidently had never looked at the subject from a politico-economic point of view; they had never given a thought to the philosophy of taxa- tion ; the term ' direct taxes,' as they used it, did not refer to the kind or character or nature of the tax, but to the fact that such taxes were no longer to be laid indirectly through ' requisitions ' upon the States, but directly upon the taxpayer by the newly constituted taxing power. Indirect taxes would be a thing of the past, of the expiring Confederation ; taxes directly laid by the future Government would supply its extraordinary revenue when needed. " But here State jealousy had entered into the problem which the framers were solving — the difficult problem of taking power from the individual States and transferring it to this new, un- known, and distant central authority. If Congress could lay a tax directly upon the property of the citizens of all the States, might it not be so laid that the citizens of Virginia would have to pay more than the citizens of New York? How should the power so trans- ferred be restrained? " The convention answered the question by the word popula- tion. The new power of direct taxation should be given to Con- gress, but the system of quotas, with which the people of the country were fainiliar, should be retained." — New York Nation. For some further discussion of this question see ante, p. 357. APPORTIONMENT. 549 shows that Massachusetts had taxed incomes for more than a hundred years prior to the assembling of the Con- stitutional Convention; other of the leading States were imposing like taxes at or about 1787, and the receipts therefrom were used to help pay the quotas demanded by the then Government of the Confederation for the main- tenance of the Federal Government. The income tax so paid, and all the other internal taxes collected by the States, were known as and called direct taxes and are so called to-day. The Constitutional Convention empowered Congress to levy any of the authorized forms of taxation on the States ; but the levy of direct taxes was guarded by a provision that such taxes should be apportioned to the population. The explanation of this curious anomaly is that the consensus of opinion in the convention was that wealth at that period was so equitably divided among the people of the States that population was the best measure of wealth and consequently of equitable taxation. But what would become of the element of equality if the levy was in the form of indirect taxes — duties, imposts, and excises — which, falling on the consumption of tea, coffee, sugar, spirits, and the like, leave it optional with the citi- -, zen in a great degree whether he will pay or not ? HamiP^ ton certainly thought that the door had been effectually ^ closed against the possibility of any such evasion, for,, when speaking of direct taxes in The Federalist, he says ; ' " An actual census or enumeration of the people mustj furnish the rule ; a circumstance which effectually shuj the door to partiality or evasion." But any doubt on this subject ought no longer i6 be tolerated, for we now have, almost for the first tirne, definition of or distinction between direct and/indirect taxes that is founded on soimd philosophy and^ large ex- perience, and can not be refuted — ^namely, ^direct ^x lH. . > has always in it an element of compulsion ./'riie person j S-.^ against whom or on whose property or income a direct tax ^ ^^^ is levied has no option whether or when he shall pay. There is nothing voluntary about it. On the other hand, an indirect tax, whoever may first advance it, is paid volun- tarily, and primarily by the consumer of the taxed article. But the most important and vital issue involved in -^ 550 THE THEORY AND PRACTICE OF TAXATION. V-. the income tax enacted 1894 (x\ugust 18th) was that it designedly provided for discrim inatinffjaxation, and this fact may be best demonstrated and brought to popular comprehension in the following manner: In a recent in- terview (1895) with a leading British parliamentary au- thority, the conversation turned on the new and unprece- dented discriminating rates in the legacy and succession taxes imposed by the present British Parliament, and the opinion of the writer was asked respecting them. He re- turned, offhand, the answer that he could only discuss them from a British point of view, for, under the Consti- tution of the United States, such taxes could not be levied by the Federal Government, contemporaneously. And how promptly foreign authorities recognise the truth of this position is shown by the following extract from an edi- torial in the London Times on the phase of the income statute then before the United States Supreme Court : " Were we," it said, " under the United States Constitu- tion, Sir William Harcourt's budget would have been de- clared unconstitutional. Populist leaders in America must envy us the freedom of dealing with other people's property, enjoyed in this motherland of liberty." This conversation led to a historical investigation, and the recognition of what seemed to be a fact little or not before noted, that the United States is the only nation that now exists or ever has existed which, through constitutional or other provisions, has, or has had, any limitations on its Gov- ernment in respect to the general exercise or extent of the power of taxation. If there are any exceptions, they are to be found in the legislative enactments of the French National Assembly of 1789, and possibly in what is now known as the referendum system of Switzerland. But a government that has no limitations on its power of taxation, that can arbitrarily take in whatever manner, to whatever extent, and at whatever time it pleases, the property of its people or subjects, whether that right exists in theory, as in England, or in actual practice, as in Ger- many, Austria, and Russia, is a despotism. If this as- sumption and reasoning may seem to any one extrava- gant and unwarranted, his attention is respectfully asked to the following expression of opinion on this subject by the United States Supreme Court, as given through Jus- CLASS LEGISLATION. 551 tice Miller in the celebrated " Loan Association vs. To- peka ''' case (20 Wallace, 665) : "It must be conceded that there are rights in every free government beyond the control of the State. A gov- ernment which recognised no such rights, which held the lives, the liberty, and the property of its citizens subject at all times to the absolute disposition and unbounded- control of even the most democratic depository of power, is after all but a despotism. It is true it is a despotism of the many — of the majority, if you choose to call it so — but it is none the less a despotism.^' And yet can there be any doubt that the American people would have abandoned their proud historical posi- tion if the Supreme Court had decided in 1895 that the income-tax enactment of 1894 was constitutional? For such a decision would practically have removed any constitutional limitation on the exercise of the power of taxation by Congress, and in this way : First, by estab- lishing that an income tax is not a direct tax, there can be practically thereafter no direct taxes to which the con- stitutional mandate of apportionment will apply, for popular sentiment will never sanction the enactment of a general " capitation " or " poll " tax, or a direct tax on land. Then it certainly could not be unconstitutional to multi- ply classes for taxation according to wealth and increase the rate up to the point of confiscation. Can any one, furthermore, doubt that the primary object of the enact- ment proposed in 1894 was not the raising of revenue for the national Treasury, but rather to permit a part of the people of the country to impose discriminating taxes on the people of another part, and then fixing a general exemption at so high a rate that those of the first part, who are entirely able, should not be required to pay any- thing? If this exemption, in place of $4,000, had been fixed only to include the average annual wages or earn- ings of the working masses of the country, is it probable that Congress would have even considered the enactment of the income tax of 1894? Even before the form of the statute of 1894 was reported from the proper committee, speculation was indulged in to the effect that the con- stituents of certain districts would not have to pay any- 552 THE THEORY AND PRACTICE OF TAXATION. .J^y thing in the way of income taxes under it. That the Gov- ernment also practically conceded that the income-tax enactment of 1894 was pre-eminently class legislation is also evident from the following extract from a statement made in a brief by the Attorney General of the United States pending the consideration of the income-tax ques- tion by the United States Supreme Court : * " Congress," he said, " has adopted as the minimum income for the purpose of taxation the limit of four thousand dollars. This limit may be said to divide the upper from the lower middle class, financially speaking, in the larger cities, or to divide the middle class from the wealthy in the country districts." f Attention is next asked to what seems to be by far the most serious point in this whole matter, and which has not as yet attracted public attention in any marked degree. The American people have been trying an experiment as a nation which has never before been attempted by any other nation — namely, that of universal suffrage, by which the power to elect legislators and shape the policy of the Gov- ernment has been put under the control of those who, through no fault of their own, have not enjoyed such edu- cational facilities as will enable them independently to form correct opinions on great constitutional, legal, finan- cial, or economic questions, thereby creating almost end- less possibilities for injudicious legislation. How such possibilities were being made actualities in the case of the income-tax statute of 1894 can be made evident to almost 'any one who makes himself fully acquainted with the cir- * By an enactment of Congress, August 18. 1804, establishing an income tax for the United States, a tax of tico per cent was imposed on the gains, profits, and incomes of persons derived from any kind of property, including rent and the growth and produce of lands, and profits made upon the sale of land if purchased within two years. Every element that could make real or personal property a source of value to an owner was taxed. An excise duty was also imposed upon income derived from any profession, trade, em- ployment, or avocation. The tax upon persons generally was not upon their entire income, but on the excess over and above the sum of four thousand dollars. All persons having incomes of four thousand dollars or under were exempt. t Opening argument by William I). Guthrie, in support of the contention that the income-tax law of 1894 was unconstitutional. SUFFRAGE AND TAXATION. 553 cumstances attendant on its inception and almost concur- rent legal adjudications and contentions. The members of the convention that framed the Con- stitution of the United States had the very questions be- fore them that have already been in issue before the Ameri- can people, and may at no distant day be again presented for their serious consideration. It was inequalities in methods and facilities for the raising of revenue among the States of the Confederation for the support of the Federal Government that threatened the existence of the Confed- eration and necessitated the assemblage of the Constitu- tional Convention. And the members of this convention, taught by experience, incorporated in their vi^ork the pro- visions respecting the exercise of the power of taxation, the meaning and validity of which are now called in ques- tion. And in so doing they gave to the people of the United States an instrument of which one great feature, if not its chief feature, and one not recognised as it ought to be, is that it guards the rights of minorities as no other governmental instrument devised by mortal man ever has done. As long as this great feature is preserved intact and the nation adds to it another principle, that every question of doubt concerning it shall be always deter- mined in a way to strengthen it, the perpetuity of the pres- ent Government is assured. But if now the Supreme Court invalidates this great feature by nullifying the man- date of the Constitution, and thereby practically removes all limitations on the power of Congress to impose taxes, sanctions discriminating taxation and disregards the rights of minorities, the hour when this Government enters— J upon the path of decadence will have struck. How puerile ^ r~ it is for any one to favour such a decision and its inevitable .:;" 'ji " results, on the ground that a contrary decision would T_ oblige the Government to repay to the people a large sum ^ of money that it had illegally collected from them! This' would, however, have one recommendation — namely, thatC it would approximately solve the difficult question, Howv much, in terms of money, is the existing Government worth ? Conclusion. — The following extract, incorporated bj Mr. Justice Field in his opinion, delivered in concurrence^! with a majority of his colleagues, and adverse to the con-!i^ 36 554 THE THEORY AND PRACTICE OF TAXATION. ^X^^ .^^, a .^ A stitutionality of the income-tax statute of 1894, which imposed discriminating taxes on the American people, is also pre-eminently worthy of notice in connection with any general history or review of this great subject : " Here I close. I could not say less in view of questions of such gravity that go down to the very foundation of the Government. If the provisions of the Constitution can be set aside by an act of Congress, where is the course of usurpation to end? T he present assault upon capit al i s but the begi nning. It will be but the stepping-stone ■ to others, larger and more sweeping, till our political con- tests will become a war of the poor against the rich — a war ^ .constantly growing in intensity and bitterness. 'If the court sanctions the power of discriminating taxation, and nullifies the uniformity mandate of the Constitution,' as said by one who has been all his life a student of our insti- tutions, ' it will mark the hour when the sure decadence of our present Government will commence.' If the purely arbitrary limitation of four thousand dollars in the pres- ent law can be sustained, none having less than that amount of property being assessed or taxed for the sup- port of the Government, the limitation of future Con- gresses may be fixed at a much larger sum, at five or ten or twenty thousand dollars, parties possessing that amount alone being bound to bear the burdens of government ; or the limitation may be designated at such an amount as a board of walking delegates may deem necessary. There is no safety in allowing the limitation to be adjusted ex- cept in strict compliance with the mandates of the Con- stitution which require its taxation to be uniform in oper- ation and, so far as practicable, in proportion to their property, equal upon all citizens. Unless the rule of the Constitution governs, a majority may fix the limitation at such rate as will not include any of their own number. / " Cooley, in his Treatise on Taxation (second edition, 215), justly observes that 'it is difficult to conceive of a justifiable exemption law which should select single in- dividuals or corporations, or single articles of property, and, taking them out of the class to which they belong, make them the subject of capricious legislative favour. Such favouritism could make no pretence to equality; it J would lack the substance of legitimate tax legislation.' DISCRIMINATION CONDEMNED. 555 " The income-tax law under consideration is marked by discriminating features which affect the whole law. It discriminates between those who receive an income of four thousand dollars and those who do not. It thus vitiates, in my judgment, by this arbitrary discrimination, the whole legislation. Hamilton says in one of his papers (The Continentalist) : ' The genius of liberty repudiates everything arbitrary in taxation. It exacts that every man, by a definite and general rule, shall know what pro- portion of his property the State demands. Whatever liberty we may boast of in theory, it can not exist in fact while [arbitrary] assessments continue.' The legislation, in the discrimination it makes, is class legislation. When- ever a distinction is made in the burdens a law imposes or in the benefits it confers on any citizens by reason of their birth, or wealth, or religion, it is class legislation, and leads inevitably to oppression and abuses, and to gen- eral unrest and disturbance in society. It was hoped and believed that the great amendments to the Constitution which followed the late civil war had rendered such legis- lation impossible for all future time. But the objection- able legislation reappears in the act under consideration. It is the same in essential character as that of the English income statute of 1691, which taxed Protestants at a cer- tain rate, Catholics, as a class, at double the rate of Protes- tants, and Jews at another and separate rate. Under"\ wise and constitutional legislation every citizen should \ contribute his proportion, however small the sum, to the 1 support of the Government, and it is no kindness to urge-/ any of our citizens to escape from that obligation. If he 1 contributes the smallest mite of his earnings to that pur- \ pose he will have a greater regard for the Government and more self-respect for himself, feeling that, though he is poor in fact, he is not a pauper of his Government. And it is to be hoped that, whatever woes and embarrassments may betide our people, they may never lose their manliness and self-respect. Those qualities preserved, they will ulti- mately triumph over all reverses of fortune." - — c h CHAPTER XXV. AVHAT SHOULD BE TAXED, AND HOW IT SHOULD BE TAXED. Some years since (1873) a citizen of Tennessee, Mr. Enoch Ensley, making no pretence of scholastic learning or private interests, but earnestly desiring the material development of his section of the country (Tennessee), and that it should not be retarded by the adoption of an unsound system of State or municipal taxation, published in the form of a letter addressed to the Governor of the State a little pamphlet entitled What should be Taxed, and How it should be Taxed, which set forth certain fundamental propositions in respect to local taxation, and supported them with such homely and clear illustra- tions as to entitle the essay to a permanent place in eco- nomic and legal literature. Mr. Ensley commences by proposing the following rule or maxim as the basis for a State (Tennessee), city, or county system of taxation: " Never tax anything that would be of value to YOUR State, that could and would run away, or that could and would come to you." Mr. Ensley then lays down the proposition that prop- erty naturally divides itself into iwo classes — movable and immovable; that the former, as its name implies, can be moved from one place to another as its owner chooses, while the latter is fixed and can not budge an inch, no matter what its owner chooses. " I hold it to be true that immovable property has no value till it is occupied or located upon, or brought to subsist or employ, movable property; and, as a rule, the more it employs or subsists, the more valuable it becomes ; and the greater the induce- ments or attractions it offers movable property, the more it will have to locate upon it " ; citing in proof and illus- 556 MOVABLE AND IMMOVABLE PROPERTY. 557 f tration the fact that the best acre of land in America is '^^ worth nothing till man goes upon it with his axe, horse, ^ cow, etc., and puts it in cultivation and brings it to subi sist himself, horse, cow, etc. ; and from that moment it^ commences to have a value, by reason of the fact that it^ employs or subsists the man (who, if he can be called property at all, is certainly movable property) as well as< the horse, cow, etc. And if this acre of ground for any] cause should become attractive to and employ double the amount of movable property, it will as a general rule be-'-— ^ come doubly valuable; and so on, if it should become at-S^l^ tractive to and employ profitably ten or a hundred or ^^ thousand fold more movable property, it would become in, ^ "^ of dollars per acre, by reason of the fact that it offers tc "D attractions, and has employed upon it profitably five, ten,^C^ S^ or fifteen millions of dollars' worth of movable property. ■* ^ Of course, when ground gets beyond a certain value iti!f< must be put to other uses than agriculture, and just this process acres of ground have doubtless passed througl^ since the Dutch first landed on Manhattan Island. There are exceptions to this rule — that immovable^ property is valuable as it has movable property employed directly on it — for it frequently has a greater value than movable property employed directly on it would warrant. It has a value reflected from the employment of movable property employed on immovable property near by, as in the case of residences in or near cities. For instance, the use of movable property on a Broadway lot gives a great value to the merchant's residence up town, by reason of the fact that it is sufficiently near and convenient for it to be in demand for the transaction of business daily at his store, all of which is attributable to the employ- ment of movable property at the store. The thrift or profit which immovable property offers to movable property helps to regulate its value. For in- stance, a man owns two pieces of property alike, say in different towns, rented out to merchants of equal capital ; one is enabled to make seven per cent per annum only on his capital, for the reason that he has to pay three per cent tax on his capital, and the other makes ten per cent net, and pays no tax. The property paying ten per cent 558 THE THEORY AND PRACTICE OF TAXATION. will be the most valuable, for it will pay the largest rent, because there will be more applicants for it than for the seven per cent ; and the law of supply and demand govern- ing, it must rent for more. It is, however, impossible, as a general thing, for these two merchants to remain of equal capital. The ten-per-cent man will soon have more capital, from his extra thrift; and the seven-per-cent man, seeing his prosperity, is apt to pull up stakes and quit his town, and move to the ten-per-cent town; and other merchants will perhaps do the same thing, until, by com- petition increasing in the one town by other merchants coming in, and decreasing in the other by their going out, profits may be made the same. This, however, is not apt to make profits the same in a country like ours, for there is generally new trade to be looked up to keep pace with the newcomers. So the result would be that the new- comers would continue to go to the ten-per-cent town from the seven-per-cent town and other places, till the one becomes a large and prosperous city, and the other a dilapidated, languishing town. It will be easy then to say which storehouse is the most valuable. In this there is little of novelty; but in the homely, clear illustrations which Mr. Ensley employed for im- pressing his fellow-citizens with the truth of his proposi- tions, novelty is not wanting. Thus, for example, he says: " I hold that, of all men, the real-estate, or fixed-prop- erty man, is most interested in the rule or motto I have adopted. To illustrate, I will say that there is an acre of ground in the city of Memphis, Tennessee, say in front of the Overton Block, that is worth at the rate of two hun- dred thousand dollars per acre, while the writer has an acre six miles below the city, quite as good naturally, and even better than the Overton Block acre, because it will produce more corn, cotton, pumpkins, peas, potatoes, cab- bage, etc., than the Overton acre will, or ever would, and my acre is not worth one hundred dollars per acre. Now why is it that the Overton acre is worth two hundred thousand dollars per acre, and mine not worth one hun- dred dollars ? The reason is that there is employed on the Overton acre, profitably, two, three, four, or five hundred thousand dollars of movable property, while upon mine VALUE OP LAND. 559 there is employed the sixteenth part of a negro, the six- teenth part of a mule, plough, hoe, etc. Xow, if you will manage in any way, either by taxation or otherwise, to drive from this Overton acre the two, three, four, or five hundred thousand dollars, and affect the Overton acre so that this capital, or any part of it, can not be employed on it with a profit, it will not be worth more than my acre — in fact, not so much, for there is nothing so value- less as ground covered with houses, when there is no de- mand for said houses. And, further, if you do anything to make the two, three, four, or five hundred thousand dollars pay less profit, you will damage the ground, or lessen its value, more rapidly than you will decrease the profits — not in the same ratio, but more rapidly. Sup- pose, for instance, the profit has been ten per cent net on the capital employed, and the property is paying a rental on three hundred thousand dollars ; if you reduce the profits permanently, in any way, to five per cent net, the property would not pay a rental on one hundred and fifty thousand; in fact, it would hardly pay any rent at all, for five per cent would be too small to induce a business at all in this country." " Movable property always seeks and locates on im- movable property where it thrives and multiplies most rapidly. A spot of ground, a city, a county, a State, or even a nation, that offers the greatest thrift, will be sought and located upon by the greatest quantity of it, and the greater the quantity the more value and thrift will the land have. Any tax levied upon it lessens its thrift, and consequently is in violation of the correct principle; though it may not be enough to perceptibly affect it, yet it will have some effect. Though it may not drive any away, yet it will, to some extent, keep other movable prop- erty from coming." " It is said that it was the last feather that broke the camel's back, while the first had as much to do with it as the last. An oppressive tax, such as exists in some parts of our State, drives off a good deal of movable prop- erty, and absolutely forbids any more coming to such parts, unless it comes relying upon dodging or evading the law, which large capital never does. Men of small amounts of money, goods, etc., such as one can hide, may 560 THE THEORY AND PRACTICE OP TAXATION. come ; but men of large amounts of money, to go into open banking, or merchandising, on a scale that can not be hidden, or evade the law, will not come. " Here I wish to state a truism which, perhaps, many owners of real estate may never have thought of. It is this, to wit : The renter or lessee of real estate must always prosper before the owner of the real estate can expect to prosper. This is certainly true as a rule, when taken for a series of years, in a country like ours, where land is abundant, and the people free to go where they please. This will apply to all real estate, whether farms, store- houses, shops, or other kinds of realty. I don't mean he must have greater prosperity, but that he must prosper first. " Of course, all mankind, where they have lived for a time, form local and social ties, and will submit to some oppression, though their property be all movable, before they get their consent to move away ; but with the millions of dollars of movable property we desire to attract to us, no such ties exist; and if we do not offer quite as much thrift as other localities, and even more, when the prop- erty may be already located, we need not expect to attract it to us. But it is just as certain as that the law of gravity will cause the apple to fall toward the earth when it leaves the tree instead of toward the sky; or as that water will run down an incline, if we (in Tennessee) do offer greater attractions than other localities we will at- tract it toward us, and the quantity and the rapidity with which it will come, can and will be measured by the amount of thrift that is offered. It is about as impor- tant to induce a man, with a given amount of capital, to come to us, as to retain one we already have in our midst, with the same amount. We can not expect to develop a State or build up large cities rapidly from their present population in their natural increase, but must invite others, with their capital, to come and settle among us. " As I have said, any tax levied upon movable property lessens its thrift, and tends to drive and keep it away; consequently, it is incorrect in principle, while a heavy and oppressive tax is absolutely prohibitive and suicidal. Embraced in the rule I have presented in the beginning. CITY AND COUNTRY. 561 never to tax anything that would be of value to your State, that could and would run away, or that could and would come to you, are two or three kinds of movable property which I regard as most important, and which I will mention — to wit, money, merchandise, and capital to be used in manufacturing. These pertain to cities mostly. There are many other kinds of property which, perhaps, would come under the rule, but for the present I will speak of these three, because through them great wealth generally enters the State. " And here I desire to call your attention to the fact that the great bulk of the movable property generally en- ters a State or nation through its cities and towns — money and merchandise or trade always, and capital for manu- facturing purposes most frequently ; and from the cities and towns its beneficial effect is radiated throughout the State far and near, greater the nearer the city, but bene- ficial, to some extent, even to the utmost bounds of the State, particularly when we owe a common debt, as most of the States of the American Union do, and as our State of Tennessee certainly does, to the extent of over twenty million dollars. And here I wish to note the fact that there exists in Tennessee, in the minds of some of our farmers, or people living in the country, a prejudice against the cities. They imagine that the interest or pros- perity of the cities is entirely separate from theirs, if not antagonistic; and again, the people of one part of our State imagine their interest to be separate from other parts of the State, which is incorrect in toto. This idea or feeling has, to a great extent, been manufactured by demagogues or ignorant politicians, and by newspapers actuated by incorrect motives or ignorance of the cor- rect relations between cities and country, and the different parts of the State. This is all wrong, and the sooner the people turn a deaf ear to all such, the better it will be for all parties. There is no antagonism of interest between them ; but, on the contrary, a unity of interest. For a city to grow large, rich, and prosperous within the borders of a State that owes a debt to be paid by all parts of the State in proportion to the wealth of the respective parts, of course can not be against the interest of any part of the State or country; and vice versa, for the country to 562 THE THEORY AND PRACTICE OP TAXATION. become rich and prosperous, it can not well hurt the cities ; for East Tennessee to flourish, can not hurt Middle and West Tennessee, and so on. But, on the contrary, the prosperity of one is, and must be, advantageous to the other, not only so far as paying the common debt is con- cerned, but in divers other ways, such as the country patronizing the trade and manufactories of the cities, etc., and the cities, in return, buying what they may con- sume of country products from the country, and offering a near and convenient market for many of their products that can not be shipped to more distant markets, besides shedding or radiating an increased value on their lands in every direction, for miles and miles. To attempt to enumerate the various reciprocal advantages is useless, for the mind once directed to the subject, they become apparent by the scores. " And here I desire to call the attention of the farmer or countryman to a fact that many have never thought of, which may tend to abate their hostility toward the cities. It is this, to wit : While it is impossible for a rich and prosperous farming country to surround a city with- out contributing to the prosperity of said city, yet it is possible for a city to be located within the borders of a State and grow to be rich, prosperous, and large, and to add great value to the lands around and to the State, without receiving a corresponding value from the country of said State. In fact, such is always the case where the city is large. For instance, the great city of New York is not indebted to the country or farm lands of New York for one hundredth of her prosperity and wealth. She reaps her wealth not only from all the States of the Union, but from all the civilized parts of the world ; yet she don't contribute a dollar to the payment of current expenses and State debt of any State in the Union, or any part of the world, except the State of New York. She gives in her immense wealth to be taxed solely for the State of New York, thereby relieving each and every farmer in the State. St. Louis reaps a majoritv of her prosperity from other States than Missouri. New Orleans reaps four fifths of her prosperity from other States than Louisiana, and of Memphis it can be said, she has reaped of whatever wealth and prosperity she has, from a half OPPRESSIVE TAXATION OF MONEY. 563 to two thirds of it from Arkansas, Mississippi, southern Missouri, and southern Kentucky; yet she does not con- tribute a dollar directly to the payment of current ex- penses or State debt of any of these States, but it is all taxed to supply the wants of the State of Tennessee alone. JSTashville is similarly situated, to some extent, and per- haps Knoxville and Chattanooga, just to the extent that they may have prosperous trade beyond the State. Hence it will be seen that the farmers or country people should not be prejudiced against the cities located within their State, for they receive more aid from them than they give in return, and are consequently the gainers. So the prac- tical operation of large cities seems to be to receive trade, and become rich out of it, from other States more than their own, and allow their own State alone to receive the full benefit, as far as her demands go. This, it strikes me, should not be objectionable to the farmer or country- man, or to the State or any part of the State. Conse- quently, by no means should they desire any law, of any kind, to exist in the land, whereby the cities are oppressed and kept from growing, when, by its repeal or modifica- tion, they would not be harmed a particle, but, on the con- trary, be benefited. " To undertake to enforce a very oppressive tax on money is ridiculous nonsense. It is impossible. Th^ Maker of all things has forbidden it, in giving to all things their peculiar nature. He has forbidden an op- pressive tax on money, by giving it such an easy mobilityi' that it can go, in a fortnight, from Tennessee almost tqi th^ uttermost parts of the world. And just so, to"some extent, with other kinds of movable property. It would be about as wise for the Legislature to pass a law enacting that, from and after this date, the great bulk of the water of the Mississippi Eiver shall flow toward Cairo instead of toward New Orleans, as to enact that the great bulk of the money of Memphis shall pay four and a half per cent tax per annum. It is wise in man to deal with things as they are, and will be in spite of him, and not as he may think they should be. Don't kick against the pricks ! " Suppose that some city or town found it necessary, in order to pay current expenses, interest on debts, etc., r 564 THE THEORY AND PRACTICE OF TAXATION. to levy a tax of ten or fifteen per cent on all kinds of property, real, personal, and mixed, and that it was rigidly enforced. Does any one suppose that there would be any movable property there in twelve months to collect the tax from? jSTo, sir; you would hardly be able to find a pocket handkerchief or a pound of coffee in either of these cities. But all the real estate, houses, etc., would be there still, but without tenants, and consequently, on account of the high tax and want of occupants, worth nothing. Suppose, again, it was possible to adopt a process to make the real estate worth something, could it be done by run- ning the occupants off and receiving no rent whatever from it ? N"o ; it could only be done by adopting a process which would fill all of your houses with tenants, and secure to you a, rental from them ; and that could only be done by allowing movable property to thrive, and by at- tracting a sufficient amount of it to you to occupy addi- tional ground, and to pay additional rental until your rental would be more than the tax. " I find, in submitting my views to intelligent men, that at first they oppose me, and invariably say it is right and just for all kinds of property to be taxed alike; they all receive protection from the laws alike, and of course they ought to pay alike. ISTow, this would do very well, and be good reasoning, if we had a Chinese wall around a State; a wall that man could not scale to go out or come in, and no railroad could go under, through, or over; and then I would favour the tax of everything, for then it would all be fixed property; it couldn't run away or come to you ; but until that kind of arrangement is made I am not in favour of it." Commenting on a rate of tax of three per cent imposed on all property by various cities of the Southern States (at the time of his writing, 1873), Mr. Ensley points out as one result of such a policy that it offered " inducements to banks to carry on business with small capitals, and rely upon deposits for their capital ; in other words, to undertake to do banking business without capital. A bank with five hundred thousand dollars capital pays fif- teen thousand dollars to State, county, and city, being five times as much as a bank with one hundred thousand dollars capital, when the bank with five hundred thou- EFFECTS OP UNEQUAL TAXATION. 565 sand dollars capital does the State, county, and city, other- wise, five times as much good in the shape of assisting trade, manufactures, and developing the various indus- tries." Commenting also upon the tax rate of four and a half per cent imposed at that time in the city of Memphis, Mr. Ensley further adds : " If you will levy, enforce, and collect such a tax on the money, trade, etc., of the great city of New York, and charge no tax in Boston, Philadel- phia, or Baltimore, I will guarantee to transfer, in a short time, hundreds of millions of the trade, money, etc., of N^ew York to those cities ; and, if she will continue it five or ten years, I will guarantee to show you, in either of these cities, more trade, more money, and more people than in New York. I will guarantee to depopulate her more effectually and more permanently than a plague ever did a city, and impoverish her more effectually than ever a war did. Yes, I will hurt her infinitely worse than a fire, that might burn every house from Castle Garden, from river to river, to Central Park. I will make it entirely safe for women and children to cross Broadway at City Park, Astor House, Wall Street, or elsewhere, with- out the protection of policemen. I will reduce the value of the real estate of Mr. Astor from one hundred million dollars (it is said to be worth one hundred million dollars) to twenty-five million dollars or ten million dollars, and perhaps even less, and the estate of every real-estate or immovable-property holder in the same ratio ; but I can not say that I will greatly injure the movable-property man, for he may go to Boston, Philadelphia, or Baltimore, and do quite as well as he did in New York city with his money, goods, etc. The truth is, it would entirely bank- rupt the great city, for the demand for immovable property would not be sufficient to pay a rental sufficient to pay the interest on her city, county, and State debt. I do not think these assertions on the extreme, or the pic- ture overdrawn. And if the picture is not overdrawn, and even say it is overdrawn by fifty per cent, who would be the injured party in New York by the enforcement of such a law? Would it be the great merchants who, for aught I know, rent their houses from Mr. Astor? Or would it be Mr. Astor, the great real-estate owner of 566 THE THEORY AND PRACTICE OF TAXATION. New York ? In other words, would it be the movable-prop- erty man, with his goods, money, etc., who can take it and go to Boston, Philadelphia, or elsewhere, and perhaps do quite as good a business as he did in JSTew York, or would it be the immovable-property or real-estate man, who has to stay where he is and pay his city and county debt, with- out tenants or rental from his property? Hence, I say that, of all the men who should object to oppressive and, to follow the principle, I will say any taxation at all on money, merchandise, or trade, manufactories, etc., it is the man who owns the real estate or immovable property. His position should be this : He should say to the thou- sands of men in the civilized world, with their money in their pockets, looking out a favourable locality to go to banking, merchandising, manufacturing, or farming, etc. : ' Come, locate on me ; I will not oppress you ; come to me, for I can't go to you, and we must come together, or I am worth nothing; and knowing this, I will not tax you and oppress you. Other localities make you pay a tax; I will not, consequently I offer that advantage over other localities.' Heretofore it has been the merchant who has done the complaining about the tax levied on him; he is not the one to do it; it is the real-estate man, and the writer being one of those men owning real estate almost entirely, and not owning a dollar's worth of merchandise of any kind for sale, and not being a lender of money, but, on the contrary, a borrower, and not being a manufacturer of any kind, and not being the owner of machinery, except a steam sawmill and a steam cotton-gin establishment, but being what is known as a plain farmer or planter by profession or occupation, thinking he sees hisinteres,t in the system he is advocfitmg7"cbnsequent!y jtheremis to be'Touhd the moving cause of this letter. " Fcontend that this system will lig*hten the burdens of taxation on real estate, and, after a very short time, the rate of taxation will really be less. To illustrate further, I will say what I said to a prominent real-estate owner in a conversation on this subject. He said to me: Do you say that such merchants or bankers shall make from ten to sixteen per cent on their capital, and pay no tax, and I make only six or eight per cent on the houses they are occupying, and pay all the tax? Yes, says I. You seek FREEDOM FROM TAX BURDENS. 567 to tax them, and that is the reason you get no larger per cent on your property. Says I : If they make one hundred per cent per annum on their capital, you should not want them to pay a copper of tax. Why? Because if they made one hundred per cent per annum, next year you would have forty applicants for the house they are doing business in, and if you should, you would certainly get a full rent for it, more than the extra tax, and as only one of the forty could get the house, and the other thirty-nine would be unaccommodated, and if your tenants should be making this large per cent, it is reasonable to presume that they would be making it, or something near it, all over town; consequently there would be near the same number of applicants for every house in town ; but as only the present tenants or their number could be accommo- dated with houses, the result would be that you would not only get exorbitant rents for all the houses in town, but you would have demand for the hundreds and thou- sands of vacant lots throughout the city to build store- houses on; they would either buy them or offer you such enormous rents as would induce you to build them houses on lots that you have been paying taxes on for years, and received no rental from. Soon there would be houses going up all over the city, block after block. The brick- maker would have more than he could do ; the lumberman would have more orders than he could fill; the carpenter, bricklayer, stone mason, foundryman, and all descriptions of mechanics and labourers would have more than they could do, so that the builders would have to send else- where for mechanics, and they would come in by the thou- sands. All these newcomers in turn would want residences for their families ; and thus would bring into demand and make pay a rental thousands of lots that have never paid anything, and you give active employment to all the me- chanics you have, and besides bring thousands of others from other places. " Let us go a little further, and see how it affects all and everybody in the city. These newcomers get their houses, and then they want furniture, and they patronize your furniture man; they want a carriage or wagon for family uses, and they patronize your carriage man; and then horses, and patronize the horsemen; and then the 568 THE THEORY AND PRACTICE OP TAXATION. 1 ^J blacksmith to shoe them; and then the retail drygoods houses, mantuamakers, milliners, grocery-men, butchers, vegetable market men, and, in short, every kind of retail establishment throughout the city, thereby giving vigour, life, and thrift to all ; and thus it would go on until, before you would be aware of it, you would have a city of hun- dreds of thousands of people, and be worth and pay a rental on hundreds of millions of dollars. Of course, no general trade would pay one hundred per cent per annum, but I have adopted this rate to illustrate the principle. " The system of non-taxation of certain kinds of mov- able property, which I am advocating as the correct sys- tem, while it is the best to be adopted in every State, yet it will not make a rich State out of every State, nor will it build up every town to be a large city, by any means. Thus, for instance, its application to a naturally poor State could not induce movable property sufficient to go there to make it a very rich State; still, if there is any way possible to develop such a State, this is the one. " I think 1 have shown beyond question that it is not in harmony with the interests of any one in any State to tax money, trade, manufactures, etc., and that, of all others, the o'Rmers of fixed or immovable property should demand that the present system be changed — that they should say : Don't adopt any system that has a tendency to drive movable property from me; but, on the contrary, adopt a system that will attract it — for we are worth noth- ing without it, and the movable-property man may go else- where and do quite as well." CHAPTER XXVI. THE LAW OF THE DIFFUSION OF TAXES. Xo attempt ought to be made to construct or formu- late an ecouomically correct, equitable, and efficient system of tajiation which does not give full consideration to the method or extent to which taxes diffuse themselves after their first incidence. On this subject there is a great differ- ence of opinion, which has occasioned, for more than a cen- tury, a vast and never-ending discussion on the part of eco- nomic writers. All of this discussion, however, has result- ed in no generally accepted practical conclusions; has been truthfully characterized by a leading French economist (M. Parieu) as marked in no small part by the " simplicity of ignorance," and from a somewhat complete review (re- cently published *) of the conflicting theories advanced by participants one rises with a feeling of weariness and disgust. The majority of economists, legislators, and the public generally incline to the opinion that taxes mainly rest where they are laid, and are not shifted or diffused to an extent that requires any recognition in the enactment of statutes for their assessment. Thus, a tax commission of Massachusetts, as the result of their investigations, ar- rived at the conclusion that " the tendency of taxes is that they must be paid by the actual persons on whom they are levied." But a little thought must, however, make clear that unless the advancement of taxes and their final and actual payment are one and the same thing, the Massa- chusetts statement is simply an evasion of the main ques- tion at issue, and that its authors had no intelligent con- ception of it. A better proposition, and one that may * On the Shifting and Incidence of Taxation, by Pi'of. Edwin E. Seligman, 1892. 37 569 r-^ J57O THE THEORY AND PRACTICE OF TAXATION, ,even be regarded as an economic axiom, is that, regard- ing taxation as a synonym for ^ force, as it really is, it jjfollows the natural and invariable law of all forces, and distributes itself in t he line o f /)east resistanc e. It is also ^valuable as indicating the line of inquiry most likely to 13 ^olead to exact and practical conclusions. But beyond this ^. ^t lacks value, inasmuch as it fails to embody any sugges- J=Ktions as to the best method of making the involved prin- Tciple a basis for any general system for correct taxation; vjinasmuch as " the line of least resistance " is not a posi- ' '^tive factor, and may be and often is so arranged as to J ^make levies on the part of the State under the name of -=^ 3^^^^tio^ subservient to private rather than public inter- *. i»^sts. Under such circumstances the question naturally i'ses, What is the best method for determining, at least, ^he approximate truth in respect to this vexed subject? manifestly correct answer would be: first, to avoid at jthe outset all theoretic assumptions as a basis for reason- £5 jingj second, to obtain and marshal all the facts and con- ditions incident to the inquiry or deducible from experi- ^ence; third, recognise the interdependence of all such facts [and conclusions; fourth, be practical in the highest degree [XB. accepting things as they are, and dealing with them ■H> "^as they are found ; and on such a basis attention is next ■J -p^ asked to the following line of investigations. -^ It is essential at the outset to correct reasoning that the distinction -between taxation an^/j ^oUalid^ be kept clearly in view. That ohly-is-^itTtTMto be called a tax law which levies uniformly upon all the subjects of taxa- tion ; which does not of itself exempt any part of the prop- erty of the same class which is selected to bear the primary burden of taxation, or by its imperfections to any extent permits such exemptions. All levies or assessments made by the State on the persons, property, or business of its citizens that do not conform to such conditions are spolia- tions, concerning which nothing but irregularity can be predicated ; nothing positive concerning their diffusion can be asserted ; and the most complete collection of experi- ences in respect to them can not be properly dignified as " a science." And it may be properly claimed that from a non-recognition or lack of appreciation of the broad dis- tinction between taxation and spoliation, the disagree- A NUMBER OF TAXPAYERS. 571 ment among economists respecting the diffusion of taxes has mainly originated. With this premise, let us next consider what facts and experiences are pertinent to this subject, and available to assist in reaching sound conclusions ; proceeding very care- fully and cautiously in so doing, inasmuch as territory is to be entered upon that has not been generally or thor- oughly explored. The facts and experiences of first importance in such /inquiry are that the examination of the tax rolls in any State, city, or municipality of the United States will show that surprisingly small numbers of persons primarily pay or advance any kind of taxes. It is not probable that more than one tenth of the adult population or about one twen- tieth of the entire population of the United States ever come in contact officially with a tax assessor or tax col- lector. It is also estimated that less than two per cent (^^ of the total population of the United States advance the ^ entire customs and internal revenue of the Federal Govern- ment. In the investigations made in 1871, by a commission created by the Legislature of the State of New York to revise its laws relative to the assessment and collection of taxes, it was found that in the city of New York, out of a population of over one million in the above year, only 8,920 names, or less than one per cent of this great multi- tude of people, had " any household furniture, money, goods, chattels, debts due from solvent debtors, whether on account of contract, note, bond, or mortgage, or any public stocks, or stocks in moneyed corporations, or in general any personal property of which the assessors could take cognizance for taxation " ; and further, that not over four per cent, or, say, forty thousand persons out of the million, were subject to any primary tax in respect to the ownership of any property whatever, real or personal; while only a few years subsequent, or in 1875, the regular tax commissioners of New York estimated that of the property defined and described by the laws of the State as personal property, an amount approximating two thou- sand million dollars in value was held in New York city alone. Later investigations show that this state of things has continued. Thus, in 1895, out of a population of 572 THE THEORY AND PRACTICE OF TAXATION. about two million, it was estimated that only seventy-nine thousand, or not over four per cent of the inhabitants of the city, were subject to primary taxation, and that one half the whole amount collected in that year was paid by less than a thousand persons. In the city of Boston, where the tax laws are executed in the most arbitrary man- ner, the ratio of population directly assessed is somewhat greater, but aside from the poll tax, which is a per capita and not a property tax, only 7.27 per cent of residents paid a property tax in 1895 out of a population of -494:,20o. In one of the smaller cities of Massachusetts, where per- sons and property are capable of more thorough super- vision than larger numbers and areas — namely, the city of vSpringfield, with a population of about fifty thousand — the report of its tax officials shows that for the year 189-i-'95 the number of persons and corporations assessed on property (mainly real estate) was 7,745, or one for every 6.4 of its citizens, while 10,560 other citizens were assessed for a poll tax of two dollars only. Of the total amount of taxes assessed — namely, $735,948 — the above number, 10,560, paid only $21,120; and this is the experi- ence generally throughout the United States, as it will be in every country under a free popular government, where arbitrary inquisitions and arrests of persons and seiz- ures of property are not allowed, and where a soldier does not practically stand behind every tax assessor and collector. The time (1871) when the personal investigations above referred to were made was when the masses of the city of Xew York were moved with indignation at the mis- use and private appropriation by a few officials (Tweed and his associates) of the municipal revenues raised by taxation, under cover of instituting public improvements, and which finally led to their prosecution, imprisonment, or self-imposed exile; and the questions which naturally suggested themselves were: If only some forty thousand ^'of the million in Xew York citv paid the taxes, what in- terest had the other nine hundred and sixty thousand who never saw the face of a tax assessor or collector in oppos- ing corruption? "What, in an honest administration of \ the city government and in a reduction of taxes? Must ' it not be for the interest of the many that the expenditures PUBLIC INTEREST IN TAXES. 5Y3 of the State shall always be as large as possible? Must I they not be benefited by exorbitant taxes on the owners of property, and a distribution of the money collected, even if stolen by corruptionists, but spent by them lavishly on enterprises ' that will furnish new opportunities for em- ployment or amusement for the masses? Clearly, so far as any personal experience growing out of any direct assess- ment and levy was concerned, ninety-six per cent of the population of the city had no more cause of personal griev- ance by reason of the unlawful taking of money from the city treasury than they would have had at the taking of an j equivalent amount from the municipal- treasuries of Lon- / don, Paris, or any other city. The answer to these questions is to be found in the fact, as John Adams once remarked, that " if the Creator has given man a reason that is fallible, he has also im- pressed upon him an instinct that is sure." And this in-i^ stinct teaches the masses everywhere, though they have \—^S never read a book on political economy, or heard any one i ^ f discourse learnedly on the principles of taxation, that if ' jf^ taxes are increased, either by a lawful or unlawful expendi- ^'^ ture of public money, they can not in any possible way ■ '"^^ avoid paying some portion of its increase; or, in other ! words, that increased taxes mean increased cost of living, j through increased rents, increased price of fuel, cloth- ' ing, and provisions; and, possibly, diminished opportunity- to labour, through such increased cost of the products of labour as would limit and restrict markets or consump-^ tion. In short, that taxes inevitably fall upon thei through the increased price of all they consume, even if they pay nothing to the tax collector directly. A large proportion of the masses of the city of New York in 1871-'72, who paid no taxes directly, accordingly and spontaneously joined hands with the comparatively few of their fellow-citizens who did pay in resisting extrava- gance and corruption.* I * The assertion would not be warranted that the masses of New York were wholly unanimous in condemninsr Tweed, for a portion of them were undoubtedly well content with the situation. He had curried favour with the very poor and ignorant by dis tributing coal and flour, and making ostentatious presents of money ; and these " charities " are remembered to this day in th< H 574 D THE THEORY AND PRACTICE OP TAXATION. We are thus led up and forced to the recognition of two propositions, or rather principles, in respect to taxation that can not be invalidated. The first is, that it is not necessary that a tax assessor or collector should personally assess and levy upon every citizen of a State or community in order that all should be compelled to contribute of his roperty for the support of such State or community; second, that there is an inexorable law by which every man must bear a portion of the burden of public expenditures, even though.' the official assessors take no direct cognizance of him whatever. The following incident may here be cited as instructive : In one of the recent official hearings before a legislative i committee of one of the States, a strenuous advocate of the popular doctrine that there was and could be no such thing as equality in taxation except by rigidly taxing every- ^body directly for all his property, of every description, both real and personal, and that to not tax immediately ^ and directly was, in at least a great degree, to exempt .^ from taxation, expressed himself as entirely opposed to ^ any system of restricting assessments to a comparatively ^ few things, on the ground that it would be a recognition in the United States of a system which in Great Britain had ground down the masses into poverty. He, however, obtained some new light on the subject of non-diffusion by being reminded that if the masses of England had been grievously oppressed by taxation, it had been under a system of many years' standing, which never in any way brings the tax collector in direct contact with nineteen » twentieths of the entire population ; the customs taxes of 4^ Great Britain being practically levied on only four arti- ^^les — spirits, tea, coffee, and tobacco ; and the inland reve- "*» nue also on practically four — spirits, beer, legacies and ^ successions, and stamps (on deeds, insurance policies, bills ■^ ^ exchange, receipts, drafts, etc.). Generalizing, then, on the basis of so broad a fact, how illogical and unsci- entific was the assumption that whatever persons, prop- erty, or business are not taxed directly are exempt from ^Doorer parts of New York city, and Tweed is esteemed by many v'as the victim of injustice, and a man who suffered because he was >the friend of the people. ■■■$ DIFFUSION OF CUSTOMS DUTIES. 575 taxation ! — and yet the practical exemplification of such a system, in the case of England, was a most efficient in- strumentality for grinding the masses of her people down to poverty. On the other hand, to generalize from the experience of an individual or a class in place of that of a nation or community, let us take the case of a person who passes all the year m transitu — moving backward and forward, for example, in a boat on the line of the Erie Canal, or between the head waters of the Mississippi and its mouth ; a citizen of no one State, a resident in no one town, and buying all that he eats, drinks, and wears wherever he can buy cheapest. Does this man escape taxation because he has no permanent situs (residence as a citizen), and is unknown by any assessor? If he does, then his occupa- tion is more profitable to the extent of the taxes he avoids than is that of the individual who, following analogous occupations, resides permanently in one location, and pays taxes regularly; or else some notable, easily discernible cause, as undue competition to obtain situations, will account for his exemption. Let us next consider how practical experience definitely indicates the line of least resistance, in conformity with which those contributions of property or service which the State requires its citizens to make for its support, and , ^j are worthy of designation as taxes, diffuse themselves. ?■ ^^ Let us take first that form of indirect taxation which is ^ \ known as customs, or taxes on imports, one from which the Federal Government of the United States has derived in recent years more than half of its revenue, and Great ^-^ ^ Britain more than one fourth of its total receipts from ^ all forms of imperial taxes. That all such taxes as a rule diffuse themselves, and ultimately fall upon and are paid by final consumers, is capable of demonstration by a great variety of evidence. Every remission of customs duties on the imports into any country of its staple articles of con- sumption is followed by a reduction of cost approximately equal to such reduction, and a consequent increase in con- sumption. On the other hand, nothing is better settled than that an increase in customs taxes on imported arti- cles as a rule increases prices and tends to reduce con- sumption. When Great Britain, in 1863, reduced her taxes 576 THE THEORY AND PRACTICE OF TAXATION. (duties) on her imports of tea from Is. 5d. to Is. per pound, her importation of tea increased from 114,000,000 pounds in 1862 to 139,000,000 in 1866, and her per capita consumption during the same period from 2.70 pounds to 3.42 pounds; and again, when the duty was further reduced in 1865 from Is. to Qd. per pound, the annual im- portations increased from 139,000,000 in 1866 to 209,- 000,000 in 1881, and the per capita consumption from 3.42 pounds to 4.58. When by the act of October, 1890, the tax was removed from the imports of crude sugars into the United States, the price of the same went down almost immediately to an equal extent in all American markets ; while the con- sumption of sugar in the country increased from an aver- age of about fifty-four pounds per capita in 1890 to more than sixty-seven pounds in 1892. A like result has at- tended a similar experience in respect to this in other coun- tries, and especially in Great Britain. Thus, the aggre- gate consumption of sugar by the British people in 1844 was returned at 237,143 tons. A reduction of taxes on its importation in 1864 increased its domestic use to 528,- 919 tons; a reduction of fifty per cent on existing rates in 1870 made it 695,029 tons; another reduction of fifty per cent in 1873 carried up consumption to 779,000 tons ; and when, in 1874, all taxes on the imports of sugar were abolished, the annual domestic consumption increased in little more than a year's period to 930,000 tons. On the other hand, when by the tariff act of 1890 an additional tax of half a cent per pound was imposed on the import of tin plate into the United States, tin plate went up to an equal extent in price all over the country; and so also on pearl buttons, linen goods, and other articles of foreign production on the importations of which the tariff taxes were largely increased. By the tariff act of 1890, also, eggs, which could formerly be imported into the United States free of duty, were made subject to a tax of five cents per dozem Since then the price of eggs imported from Canada into districts of the United States within the same sphere of territorial competition has been in- creased to the American consumers to almost exactly the extent of the import tax to which they are subjected. Thus, when the price of eggs was ten and a half cents CUSTOMS DUTIES AND PRICES. 577 per dozen in Toronto, they were sixteen cents in Buffalo and sixteen and a iialf to seventeen cents in Xew York. Such a result would be unaccountable if the Canadian farmers paid the duty on eggs sent by them to the United States. It is interesting to here ask attention to the opinions entertained and expressed by those whose situation and ex- perience have qualified them to speak with authority: " The duty constitutes the price of the whole mass of the article in the market. It is substantially paid on the arti- cle of domestic manufacture, as well as that of foreign production " (John Quincy Adams). " I said it, and I stand by it, that as a general rule the duties paid on imports operate as a tax upon the consumer" (John Sherman). Mr. Blaine, in his Twenty Years in Congress, says, speak- ing of the increase of duties on imports by the tariff act of July 14, 1862, that it " shut out still more conclusively all competition from foreign fabrics. The increased cost was charged to the consumer." Mr. McKinley, in 1890, in a report introducing a bill for revision of the tariff of the United States, in the direction of increased rates of duties on imports, said it was not the intent of the bill "to further , ^ cut down prices," that the people were " already sufferi ng qX^t^a^ ojL from low prices," and would not be satisfied " with legisla- ^'Wtrl/^ tion which will result in lower prices." In an elaborate /^ opinion given by the New York Court of Appeals in 1851 (see vol. iv. New York Reports), in which there was no sus- picion of any issue of free trade or protection, the courts, in carefully considering the relative powers of the Legislature and the judiciary in respect to taxation, assumed the proposition that " all duties on imported goods are taxes on the class of consumers " to be in the nature of a self- evident truth or economic axiom. Henry Clay, in a celebrated speech in the United States House of Representatives in 1833, in advocacy of a protective tariff policy, candidly admitted that " in gen- eral it may be taken as a rule that the duty upon an arti- cle forms a portion of its price." But he subsequently qualified such admission by claiming that it does not fol- low that any consequent enhancement of its price is a tax on consumers, inasmuch as " directly or indirectly, in one form or another, all consumers of protected articles, en- 578 THE THEORY AND PRACTICE OP TAXATION. hanced in price," will get an equivalent. But this may be equally affirmed of all necessary and equitable taxa- tion, and does not in any way antagonize the theory that the final incidence of the class of taxes under considera- tion falls on consumption. But, notwithstanding these conclusions and the incon- trovertible evidence by which they are supported, not a few persons occupying places of great legislative influ- ence, and no small part of the general public, hold to the view that taxes on imports are really in the nature of premiums paid by foreigners for the privilege of selling their goods in the markets of the importing country, and do not fall on its people who consume them. That means that if the foreigner has a yard of cloth, or other com- modity, which he sells at home for one dollar, and the United States imposes a tariff of fifty cents on it, he will then sell it for export to America at fifty cents. There is no instance mentioned in history where this has ever been done, but history unfortunately is rarely taken into account by the public in the discussion of these questions. In this connection the following historical incident is in- teresting and instructive: In 1782 an attempt by the Con- gress of the Confederation of the several American States to provide a system of revenue to defray the general ex- penses of the Confederation by duties on imports, which then was not permissible, was blocked by the refusal of the State of Ehode Island to concur in it, the Legislature of that State unanimously rejecting the measure for three reasons — one of which was that it would bear hardest on the few commercial States, particularly Ehode Island, which in virtue of their relations with foreign commerce monopolize imports, and lightest on the agricultural States, that directly imported little or nothing. Congress appointed Alexander Hamilton to draft a reply to Ehode Island, and in his answer he relied mainly on what he re- garded as an incontrovertible fact, that duties on imports would not prove a charge on an importing State, but on 1 the final consumers of imports, wherever they may be ' located. If the theory and assumption are correct that the for- eigner pays the protective taxes which a country levies on its imports, and that they do not fall upon or are not paid TARIFF AND THE FOREIGNER. 579 by its people who consume them, then it must follow that to the extent that a country taxes its imports it lives at the expense of foreign nations ; and that, as Great Britain is the country with which the United States has the largest foreign trade, it must pay the largest share of the customs taxes of the United States, or a good share of its annual revenue from all sources. Attention is further asked to the exact practical application of this theory. Thus, the United States in 1895 imported $36,438,196 worth of woollen manufactures, on which it assessed and collected duties (taxes) to the amount of $20,698,264, or 56.80 per cent of the value of such imports. Certainly this was a pretty heavy tax on foreign nations in respect to the sales of only one class of these commodities ; but it repre- sented but a tithe of what the tariff taxes of the United States, if paid by foreigners, cost them. Thus they had to sell their woollens to the people of the latter country at less than half their value in order to compensate for the 56.8-per-cent tax. But a nation engaged in foreign trade\(i, can not as a rule have two prices for the product of itsl '^^^-t'" industries ; or one price for what it sells at home and I (j t another and different price for what it sells to foreigners./ '^ So the fifty-six per cent deducted from the cost of the woollens sold by foreigners to the United States necessarily had to be deducted not only from so much of their product consumed at home, but also from what they sent for sale to all foreign countries. A further practical application of this theory is worthy of consideration. As Great Brit- ain imposes no protective duties or taxes on its imports, it evidently can not collect anything from other nations by the system of taxation under consideration. On the other hand, the aggregate value of its exports sent to for- eign nations during the year 1892 was $1,135,000,000, and if these several nations taxed this valije at the average rate which the United States imposed in 1894 on all its dutiable imports — namely, fifty per cent — Great Britain obviously had to pay some $557,000,000 in that year for the support of foreign governments ; and while this has been the experience of Great Britain for more than forty years of this century, she has as a nation been increasing in wealth during this whole period. Some of the recent official experiences of the Govern- 580 THE THEORY AND PRACTICE OF TAXATION. ment of the United States that are pertinent to the topic under consideration are sufficiently curious to make them worthy of an economic record. In a speech introducing a bill into the United States House of Eepresentatives, which subsequently resulted in the tariff act of 1890, the then chairman of the Committee of Ways and Means laid down the following proposition : " The Government ought not to buy abroad what it can buy at home. Nor should it be exempted from the laws it imposes upon its citizens." This would seem to warrant the characterization of a discovery that the United States had some reliable and important source of revenue independent of taxation,* and that, by compelling the application of a part of this income to the payment of taxes to itself, the Government is placed upon an equality with the citizens. A legitimate criticism on this proposition is that the idea that all the income of the Treasury is derived from the people, and that to transfer portions of this income from one official recipient to another can have hardly any other result than an additional cost of bookkeeping, seems never to have entered the mind of the speaker. Again, the United States tariff act of 1883 contained in its free list a provision for the admittance of " articles imported for the use of the United States, provided that the price of the same did not include the duty " imposed on such importations. Under the tariff act of 1890 this provision was stricken out of the statute, with the result that when the Government imported any articles for its own use which were subject to duties (as, for example, materials to be used in the National Bureau of Printing and Engraving), it was obliged, in virtue of its non-exemp- tion from the laws which it imposed on its own citizens, to pay such duties itself. But as the Government has no authority to expend money for any purpose without the authority of Congress, the latter body accordingly author- ized the Federal Treasury to appropriate money from its tax receipts and make payments with the same to the cus- * Of the net ordinary receipts of the Federal Government ($385,819,000) in 189.3, only about $12,000,000 was derived from soiirces that could not be regarded as taxes, and were mainly re- ceipts from the sales and surveys of public and Indian lands ($4,120,000) and of other Government property. GOVERNMENT PAYS DUTIES. 581 tomhouse, which the customhouse was to immediately pay back into the Treasury. Just what process was gone through with to effect such a result the public was not informed, but probably the collector of customs drew his warrant on the Treasury, had the amount credited to his account, and then recredited to the Treasury. But, be this as it may, it is clear that the Government, under the con- ditions above stated, paid the tax on its imports; that the tax may be regarded in the light of a penalty on the Government for importing articles for its own use; and that the action of Congress in authorizing the Treasury to appropriate money for the payment of such taxes was i a recognition or admission by that body that a tax upon ' imports neither puts anything in nor takes anything from the pocket of the foreigner. Does it not, moreover, invest with a degree of comicality a law enacted by the Congress of the United States for the purpose of taxing foreign importers, which necessitated the enactment by it of an- other law appropriating money to enable the United States to pay customs taxes every time on everything that it may import for its omti uses ? * Finally, if the foreigner and * In 1897 the merchant tailors of the United States, Avho ought to know something about the incidence of a custom tax on im- ported clothing, united in a petition to Congress asking that Americans returning from Europe be permitted to introduce only two suits of foreign-made clothes free of duty; and in support of their request they comment as follows on a ruling of the Treasury in respect to this matter: "Under this ruling it was possible to enter free of duty vast quantities of foreign-made garments which had never been actually in use, and which were so imported solely because there exists a relative difference of at least fiftj_^£er cent in values between the cost of made-up garments in 'the United States and Europe, thus saving to the purchaser of garments abroad one half of their actual value upon arrival within the United States duty free." But if the foreigner who made and sold the goods in question was liable to pay the duty on dutiable clothing, and attended to his duty, there would be no profit to the returning tourist in importing clothing free of diity. It is further evident also that American tailors agree in opinion with Alexander Ham- ilton that the consumers of imported articles pay the customs taxes. The records of the commercial relations between the United States and Canada are exceedingly instructive on this matter. They all show that for the products which the Canadian sends to the United States, and on which somebody pays the duty, he receives exactly the same price as for those products which he sends to England, on which nobody pays any duty. This experience is 582 THE THEORY AND PRACTICE OF TAXATION. not our citizens pays our customs taxes on imports, what is the object of placing by specific statutes any article on the free list ? Why not let him continue to pay millions of taxes for us, as, for example, on sugar? Attention is next asked to an analysis of the incidence of taxation, what is mainly direct, on processes and prod- ucts, and on the machinery by which one is effected and the other distributed. At the outset the following proposi- tions in the nature of economic axioms are submitted, exactly the same as that of the farmers of the Northwestern States of the Fedeial Union, who usually get the same price for their wheat furnished to a Minnesota flour mill, or for shipment to free- trade England, as to countries like France and Germany, where heavy duties are assessed upon its import. The term " usually " is employed, for producers in the United States and Canada alike do not always get as large a price for the articles they export as for the same articles they sell to their fellow-countrymen. Again, if it be true, as the advocates of extreme protection assert, that the foreign exporter and not the consumer pays the duties on goods sent by him for sale in this country, how does it happen that it is not true concerning the farm produce and live stock exported from Canada? And why should American farmers be exempt from this rule in sending their grain to Europe ? Has anybody ever known of England buying American products any cheaper in New York than France or Germany, and is it not also true that the French or German or Italian consumer usually pays at least the amount of the duty levied by his Government more for American products than his English competitor has, whose imports are subjected to no duty? During the period from 1854 to 1866 there was, under the reciprocity treaty, practically free trade between Canada and the United States in live stock, wool, barley, rye. peas, oats, and other farm products, while subsequent to 1866, when the reciprocity treaty had been repealed, duties were imposed on all these articles on their import from Canada into the United States. During the first period Canadian horses, for example, sold under free trade for shipment to the United States at from sixty-five to eighty-five dollars each, while during the years next subsequent to 1866 the value of the Canadian horses imported into the United States was returned at from ninety-two to one hundred and four dollars each ; thus showing that tlie United States tariff did not force the Canadian horse breeders to lower their prices in order to compen- sate American purchasers for the duties exacted. And as regards the other products mentioned, the official data show that in no case did the imposition of duties under the United States tariff reduce the prices paid by American purchasers to the Canadian farmers for their products. These are very commonplace, very familiar, and very convincing facts which ought to silence all this talk about the foreign exporter or anybody else but the con- sumer paying the duty; but it is not at all probable that they will. THE COST OF PRODUCTION. 583 which it is believed will serve as stepping stones to the attainment of broad generalizations. Thus, property is solely produced to supply human ./ wants and desires; and taxes form an important part of the cost of all production, distribution, and consump- tion, and represent the labour performed in guarding and protecting property at the expense of the State, in all the processes of development and transformation. The State is thus an active and important partner in all production Without its assistance and protection, production would be impeded or wholly arrested. The soldier or policeman- guards, while the citizen performs his labour in safety As a partner in all the forms of production and business, the State must pay its expenses — i. e., its agents, for their services ; and its only means of paying are through its re- ceipts from taxation. Taxes, then, are clearly items of expense in all business, the same as rent, fuel, cost of material, light, labour, waste, insurance, clerical service, advertising, expressage, freight, and the like, and on busi- ness principles they find their place on the pages of profit and loss ; and, like all other expenses which enter into the cost of production, must finally be sustained by those who gratify their wants or desires by consumption. Pro- duction is only a means, and consumption is the end, and the consumer must pay in the end all the expenses of pro- duction. Every dealer in domestic or imported merchan- dise keeps on hand, at all times, upon his shelves, a stock of different and accumulated taxes — customs, internal revenue. State, school, and municipal — with his goods ; and when we buy and carry away an article from any store or shop, we buy and carry away with it the accompany- ing and inherential taxes. Any primary taxpayer, who does not ultimately con- sume the thing taxed, and who does not include the tax in the price of the taxed property or its products, must literally throw away his money and must soon become bankrupt and disappear as a competitor; and accordingly the tax advancer will add the tax in his prices if he under- stands simple addition. How rapidly bankruptcy would befall dealers in imported goods, wares, and merchandise in the United States who did not strictly observe this rule will be realized when one remembers that the average tax 584 THE THEORY AND PRACTICE OF TAXATION. imposed by its Government (in 1896) on all dutiable im- ports is in excess of fifty per cent. When Dr. Franklin was asked by a committee of the English House of Commons, prior to the American Revo- lution, if the province of Pennsylvania did not practically relieve farmers and other landowners from taxation, and at the same time impose a heavy tax on merchants, to the injury of British trade, he answered that " if such special tax was imposed, the merchants were experts with their pens, and added the tax to the price of their goods, and thus made the farmers and all landowners pay their part of the tax as consumers." Taxes uniformly levied on all the subjects of taxation, and which are not so excessive as to become a prohibition on the use of the thing taxed, become, therefore, a part of the cost of all production, distribution, and consump- tion, and diffuse and equate themselves by natural laws in the same manner and in the same minute degree as all other elements that constitute the expenses of production. We produce to consume and consume to produce, and the cost of consumption, including taxes, enters into the cost of production, and the cost of production, including taxes, enters into the cost of consumption, and thus taxes levied uniformly on things of the same class, by the laws of competition, supply, and demand, and the all-pervading mediums of labour, will be distributed, percussed, and re- percussed to a remote degree, until they finally fall upon every person, not in proportion to his consumption of a given article, but in the proportion his consumption bears to the aggregate consum])tion of the taxed community. A great capitalist, like Mr. Astor, bears no greater burden of taxation (and can not be made to bear more by any laws that can be properly termed tax laws) than the proportion which his aggregate individual consump- tion bears to the aggregate individual consumption of all others in his circuit of immediate competition; and as to his other taxes, he is a mere tax collector, or con- duit, conducting taxes from his tenants or borrowers to the State or city treasury. A whisky distiller is a tax conduit, or tax collector, and sells more taxes than the original cost of whisky, as finds proof and illustration in the fact that the United States imposes a tax of one LAW OF DIFFUSION. 585 dollar and ten cents per gallon on proof whisky which its / manufacturer would be very glad to sell free of tax for an f^ average of thirteen cents per gallon. The tax, further- more, is required to be laid before the whisky can be re- moved from the distillery or bonded warehouse and allowed to become an article of merchandise. Tobacco in like man- ner can not go into consumption till the tax is paid. In Great Britain, where all tobacco consumed is imported, for every '3d. paid by the consumer, 2.5d. represents cus- toms duties or taxes. In Eussia it is estimated that the Government annually requires of its peasant producers one third the market value of their entire crop of cereals in payment of their taxes, and fixes the time of collecting the same in the autumn, when the peasant sells sufficient of his grain (mainly for exportation), and with the pur- chase money meets the demands of the tax collector. Can it be doubted that the sums thus extorted enter into and form an essential part of the cost of the entire crop or product of the land? It is, therefore, immaterial where the process of manufacture takes place; the citizens of a State pay in proportion to the quantity which they con- sume. The traveller who stops at one of the great city hotels can not avoid reimbursing the owner for the tax he primarily pays on the property, and the owner, in respect to the taxation of his hotel property, is but a great effect- ive real-estate and diffused tax collector. Again, the farmer charges taxes in the price of his products; the labourer, in his wages ; the clergyman, in his salary ; the lender, in the interest he receives ; the lawyer, in his fees ; and the manufacturer, in his goods. The American Bible Society is always in part loaded with the whisky and tobacco taxes paid by the printers, paper-makers, and bookbinders, or by the producers of articles consumed by these mechanics, and reflected and embodied in their wages and the products of their labour according to the degree of absence of competition from fellow-mechanics who abstain from the use of these and other taxed articles. These conclusions respecting the diffusion of taxes may be said to be universally accepted by economists so far as they relate to the results of production before they reach the hands of the final consumers ; but they are not 38 586 THE THEORY AND PRACTICE OF TAXATION. accepted by many, as Mr. Henry George has recently ex- pressed it, in respect to taxes on special profits or advan- tages on things of which the supply is strictly limited, or of wealth in the hands of final consumers, or in the course of distribution by gift, and finally in respect to taxes on land. But a little examination would seem to show that all these exceptions are of the kind that are said to prove the rule. Special profits and advantages in this age of quick diffusion of knowledge and intense competi- tion are exceedingly ephemeral, and are mainly confined to results which the State with a view of encouraging re- moves for a limited time from the natural laws of com- petition by granting patents, copyrights, and franchises. Of things which are strictly limited in respect to supply, what and where are they? Only a very few can be speci- fied: ivory, Peruvian guano, whalebone, ambergris, and the pelts of the fur seal. Of wealth in the process of trans- mission, or in the hands of final consumers, it is not tan- gible wealth unless it is tangible property, which conforms under any correct system of taxation to the principles of taxation; and if any one advocates the taxation of the right to receive property which has already been taxed, he in effect advocates a double exaction of one and the same thing. If it be asked. Will an income tax on a per- son retired from business be diffused? the answer, beyond question, must be in the affirmative, if the tax is uniform on all persons and on all amounts, and is absolutely col- lected in minute sums. Would any one pay the same price for a railroad bond which is subject to an income tax as he would for it if it was free from tax? If one's land is taxed, either in the form of rent or income, will not the tenant have the burden primarily thrown upon him ? And, finally, will not the consumer of the tenant's goods pay through or by reason of such consumption? Eespecting the incidence of the tax on mortgages, it does not make an}'- difference how mortgages are taxed — no earthly power canmake th e lend er pay it. If the bor- rower woiiTd not agree to pay the tax, the "lender would not loan him money, and whenever possible loans would be foreclosed and payment insisted upon if the borrower should refuse to pay the tax. Let us next subject to analysis the incidence of the ^ TAXATION OF LAND. 58^ so-called taxation of land. Considered per se (or in it-[ self), land, in common with unappropriated air and water,] has no value ; and it can not in any strict sense be affirmed i that we tax land; and when such affirmation is made, its only legitimate and justifiable meaning is that we tax the value of land; which value is due entirely to the amount of personal property (in the sense of embodied labour) expended upon it, and the pressure or demand of such property or labour to use, possess, and occupy it. Vattel, in his Law of Nations, enunciates as a self- v/j. evident and irrefutable proposition that "Nature has not( ^-t herself established property, and in particular with regard ](v ''<-/ to lands. She only approves this introduction for the ad-'^^)^ \y vantage of the human race." " '" One of the most striking examples of evidence in illus- tration and proof of this proposition is to be found in an incident, which has heretofore escaped attention, which occurred during a debate in the Senate of the United States in 1890 on a bill for revision of duties on imports, in re- spect to the article borax (borate of soda). Formerly the world's supply of this mineral substance, which enters largely into industrial processes and medicine, was limited, and mainly derived from certain hot springs in Tuscany, Italy; but within a comparatively recent period it has been found that it exists in such abundance in certain of the desert regions of California, Nevada, and Arizona, that it can be gathered with the minimum of labour from the very surface of the ground. Were a single acre of simi- lar desert to be found in anv section of a country enjoy- ing the most ordinary privileges in respect to 'transpor- tation and water supply, it would be a source of wealth to its proprietor. But under existing circumstances, al- though thousands and thousands of acres of this land can be bought with certain title from its owner — the Federal Government — for two dollars and twenty-five cents an acre, no one wants it at any price; and the prospective de- mand for it has not yet been sufficient to warrant the Gov- ernment in instituting even a survey as a preliminary to effecting a sale. In the Senate debate above alluded to it was proposed to increase the duty on imported borax, with the expectation that a consequent increase in its domestic price would afford sufficient profit to induce such construe- 4. 588 THE THEORY AND PRACTICE OF TAXATION. ion of roads and such a sup}jly of water and labour on the borax tracts of the deserts as to enable them to become property.* / In the oases of the deserts of North Africa and Egypt /the value of a tract of land depends very little upon its size or location, but almost exclusively upon the number of the date-bearing palms, the result of labour, growing upon it, and the quality of their fruit. John Bright on one occasion stated that if the land of Ireland were stripped of the improvements made upon it by the labour of the occupier, the face of the country would be " as bare land naked as an American prairie." An exact parallel to this state of things is afforded in the case of lands of no value reclaimed from the sea and made valuable, as has been often done in England, Hol- land, and other countries, by embodying labour upon them in the shape of restraining embankments and the trans- portation and use of filling material. Again, the value of springs or running streams of water is generally limited and of little account. But when, through direct labour, or the results of labour, the water is collected in reservoirs and made the instrumentality of imparting power to ma- chinery, or conducted through conduits to centres of popu- lation which otherwise could not obtain it, it becomes extremely valuable, and capable of being sold in large or small quantities. Another similar illustration is to be found in the case of atmospheric air, which in its natural and ordinary state has no marketable value, but when compressed by labour embodied in the form of machinery and made capable of transmitting force, it at once be- comes endowed with value and can be sold at a high price. An opinion entertained and strongly advocated by not a few economic waiters and teachers of repute (more espe- cially in Europe, but not in the United States) f is, that * " Senator Paddock : I should like to ask the Senator from Nevada if, in the region of country where borax is found, by reason of finding it the land in the particular State or Territory is appre- ciated in value on account of its existence. " Senator Stewart: Not at all. " Senator Paddock: The value then given to it is all in labour." — ConffressioiniJ Rrrord. Jiihi. Jf^90. t "In America," writes Professor Seligman, " the few writers of prominence on the subject of taxation were, until recently, al- DIFFUSION OF LAND TAX. 589 taxes on land do not diffuse themselves, but fall wholly on the landowner, and that there is no way in which he can throw it off and cause any considerable part of them to be paid by anybody else. The concrete argument in sup- port of this opinion has been thus stated : " When land is taxed, the owner can not, as a general rule, escape the tax, for the reason that, to get rid of the tax, the price of the land or of the rent must be raised the full amount of the tax, and the only way in which this can be done is by reducing the supply or quantity offered in market, or else by increasing the demand. The supply of laud can not be reduced, and the demand being created by capital and population, both of which are beyond the control of the landowner, he can do nothing to raise the price of land, and hence can not get rid of the tax. It may be stated, then, as a general rvile, that a tax on land, or on any commodity the supply of which is limited abso- lutely, must be paid by the owner. It is possible to sug- gest cases in which, through combination of owners and the necessities of consumers, a demand may be created strong enough to raise the price to the full amount of such tax, but it is doubted if such cases ever really occur." * The source of the contention on this important eco- nomic and social question, and the difftculty in the way of the attainment of harmonious conclusions, is due to a non- recognition of the fact that land is taxed under two con- ditions, and can not be taxed otherwise. Thus, if a person holds land for his exclusive use or enjoyment, and con- sumes all of its product, a tax on such land, which has been characterized by some economists as its " pure rent," will not diffuse itself, because it is a tax on personal en- most all followers of Thiers," the French economist and statesman, who claimed to have invented the term " diffusion " of taxes. * '■ Our conclusion is, that under actual conditions in America to-day the landowner may virtually be declared to pay in the last instance the taxes that are imposed on his land, and that at all events it is absolutely erroneous to assume any general shiftiufj to the consumer. In so far as our land tax is a part of a general prop- erty tax, it can not possibly be shifted; in so far as it is more or less an exclusive tax, it is even then apt to remain where it is first put — on the landowner." — Seligman: Incidence of Taxa- tion, p. 99. 590 THE THEORY AND PRACTICE OP TAXATION. Jt^- joyment or final consumption. The same is the case when v3' ^ a portion of a river or lake or its shore is rented for fish- ^' ing for the purposes of sport. A like result will also follow, in a greater or less degree, from the inability or <( unwillingness of tenants, as has been often the case in ->^ Ireland, to pay rent sufficient to reimburse the landowner for interest on his investment of capital and cost of re- pairs. But if one employs land as an instrumentality for acquiring gain through its uses, the taxation of land must include the taxation of its uses — its contents, all that rests upon it, all that is produced, sold, expended, manufactured, or transported on it — and all such taxes will diffuse themselves. On the other hand, if the taxa- V'^^ion of land under such circumstances and conditions ^ A does not diffuse itself, then the takingjg_shnply_a_process > <5^ Ji^^o f confisca tion, which if continued will ultimately rob ^ the~owner of liis property, and is not governed by any principle. It is indeed difficult to see how a theory so wholly in- applicable to fact and experience as that of the nondiffu- sion of taxes on land — which makes property in land an exception to the rule acknowledged to be applicable to all other property — could originate and be strenuously main- tained to the extent even of stigmatizing any opposite view " as so very superficial as scarcely to deserve a refu- tation." * No little of confusion and controversy on this subject has arisen from the assumption that land specifi- cally, and the rent of land, constitute two distinct and legitimate subjects for taxation, when the fact is just the contrary. The rent of land is in the nature of an income to its owner; and it is an economic axiom that when a government taxes the income of property it in reality taxes the property itself. In England and on the continent of Europe land is generally taxed on its yearly income or in- come value, and these taxes are always considered as land taxes. Alexander Hamilton, in discussing the taxation of incomes derived directly from property, used this lan- guage : " What, in fact, is property but a fiction, without the beneficial use of it? In many instances, indeed, the income is the property itself." The United States Supreme * Seligman. Shifting and Incidence of Taxation. TAXATION OP RENT. 591 Court, in its recent decision of the income tax (1895), also practically indorsed this conclusion. To levy taxes on the rent of land and also upon the land itself is, there- fore, double taxation on one and the same property, which in common with all other unequal and unjust taxes can not be diffused; and for this reason should be regarded as in the nature of exactions or confiscation, concerning the incidence of which nothing can be safely predicated. In short, this whole discussion, and the unwarranted as- sumption involved in it and largely accepted, is an illus- tration of what may be regarded as a maxim, that the greatest errors in political economy have arisen from over- looking the most obvious facts or deductions from ex- perience. With a purpose of further elucidating this problem, attention is asked first to its consideration from an " ab- stract," and next from a practical standpoint of view. Let us endeavour to clearly understand the common mean- ing of the word " rent." It is derived from the Latin reddita, " things given back or paid," and in plain Eng- lish is a word for price or hire. It may be the hire of any- thing. It is the price we pay for the right of exclusive use over something which is not our own. Thus we speak of the rent of land, of buildings and apartments, of a fishery, of boats, of water, of an opera box, of a piano, sewing ma- chines, furniture, vehicles, and the like. In Scotland at the present time farmers hire cows to dairymen, who pay an agreed-upon price by the year or for a term of years for each cow, and reimburse themselves for such payment and make a profit on the transaction by the sale of the products of the animal. This hire is called a rent, and is clearly the same in kind as the rent of land. We do not apply the word " hire " to the employment of men, because we have a separate word — " wages " — for that particular case of hire. Neither do we apply the word " rent " in English to the hire of money, because we have another separate word — " interest '" — which has come into special use for the price paid for the loan or hire of money. But in the French language the word rent is habitually and specially used to signify the price of the hire money, and that of " rentes " to investments of money paying interest ; the French national debt being always spoken of as " les 592 THE THEORY AND PRACTICE OP TAXATION. rentes "; while the men who live on the lending of money, or capital in any form, are called '* rentiers." The question next naturally arises, Why is it necessary to set up any special theory at all about the disposition of the price which we pay for the hire of land, any more than about the price we pay for the hire of a house, of furniture, of a boat, of an opera box, or of a cow? The particular kind of use to which we put each of these various things is no doubt very different from the kind of use to which we put each or all the others. But all of these uses resolve themselves into the desire we have to derive some iiilEnswi ' Q ' oi '^ngsi^y^^ by the possession for a time of the right of exclusive use of something which is not our own, and for which we must pay the price, not of purchase, but of hire. The explanation of this curious economic phenomenon is to be found in the assumption and positive assertion on the part of not a few distinguished economists that the truly scientific and only correct use of the term " rent " is its application to the " income derived from things of all kinds of which the supply is limited, and can not be increased by man's action." * As a rule, economists who accept this definition confine its application to the hire of land alone, although it professes to include other things, " of all kinds," to which the same description applies — namely, that they can not be increased in quantity by any human action. There are, however, no such other things specified, and in any literal sense there are no such other things existing, unless water and the atmosphere be in- tended. Now, although it is indisputably true that man by his action can not increase the absolute or total quantity of land, any more than of water and air, appertaining to the whole globe on which we live, there is practically no limita- tion to the degree of value which man's action can impart to land, and which is the only thing for which land is wanted, bought, or sold, and which, as already shown, can be truly made the subject of taxation. The tracts of land on the earth's surface which are of no present marketable value are its deserts, its wildernesses, the sides and summits * Professor Marshall. Principles of Economics, vol. i, p. 142. PRACTICAL CONSEQUENCES. 593 of its mountains, and its continually frozen zones, where no results of labor are embodied in or reflected upon it; while, on the other hand, its tracts of greatest value are in the large cities and marts of trade and commerce, as in the vicinity of the Bank of England, or in Wall Street, where the results of labour are so concentrated and re- flected upon land that it is necessary to cover it with gold in order to acquire by purchase a title to it and a right to its exclusive use. The difference between land at twenty- five dollars an acre and twenty-five dollars a square foot is simply that the latter is or may be in the near future covered or surrounded by capital and business, while the former is remote from these sources of value. One of the greatest possible, perhaps probable, outcomes of the mod- ern progress of chemistry is that through the utilization of microbic organizations, the value of land as an instru- mentality for the production of food may be increased to an extent that at the present time is hardly possible of con- ception. Again, in the case of air and water, although their total absolute quantity can not be increased, their available and useful quantity in any place, as before shown, can be by the agency of man, and their use made subject to hire or rent. Consideration is next asked to the question at issue from what may be termed its practical standpoint. We have first a proposition in the nature of an economic axiom, that the price of everything necessary for production, or the hire of anything — land, money, and the like — without which the product could not arise, is, and must be, with- out exception, a part of the cost of that product; second, that all levies of the State which are worthy of being desig- nated as taxes constitute an essential element of the cost of all products. The rent of an opera box, given to obtain a mere pleasure, constitutes a part of the fund out of which the musicians are paid, and if they are not so paid they will not play or sing. The rent given for the right to fish on a certain part of a river or its shores is a part of the cost of producing the fish as a marketable commodity. If a house is hired for the purpose of conducting any busi- ness in it, the price of that hire does most certainly enter into the cost of that business, whatever it may be, assum- ing that the use of the house is a necessity for carrying it 594 THE THEORY AND PRACTICE OP TAXATION. on. As no man will produce a commodity by which he is sure to lose money, or fail to obtain the ordinary rate of profit, the tax must be added to the price, or the production will cease. If a uniform tax is imjjosed on all land occu- pied, it will be paid by the occu])icr, because occupation (house-building) will cease until the rent rises sufficiently to cover the tax. The landlord assesses upon his tenants the tax he has paid upon his real estate; each tenant assesses his share upon each of his customers; and so per- fect is this diffusion of land taxation that every traveller from a distant part of the country who spends even a single day at a hotel pays, without stopping to think about it, a portion of the taxes on the building, first paid by the owner, then assessed upon the lessees, and next cut up by them minutely in the per diem charge. But of course neither the owner nor lessee really escapes taxation, be- cause a portion of somebody else's tax is thrown back upon them. Is it possible to believe that in a city like New York, where less than four per cent of its population pay any direct tax on real estate, or in a city like Montreal, where the expenses of the city are mainly derived from taxes on land and the building occupancy of land, the great major- ity of the inhabitants of those cities are exempt from all land taxation? In China, where, as before shown, the title or ownership of all land vests in the emperor, and the rev- enue of the Government is almost exclusively derived from taxation of land in the form of rent, does the burden of tax remain upon the owner of the land? If the tax in the form of rent is paid in the products of the land, as un- doubtedly it is in part, will not the cost of the percentage of the whole product of the land that is thus taken in- crease to the renter the cost of the percentage that is left to him; or, if the product is sold for money with which to pay the tax rent, will not its selling price embody the cost of the tax, as it will the cost of every other thing necessary for production? To affirm to the contrary is to say that the price which the Chinese farmer pays for the right of the exclusive use of his land is no part of the crops he may raise upon it. Consider next the assertion of those who maintain the non-diffusion theory that taxes on land are paid by the LAND TAX COMPENSATED. 595 owners because the supply of land can neither be increased nor diminished. In answer to it we have the indisputable fact that the owners of land, whenever taxes are increased, attempt to obtain an increased rental for it if the circum- stances will permit it. And the very attempt tends to in- crease the rent. JSTothing but adverse circumstances, such as diminishing population or commercial and industrial distress, can prevent a rise in the rental of land on which the taxes are increased; and in the case of dwellings and warehouses the rise is almost always very prompt, l)ecause no man will erect new dwellings or warehouses unless their rent compensate fully the increase of taxation. And in any prosperous community, in which population in- creases in the natural ratio, there must be a constant increase of dwellings and warehouses to prevent a rise of rent, independent of higher wages and higher taxation. In no other occupation is capital surer of obtaining the average net remuneration than in the erection of dwell- ings and warehouses, and nothing but lack of general pros- perity and diminishing population can throw the burden of taxation on real estate or its owners, without the slightest attempt at combination on their part. If the owners of land are not reimbursed for its taxation by its occupants, new houses " would not be erected, the old ones would wear out, and after a time the supply would be so small that the demand would raise rents, and house building begin again, the tax having been transferred to the occu- pier." It is pertinent at this point to notice the averment that is frequentl}^ made, that cultivators of the soil can not incorporate taxes on the land in the price of their prod- ucts, because the price of their whole crop is fixed by the price at which any portion of it can be sold in foreign markets. In answer to this we have first the fact that, to give the population of the world an adequate supply of food and other agricultural products, it is not only neces- sary that all the land at present under cultivation shall continue to be so employed, but further that new lands shall each year be brought under cultivation, or else the land already cultivated shall be made more productive. The population of the world steadily increases, not- withstanding wars, epidemics, and all the evils which are 596 THE THEORY AND PRACTICE OF TAXATION. consequences of man's ignorance and of his improper use of things, his own faculties included. Hence, in case of increased taxation on land, the cultivator of the soil is generally enabled to transfer easily and promptly the burden of the tax to the purchasers of the products he raises, without abandoning the cultivation even of the least productive soil. Furthermore, the exports of many agricultural prod- ucts are due not to the cheapness of their cost of produc- tion, but to the variations which occur in the productive- ness of the crops of other countries. M. Rouher, a French economist, and for a period a minister of commerce, thoroughly investigated this matter, and proved by incon- testable data that almost invariably when the yield of breadstuffs in Europe was large in the country drained by the Black and Baltic Seas, it was small in the countries drained by the Atlantic. This variation in the yield of agricultural crops forces the countries where crops are deficient to purchase from those where they are abundant, or who have a surplus on hand from previous abundant harvests. In the United States, when the harvests are abundant, the American farmers, rather than sell below a certain price, keep a portion of their crops on hand until bad crops in Europe produce a foreign demand, which has to be supplied at once. Under such circumstances those who hold the surplus stock of breadstuffs, or any other product, would control the price, and not the foreigners who stand in need of it. The only check, then, to the cupidity of the holders of breadstuffs is the competition among them- selves, which invariably suffices to prevent any undue advantage being taken of the necessities of the countries whose harvests are deficient. These bad crops occur fre- quently enough to consume all the surplus of the countries that produce in excess of their own wants. In fact, this transient, irregular demand is counted upon and provided for by producers just as much so as the regular home de- mand — hence is one of the elements that regulate produc- tion and control prices. At this point of the discussion it is desirable to obtain a clear and true idea of the meaning or definition of the phrase " diffusion of taxes." As sometimes used in popu- lar and superficial discussions, it is held to imply that every TAXATION AND CONSUMPTION. 597 tax imposed by law distributes itself equitably over the whole surface of society. Such implication would, how- ever, be even more fallacious than an assumption that every expenditure made by an individual distrilmtes itself in such a way that it becomes equally an expenditure by every other individual. On the other hand, a fair con- sideration of the foregoing summary of facts and deduc- tions would seem to compel every mind not previously warped by prejudice to accept and indorse the following as great fundamental principles in taxation: First, that in order to burden equitably and uniformly all persons and property, for the purpose of obtaining revenue for public purposes, it is not necessary to tax primarily and uniformly all persons and property within the taxing district. Sec- ond, equality of taxation consists in a uniform assessment of the same articles or class of property that is subject to taxation. Third, taxes under such a system equate and diffuse themselves; and if levied with certainty and uni- formity upon tangible property and fixed signs of property, they will, by a diffusion and repercussion, reach and bur- den all visible property, and also all of the so-called " in- visible and intangible " property, with unerring certainty and equality. All taxation ultimately and necessarily falls on con- sumption; and the burden of every man, under any equi- table system of taxation and which no effort will enable him to avoid, will be in the exact proportion or ratio which his aggregate consumption maintains to the aggregate con- sumption of the taxing district. State, or community of which he is a member. It is not, however, contended that unequal taxation on competitors of the same class, persons, or things diffuses itself whether such inequality be the result of intention or of defective laws, and their more defective administration. And doubtless one prime reason why economists and others interested have not accepted the law of diffusion of taxes as here given is that they see, as the practical workings of the tax systems they live under, or have become practically familiar with, that taxes in many instances do seem to re- main on the person who immediately pays them; and fail to see that such result is due — as in the case of the taxa- tion of large classes of the so-called personal property — to k P 598 THE THEORY AND PRACTICE OP TAXATION. the adoption of a system which does not permit of equality in assessment, and therefore can not be followed by any- thing of equality in ditfusion. Such persons may not unfairly be compared to physicists, who, constantly work- ing with imperfect instruments, and constantly obtaining, in consequence, defective results, come at last to regard their errors as in the nature of established truths.* According to these conclusions, the greatest consumers must be the greatest taxpayers. The man also w ho evades a tax clearly robs his neighbours. The thief "alsb pays * In a like experience the Duke of Argyll, in his work The Unseen Foundations of Society, finds an explanation of the so- called theory of Kicardo, that the rent which a farmer of agricul- tural land pays as the price of its hire — that is to say, the price which he pays for the exclusive use of it — is no part of the cost of the crops he may raise upon it; a conclusion that can not be pos- sibly true, unless it be also true that rent is paid for something that is not an indispensable condition of agricultural production. " Thus rights are in their very nature impalpable and invisible. They are not material things, but relations between many ma- terial things and the human mind and will. The right of exclusive use over land is a thing invisible and immaterial, as other rights are, and, although it is, and has been since the world began, the basis of all agricultural industry, it is a basis impalpable and invisible, whereas the material visible implements and tools, whose work depends upon it, are all visible and palpable enough, and all of which would never be were we to see them without the invisible rights upon which they depend. All of the former, in their place and order, are instruments of production ; all of them catch the eye, and may easily engross the attention. On the other hand, if we are induced to forget those other elements, which are equally essential instruments of production, merely because they are out of sight, then our deception may be complete, and fallacies which become glaring when memory and attention are awakened may find in our half-vacant minds an easy and even a cordial reception." Adam Smith may be fairly considered as having fully com- mitted himself beyond all controversy in his great work. The Wealth of Nations, to the principle that taxes, with a degree of infallibility, diffuse themselves when they are levied uniformly on the same article; and he even goes so far as to admit that a tax upon labour, if it could be uniformly levied and collected, woidd be diffused, and that the labourer would be the mere conduit through which the tax would pass to the public treasury. Thus he says, " While the demand for labour and the price of provisions, there- fore, remain the same, a direct tax upon wages can have no other efTect than to raise them somewhat higher than the tax." The German economist Bluntschli, who has carefully studied this question of the final incidence of all just and equitable taxes, ALL PAY TAXES. 599 taxes indirectly, for he is a consumer, and must pay the ad- vanced price caused by his own roguery for all he con- sumes, although he does steal the money to pay with. Idlers and even tramps pay taxes, but the amount that they indirectly pay into the fund is much less than they take out of it. People are sometimes referred to or char- acterized as non-taxpayers, and in political harangues and socialistic essays measures or policies are recommended by which certain persons or classes, by reason of their ex- treme poverty, shall be entirely exempt from all incidence or burden of taxation. Such a person does not, however. is in substantial agreement with the above conclusions, but pre- fers to use a different term for characterizing such finality than consumption, and expresses himself as follows: "In the end taxes fall on enjoyments. Hence the amount of each man's enjoyments and not his income is the justest measure of taxation." — Bluntschli, vol. X, p. lJf6. M. Thiers, the French statesman and economist, was also a believer and earnest advocate of tlie theory of the diffusion of taxes, and lays down his principles in the following words: "Taxes are shifted indefinitely, and tend to become a part "if the price of commodities, to such an extent that every one bears his share, not in proportion to what he pays the state, but in proportion to what he consumes." And in his book Rights to Property he thus illus- trates the method in which taxation diffuses itself: "In the same manner as our senses, deceived by appearances, tell us that it is the sun which moves and not the earth, so a particular tax appears to fall upon one class, and another tax upon another class, when in reality it is not so. The tax really best suited to the poorest mem- ber of society is that which is best suited to the general fortune of the state ; a fortune which is much more for the possession and enjoyment of the poor man than it is for the rich ; a fact of which we are never sufficiently convinced. But of the manner, neverthe- less, in which taxes are divided among the different classes of the state, the most certain thing we can say is: That they are divided in proportion to what each man consumes, and for a reason not generally recognised or understood, namely, that taxes are re- flected, as it were, to infinity, and from reflection to reflection be- come eventually an integral part of the prices of things. Hence the greatest yjurchasers and consumers are everywhere the greatest taxpayers. This is what I call ' diffusion of taxation,' to borrow a term from physical science, which applies the expression ' dif- fusion of light ' to those numberless reflections, in consequence of which the light which has penetrated the slightest aperture spreads itself around in every direction, and in such a manner as to reach all the objects which it renders visible. So a tax which at first sight appears to be paid directly, in reality is only advanced by the individual who is first called upon to pay it," 600 THE THEORY AND PRACTICE OF TAXATION. f exist in any civilized community. If one could be found he would be a greater curiosity than exists in any museum. To avoid taxation a man must go into an unsettled wilder- ness where he has no neighbours, for as soon as he has a companion, if that companion be only a dog, which he in : part or all supports, taxation begins, and the more com- "panions he has, the greater improvements he makes, and I the higher civilization he enjoys, the heavier will be the taxes he must pay. Taxes legitiinalely levied, then, are a part of the cost of all production, and there can be no more tendency for taxes to remain upon the persons who immediately pay them than there is for rents, the cost of insurance, water supply, and fuel to follow the same law. The person who wishes to use or destroy the utility of property by con- sumption to gratify his desires, or satisfy his wants, can not obtain it from the owners or producers with their con- sent, except by gift, without giving pay or services for it; and the average price of all property is coincident with the cost of production, including the taxes advanced upon it, which are a part of its cost in the hands of the seller. Again, no person who produces any form of property or utility, for the purpose of sale or rent, sustains any bur- den of legitimate taxation, although he may be a tax ad- vancer; for, as a tax advancer, he is the agent of the State, and a tax collector from the consumer. But he who pro- duces or buys, and does not sell or rent, but consumes, is the taxpayer, and sustains a tax in his aggregate consump- tion, where all taxation must ultimately rest. In short, no person bears the burden of taxation, under an equita- ble, legitimate system, except upon the property which he applies to his own exclusive use in ultimate consumption. The great cousuhht is tlio only great taxpayer. Finally, a great economic law })ointecl out by Adam Smith, which has an important and almost conclusive bear- ing upon this vexed problem of the diffusion of taxes, should not be overlooked — namely, his statement in The Wealth of Nations that " no tax can ever reduce for any considerahle time the rate of profit in any particular trade, wliicli must always Tceep its level with other trades in the neighbourhood." In other words, taxes and profits, by the operation of the laws of human nature, constantly tend to LEVEL OF TAXATION. 601 equate themselves. Man is always prompted to engage in the most profitable occupation and to make the most prof- itable investment. And since the emancipation from feudalism with its sumptuary laws, legal regulations of the price of labour and merchandise, and other arbitrary gov- ernmental invasions of private rights, individual judgment and self-interest have been recognised as the best tests or arbiters of the profitableness of a given investment or occupation. The average profits, therefore, of one form of investment, or of one occupation (as originally shown by Adam Smith), must for any long period equal the average profits of other investments and occupations, whether taxed or untaxed, skill, risk, and agreeableness of occu- pation being taken into consideration.* Natural laws will, accordingly, always produce an equilibrium of burden between taxed and untaxed things and persons. There is a level of profit and a level of taxation by natural laws, as there is a level of the ocean by natural * As applied to the wages of labour, the truth of this principle is equally incontestable. " The sewing girl performing her toilsome work by the needle at one dollar a day, the street sweeper working the mud with his broom at a dollar and a half, the skilled labourer at two and three dollars, the professor at five, the editor at five or ten, the artist and the songstress at ten or five hundred dollars a day are all members of the working classes, though working at diflTerent rates. And it is only the difference in their effectiveness that causes the difference in their earnings. Bring them all to the same point of efficiency, and their earnings also will be the same." — W. Jungst, Cincinnati. John Locke, in his treatise On the Standard of Value, treats of taxation, and shows conclusively that if all lands were nominally free from taxation, the owners of lands would proportionally pay more taxes than now, because the same amount of money must continue to be collected in some form, and the average profits of lands would only be equal to the average profits of other invest- ments; and further, that the expense and annoyance (another form of expense) would be increased if the tax were exclusively levied in the first instance upon personal property ; and hence the land- owner would be burdened with his proportion of the unnecessary expense and annoyance. He also shows that you may change the form of a uniform tax, but that you can not change the burden ; and that the change will increase the burden, if the new system is more expensive and annoying than the old. Locke wrote nearly a century before Adam Smith published his Wealth of Nations, and it would seem probable that Smith acquired his ideas relative to the average profits of investments from Locke. . . i =». , . "^^ v., 602 THE THEORY AND PRACTICE OF TAXATION. laws. In fact, all proportional contributions to the State from direct competitors are diffused upon persons and things in the taxing jurisdiction by a uniformity as mani- fest as is the pressure upon water, which is known to be equal in every direction. A word here in reference to the popular idea that the exemption of any form of property is to grant a favour to those who possess such property. This idea has, however, no warrant for its acceptance. Thus, an exemption is freedom from a burden or service to which others are liable; but in case of the exclusion of an entire class of property from primary taxation, no person is liable, and therefore there is no exemption. An exclusion of all milk from taxation, while whisky is taxed, is not an ex- emption, for the two are not competing articles, or articles of the same class. It is true that highly excessive taxa- tion of a given article may cause another and similar article, in some instances, to become a substitute or com- peting article; and hence the necessity of care and moder- ation in establishing the rate of taxation. We do not consider that putting a given article into the free list, under the tariff, is an exemption to any particular indi- vidual; but if we make the rate higher on one taxpayer or on one importer of the same article than on another tax- payer or importer, we grant an exemption. We use the word " exemption," therefore, imperfectly, when we speak of " the exemption of an entire class of property," as, for example, upon all personal property; for if the removal of the burden operates uniformly on all interested, or owning such property, then there can be no primary exemption. CHAPTER XXVII. THE BEST METHODS OF TAXATION. PART I. This historical survey of tax experience among peoples widely differing in their economic condition and social rela- tions, and this examination of the scope and practice of taxation, with especial reference to the tax systems of the United States as defined and interpreted by judicial au- thority, prepare the way for a discussion of the best methods of taxation for a country situated as is the United States. General as are the theoretical principles under- lying taxation, the application of these principles to exist- ing conditions must be modified to meet the long usage and inherited prejudice of the people, and the form of produc- tion or manner of distributing wealth. This holds true in the face of appearances so opposed to it as to defy defi- nition and acceptance. No less promising field for an income tax can be pictured than British India, and few more promising fields than France. Yet India has borne such a tax for years, while France will not permit a true tax on income to be adopted as a part of its revenue system. In the latter country the plea is made that the upper and middle classes already pay under other forms of taxation more than their due proportion of the public burdens, and an additional and necessarily discriminating duty laid upon them will only make this inequality the greater. Class interest may thus oppose its veto to a change that promises to reduce the burdens of one class of taxpayers at the expense of another; or may even oppose a change that offers the chance of collecting a larger revenue with less real difficulty and sacrifice on the part of the taxed. No opposition can set aside even temporarily the great rules that clearly define a tax from tribute, a legal and beneficial taking by the state of a certain part of the public 603 604 THE THEORY AND PRACTICE OF TAXATION. wealth from a demand that involves waste or mischievous expenditure, for which the state or people derive no advantage commensurate with the cost, or from which individuals obtain a gain not defensible in justice, and at the ex})ense of only one part of the community. After so many centuries of experiment, in which hardly a possible source of state revenue has escaped atten- tion, some knowledge of the great principles of taxation might have been evolved. Unfortunately, the experience of one nation is not accepted as containing lessons applica- ble to the needs or conditions of another, and one genera- tion rarely appeals to history save to defend its own experi- ments. Ignorance, half knowledge, which is quite as dangerous, and interest guide or influence legislation, and those who predict failure or danger are regarded as the- orists, and denounced as unpractical. Nowhere is the tendency to move independent of enlightened knowledge more evident than in the United States. At every appear- ance of the tax question. State and national legislatures are overwhelmed with measures that have been tried in the past, and after a thorough test condemned beyond any hope of defence. Yet history shows the gradual disappearance of certain forms of taxation which enjoyed great popularity for a time, and accomplished the end of their creation in a crude and often cruel manner. Looking over long periods of time, it is seen that some advances have been made, rather from a change in the economic condition of the people than from a true appreciation of the principles in question. The development of popular liberty has been an essential factor, and the alterations in tax methods require a close analysis of the causes leading to the rise and dominance of political and constitutional principle. While it is true that a popular uprising against fiscal exactions usually marked the limit of endurance of an oppressive system, it is also true that the same uprisings marked the completion of one stage of political development, and the readiness or even the need of entering upon a new stage. In one sense the progress of a people toward civilization in its highest meaning may be illustrated by its fiscal machinery and methods of obtaining its revenue from the people. It will be of interest to glance at some of these passing phases FARMED REVENUES AND LOTTERIES. 605 which have generally come down to a late day, and are still to be found in activity in some of the most advanced states of Europe. The practice of farming out the revenues of a state or any part of it has become nearly obsolete, and where it does exist is the mark of a fiscal machinery as yet not fully developed. The opportunities and temptation which the contract system oifered for oppressing the taxpayers were apparent long before the state was in a position to assert its ability to make its own collections. In France the fermiers generaux were a political factor, standing between the king and his people, regarded as necessary to the former and as oppressors of the latter. Their unpopularity, in part justified by their conduct, was a not unimportant item in the arraignment of royalty by the people. Wherever introduced, the farming of taxes proved in the long run as unwise politically as it was unprofitable financially; and the only reasonable defence for adopting it was the want of strength in the state to command its own revenue — a want as likely to arise from the dishonesty of its agents as from a political weakness. In early times the most universal manner of supplying the treasury of the state, the farming of taxes has now become so rare as to be classed as a curi- osity. Italy still employs this machinery to collect her taxes on tobacco, and Spain from necessity has mortgaged her taxes to the bank, with the task of collecting them. Of the same general character are the state lotteries, of which some few and quite important instances may still be found in action. Of the immorality of these instru- ments there can be little doubt, and there is quite as unanimous an opinion as to their inefficiency as fiscal in- struments. Yet it is only within very recent years that state lotteries have been discarded even in the most ad- vanced countries. The machinery of lotteries has often been modified, but, no matter how altered in details, they all have appealed to the love of games of chance. Adam Smith asserted that the " absurd presumption " of men in their own good fortune is even more universal than the overweening conceit which the greater part of men have in their own abilities.* Yet another assertion of the same * Wealth of Nations, vol. i, p. 112 (Roger's edition). 606 THE THEORY AND PRACTICE OF TAXATION. writer is as true: "The world neither ever saw, nor ever will see, a perfectly fair lottery, or one in which the whole gain compensated the whole loss." Where the state undertakes it, there is a profit generally assured to the state, but that profit is by no means certain, and can not make good the demoralization introduced among the peo- ple. State lotteries are still a part of the revenue system in Italy and Austria (proper), where the receipts are im- portant, but show a decided tendency to diminish; Hun- gary and Denmark, where they are of little moment; and in Spain, where they are retained because of the general incapacity of the administration to reach other and more profitable sources of revenue. The experience of the State of Louisiana in connection with a State lottery is too recent to require examination. It is not probable that once abandoned such an instrument for obtaining money from the people will be revived, save as a last resort. The State monopoly in the manufacture and sale of an article for fiscal purposes holds a place of high importance in European countries, and is met elsewhere under condi- tions not so favourable to its maintenance. As an example of the latter may be cited the colonial policy of the Dutch in their possessions in the East. After the termination of the trading companies, the Government undertook the entire control of the colonies, and sought to make them a source of revenue. The natives were to be taxed, but, having little of their own to be taxed, and practising no occupation that could of its own volition become a profit- able source of revenue, the state undertook to organize industry, and, by creating an opportunity for employing the labour of the natives, to receive the profits of produc- tion for its own uses. The native chiefs were made " mas- ters of industry " and collectors of the revenue; and a cer- tain part of the labour of the natives, one day in every five, was decreed to the state. In order to derive a profit, this labour must be bestowed in cultivating some product that finds a market in international trade. Hence arose the importance of the sugar, coffee, tobacco, and spice crops of these Dutch islands, and for many years a handsome profit to the treasury was obtained from the management and sales of product. With the great fall in the prices of sugar and coffee throughout the world, and the narrowing STATE MONOPOLIES. 607 of the market for cane sugar, the Government obtained a less income each year, and has found it of advantage to relax the conditions surrounding cultivation, and to throw the management of the plantations more and more into private hands. To such an extent has this transition been effected that the state can no longer be considered as con- trolling a monopoly in product or sales, and is content with a revenue from other sources, one that does not even cover the expenses incurred in the colonial system. This experiment differs widely from those industries under- taken with the aid or encouragement of the state to be found in India. It was not with a fiscal object that they were established, and not infrequently the state sacrifices revenue by releasing them from tax burdens they would ordinarily endure. As one of the few remaining instances of the direct participation of a state in the production of products intended for foreign markets, yet undertaken and maintained for fiscal reasons, the history of the Dutch colonies in the East is instructive. In Prussia the working of certain mines is in the hands of the state, and was originally looked upon as an im- portant contribution to the income of the state. As in the Dutch experience, the changes in production throughout the world have greatly reduced the returns and made the income variable; yet there is little disposition to dispose of these possessions. " The danger of mineral supplies being worked in a reckless and extravagant manner with- out regard to the welfare of future generations, and the dread of combinations by the producers of such commodi- ties as tin, copper, and salt, with the aim of raising prices, have both tended to hinder the alienation of state mines." * The more common form of state monopoly is that which occupies a middle position, established for reasons of public safety or utility as well as of revenue. The salt monopoly enforced in Prussia was only abolished in 1867, and is still maintained in every canton of Switzerland. The strongest plea in its defence has been the g^^arantee by the state of the purity of the article sold, and this phase of the question has superseded the revenue aspect. Few * Bastable. Public Finance, p. 181. 608 THE THEORY AND PRACTICE OF TAXATION. articles of prime necessity, like salt, are subject to monopo- lies imposed by the state, and by a process of elimination it is only articles of luxury or voluntary consumption that are regarded as fit objects of monopoly for the benefit of the state. A tax miposed upon an article at a certain stage of its production or manufacture may enforce the expediency or necessity of a state monopoly. Where the supervision of the state agents must be so close as to interfere with the conduct of the industry, the state intervenes and itself controls the manufacture and sale. Tobacco has long been subject to this fiscal regime, and, proving so produc- tive of revenue, there is little to be said against a monop- oly by the state of its manufacture and sale. In Italy the tobacco monopoly is conceded to a com- pany, but its return of net revenue to the state is nearly as large as the revenue derived from the taxes on real property (about thirty-eight million dollars a year). Prus- sia imposes a charge on the home-grown tobacco by a tax on the land devoted to its culture, but the return is very small, and Bismarck wished to introduce a true tobacco monopoly, modelled on that of France. But the condi- tions were opposed to his scheme, for the use of tobacco is general throughout the empire, and a proposition to in- crease its price by taxation or modify its free manufacture and distribution excited a widespread opposition. France maintains a full monopoly, and finds it too profitable to be lightly set aside unless some equally profitable source of revenue is discovered to make good the loss its abolition would involve. While historical support is given to the maintenance of a monopoly as in France, it is not probable that the system will find imitators in other states, however tempting the returns obtained might seem. Great Britain has by her insular position solved the problem in another way. By interdicting the domestic cultivation of tobacco, all that is consumed must be imported, and a customs duty ofl^ers a ready instrument for making the plant, in whatever form it enters, contribute its dues to the exchequer. In Eussia, as in the United States, where tobacco is a domestic prod- uct, the tax is imposed upon its manufacture, and this method requires supervision but no monopoly of the state. I TRANSIT DUES. 609 The tobacco regime is defended almost entirely on fiscal grounds, and as a monopoly, an extreme measure, has proved its value as an instrument of taxation. Other reasons, of a moral character, are urged to induce the state to monopolize the manufacture and sale of distilled spirits. Both France and Germany have considered this question, and, in spite of confident predictions of a large profit, have decided not to undertake it. Russia, on the other hand, has taken it up quite as much on social as on revenue grounds, and is gradually securing a monopoly of the trade in spirits. The initial cost of the undertaking is large, and, as the system has not yet been perfected, it is too early to give a judgment on its availability as a financial instrument. The transit dues, once commonly used by different countries, have been generally abandoned, and in China must they be sought for in their original forms of vexa- tious and unprofitable force. They arose from a desire to derive some benefit from a commerce permitted grudging- ly, and rarely attaining any high results. The same end was sought by duties on exports, much employed when the country was supposed to be drained of its wealth by what was sent out of it. The conditions necessary for a suc- cessful duty on exports are not often found, and only in a few countries are they now existent. In Italy, South America, and Asia, exports of certain natural products are taxed, and, as in the case of Brazil, yield a notable revenue. In view of the rapid advancement of production in new countries and of inventions in the old, whereby many natu- ral monopolies have been destroyed and competition made more general, such duties prove to be more obstructive to trade than productive of revenue, and are rapidly being abandoned. In spite of a formal prohibition of export duties in the Constitution of the United States, they are sometimes suggested in all seriousness. In thus clearing the path of what may be called dead or dying methods of recent tax systems, the advantages en- joyed by the United States in their freedom from such sur- vivals become more evident. The practice of farming taxes never gained a foothold in any part of the country. Lotteries have been occasional, and with two exceptions have been conducted on a limited scale — that of Louisiana 610 THE THEORY AND PRACTICE OP TAXATION. is well known; an earlier instance is less known. During the Eevolution one of the means resorted to by the Conti- nental Congress for income was a lottery, but the attempt proved disastrous to all concerned, and was finally aban- doned even more thoroughly than was the continental cur- rency. State monopolies of production and sale of any commodity have never met with favour, and stand con- demned in the desire for individual initiative. As sources of revenue, the public lands, state control of the post of- fice, and of such municipal undertakings as the water and, in a very few cases, the gas supply, has been employed, and in place of profit the mere cost of management is sought. More than any country of continental Europe, the United States has depended upon taxes, pure and simple, unsup- ported or modified by state domains, state mines, state manufactures, or state monopolies. Even Great Britain in her local taxation is bound and hampered by precedent, and pursues a system that is notoriously confused, costly, and vexatious. Long usage and the erection of independ- ent and conflicting authorities on principles other than fiscal have imposed upon the local agents the duty of as- sessing and collecting county and borough taxes which are as indefensible in theory as they are difficult in practice. From this weight of tradition and precedent the United States has been almost entirely free, and it was possible to construct out of small beginnings systems of Federal and State taxation at least reasonable and con- sistent, producing an increasing revenue with the rapid development of wealth and the larger number of taxable objects; and so elastic as to adapt themselves to such changes as are inevitable in any progressive movement of < commerce or industry. That no such system has resulted ^ J after a century of national life, and an even longer term (W'y of local (colonial and State) activities, these papers have a) tended to show. That the time is at hand when the prob- w v/ ■' lem of a thorough reform of both State and Federal taxa- \v^ '^jS^ ^^°^ miist be met, current fact's prove beyond any doubt. X-'-'^ry If I have aided in a proper comprehension of these prob- V^ lems, and, by collecting certain experiences in taxation ^ among other peoples and in different stages of civilization, contributed toward a proper solution, the end of this work V CONDITIONS IN THE UNITED STATES. 611 will have been attained. It is not possible to introduce a complete change of policy at once; it is not only feasible but necessary to indicate the direction this change should take, and the ends to be secured in making them. And first as to Federal taxation: In a democracy like that of the United States, the continuance of a mixed system of direct and indirect taxes is a foregone conclusion. Not that there is an absence of change or modification in the details of this double system, or in the application or distribution of a particular impost or duty. To deny such modification is to deny any move- ment in the body politic, or any progress in the industrial ;~ and commercial economy of the people. There is a steady '^ and continuous movement in every direction, and the mere '- " effort to escape taxation results in a new adjustment of related facts. This development has, partly through ne- ^'^ cessity and partly through a rising consciousness of what ''. a tax implies, been tending from indirect to direct taxes. Ever restive under a rigid supervision by the state of pri- ^ vate concerns, there has been a wholesome opposition to ^ inquisitorial taxes. But this opposition has been carried too far, and is due more to the ignorant and at times brutal disregard by the agents selected for enforcing the law than to an appreciation of the injustice of the tax. Whether in customs or excise, the same blunders of management have been committed, and created a spirit in the people > that is injurious to their best interests. On the one hand, private enterprises have been unduly favoured by the removal of foreign competition, a favour that is now disap- pearing through the remarkable development of domestic competition. Thus taxes have been extensively used for other purposes than to obtain revenue, and for private ends. On the other hand, there has been created the^ • feeling that taxation is a proper instrument for effect- \ ing a more equal distribution of wealth among the people, I - and readily becomes an instrument of oppression. i^ The almost absolute dependence of the Federal Gov- ernment upon the customs duties for revenue through a great part of its existence was a striking fact. The sim- plicity of collection and the comparatively moderate scale of duties, although considered high at the time of imposi- tion, gave this branch of the possible sources of revenue a 612 THE THEORY AXD PRACTICE OF TAXATION. magnified importance. The development of the country was slow, and at times greatly hampered by the tariff policy; but until about 1857 no other source of income was needed to meet the expenditures of the Government in a time of peace. In recent years this has all changed, and not for the better. The immense development in manufactures and financial ability accomplished since 1860 has made a tariff for protection an anachronism. {The political features of customs legislation have been pushed so far as almost to overshadow the fiscal qualities^ The wave of protection- ism that followed the abrogation of the commercial treaties of Europe about 1880 has resulted in tariffs framed with the desire to injure the commerce of other states rather than to meet the needs of a treasury. In the United States this policy has been carried beyond that of Europe, and the tariff now in existence is more protective than any hitherto enforced, short of absolute prohibition of imports. In more respects than one the tariff law of 1897 was an extreme application of the protective policy. Each year the United States has demonstrated its ability not only to meet the industrial competition of the Avorld on an equal footing, but to engage with it aggressively and ^^'ith com- plete success. It is not necessary to give the figures of exports of manufactures to establish this fact; it is now beyond question. To frame a measure of extreme protec- tion was, therefore, to overlook the most striking phase of the industrial situation existing in the United States. With an ability to manufacture cheaply and on a grand scale, and with a capacity to supply the demands of a market larger than any home market, there was no foreign competition to encounter, and the higher rates of duties meant nothing, either for protection or for revenue. In carrying further into action a tariff framed more for pro- tection than for revenue, a twofold error was committed. The provisions were so complicated as to make the appli- cation diificult, and in applying these provisions inquisi- torial and vexatious regulations were necessary to assure even a reasonable fulfilment of the requirements. In for- mer tariff laws a general description carried a large class of articles, and a uniform duty, usually ad valorem, was collected. But, under the demand for a more scientific COMPLEX TARIFF LAW. 6I3 tariff, these general classes were broken up into a number of enumerated articles, each one carrying a specific or mixed duty, and an omnium or basket clause at the end to catch any article that could not be included in one of the enumerations. This desire to fix specific rates upon each imported commodity has been applied more generally in the law of 1897 than in any previous tariff act. An exam- ination of the imports of manufactures of textile fibres will illustrate this increase of complexity without any increase of revenue. Indeed, these classifications and rates, being suggested by interested parties, have for their object a reduction of imports, and as a rule a reduction in revenue from them follows. The second objection to the increasing complexity of the tariff laws is to be found in the petty annoyances im- posed upon importers and others in enforcing the not always consistent provisions of the law. These vexations are made all the more telling by the fact that the admin- istration of the law is apt to be in the hands of those who are openly hostile to foreign importations, and therefore regard the importer in an unfriendly spirit. The power given to the customs agents is enormous, and it is not remarkable that it is abused. The demand for samples, the appraisement of articles, the classification of new or compound commodities, all offer room for controversy, which is not always decided by an appeal to the courts of justice. In special instances, where a section of the law has been framed in behalf of a special interest, the at- tempt to enforce it becomes petty tyranny of the most intolerable kind. In operation the law soon exhibited its failure as a rev- enue measure. Although duties were generally increased, the more important articles taxed yielded a smaller revenue than under lower rates. The aggregate collec- tions under the bill did not meet the expectations of its sponsors, and for two reasons: first, because the higher duties discouraged imports; and, secondly, the demand for imported articles was steadily decreasing under the ex- panding ability of home manufactures to meet the needs of the market. No measure short of a direct encourage- ment to importations can change this situation, or prevent the further shrinkage in the use of foreign manufactures. 614 THE THEORY AND PRACTICE OF TAXATION. It follows that the tariff, unless radically altered, can no longer be depended on for a return sufficient to defray one half of the rapidly increasing expenditures of the national Government. (By refusing to impose moderate duties on articles of general consumption, revenue is sacrificed; by insisting upon imposing protective duties where little rev- enue can be had, the tariff is converted into a political weaponj Its dangerous qualities are strengthened by turning these duties against the products of certain coun- tries, a policy specially fit to invite reprisals. Even the framers of this latest tariff entertained the belief that some provision should be made for breaking its full effect. The familiar scheme for reciprocity treaties, under which moderate concessions in some of the duties could be made, was retained; but France was the only power that could have an object in seriously entertaining the proposition to enter into a negotiation. No real reduc- tion in duties could be given to Germany or any other country, and it has become a recognised fact that Germany does not hesitate to seize an opportunity to exclude the products of the United States, and on the same grounds as support the high duties in the American tariff. The system of drawbacks has ceased to be of much moment in our customs policy, and in the export interest in canned goods finds its chief exercise. Nor does a privilege to manufacture in bond affect more than one article of im- portance — ores of lead containing silver. No matter how it is regarded, the tariff of 1897 was not framed for rev- enue, and in experience has not proved sufficiently produc- tive to meet its share of the expenditures of Government. The animus of its sponsors in attaining the immediate political object sacrificed the more important and perma- nent object of revenue. It is a law which can be produc- tive of revenue only in periods of great commercial activity. Were the true object of customs duties — revenue — to be kept in view in tariff legislation, it would be a simple matter to devise a measure that would be satisfactory and highly productive of revenue. In the fifteen hundred or more articles enumerated in the tariff schedules, more than fourteen hundred are non-productive, or yield so small a return as to have in the aggregate no appreciable effect TARIFF REFORM. 5I5 on the total receipts. The number left after so large an exclusion can be still further reduced without reducing the revenue one tenth; and it is from a small number of articles, hardly twenty-iive, that the great part of the cus- toms revenue is obtained. By reducing the rates of duties on these to a point of highest revenue efficiency, at which the import is not interfered with and yet not encouraged, a higher return could be had than from the existing com- plicated, overloaded, and political compilation of duties, usually imposed for any reason other than what they will bring into the treasury. When, therefore, the best methods of Federal taxation are broached, the reform of the tariff stands first in im- portance. It is necessary to bring it more into line with the industrial conditions of to-day, which call for foreign markets rather than a domestic or closed market; and for a liberal commercial policy in place of one that regards the products of other countries, whether imported in the crude or manufactured forms, as constituting a menace to Ameri- can labour and American interests. It calls for a sys- tematic and intelligent revision, which shall throw out such duties as are no longer of service even for protection, and to reduce those that are hostile to the products of other countries and bear in themselves the seeds of repris- als in the future. Now that the United States is going into the great markets with its manufactures, and obtain- ing a foothold against all competitors, the invitation to retaliation holds a danger far greater to its own interests than any that can be inflicted on other peoples. The greater the advances made the more readily will recourse be had to reprisals and hostile legislation; and in support of every act appeal may be had to examples set by the United States.* * " The old protectionist, with the stoek arguments about the influence of the tariflF upon wages and all the rest of it, is beginning to die out. He told us all he had to say about the ' pauper labour ' of Europe, by which he often meant the best-educated and most skilful artisans of the world. We got tired of hearing about how the importer paid the tax, how it was Europe and England in particular that was all the time squeezing our lives out, till nearly all of us, being of English ancestry ourselves, wondered whether we, even, could be so good as we hoped we were, if we had sprung from something soessentially perverted and bad. We were told, 616 THE THEORY AND PRACTICE OF TAXATION. too, that American tourists who went to Europe and spent money there which they ought to have squandered at home were not friends of their country, and that they did us a particularly hostile act when they brought clothing, statuary, or diamond rings back with them from foreign parts. A season of high prices was a real heaven, and wars and fires were good things because they destroyed property that would have to be replaced, and this would create that demand which, reacting on supply, would increase prices. To say that an article was cheap was to say that the political party in power was no longer worthy of public confidence. It was related that each government could make its people so rich, and the idea was thought to have been traced down from Henry C. Carey, that the rest of the world could be safely disregarded altogether. "Seriously, who believes any of this stuff nowadays? The pro- tectionist is not reckoning with such popular impotency and stupid- ity. He believes in his fellow-man, and wants to give him a helping hand. He does not care what effect it has on England or Ireland. He is not sure that a protective tariff in and of itself will increase the wages of the workmen. He is even inclined to think that less wages and profits would do well enough for every man, if it were cheaper to live and there were not such extravagant demands upon every person from all sides — this without being a socialist. He is certain that ' a cheap coat ' does not necessarily make ' a cheap man,' but the cheaper the coat the better it Avill be for the wearer. That is what we are all trying to do, improve our processes, in- crease our effective working power, which means, if you please, to make things cheaper." — The Manufacturer (organ of the Manu- facturers' Club of Philadelphia). CHAPTEE XXVIII. THE BEST METHODS OF TAXATION. PART II. In passing from the tariff, or duties on imports, to the internal or excise taxes imposed by the Federal Govern- ment, there is evidently a distinct change in purpose. However subject to abuse the tax on distilled spirits has proved, and however frequently its agency has been in- voked to exaggerate the profits of interested parties, there has never been an open and avowed intention of turning it to private gain. The policy that has become almost inseparable from the customs tariff, and is by most people regarded as inherent in all customs legislation, has not been transferred to the internal-revenue taxes save in one or two instances of recent application and secondary importance. The danger of permitting taxation to be employed by either State or Federal Government for a purpose other than that of raising necessary revenue has been dwelt upon. When a police power is exercised in conjunction with a tax framed for revenue, and is regarded as the more important function to be performed, the policy requires careful examination. If revenue is the real object, the method of imposing the tax and the determina- tion of the rate which will give the highest return with the least interference in the production, distribution, and export of the commodity taxed remains to be defined. If restriction in manufacture, sale, or consumption is intend- ed, the question is no longer one of taxation proper, but of police regulation. The Federal taxes on oleomargarine, filled cheese, and mixed flour are of the nature of police inspection, and the tax on the circulation of State banks, amounting, as it has, to prohibition, is a still more extreme exercise of the same power. Th,e imposition and collec- 40 617 618 THE THEORY AND PRACTICE OF TAXATION. tion of these duties have a penal quality, an intention to restrict or prohibit the production or sale or use of some article. They are not properly taxes; they are not a proper application of tax principles, but have originated in private interest, or in tlie deliberate intention to consti- tute a monopoly. State or other. The approach of war, or its actual presence, is made the excuse of an extension of taxes, and the Federal Gov- ernment tacitly admits its inability to increase indirect taxes on consumption by its general resort to an extension of the internal taxes and excise. The instrumentalities of business offer a fair field for stamp taxes, and these, when not so burdensome as to invite evasion, are acceptable because of the ease with which they are assessed and col- lected. A specific duty on the more important acts of commerce and daily business may be evaded, it is true, but not when the paper or instrument taxed must become public evidence. Stamps of small denomination on bonds, debentures, or certificates of stock and of indebtedness; on a bill of sale or memorandum to sell; on bank checks, drafts, or certificates of deposit; bills of exchange, draft, or promissory note; money orders and bills of lading; on express and freight receipts, on telegraph messages, and a large number of legal and other instruments, such as leases, mortgages, charter party, insurance policies — these are simple duties productive of large returns, and not unequal in their weight. The law of 1898 included such stamp taxes, as well as others on proprietary articles and wines. It was not easy to predict the incidence of these rates, and the distribution has been unequal. The charges of one cent on telegraph messages and express packages are paid by the sender in the larger number of cases, the companies merely adding a penny to their rates. This was not the intention of the law, and the courts have held that it was not so intended. The individual is power- less in a few transactions, and only the great concerns are able to avail themselves of this decision. The duties for seats or berths in a parlour car or for proprietary medi- cines, are paid by the company or manufacturer, though in certain preparations the price to the consumer was ad- vanced on the passage of the act. "With all their draw- backs, and they are not few in number, these stamp duties INTEENAL DUTIES. 619 afford a ready means of obtaining a good revenue without increasing unduly the general burdens of taxation. The law of 1898 was modelled after that of 1863, and many of the rates and descriptions will undoubtedly be incorpo- rated into the permanent internal-revenue system of the country — a measure enforced by the remarkably unequal returns derived from the customs. The existing system of internal duties is even more defensible than the tariff as a source of revenue. Its in- equalities, due to the haste in which the measure was prepared and the inexperience of those who framed the provisions and fixed upon the rates, are worn away in use, and where the rates are moderate and are not infected with a penal quality, the community adapts itself to them, accepting them as a necessary convenience. In the United States this spirit of acquiescence is most marked, not only because of a natural patience of tax burdens, but because of as natural a fear of other untried and more radical or oppressive measures. The situation of " busi- ness " when a general tariff' bill is pending in Congress is one almost of panic, and the scramble to protect interests or to obtain some special advantage against rivals has become a scandalous feature of tariff revision. Except in the instances named, as oleomargarine and filled cheese, the internal-revenue system presents less of a field for such an exhibition of greed and self-interest; but the spirit duties, and even the tobacco rates, may be used in such a way as to favour the large manufacturer against the small con- cerns, and are to that extent misused and applied for pur- poses antagonistic to those properly pertaining to taxation. In a time of tax revision the suggestions for new taxes and ideas for changing the old are freely offered, and do not stop short of absolute prohibition of an industry, of total destruction of interest. The vagaries of a legislative body under such suggestions have instilled into the public mind a wholesome fear of its possible acts and fully explain the timid and uneasy condition of " business " when a general tax measure is under discussion. Whether it be the man- ufacturer or producer seeking protective duties, or the Granger or Populist asking for taxes of confiscation against capital and accumulated property, the spirit is the same — a desire to turn taxation to improper purposes. v.> 620 THE THEORY AND PRACTICE OP TAXATION. The tendency of Federal taxation to turn to taxes on capital and the instruments of " business " — direct, rather than indirect taxes — found its most extreme illustration in the income tax of 1894, the principles of which have al- ready been discussed. It finds a more moderate and re- stricted exercise in certain graduated duties under the act of 1898, and especially in the duties on legacies and distributive shares of personal property. It was no senti- mental or even theoretical argument based upon the right of inheritance or the inequality of taxation that led to the adoption of these duties in 1898; it was only a blind fol- lowing of the provisions of the earlier act and the con- sciousness that revenue must be had at every cost, and no possible source of income should be overlooked. Yet the legacy tax is essentially a tax of democracy and defensible for much the same reasons as a tax,^vliether graduated or not, upon income might be. By the act approved June 13, 1898, entitled " An act to provide ways and means to meet war expenditures, and for other purposes," the national Government imposed a tax upon legacies and distributive shares of personal prop- erty. This tax has been one of the features of the tax law of 1862 (§§ 111-114), but in a much simpler form and in a form better calculated to produce a revenue. This ear- lier law imposed a duty on all legacies exceeding one thou- sand dollars in amount, but very properly made a distinc- tion in the rate according to the 'degree of connection between the person from whom the property came and the receiver of the legacy. Thus, lineal issue, or lineal ances- tor, brother or sister, should pay at the rate of seventy-five cents for each and every hundred dollars of the clear value of the interest in the property. A descendant of a brother or sister of the decedent paid double this rate; an uncle or an aunt was taxed three dollars for every one hundred dollars passing; a great-uncle or a great-aunt, four dollars; and persons in any other degree of collateral consanguin- ity, or a stranger, or a body politic or corporate, five dollars. The only exemption made was in favour of a wife or hun- band. As only personal property was intended to be reached, all land and real estate escaped the duty. The law of 1898 made important modifications in these rates and manner of assessing. In the first place, the LEGACY TAX. 621 rates fell only on legacies in excess of $10,000, a limit ten times larger than that of the law of 1862. The degrees of relationship were the same, the rates were copied from those of the earlier act, and the same exemption of prop- erty passing between husband and wife was admitted. But the idea of a progressive tax was ingrafted into the law. Thus, the old rates applied only to legacies of more than $10,000 and not more than $25,000. When the prop- erty passing was valued between $25,000 and $100,000 the rates were multiplied by one and a half; between $100,000 and $500,000, they were multiplied by two; between $500,000 and $1,000,000, they were multiphed by two and a half; and by three when the property was in excess of $1,000,000. In restricting the tax to personal property passing by inheritance the measure aims at a crude means of making the burdens of personal more nearly approach those of real property. No such consideration controlled the views of those responsible for the act, and, after all, it offers only a question of theoretical interest. The in- heritance taxes collected in many of the States may have owed their adoption to such an idea, but the United States, in taking up these duties, merely saw a means of obtaining revenue without regarding the actual results of the tax on the estates paying it. " The inheritance tax in one form or another has come to stay, and new States are being added every year to the list of those which have adopted it. Five years ago it was found in only nine States of the Union — Pennsylvania, Maryland, Delaware, New York, West Virginia, Connecti- cut, Massachusetts, Tennessee, and New Jersey. During the first half of 1893 Ohio, Maine, California, and Michi- gan were added to the list, though the Michigan law was afterward annulled because of an unusual provision in the State Constitution which was not complied with. In 1894 Louisiana revived her former tax on foreign heirs; Minne- sota adopted a constitutional amendment permitting a pro- gressive inheritance tax which has not yet been given effect by the Legislature; and Ohio added to her collateral inheritance tax a progressive tax on direct successions. In 1895 progressive inheritance taxes were adopted in Illi- nois and Missouri, and an old proportional tax was re- vived in Virginia; and last year Iowa adopted in part 622 THE THEORY AND PRACTICE OF TAXATION, the inheritance tax recommendation of her revenue com- mission 55 * The real problems are to be encountered in local taxa- tion. The many different methods used in the different States, the want of uniformity in the local divisions of each State, and the extraordinary diversity in the interpre- tation or application of tax laws by the courts and execu- tive authorities of the States have introduced a confusion, to end which, many would invoke the intervention of the Federal Government. The haphazard manner in which the laws have been framed and passed is only the least notable explanation of the variety of phrase and interpre- tation to be found. Even were the Federal Government to establish definitions, and frame uniform rules of assess- ment, there would still be room for difference. The cus- toms tariff is known to be variously applied in different parts of the country, and there is greater certainty in the tariff rate than could be found in a tax resting on the assessed valuation of land, for example. The difficulty encountered by France in its attempt to determine the net income from land for the purposes of taxation carries an important lesson. Failing to obtain uniformity of appraisement of this net income under the crude method first employed — of basing it on the charac- ter of soil and nature of cultivation, deducting the ex- penses of cultivation — a cadastre was decreed, f In this cadastre each particular piece of property was recorded, with its boundaries, its manner of cultivation, and its net rental. Begun in 1807, it was not completed until 1850, and proved of little value, as no provision had been made for recording the changes in cultivation, rentals, or other conditions, except those of ownership, buildings, and exemption from taxes. Instead of proving a successful means to a desired end, it " turned out to be a stupendous disillusionment." " The experience of both the western Prussian provinces and of France showed that the newly * Max West, in North American Review, May, 1897, p. 635. t The word cadastre was derived from the Latin capitastrum, or register of capita, gric/a, or units of territorial taxation into which the Roman provinces were divided for the purposes of eapitatio tcrrcna, or land tax. It is of modern use and is locally found in Louisiana. LAND CADASTRE. 623 constructed cadastre was of considerable service in equaliz- ing the land tax within a relatively small area, but not as a basis for alterations in the contingents to be paid Ijy large and widely separated regions. The officials in charge of the cadastre on the Ehine, as well as those in France, themselves admitted that any computation of net income was uncertain; that the coincidence of the figures obtained by the cadastral computation with the actual net income could never be assured; that the figures afi:orded by the cadastre were rather of the nature of a proportion, while uniformity of assessment was to be attained rather by observation of the business transacted than by depending on the figures obtained by computation." * This effort to discover and record the net income from land was a failure. So thorough an experiment, carried through so long a time, and presenting an example to be avoided, was in fact imitated by Prussia under a law of 1865. In each division (Kreis) was appointed a commissioner, who was chairman of a committee, the size of which ranged from four to ten members, according to the size of the division. One half of this committee was appointed by the representatives of the division, and one half by the central Government. A number of divisions formed a department, with its com- missioner and committee of similar composition as in the division, and above all was a central committee, presided over by the Minister of Finance. The valuation was accomplished in less than four years. The method was applied only to land employed in agriculture or forests; a separate law provided for the taxation of buildings and gardens. In the end the results were no better than those obtained in France. In either case a plan too refined to work to advantage had been employed, and, apart from its simplest function, that of making a general survey of the land and the uses to which it was applied, it could not advance the theory of a proper land tax. No modification could make it a better instrument of taxation. The gross income from land as a taxing basis would involve heavy in- justice, and further supervision by government officers could not do away with the mechanical difficulties of secur- * Cohn. Science of Finance, p. 477. 624 THE THEORY AND PRACTICE OF TAXATION. ing uniformity. The English plan of making rental value the foundation is more easily applied and gives better results. If land be difficult of assessment, personal property offers a very much more difficult problem. On this par- ticular question this country has much to learn from the experience of other governments. In Great Britain a Royal Commission has been making a study of local taxa- tion, and, in a preliminary report, concludes that an alteration in the law for the purpose of obtaining a uni- form basis of valuation in England and Wales is a neces- sary preliminary to any revision of the existing system of local taxation. It has been already stated that the poor rate constituted the basis of valuation of property for local rates. In its development the system has become more complicated. Two valuations of the same property may be made for raising imperial taxes — namely, one for the income tax and one for the land tax. Three valuations of the same property may be made for raising local rates — namely, one for the poor rate, one for the county rate, and one for the borough rate. Here, then, are five differ- ent valuations in activity. Of these the parish was the first and most important division, having been introduced in the sixteenth century, when the dissolution of the monasteries had raised the question of poor relief. It was adopted for convenience, as the contributions were at first entirely voluntary; but as the problem of the poor increased in importance, com- pulsion was applied, and at the beginning of the seven- teenth century, by the acts of Elizabeth of 1597 and 1601, compulsion was fully established and the parish adopted as the area for levying rates for the relief of its poor. It now became necessary to define more specifically the persons liable for this rate, but the law framed no system by which assessments were to be made or rates collected. A distinction was made between the occupier of certain properties (such as lands, houses, coal mines, or salable underwoods) and an inhabitant of the parish. The occu- pier was to be taxed upon the basis of the annual benefit arising from the property situated in the parish; but the inhabitant was taxed not in respect to any specified sub- jects, implying an intention to tax them upon some other LOCAL VALUATIONS IN ENGLAND. 625 basis. This raised the question of " abihty/' and how that question was to be determined. The act said nothing that could point to personal property, " and it was only on the ground of his being an inhabitant that any owner of per- sonal property could be rated for that property, because there was no word in that statute to include him, except the word inhabitant. Under that statute, therefore, there was necessarily a distinction between residents and non- residents, because the resident would be ratable for his personalty within the place, the non-resident not. The distinction, however, under that statute applied only to those kinds of property which the statute did not specify, for the occupier of lands, houses, etc., and whatever the statute enumerated, was ratable whether he were resident or not." * And when the judge of assize was asked to give an opinion he decided that lands should be taxed equally and indifferently, but an additional tax could be laid on the " personal visible ability " of the parishioner. Further, " all things which are real, and a yearly revenue must be taxed to the poor." Yet there were limitations on this apparently wide interpretation, and as early as 1633 it was only visible properties, both real and personal, of the inhabitants within the parish, and only within the parish, that could be taxed. The property to be assessed must be local, visible, and productive; it must consist only of the surplus left after deducting debts; it must be rated according to the profit produced; and its nature must be distinctly specified. " Consequently, such subjects as wages, pensions, easements, profits derived from labour and talent, profits from money invested or lent elsewhere, and furniture, were exempt." The absence of all attempts to tax or value property other than what was visible and tangible continued to the reign of Queen Anne, when a single decision of the court pointed to the taxation of the stock in trade of a trades- man, a decision that does not appear to have been acted upon. As late as 1775 Lord Mansfield said, " In general, I believe neither here nor in any other part of the kingdom is personal property taxed to the poor." At all events, it * Abbott (Chief Justice) in E. vs. The Hull Dock Company, 3 B and C, p. 525. 626 THE THEORY AND PRACTICE OP TAXATION. could not be taxed unless usage could support it. Toward the end of the century, when taxation for the Napoleonic wars was touching more intimately the concerns of the people, the idea of subjecting personal property to the poor rate was favoured, but nearly half a century passed before it attracted attention. In their report for 1843 on local taxation the poor-law commissioners gave the follow- ing summary of the status of this question: " The practice of rating stock in trade never prevailed in the greater part of England and Wales. It was, with comparatively few exceptions, confined to the old clothing districts of the south and west of England. It gained ground just as the stock of the wool staplers and clothiers increased, so as to make it an object with the farmers and other rate payers, who still constituted a majority in their parishes, to bring so considerable a property within the rate. They succeeded by degrees, and there followed upon their success a more improvident practice in giving relief than had ever prevailed before in England. . . . When the practice of rating stock in trade was fully estab- lished in this district, the ancient staple trade rapidly declined there and withdrew itself still more rapidly into the northern clothing districts, where no such burden was ever cast upon the trade." A final determination of the question was imposed upon Parliament by the pressure of the manufacturing and commercial classes arising from a decision in the case of E. vs. Lumsdaine, in 1839, looking to the taxation of personal property. In consequence, an act was passed (3 and 4 Vict., c. 89), and has remained in force until the present time, exempting an inhabitant from any tax " in respect of his ability derived from the profits of stock in trade or any other property, for or toward the relief of the poor." Thus it is that the English local taxation has man- aged to keep clear from the bog of assessing personal prop- erty, and the annual value of immovable property, such as lands and houses, within the parish has come to be selected as the simplest and most practical basis for assessments. The history is of high importance, because the basis of the poor rate was adopted as the basis for all other rates levied in local taxation. Whatever confusion has been intro- duced has arisen from other causes, such as the consti- MULTIPLE VALUATIONS. 627 tuting poor-law unions containing more than one parish, the levying of county rates, a county having a boundary other than a parish or a union, and the assessing for rates by parish officers who acted independently of each other. Many efforts have been made to introduce a uniform sys- tem of assessment, but without success. One of the clear- est thinkers on this subject was Sir George Cornewall Lewis. In appearing before a committee on taxation, in 1850, he said: " We have never recognised the principle of having one valuation for all the different rates. If that principle were once admitted, the inducement to have an accurate and complete valuation would be at its maximum, because then you would know that whatever charge might be imposed it would be imposed upon that valuation, whereas if there is one assessment for one rate and another assessment for another rate, and an amended assessment for a third rate, no one cares much about making any assessment perfect. This is one defect of the present system of valuation." The defect has persisted and become more aggravated each year. In 1870 a special commission came to the resolution that " the great variety of rates levied by differ- ent authorities, even in the same area, on different assessments, with different deductions and by different collectors, has produced great confusion and expense; and that in any change of the law as regards local taxation, uniformity and simplicity of assessment and collection, as well as of economy of management, ought to be secured as far as possible." When it is considered that for the five independent valuations for raising rates on property there are in England and Wales more than one thousand valua- tion authorities, the hopelessness of obtaining uniformity is apparent. With such a multiplicity of agents it is use- less to look for good results. There is no fixed or neces- sary time for making the valuation lists; no uniform system of or scale for making deductions for arriving at the ratable values of certain classes of property; exemp- tions and allowances are said to be given unduly, through undue pressure on the assessing authorities; and the assessment committees have no statutory power to ascertain from owners or occupiers the rentals and other particulars needed to determine values. The reforms needed are a 628 THE THEORY AND PRACTICE OF TAXATION. geographical redistribution of taxing limits and uniform rules of assessments. If so great confusion can occur where the property to be valued for taxation is visible and tangible property, and where the principles underlying the assessment are few and comparatively simple, what is to be expected when the attempt to reach invisible and intangible property is added? Constitutional provisions have not secured equality of valuation, and the statute laws are powerless to make effective the sounding phrases of the Constitutions. " Property shall be assessed for taxes," says the Constitu- tion of New Jersey, " under general laws and by uniform rules, according to true value." The Assembly sought to embody this principle or rule in the laws of the State. " All real and personal estate within this State, whether owned by individuals or corporations, shall be liable to taxation at the full and actual value thereof, on the day in each year when by law the assessment is to commence." * Such assertions of the basis of taxation need no further explanation, for the intention of the framers of constitu- tion and law is unmistakable — equal and uniform taxation, a common burden involving a common obligation to dis- charge it. The practice at once creates the necessity for recognising the inaptitude of the instruments called upon to carry the law into execution. More than four hundred separate assessors and boards of assessors determine the taxable values upon no uniform system and in defiance of law and Constitution. " In practice they value real estate all the way from twenty-five to seventy-five per cent of its true value, depending on its location, income, etc., and their personal or political prejudices, and value different contiguous areas at different valuations, though of equal values really; and as to personal property, I regret to say, they appear to make no earnest or honest effort to reach it anywhere, except in the agricultural districts, and even there very imperfectly." f Enough has been said in these articles to show that this defect of method is not peculiar to one State, but is * General Statutes of New Jersey, p. 3929, section G2. t James F. Rusling, in the New Jersey report of 1897. ASSESSMENTS FOR LOCAL TAXATION. 629 to be found in all. The remedies proposed or adopted have proved inefTectiial to produce a better result. It is asserted that the more careful selection of the assessors, a higher salary for service, and a more strict accountability for their acts would introduce a reform; but this could, even under the most favourable of conditions, be only a partial reform. A State assessor with power to remove the assessors has been recommended, but this officer could not become so conversant with conditions throughout the State as to be able to decide on the many questions of assessments coming before him. Certain descriptions of property could be dealt with by such an officer and with an approach to fair and equal treatment. The valuation of the " main stem " of the New Jersey roads was made by civil engineers, and it is believed to have met the consti- tutional provision as to " true value." In the valuation of a vast quantity of other property no such expert knowledge could be applied, and especially is this true as to " personal property." Eeal estate might be approximately valued and a cadastre or record prepared, but after twelve months the most carefully compiled valuation would be out of date. Before personal property the assessor would still stand powerless. No multiplication of officers or no system of control over the many local assessors can solve this question in a manner satisfactory to justice to both State and taxpayer. It would seem, then, as if an abandonment of what has been regarded as almost essential features of the State tax systems alone offers relief. No such abandonment can be effected unless an adequate revenue from other sources be provided. The " general property tax," with its futile and laughable incompetency to reach the most profitable sources of revenue, should be modified, and even elimi- nated as far as is possible. The general principle under- lying it, of taxing every form of property, was suited only to a time when the bulk of a man's estate consisted in visible and tangible objects — lands, houses, live stock, and furniture. With every creation of a credit instrument, with the immense development of corporations, the prin- ciple has become weaker, until it now stands confesedly inapplicable to at least four fifths of the personal property in existence, and this proportion grows larger each year. 630 THE THEORY AND PRACTICE OF TAXATION. The universal and admitted failure of the general prop- erty tax to attain good results and the great difficulty, indeed the impossibility, of reducing it to a form in which it can operate with efficiency and an approach to justice, must lead to its abolition and the gradual substitution of other and more simple taxes. However well adapted to a community in which the taxable property was in evidence and easily assessed for purposes of taxation, it becomes antiquated, unequal, and inquisitorial in a people where credit and credit investments have been highly developed, and where the greater social activities, whether in com- merce or industry, transportation or production, are con- ducted by corporations issuing various kinds of securities, none of which can easily be reached by a taxing authority away from the centre of incorporation. To undertake to include these securities, evidences of debt, or obligations in a general property tax is to invite evasion, put a heavy inducement on concealment, and, whenever effective, to give rise to shocking inequalities of burden. The widow and orphan, whose property is in the hands of a trustee, pay the full tax; in any other direction the holder of stocks or bonds, money or notes, escapes according to the elasticity of his conscience. The very exemptions recog- nised by law give an opportunity for new evasions, based upon analogy or upon some technicality under which the business is conducted. Bonds of the United States, the legal-tender notes, or money are beyond the reach of State authorities for the purpose of taxation. In the same cate- gory come also all imported goods in original packages, in the possession of the importers, and all property in transit. These exemptions alone amount to thousands of millions of dollars, and the tendency has been to increase the num- ber of items exempted. But every such exception under the law adds to the burdens of the honest taxpayer, and every evasion of taxation also renders his charge the greater. Here is not distributive justice, but concen- trated injustice. Another large proportion of the personal property owned by the citizens of the State is of the most intangible character, and in great part invisible and incorporeal, such, for instance, as negotiable instruments in the form of bills of exchange, State, municipal, and corporate bonds, and, if GENERAL PROPERTY TAX. 631 actually situated in other States, exempt from taxation where they are held; acknowledgments of individual in- debtedness, and a number of similar matters. All property of this character is, through a great variety of circum- stances, constantly fluctuating in value; is offset by indebtedness which may never be the same one hour with another; is easy to transfer, and by simple delivery is, in fact, transferred continually from one locality to another, and from the protection and laws of one State to the sov- ereignty and jurisdiction of some other. It is not to be wondered, therefore, that all attempts to value and assess this description of property have proved exceedingly un- satisfactory, and that nearly every civilized comnmnity, with the exception of the States of the Federal Union, have long ago abandoned the project as something wholly inexpedient and impracticable. The differences among the States in the interpretation of residence, of the situs of the property taxed, are also an objection to this system and an obstacle to its applica- tion. The want of uniformity can not be abolished by enactments of law, because absolute uniformity of laws would not insure as uniform interpretation of their pro- visions. The rules for assessment are uniform for the officers of a State, but the returns made involve such dif- ferences in the application of the rules that one is forced to the conclusion that a misunderstanding of the spirit of the law exists, colouring differently the view of each re- turning officer. Discrimination against the county or municipality and discrimination against the individual are to be met at every turn. No wording of the law can elimi- nate this personal judgment of each assessing authority, and the supervision of the returns by State boards of equalization has introduced an even greater departure from justice, as a majority, based upon selfish interests, may be had, and its decision may readily be defended as based upon good and sufficient reasons. An appeal to the last resort, the higher courts, may produce redress against unjust assessments, but each case must be decided upon its merits, and only under very exceptional circumstances — as in the recent case at Tarrytown, New York, where striking and general, even personal, spite had been shown in the tax levy — can a number of taxpayers find it their interest 632 THE THEORY AND PRACTICE OF TAXATION. to combine and carry the question into the courts for adjudication. Imperfect in theory, the machinery of the general property tax is imperfect. With at })resent fully two thirds of the personal proj)erty of the State exempted from taxation by law or by cii'cumstances growing out of its condition, or the natural depravity and selfishness of the average taxpayer, and with a large part of the other third exempted by competing nations or neighbouring States, what becomes of the theory so generally accepted in the United States that in order to tax equitably it is necessary to tax everything? A very slight examination leads to the conclusion that it is the most imperfect system of taxa- tion that ever existed; that, with the exception of moneyed corporations, it is a mere voluntary assessment, which may be diminished at any time by an offset of indebtedness which the law invites the taxpayers to increase ad infini- tum, borrowing on pledge of corporate stocks. United States bonds, legal-tender notes, etc., all exempt from taxation; that its administration in res])ect to justice and equity is a farce and more uncertain and hazardous than the chances of the gaming table; and that its continuance is more provocative of immorality and more obstructive of material development than any one agency that can pos- sibly be mentioned. A stringent enforcement only leads to greater perversions and a wider evasion. A lax enforce- ment does not reduce its inequalities and general want of application to actual conditions.* The problem, then, is wdiat taxes to introduce in place of this confessed failure of the general property tax. * The cominissioners "have no confidence in any system of in- quisition or system which requires assessors to be clairvoyants; to ascertain thinjjs impossible to be ascertained by the agencies pro- vided in the law; to ascertain the indebtedness of the taxpayer; to ascertain or know who is the owner of property at a given time that can be and is transferred hourly from owner to owner by telegraph or lightning, and that may be transported into or out of the jurisdiction of the assessor with the rapidity of steam. or that requires assessors or taxpayers to make assessments on evidence not admissible in any court, civil or criminal, in any civilized country where witches are not tried and condemned by caprice or malice on village or neighbourhood gossip." SINGLE TAX. 633 There can be little doubt that the desire for greater simplicity in taxation is generally felt, and in part put into practice. The mass of various kinds of imposts, added without any system or real connection or relation one to another, has often resulted in so large a number of charges on Government account as to defeat itself. The French taxes at the end of the last century, with their added fault of inequality and injustice in distribution, led naturally to the theory of a single tax — the inipot unique of the physio- crats — which did not become a fact, yet registered the protest against the multiplicity and crying oppressiveness of the remains of feudal dues and fiscal experiments under- taken under the stress of an empty treasury. So it has been noted at the present time that where an opportunity has offered there is a tendency in European countries to simplify their taxes, and, as in the case of Switzerland, prepare the way for income and property taxes. It is a greater dependence on such direct taxes in place of indirect taxes that has distinguished the great fiscal changes in recent years. Germany may have wished to establish a brandy monopoly, and Russia may resort to a monopoly of the manufacture and sale of distilled spirits. But Eng- land increases her death duties, France and the United States seek to frame acceptable taxes on income, and Switzerland succeeds in modifying her system in the line of direct taxes. There is an earnest movement in favour of a single tax on the value of land, exclusive of other real property connected with it. As involving a question of abstract justice the proposition has much in its favour, but it can not be denied that practical obstacles oppose its adoption. The recent commission on taxation in Massachusetts thus treats of it: " It proposes virtually a radical change in the ownership of land, and therefore a revolution in the entire social body. In this form of taxation all revenue from land alone is to be appropriated — that is, the beneficial ownership of land is to cease. Whether or not this sys- tem, if it had been adopted at the outset and had since been maintained, would have been to the public advantage may be an open question, but it would certainly seem to be too late now to turn to it in the manner proposed. In any event, it involves properly not questions of taxation, but 41 634 THE THEORY AND PRACTICE OP TAXATION. questions as to the advantage or disadvantage of private property in land." * If securities are to be taxed, tlie methods adopted should avoid a double taxation, and an attempt to reach capital outside of the State. It is evident that a State, like Massachusetts, which taxes the foreign holder of shares in its corporations as well as the shares of foreign corporations held by its own citizens, is inviting a danger- ous reprisal from other States. " Wherever the owner may be, if the corporation is chartered within the State the Commonwealth collects the tax on the shares. Wher- ever the corporation may be, if the owner is within the State the Commonwealth also collects the tax (in theory of law at least)." If this be the best possible system, and it is supposed Massachusetts assumes it to be, general double taxation would follow its adoption by the other States. The effort to c^rry this rule into practice proves its injustice as well as futility. The most searching and inquisitorial methods of seeking such property will not avail to reach a good part of it, and this results in adding inequality of burden to its other difficulties. Evasion is too simple a process to be unused, and the heavier the rate of tax the greater will be the resort to evasion and even to perjury, express or implied. The fundamental cause of the failure lies in this, " the endeavour to tax securities, which are no more than evidences of ownership or interest in property, and which offer the easiest means of conceal- ment and evasion, by the same methods and at the same rate as tangible property situated on the spot." This inherent difficulty can be cured only by abandon- ing the attempt to tax directly securities or evidences of debt, representing ownership or interest in property be- yond the limits of the taxing authority. In the case of the securities of home companies they may be readily taxed at the source, but in the case of foreign corporations it is only by methods almost revolting in their injustice and treatment of the taxpayer that even a partial success can be secured. The dependence upon the sworn state- ment or declaration of the taxpayer is known to be ex- tremely faulty and to offer a premium on untruthfulness. * Report of the Massachusetts Commission, 1897, p. 74. BUILDING-OCCUPANCY TAX. 635 So long as this dependence is retained in whole or in part in a system for taxing personal property, the results must be unsatisfactory. The most judicious, even if it seems the most radical, remedy is to abandon the taxation of securities. Certainly it would be well to put an end to the Massachusetts plan of taxing securities representing property outside of the State, for that involves double taxation wherever it has been possible to impose the tax. What can be reached only by methods at all times trying and difficult, and sometimes very demoralizing, should not be permitted to remain a permanent feature of the revenue system of a State. The New York commission of 1870 proposed to limit the State taxes to a very small number of objects. That they be " levied on a comparatively broad basis — like real estate — with certainty, proportionality, and uniformity on a few items of property, like the franchises of all moneyed corporations enjoying the same privileges within the State, and on fixed and unvarying signs of property, like rental values of buildings " — such was the scheme proposed. The leading object to be attained was equality of burdens, and a second object of quite as great importance was sim- plicity in assessment and collection. Granting that real estate, lands, and buildings were taxed on a full and fair market valuation, and that corporations contributed their share toward the expenses of the State, it remained to devise a tax that should reach all other forms of property that could be properly and easily assessed. This tax was to be known as the " building-occupancy " tax, and was to be levied on an additional assessment of a sum equal to three times the annual rent or rental value of all the build- ings on the land.* Nearly thirty years later the Massa- * The New York commission of 1870 submitted two pi'opositions on this point: 1. Tax the house or building as real estate separately, at the same rate of valuation as the land — that is, fifty per cent — and then assuming that the value of the house or building, irrespective of its contents, be such contents furniture, machinery, or any other chat- tels whatsoever, is the sign or index which the owner or occupier puts out of his personal property, tax the house or building on a valuation of fifty per cent additional to its real-estate valuation, as the representative value of such personal property; or, in other words, tax the land separately on fifty per cent of its fair market- 636 THE THEORY AND PRACTICE OP TAXATION. chusetts commission proposed a modified form of this tax. An annual rental value of four hundred dollars was to be exempt from taxation, but ten per cent was to be levied on all rental values in excess of that amount. " The advantages of a tax on house rentals," said the commission, " can be easily stated. It is clear, almost im- possible of evasion, easy of administration, well fitted to yield a revenue for local uses, and certain to yield such a revenue. It is clear, because the rental value of a house is comparatively easy to ascertain. The tax is based on a part of a man's affairs which he publishes to all the world. It requires no inquisition and no inquiry into private matters; it uses simply the evidence of a man's means which he already offers." * If this tax were to be given it would be possible to wipe out all the tax on incomes from " profession, trade, or employment," to abolish the exist- ing assessments on personal property. The effects would be far-reaching. If loans of money are free from taxation, the purchasing power of money in the same degree must diminish, which simply means that the purchasing power of farms and products of farms for money must to the same extent increase; hence, the borrower on bond and mort- gage will not be subject to double taxation — first, in the form of increased rate of interest, and then in taxation of his real estate — and hence the farmer or landowner who is not in the habit of either lending or borrowing money will find his ability to meet additional taxation on his land increased in additional value of land and products of land in proportion as the tax is removed from money at interest. Also, the exemption of the products of farms and things able valuation, and tax the building apart from the land, as repre- senting the owner's personal property, on a full valuation, as indi- cated bv the rent actually paid for it or its estimated rental value. Or— 2. Tax buildings conjointly with land as real estate at a uniform valuation ; and then as the eqviivalent for all taxation on personal property, tax the occupier, be he owner or tenant of any build- ing or portion of any building used as a dwelling, or for any other purpose, on a valuation of three times the rental or rental value of the premises occupied. Tenement houses occupied by more than one family, or tenement houses having a rental value not in excess of a fixed sum, to be taxed to the owner as occupier. — Report, p. 107. * Massachusetts Report, p. 106. TAX ON RENTAL VALUE. 637 consumed on farms from taxation will give a corresponding increased value to compensate for tlie " building-occu- pancy " tax. Tenants controlled by all-pervading natural laws can and will give increased rents, if their personal property is exempt primarily from taxation. The average profits of money at interest or of dealings in visible per- sonal property free from taxation can not exceed, for any considerable length of time, the average profits of real estate, risk of investment and skill in management taken into consideration; and therefore the real pressure of taxa- tion under the proposed system will finally be, like atmos- pheric pressure, or pressure of water, on all sides, and by a natural uniform law executed upon all property in every form used and consumed in the State. Persons must oc- cupy buildings and business must be done in buildings, and through these visible instrumentalities capital can be reached by a rule of fractional uniformity, and by a sim- ple, plain, and economical method of assessment and col- lection. This building-occupancy tax, or tax on rental value, does not preclude a supplementary tax on corporations. Much as has been said of the onerous burdens of taxa- tion endured by individuals compared with those of cor- porations, and especially corporations enjoying certain rights or franchises in public streets and highways or cor- porations of a more or less public character. The phe- nomenal growth of municipalities has been one of the notable social movements of the last twenty-five years. The drift of population from the country districts to cities has increased with each year, and finds an explanation in many causes. The opportunities offered in a city for advancement are greater and more numerous; the monot- ony of farm life does not keep the young at home, but drives them for excitement and profit to the great centres of population. The economic changes of a half century also have their influence. The competition of new re- gions, better adapted for certain cultures on a commer- cial scale, has reduced the profitableness of older and more settled localities, where comparatively costly methods must be resorted to if the fertility of the land is to be maintained. The wheat fields of the West narrowed the margin of profit in New England farming, while the sheep 638 THE THEORY AND PRACTICE OP TAXATION. and cattle ranges of the West made it impossible for the same quality of live stock to be raised for profit in the East. Farms were abandoned, and the younger blood went West to grow up with the country, or into the cities to struggle for a living. Further, the advances in agriculture, the application of more productive methods, and the intro- duction of machinery have reduced the demand for labour in the rural districts, and this has led to a migration to the cities. The result of this has been an immense development of city life, and with it an ever-increasing field for invest- ment in corporate activities. The supply of water is usually in the city's control, but the manufacture and sale of gas, the production and distribution of electricity, the street railways, telegraph, and telephone interests are private corporations formed for profit and using more or less the public highways in the conduct of their various enterprises. A grant of a street or highway for a railway or electric-wire subway generally involves a monopoly of that use, and the privilege or franchise may become more valuable with the mere growth in the population of the cities. Assured against an immediate competition, there is a steady increment in the value of the franchise, and in the case of a true monopoly ther€ seems to be no limits to its possible growth. An instance of this nature is so striking in its relations and so pertinent to the present discussion that attention is asked to it. In the reign of James I water was supplied by two or three conduits in the principal streets of London, and the river and suburban springs were the sources of supply. Large buildings were furnished with water by tapping these conduits with leaden pipes, but other build- ings and houses were supplied by " tankard bearers," who brought water daily. A jeweller of the city, Hugh ]\Iyddleton by name, believed something better could be done, and he proposed to bring water from Hertfordshire by a "new river." He embarked in the undertaking, sank his fortune in its conduct, and appealed to the king for assistance. James granted this aid, taking one half of the shares of the company — thirty-six out of the seventy- two shares into which it was divided. The shares that remained received the name of "adventurer's moiety." DEFINITION OF FRANCHISE. 639 The work was completed in 1613, and water was then let into the city. So little was the measure appreciated that its first years were troublous ones for the shareholders. The squires objected to the river, believing it would overflow their lands or reduce them to swamps and destroy the roads. The city residents adopted the use of the water slowly. The shares were nominally worth £100 apiece, but for nearly twenty years the income was only 12s., or $3, per share. In 1736 a share was valued at £115 10s., and by 1800 it had risen to £431 8s. With the first years of this century the company prospered, and its benefits were widely applied, reflecting this change in the value of its capital. In 1820 a share was worth £11,500 and in 1878 the fraction of a share was sold at a rate which made a full share worth £91,000. In 1878 the dividend distributed to each share was £3,610. Eleven years later, in July, 1889, a single share was sold for £122,800, or nearly $600,000. The nominal capital of the company in 1884 was £3,369,000, and besides its water franchise it held large estates and valuable properties. While the actual real estate controlled by the corporation accounts for some of this remarkable rise in the value of the shares, a greater and more lasting cause was the possession of an almost exclusive privilege or franchise which assured a handsome and ever-increasing return on the investment. Had all the other property been deducted from the state- ment of the company's assets, there would have remained this intangible and unmeasurable right created and con- ceded by its charter and long usance. A definition of a franchise has been given by the Supreme Court in terms of sufficient general accuracy to be adopted: " A franchise is a right, privilege, or power of public concern which ought not to be exercised by private individuals at their mere will and pleasure, but which should be reserved for public control and administration, either by the Government directly or by public agents act- ing under such conditions and regulations as the Govern- ment may impose in the public interest and for the public security." * A necessary condition, then, is a public inter- • California vs. Southern Pacific Railroad, 127 U. S., 40. 640 THE THEORY AND PRACTICE OP TAXATION. est in the occupation or privileges to be followed. The good will of a person or individual trader is not a franchise in this sense, though a franchise may he enjoyed by an individual as well as by a cor{)oration, and good will may rest upon the pi-ivilege implied in the franchise. The recognition of franchises, a species of property " as invisible and intangible as the soul in a man's body," as a proper object for taxation is now regarded by many as beyond any dispute. It is peculiarly appropriate as a source of revenue for the exclusive use of the State, inasmuch as the grant of franchises emanates from the State in its sovereign capacity. In the case of Morgan vs. The State of Louisiana, Justice Field, of the Supreme Court of the United States, said: " The franchises of a railroad corporation are rights or privi ileges which are essential to the operation of the cor- poration and without which its roads and works would be of little value, such as the franchise to run cars, to take tolls, to appropriate earth and gravel for the bed of its road, or water for its engines, and the like. They are posi- tive rights or privileges, without the possession of which the road or company could not be successfully worked. Immunity from taxation is not one of them." * Further, the extent to which this taxation of franchises may be carried rests entirely in the discretion of the taxing power, subject only to constitutional restrictions. The great difficulty in applying such a tax lies in the methods of reaching an understanding on the value of the franchise. How can this indefinite something be made visible on the tax books? In many instances the franchise may be regarded as inseparable from the real property of the corporation. The rails of a tramway, the poles and wires of a telegraph company, the pipes and conduits of a gas company, are real and tangible things, necessary to a proper conduct of the respective functions of the corpora- tions. But the right to lay tracks in the public streets, to sink pipes under the streets, or to string wires overhead is as necessary a possession and as essential to the perform- ance of what the corporation was created to accomplish. Whether this permits the franchise to be regarded as " real * 93 U. S. Reports, pp. 217, 224. NEW YORK FRANCHISE LAW, 641 estate " and so offers it for taxation is a question of some theoretical interest, but of little practical importance.* Unless the franchise is regarded in this way, as belonging to real estate, or as forming a taxable entity apart from other property, it would be simpler to reach it through a corporation tax in one of the many ways open for apply- ing that tax. Enough has been said to demonstrate the extremely faulty condition of tax methods in the United States. * A recent law of New York is very full on this point: " The terms ' land,' ' real estate,' and ' real property,' as used in this chapter, include the land itself above and under the water, ail buildings and other articles and structures, substructures, and superstructures, erected upon, under, or above, or affixed to the same; all wharves and piers, including the value of the right to col- lect wharfage, cranage, or dockage thereon; all bridges, ail tele- graph lines, wires, poles, and appurtenances; all supports and in- closures for electrical conductors and other appurtenances upon, above, and under ground; all surface, underground, or elevated rail- roads, including the value of all franchises, rights or permission to construct, maintain, or operate the same in, under, above, on, or through streets, highways, or public places; all railroad structures, substructures, and superstructures, tracks, and the iron thereon, branches, switches, and other fixtures permitted or authorized to be made, laid, or placed on, upon, above, or under any public or private road, street, or grounds; all mains, pipes, and tanks laid or placed in, upon, above or under any public or private street or place for conducting steam, heat, water, oil, electricity, or any property, substance, or product capable of transportation or conveyance therein, or that is protected thereby, including the value of all franchises, rights, authority, or permission to construct, maintain, or operate in, under, above, upon, or through any streets, liighways, or public places; any mains, pipes, tanks, conduits, or wires, with their appurtenances, for conducting water, steam, heat, light, power, gas, oil, or other substance, or electricity for telegraphic, telei)honic, or other purposes; all trees and underwood growing upon land, and all mines, minerals, quarries, and fossils in and under the same, except mines belonging to the State. A franchise, right, authority, or permission, specified in this subdivision, shall for the purposes of taxation be known as a ' special franchise.' A special franchise shall be deemed to include the value of the tangible property of a person, copartnership, association, or corpoi-ation. situated in, upon, under, or above any street, highway, public place, or public waters, in connection with the special franchise. The tangible property so included shall be taxed as a part of the special fran- chise." The reason for classing franchises as real estate was that under the existing laws of New York a franchise could not be assessed as personal property, as the bonded debt could then be deducted, leaving little or nothing to be taxed. 642 THE THEORY AND PRACTICE OF TAXATION. Uniformity is highly desirable, but equality of burden is even more to be desired. The advances in this direction have been few, and accomplished only partially in a few- States. The machinery for making assessments is only a part of the problem, as the intention of the law, the spirit of the act, is of even higher importance in securing justice and moderation. If these essays, incomplete as they must of necessity be, have led to a better comprehen- sion of the chaotic condition existing now and of the diffi- culties to be overcome, their object will have been attained. The remedy may be left for time to effect. INDEX Actualities, subject to taxation, 472. Adoram, 66. Alcavala, 74; in Mexico, 135, re- peal, 140. Alcohol, free in the arts, 11 ; Swiss monopoly, 187. Alienation of taxing power, 279. Allen vs. Jay, 292. Anthropology and taxation, 72. Anti-option bill, 260. Anticipation of taxes, 36. Apportionment of direct taxes in United States, 236, 357, 367, 547, 549. Arabi Pasha, revolt under, 143. Argyll, Duke of, on taxation, 598, n. Aristotle on majority rule, 86, n. Assessments, in Rome, 97 ; in early Massachusetts, 244; of personal property, 402 ; for local taxation, 628 ; uniform day, 406. Athens, sources of revenue, 85. Atkinson, Edward, estimate, 33 ; defi- nition of tax, 202 ; taxes on produc- tion, 390. Augustus, taxes imposed by, 89. Austria-Hungary, general taxes, 197, n. ; taxation of income, 522, 538. Bachelors, taxation of, 95, 331. Bacon, Theodore, on protection, 315, n. Baron's war, 286. Beards, taxation of, 198, n. Bengal, land assessment, 164. Beer, internal duty, 56 ; consumption, 58. Beet sugar, bounties, 307. Bluntschli, on taxation, 598, n. Boadicea, revolt of, 93. Boards of equalization, 397. Boisguillebert, 126. Bond case, foreign-held, 452. Bonds, government, exempted, 481. Borax lands, 587. Bounties, constitutional aspects, 302, 306 ; perversion of, 309 ; on sugar, 299, 307. Boyd vs. United States, 518. Brazil, taxation in, 155. Breadstutfs and population, 596. Brown, Justice, quoted, 3, n. Brown vs. Maryland, 276. Building-occupancy tax, 636. Burke, Edmund, on theory, 225, n. Cadastre in France and Prussia, 622. Cade, Jack, 67. Caesar, render unto, 72. California, Constitution of 1879,422; taxation of mortgages, 487 ; taxation of titles, 474. Canada, commercial relations with, 581, n. Cantons of Switzerland, 184. Capital and property, 467 ; taxation of, 521 ; outflow of British, 2. Carey, Henry C, on indirect taxation, 349 ; on taxation of industry, 217. Carriage tax ( United States), 360. Castine, Maine, customs question, 311. Ceylon, poll tax in, 333. Chase, S. P., estimates of revenue, 25, Charters as contracts, 279. Chattels real and personal, 444. China, budget of, 77 ; customs reve- nue, 78 ; land ownership, 76 ; land tax, 77 ; likin, 78 ; remission of taxes, 78 ; salt monopoly, 78 ; ter- minal tax, 79 ; transit passes, 78. Choses in action, taxation of, 485. Cicero against Verres, 70. Circulation, tax on bank, 263. 643 ^f6 644 THE THEORY AND PRACTICE OF TAXATION. City and country, 561. Class legislation, 9, 551. Clergy on taxation, 6. Cleveland, President, quoted, 250, 262, w. Coffee import returns, 1865, 36. Cole vs. La Grange, 293. Col well, Stephen, 20. Commerce, interstate, 275 ; taxation of instruments of, 412. Compulsion and direct ta.xes, 341. Congress as a disturbing influence, 619. Connecticut, franchises in, 280 ; tax experience, 415, 493. Constitution, United States, forma- tion of, 69 ; apportionment under, 357, 367, 547 ; on taxation, 545 ; Fourteenth Amendment, 508. Constitutions, State, 239, 628. Consumers pay customs duties, 577. Consumption, taxation falls on, 597. Contracts, tax on, 274. Convention, constitutional, 234, 357, 547. Cooley, Thomas M., quoted, 289, 305. Copper, import duty on, 258. Copyrights as property, 464. Corporations, municipal, and taxa- tion, 242. Corvee, in France, 124; in Egypt, 142, 146. Cossa, Luigi, on taxation, 63. Cost of production, taxes enter into, 583. Cotton, profits on, during famine, 32. Country and city compared, 561. Court of the Exchequer, 108, n. Credits as property, 450. Crows and bounties, 309. Cuba, taxation in, 14. Cuissage, 124. Curtis, George T., on protective du- ties, 260, n. Customs, 379. Debt, deduction for, 375; situs of, 498 ; taxation, 479, 493. Deeds as property, 469. Definitions, want of, 7. Democracy and taxation, 16. Denmark, taxation of income, 523. Desmarets, 127. Dice, tax on, 327. Difl'usion of taxes, 569 ; law of, 584, 597 ; customs, 575 ; land tax, 589. Distilleries, number of, in United States, 46. Dixme Roy ale, 125. Dodgers of taxation, 433. Domain, eminent, 238. Domains, royal, 102. Dooming in Massachusetts, 431, 530. Droit du seigneur, 124. Druids, revenue methods, 101. Egypt, 141 ; corvee in, 142, 146 ; debt of, 144 ; fiscal commission, 145 ; land tax, 147; reforms, 150; repeal of taxes, 147, 152. Emerson, R. W., quoted, 62, n. England, in Egypt, 143, n. : excise, 114; feudal taxes, 108; indirect taxes, 113 ; land tax and American Revolution, 115; meal tax, 115; poll tax, 331 ; representation and taxation, 110; revolution, 68; tenure, 108. See Great Britain. Ensley, Enoch, rules of taxation, 556. Equalization, boards of, 397. Erie Railroad opera house, 252. Europe, sugar bounties, 308. Excise, 380. Exemption, 411, 481, 541, 602. ■? ^f Expediency in taxation, 15. Extradition and tax violations, 312. Extravagance, cost of, 241. Farm-rating act, Great Britain, 540. Farmers' Alliance, Maryland, 15. Farmers-general, France, 129. Farming of taxes, 605. Fiction, legal, 441, n. Field, Stephen J., on income tax, 553. Fines, feudal, 106 ; in Greece, 86. INDEX. 645 Fish, royal, 107. Fisheries, encouragement of, 302. Fraction of a day in law, 319, n. France, cadastre, 622; corvee, 124; exemption of clergy, 120; gabelle, or salt tax, 121 ; income tax, 517, 538; indirect taxes, 121; list of taxes, 123; mobiliary tax, 519; re- forms offered by Vauban and Bois- guillebert, 125; Revolution in, 69, 128 ; taille, 119 ; taxation in, 76, 117 ; transfers, 123; window tax, 519. Franchise, definition, 639 ; taxation, 379, 637. Gabelle, in France, 121. Garfield, James A., on Mr. Wells, 39. George, Henry, 66. Germany, bounties on sugar, 308; exemptions under income tax, 537. Godkin, Edwin L., on protection, 253, n. God's truce, 101. Great Britain, direct ta.^es, 356 ; false idea of taxation, 574 ; income tax, 525 ; local taxation, 392, 624 ; per- sonal property, 625 ; revenue by taxation, 14. See England. Greece, decline of, 67 ; taxation in, 85. Greeley, Horace, quoted, 60. Guyot, Yves, on income tax, 520. Hamilton, Alexander, on carriage tax, 362 ; on taxation, 400. Hayes, S. S., 20. History, taxation in, 66, 74. Hoar, George F., quoted, 253, n. Holland, taxation in, 74. Hylton vs. United States, 360. Ideas as property, 465. Hlinois, tax theories, 10. Imposts, 380. Impot unique, 633. Income, taxation of, 514; direct tax, 363 ; discriminating tax on, 533 ; Austria-Hungary, 522, 538 ; Den- mark, 523 ; France, 517, 519 ; Ger- many, 524; Great Britain, 525; India, 169; Italy, 540; Rome, 518; Switzerland, 523; United States, 305, 528, 545. Indebtedness, taxation of, 479, 493. India, British, customs duties, 168 excise, 167 ; food of people, 177 income tax, 169; land tax, 163 opium, 166, 174; population, 158 poverty, 159 ; salt duty, 165 ; stamps, 168; taxation, 76, 158; trade in treasure, 173, v. Inequality of taxation, 323. Inheritance tax, 621. Internal revenue, United States, 26, 33, 619. Investments, inducements to, 559. Ismail Pasha, career of, 144. Italy, income tax, 540 ; oppressive and dishonest methods, 228. Japan, land tax, 82 ; poverty, 81 ; taxation, 80 ; treaties, 83. Jefferson, Thomas, quoted, 3, n. Jews, taxation among, 66, 70 ; plunder of, 104. Kirtland vs. Hotchkiss, 493. Kleber, General, in Egypt, 155. Labour, as source of wealth, 462, 587. Land, and personal property, 419 ; direct taxes, 368 ; incidence of tax, 587 ; feudal duties, 102; taxation in China, 77; Egypt, 148 ; India, 163; Japan, 82 ; tenures, 75 ; value of, 558, 587. Law, economics and, 7. Legacy tax, in Rome, 89 ; in United States, 620. Legislation, class, 9, 551. Leroy-Beaulieu, Paul, on French taxation, 14, n. ; on income tax, 539. Lewis, George Cornewall, on valua- tions, 627. Likin, in China, 78. Lincoln, Abraham, quoted, 19. Literature, taxation in, 73. 646 THE THEORY AND PRACTICE OP TAXATION. Liturgies in Greece, 87. Loan Association vs. Topeka, 231, 294. Local taxation in Great Britain, 391, 624. Locke, John, on ta.xation, 601, n. London water supply, 638. Loti shui in China, 79. Lotteries, State, 605 ; taxation of, 262. Loubet on French taxation, 14. Louis XIV, 127, 223. Lowell vs. Boston, 289, 291. Lowrey on protection, 315, n. Macleod, H. Dunning, on property, 451. McCulloch vs. Maryland, 269. McCulloeh, Hugh, 19, 39, n. Madison, James, on direct taxes, 547, n. Magna Carta, 111, 285. Malthus, theory in India, 159. Mansfield, Lord, decision on slavery, 7. Manufactures, State intervention, 252 ; taxing, 26. Maryland Farmers' Alliance, 15. Massachusetts, dooming in, 431 ; early yiJ\^^\ \ provisions for assessing, 244; gen- 4r3*i 9 ll I y®'"^^ property tax, 393 ; numbers of V ! taxpayers, 572 ; poll taxes, 337 ; tax I ' ' commission, 435 ; taxation of in- comes, 529. Matches, stamp tax, 349. Material, raw, definition of, 59. Menier on discriminating taxes, 387 ; on meaning of words, 201. Mercantile system, 114. Mexico, Alcavala, 135 ; customs, 132 ; land tenure, 139 ; repeal of transit duties, 140; taxation, 130. Middle ages, taxation in, 100; land ta.x, 102. Mill, John Stuart, discriminating ta.x- ation, 387 ; on direct taxes, 351. Minorities, rights of, 553. Mississippi, suffrage in, 340. Mobilia personam sequuntur., 440. Money, taxation of, 477, 563. Monopolies and indirect taxes, 348 ; State, 606. Morality and taxation, 5 ; commercial, 432; standard of, 415. Mortgage, definition of, 478 ; in Rome, 480 ; taxation in California, 487 ; in New Jersey, 479. Myddleton, Hugh, 638. JVaviculari, of Eome, 94. Necessity as a check on taxation, 243. New Jersey taxation of mortgages, 479 ; local taxation, 628. New liiver Company, 638. New York, number of ta.xpayers, 571 ; source of wealth, 562 ; tax commis- sion, 61 ; taxation of, 520. Nile, cleaning of the, 146. Oaths, use and value, 432. Octroi in Italy, 228, n. Officeholding in Greece, 87. Ohio, assessment of corporations, 314 ; tax experience, 424 ; taxation of money, 532, n. Oleomargarine, taxation of, 257. Olney, Richard, argument on income tax, 369. Opdyke, George, on direct ta.xes, 351, n. ; 352. Opium duty, 166; movement to sup- press, 174. Options, legislation on, 260. Our burden and our strength, 18. Package, original, decision, 276. Paper money, idea of, 30, n. Paris, taxation of, 520. Parish, as tax unit in Great Britain, 624. Parliament, origin of, 109. Patten, Simon N., proposition on taxes, 265. Pennsylvania, poll taxes, 338: tax laws, 441. Pension, in United States, 3, 17. People vs. Township, 289. Perjury, 6, m., 74. Persia, taxation in, 213, n. INDEX. 647 Personal property and real, 374, 398, 401 ; assessment of, 402 ; exemp- tions, 411. Peter's pence, 67. Pljmouth Company, 233. Police and ta.xation, 254. Poll tax, 330 ; mark of inferiority, 334 ; sufirage, 335. Population and taxation, 546 ; increase in Japan, 81 ; Malthusian theory in India, 159. Possession, meaning of, 461. Prices and taxation, 40, 218. Process of law, due, 510. Production, burden of taxation on, 390 ; cost of, 583. Profits and taxation, 600 ; decrease of, 4 ; ditt'usion of, 557, 586 ; in tax legislation, 31, 43. Progression in taxation, 388. Property, definitions of, 451, 460 ; credits as, 450, 467 ; movable and immovable, 556; general tax, 392, ^^^r*;428,435,629. _ y proportional taxation, 320. 3 /V 7 ^Protection and taxation, 315, 456; "CW^ policy in the United States, 258, 'iy^L '^ 612. Tl'ti ,T)'\ ' <4 1 Prussia, cadastre, 622 ; taxation of in- comes, 524. Ptolemy V, 154. Public purposes, what are, 288. Publicans of Kome, 71, 91. Kailroads as " public purposes," 297. Real property, assessment of, 396 ; taxation of, 374, 395. Reciprocity, 614. Rent of land, 590 ; tax on house, 635. Rents in kind, 110. Repairs, tax on, 28. Representation and taxation, 68, 110. Reprisals, 615. Residents, defined early in Great Brit- ain, 625. Retroaction in taxation, 319. Revenue, definition, 247 ; source of State, 202. Revenue commission, United States, 19-60. Revolution, French, 128. Rliode Island, opposes impost, 578 ; tax provisions, 398. Rome, assessments, 97 ; bachelor tax, 95 ; destruction of industry, 90 ; dis- tribution of corn, 94 ; legacy tax, 89; mortgages, 480; publicans, 71, 91 ; provincial taxes, 93 ; taxation, 88, 518. Rosetta stone, 153. Russia, excessive taxation in, 227. Salt monopoly in China, 78 ; taxation of, in France, 121 ; in India, 165. Say, Leon, on income tax, 4, n. Scutage, 108. Securities, sittis of, 457 ; taxation of, 634. Seligman, E. R. A., on general prop- erty tax, 428. Servitude, idea of, 444. Sharswood, on security, 250. Sherman, Isaac, tribute to, 61. Shipping, taxation of, 412. Sicilian Vespers, 67. Silence des grenouilles, 123. Silver, Federal tax, 265. Single tax, 633. Situs of debt, 498 ; personal property, 406. 438 ; vessel, 448. Smith, Adam, maxims of taxation, 385 ; on diffusion of taxes, 598, n. Source of income, 535, n. South Africa Company, 248. Spain, taxation of Cuba, 14. Special commissioner of revenue, 38. Spencer, Herbert, on right to tax, 223. Spirits, distilled, consumption in United States, 51 ; profits to distil- lers, 31 ; taxation of, in United States, 11, 41-56. Stamps, use of, 41, 56 ; duties in Unit- ed States, 618. Stare decisis, 7. State and taxation, 222 ; instruments exempt from taxation by the Gen- 648 THE THEORY AND PRACTICE OP TAXATION. eral Government, 277 ; paternalism, 5 ; tax commissions, 427. Statistics, want of reliable, 35. Story, on limitations on taxation, 301. Strachey, Sir John, on opium, 170. Subsidy, 382. Buflrage and taxation, 552; poll tax, 335 ; universal, 3, n. Sugar, bounties on, 299, 345. Sumptuary laws, 256. Switzerland, alcohol monopoly, 187 ; budget, 185; constitution, 182; cus- toms duties, 186; double taxation, 194; local taxes, 193; progressive taxation, 191, 523, 534; property tax, 190. Taille, 119, 443. Tallies, 109, n. Tariff and consumption, 576; prices, 577 ; protective, 295, n. ; wages, 60 ; measure drafted, 59 ; who pay duties, 578. Tax, definition, 200; alienation of power, 279 ; direct, in law, 357 ; evasion of, 50, 328; general prop- erty, 392 ; limitations on power, 301. Taxation and anthropology, 72 ; de- mocracy, 16, 115; morality, 5, 214, 327 ; protection, 315, 346 ; represen- tation, 68, 286; spoliation, 570; a science, 12, 199 ; best methods, 603 ; definition, 204; double, 408, 438, 634 ; discriminating, 386 ; extra- state, 310; in literature, 73; his- tory, 74 ; limitations on, 230, 277 ; literature of, 63 ; multiple, 533 ; op- pressive, 4. 13 ; origin, 224 ; perver- sion, 267 ; proportional, 320 • pro- duction, cost of, 390, 583; public purposes, 287 ; revenue, 248 ; rules and maxims, 284, 385 ; sphere of, 226 ; stimulus to industry, 217 ; sub- jects of, 384 ; unequal, 323, 565. Taxes, benefits from, 9 ; diffusion of, 569 ; direct and indirect, 340 ; di- rect, unpopular, 352 ; indirect, and monopolies, 349 ; cost of collecting, 347 ; objections to, 343 ; war, reduc- tion of, 40. Taxpayers, defaulting, 403; number of, 571. Tewtik Pasha, 143. Thiers, Adolphe, on diffusion of taxes, 599, n. Titles to property, 467. Tobacco regime, 608. Toll, 382. Tolstoi, on wealth, 69. Tooke, John Home, 527. Torture, 430. Transit dues, 609. Turks, conquests of, 99. Tweed, William M., public interest in, 572. Tyler, Wat, 401. Uniformity of taxes, 236, 322. United Kingdom, 550. United States, cost of the civil war, 32 ; dependence on the tariff, 611 ; direct taxes, 359 ; financial history, 20 ; in- come tax, 528, 545; indifference to taxation, 64; internal taxes, 618; local taxation, 622; prices in war, 32; protection, 612; revenue, 15, 202; tariff of 1897, 612. Vauban's Dixme Boy ale, 125. Vinton, Lindley, 59, n. Wages and tarifl', 60. War and origin of taxes, 224. Wealth, prejudice against, 69; pro- duction and distribution, 2. Welfare, general, 237. West, Max, on inheritance tax, 621. Weston vs. City of Charleston, 273, 279. White, Edward D., on option bill, 261, n. Window tax in France, 519. Wine, heavy taxation in France, 76. Zaccheus, a publican, 71. UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE UNIVERSITY LIBRARY This book is DUE on the last date stamped helow DtC 6 1950< ,,,9 1951 i JS; JUN16 U)?[Il^ JUN2 41974 1 J DISt ia2ll9T8 DURL NO HARGE-URL / 3 1978 giCO L04) ^ SEP 2 3 1972 RtCO LOURl OCT 7 W^ ^ OCT T198S Form L-O 20ni-12,'30