HJ 145 .•.^■/ P71 i." ^ KLehn >- Introdnp.i-.i '^n f.n r piiblic finnnc, ^. Southern Branch of the University of California Los Angeles Uvi 1 ^/!V 3 1 last date stamped Pyf ^*» ^ ^ ^ '• W L. ^-RN BRANCH V or CALIFORNJA, ABR ARV, lUJS ANGELES. CALIF. HJ 145 ..^'z P71i-"^ P-Lehn - Ini:por^n p.1-.T -^n t-.n pu 'blic finnnoft. Southern Branch of the University of California Los Angeles V / This book is DUE on the last date stamped below i . 19?f WIAV MAY 3 1 1932 oc^ ^^ \^^ Fnini L0-1.'),„-10,'25 INTRODUCTION TO PUBLIC FINANCE THE MACMILI.AX COMPANY NEW VORK • BOSTON • CHICAGO SAN FRANCISCO MACMir.LAN & CO, Limited LONUON ■ BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, Ltd. TORONTO INTRODUCTION TO PUBLIC FINANCE BY CARL C. PLEHN, Ph.D. PROFESSOR IN THE UNIVERSITY OF CALIFORNIA *' Jc n'impose rien; je ne propose meme rien ; fexpose^^ DONOTER THIRD EDITION COMPLETELY REVISED AND ENLARGED "NCm gork THE MACMILLAN COMPANY 1916 All rig/itu rtnerved 2 6Z^3 COPYKIGHT, 1S9(>, 1909, By the MACMILLAN COMPANY. Set up and electrotyped. Published August, 1896. Reprinted August, 1897. Second edition, revised. May, 1900; July, 1902; August, IQ04; January, 1906. New edition, publi-^hed September, 1909 ; January, December, 1911 ; April, 1913; June, 1914: July, 1915; July, 1916. Norfasooti J^xtee J. 8. Cushinjr Ci>. lier« ick it Smith Co. Norwood, Mass.. I'.S.A. PREFACE TO THE THIRD EDITION In its third edition, this book has been revised through- out, partly rewritten, and considerably enlarged. The statistics and other illustrative data have been brought down to date, and discussions have been introduced of some of the more important of the fiscal questions which have come into prominence since the first edition was written. By using the book with his classes in Public Finance at tlie University of California, the author discovered many points in which he thought it might be improved. lie has, also, gratefully adopted many suggestions kindly offered by his colleagues who have used the book in other colleges and universities. During the period that has elapsed since the publication of the first edition, the author has had much experience at first hand with the f^ actual administration of public fiscal affairs. This expe- r rience was gained both in his home State, California, *^ and in the Philippines. This intimate contact with ^v taxation in the doing and in the making has, on the one X hand, nuulified the author's views, and on the other hand should have aided liim in his endeavor to make the book more useful to ollicei-s concerned with taxation and to legislators and their advisers. V vi PREFACE TO THE THIRD EDITJOX In addition to the general revision outlined above, the following items may be specifically mentioned: the defi- nitions and explanations intended to aid the beginner have been shar})ened and clarilied, and many new ones have been added ; more space is given to French taxa- tion ; the chapter dealing with the Anu'rican general property tax has been entirely rewritten from a new point of view and very much enlarged ; the descri})tion of that " great engine of the revenue," the British income tax, has been revised, primarily with a view to making it more easily understood by American readers; Henry George's " single tax," although still disapproved, is much more sympathetically treated ; appendices have been added to two of the chapters, giving an outline of the valuable work done by the United States Census Bureau on the classification of public expenditures and of public revenues ; and inasmuch as the first edition seems to have found quite as many readers in England as in America, the effort has been made in the selection of new material to choose those things which may be of equal interest in both countries. LucBBNB, Switzerland, August, I'JOy. PREFACE TO THE FIRST EDITION This Introduction to Public Finance is intended to be an elementary text-book. It contains a simple outline of those things which are necessary to pi'epare the stu- dent for independent research ; a brief discussion of the leading principles that are generally accepted; a state- ment of unsettled principles with the grounds for con- troversy; and sufficient references to easily accessible works and sources to enable the student to form some opinion for himself. The references that are given are not so much for the purpose of sustaining the author's statements, which any advanced student or teacher can easily trace to their sources, as to enable the beginner to add to his information on points that are of necessity briefly treated here. Both the American and the English systems of taxa- tion are badly in need of reform. Public opinion is gradually awakening to this need. Financial questions are widely discussed. There can be no doubt that the most pressing reforms of the close of the nineteenth century are tax reforms. The rapid extension of govern- mental functions — the invasion by the government of fields of activity that lie near to the welfare of the people — has given rise to great interest in the financial side of vii viii PREFACE TO THE FIRST EDITION these activities. It is hoped that this work may be help- ful ill the accomplishment of these needed reforms. The Introduction to rublic Finance can be intelli- gently studied by any person already familiar with the general principles of Political Economy. Technical details and wearisome tables of statistics have been avoided wherever possible. Abundant references to sta- tistical compilations are, however, given, so that such matters can be readily looked up if wanted. The coun- tries whose financial systems have been chiefly used to illustrate principles are England, Germany, France, and the United States; other countries have been drawn upon only for particularly p(!rtiiient exami)les. A brief but complete history of the financial practices of the four countries named has been given. The countries most extensively studied are England and the United States. Although the book has been written from the point of view of an American, the author ventures the hope that it may not prove the less useful to English students. CARL C. PLEHN. Berkeley, Cal., August, 1896. TABLE OF CONTENTS INTRODUCTION Section 1. Definition, scientific character, and relations of Public Finance. Sec. 2. History of the science. Stc. .3. Method. Sec. 4. Divisions of the subject. Sec. 5. Desirability and feasi- bility of a single method of classification throughout the whole subject. Page 1 PART I PUBLIC EXPENDITURE CHAPTER I The Natdre of the State and its Functions Section 1. Political science sets no definite limits to the extension of State functions. Sec. 2. Public Finance finds a limit in the revenue-yielding strength of the State. Sec. 3. Public expendi- ture in early times. Sec. 4. Public expenditure in Greece and Rome. Sec. 5. Feudal expenditure and the beginnings of mod- ern. Sec. 6. Classification of expenditures. Page 18 Appendix The official classification of expenditures by the United States Census Bureau. CHAPTER II Expenditure exclusively for the Common Benefit Section 1. Expenditure for general administration. Sec. 2. Ex- penditure for the legislative department. Sec. 3. Expendi- ture for public buildings. Sk<-. 4. Expenditure for defence. Sec. 5. Expenditure for means of transportation. Sec. (>. Ex- ix X CONTENTS penditure for education. Sec. 7. Assistance of private industry and commerce. Page 39 CHAPTER III Expenditure for the Benefit of Individuals Section 1. Expenditure for charities. Sec. 2. Pensions. Sec. 3. Bounties and "protection." Sec. 4. Expenditure for the ad- ministration of justice. Sec. 6. "Betterment" of property. Sec. 6. Expenditure in public industries. Page 62 PART II PUBLIC REVENUES CHAPTER I The Character and Classification of Public Revenues Section 1. Early forms of revenue. Sec. 2. The growth of con- stitutionalism results in uniformity of the revenue systems of the different countries. Sec. 3. Different States tind the same justification of taxation. Sec. 4. Compulsion is universal. Sec. b. Classification of revenues, definitions of fees, taxes, and rates. Secs. 6 and 7. Further considerations on classifi- cation. Page 79 Appendix The United States Census Bureau classification of revenues. Page 94 CHAPTER II The Various Kinds of Taxes, Fees, and Rates ; Definitions Section 1. The mea.sure of taxation distinguished from the justi- fication ; benefit theory and faculty theory. Sec. 2. Difficulties in the cIa.ssification of taxes. Skc. 3. Direct and indirect taxes. Sec. 4. Taxes on persons, property, and income. Sec. 5. Other classifications of taxes. Sec. 6. Classification of fees. Sec. 7. Economic revenues. Sec. 8. Definitions of various terms used. Page 103 CONTENTS xi CHAPTER III The Tax System Section 1. All nations use many different taxes; no single tax feasible. Sec. 2. What, in the opinion of nations, constitutes the ideal of correct or just taxation. The benefit theory ; the legal theory in the United States. Sec. 3. The faculty theory ; what constitutes faculty. Sec. 4. Other theories and progres- sion. Page 133 CHAPTER IV The Development of Taxation before the Industrial Revolution Section 1. Feudal dues commuted, and voluntary contributions be- come taxes. Sec. 2. History of taxation in France. Sec 3. History of Crown taxation in England. Sec. 4. History of local taxation in England. Sec. 5. Colonial taxation in America. Page 153 CHAPTER V The Development of Tax Systems since the Industrial Revolution Section 1. The effect of the industrial and political revolutions. Sec. 2. General outline. Sec 3. Development of taxation in Prussia. Sec 4. In France. Sec. 5. In England. Sec 6. In America. Page 176 CHAPTER VI Excises Section 1. Comparison of excises and customs ; and direct con- sumption taxes. Sicc 2. Purposes and principles of the ex- cises. Sec 3. Method of as.ses.sment. Sec. 4. Typical excises. Sec 6. Proper field for excises. Page 204 xii CONTENTS CHAPTER VII Customs Duties Sections 1 and 2. Customs duties defined. Secs. 3 and 4. The pur- poses of customs duties, both fiscal and political. Protective and revenue tariffs. Sec. 5. The protective principle widely applied. Sec. 0. The tax character of protective duties. Skc. 7. Customs duties as a. source of revenue. Sec. 8. Ili.story of cus- toms duties in England. Sec. 9. The German customs union and the Imperial tariffs. Sec. 10. History of the French tariff. Sec. 11. Tariff history of the United States. Page 218 CHAPTER VIII Property Taxes Part 1. The General Property Tax. With Special Reference to the United States Section 1. The place of the general property tax in the revenue system. Sec. 2. The types of the general property tax. Sec. 3. The property subject to this tax. Sec. 4. The property exempt from this tax. Sec. 5. The forms and methods of assessment, and the valuation of the property. Sec. 6. The taxation of mortgages, and of money and credits other than mortgages. Sec. 7. The taxation of corporation franchises. Sec. 8. The objections urged against the general property tax. Sec. 9. The scientific judgment on the general property tax. Page 24G Part 2. Special Property Taxes Sec. 10. The land tax. Sec. 11. Building tax. Sec. 12. Taxation of capital. Sec. 13. Inheritance tax. Page 295 CHAPTER IX Personal Taxes Section 1. Poll tax. Sec. 2. Tiieory of the income tax. Sec. 3. Place of the income tax in the tax sy.stem. Sec. 4. Prussian income tax. Sec. !i. The Hritish jiroperty and income tax. Sec. 6. Income taxes in the United States. Page 312 CONTENTS Xm CHAPTER X The Incidence of Taxation Section 1. Incidence depends upon the system ; meaning of shift- ing and incidence. Sec. 2. Shifting may or may not defeat the purpose of the tax. Sec. 3. Shifting adds to the burden of taxation. Sec. 4. Shifting cannot take place when taxes are universal and equal. Sec. 5. Incidence of excises and cus- toms. Sec 6. Incidence of the general property tax. Sec 7. Incidence of special property taxes and of personal taxes. Page 336 CHAPTER XI Fees and Industrial Earnings Section 1. Connection between fees and industrial earnings ; development of fees into taxes. Sec 2. Judicial and legal fees. Sec 3. Administrative fees. Sec. 4. Special assess- ments. Sec 5. Postal fees. Sec. 0. Revenues from public property. Sec 7. Revenue from public industries. Page 347 PART III PUBLIC INDEBTEDNESS CHAPTER I The Growth and Natire of Piblic Credit Section 1. Size of public debts. Secs. 2 and 3. The nature of credit. Sec 4. Wherein public credit differs from private. Sec 5. Economic effects of public borrowing. Sec 6. Foreign and domestic loans. Page 360 CHAPTER II Forms of Public Debts Section 1. Funded and floating debts. Sec. 2. Forced and con- tractual loans. Skc. 3. Classification of debts. Sec 4. "Per- petual" bonds and redeemable bonds. Sec 5. Terminable annuities. Sec 6. Lottery loans. Sec 7. The rate of in- Xiv CONTENTS terest. Sec. 8. Debts of the treasury. Sec. 9. Productive loans. Page 383 CHAPTER III Negotiation, Payment of Interest, Conversion, and Redemp. TioN OF Debts Section 1. Two chief methods of negotiating public loans. Sec. 2. Place of payment of interest, and other minor considerations. Sec. 3. Conversion of the debt. Sec. 4. Debt payment and the sinking fund in England. Sec. 6. Debt payment and the sinking fund in America. Sec. 6. Summary. Page 401 PART IV FINANCIAL ADMINISTRATION CHAPTER I The Budget ; Administration of Expenditure ; Control and Audit Section 1. Importance of sound methods of administration. Sec. 2. History of fiscal administration. Sec. 3. The budget in England, and appropriations in the United States. Sec. 4. English control and audit. Sec. 5. Control and audit in the United States. Page 416 CHAPTER II Collection of the Revenues ; Custody of the Funds ; and the I'ibmc Accounts Section 1. Early methods of collecting revenues. Sec. 2. Collec- tion of customs dutie.s and exci.ses. Sec. 3. Assessment of direct taxes, "declaration," and eiiualization. Sec. 4. Con- venience of the contributor must be consulted in the collection of taxes. Sec. 5. Transfer of the public funds and custody of the public moneys. Sec. 0. Public accounts in England and America. Sec. 7. •' Funda of account." Page 431 CONTENTS X\ CHAPTER III Financial Administration of War ; Illustrated by the Expe- rience OF THE United States in the War with Spain Section 1. "Extra-ordinary"' expenses. Sec. 2. Increased rates for old taxes. Sec. 3. New taxes. Sec. 4. Difficulties in the use of credit. Sec. 5. Situation of the United States Treasury at the outbreak of war. Sec (J. The tariff could not be chanj^ed. Sec. 7. Main resource internal taxes. Sec. 8. Yield of new taxes. Sec. 9. Amount borrowed. Sec. 10. Preserva^ tion of credit. Sec. 11. A popular loan. Page 445 Brief Bibliography for Supplementary Reading. Page 466 Index. Page 469 INTEODUCTION TO PUBLIC FIXANCE JXKo INTRODUCTION Section 1. Public finance deals with the way in which the State acquires and expends its means of subsistence. It stands in somewhat the same relation to the State that economics stands to the individual. If economics were defined as the science which deals with the activity of the practical reason in acquiring and applying those things that are pro- vided in com[)aratively limited quantities, for the satisfaction of tlie external and temporal wants of man, then, adapting our definition to somewhat the same terminology, public finance would be de- lined as the science which deals with the . . .... , Definitioiu activity or the statesman in obtaining and applying the material means necessary for fulfilling the proper functions of the State.^ 1 When used by itself, without a modifyino; adjective, the term "finance" often has a broad mean inj,', and may cover not only the receipts and expenditures of governments, but also matters relating to the capital, income, and expenses of corporations, associations, jiartnerships, and even of individuals. By metonymy it is applied also to tlie forms which the several items just named may take, and to the business transactions through which they may pass. B 1 2 INTRODUCTION TO PUBLIC IINANCE Public finance ma}' be called a st-ience, because, (1) it deals with a deiinite and limited lield i)f human knowledge; (2) it admits of an orderly called a arrangement of its facts and principles, science. ,^^^ contains many laws of general prog- ress belonging exclusively to its own iield ; (3) it admits of the application of scientilic methods of in- 'I'hus it inchuks money, notes, bonds, stocks, etc., and transactions tlierein, together witli all the forms and methods of banking. In common usage, "to finance" a transaction, whether conducted by the government, by an association, or by an individual, is to provide the "funds," which may take the form of taxes, money, evidences of indebtedness, or records of investment, for the further- ance of the transaction. Thus Cleveland's book on the Funds and Tlieir Uses covers matters that are in this sense " financial." To guard against ambiguity, it is customary to designate each of these various uses by some appropriate adjective. Thus we have "corporation" finance, "trust" finance, "private" finance, "public" finance, and many other kinds of finance. When used without modification, as in Bolles' book on American Finance, and in his Financial History of the United States, or by Dewey in a book with the same title, it covers public receipts, expenditures, and indebtedness, and also money and banking, in so far as these have been the subject of governmental concern and formal action. Yet, on the other hand, Adams' Science of Finance deals exclusively with matters relating to public finance. Of the two adjectives relating to our subject, "financial" and " fiscal," the former has all the ambiguity that is found in the noun from which it is derived, while the usage of the latter is purer. The adjective "fiscal" usually means, relating to public finance, to the exchequer, or to the public treasury. The noun "fiscal" is not in common usage in EnglLsh, although it has some sanction. It might be used to designate any officer who has to do with the final enforcement, by legal procedure, of the collection of the public revenues. In this sense it recalls the original meaning of ^nare, to pay a fine. Tims in Spanish countries the "fiscal" is a special attorney, or prosecutor, attached to the treasury de- partment. Unless the meaning of the adjective is perfectly deal INTRODUCTION 5 vestigation ; (4) it foresees as well as explains a certain class of phenomena. That it is generally, if not universally, so regarded confirms this view. It is, however, a secondary or dependent ^ dependent science. It is closely related to two science. other larger sciences, upon which it properly depends. These are economics and political science. While, on the one hand, it draws largely upon the con- clusions of these two sciences for its hypotheses, and for some of its principles, yet on the other it con- tributes much to them. Most of the prominent German writers on the subject regard public finance as a corporate part of economics, or at least of the older political economy.^ It is properly so regarded, because the activities of the State which belong to this field are of such a nature as to consume wealth, produce wealth, and to interfere with the distribu- tion of wealth. From political science, public finance has to borrow many conclusions as to the nature of the State, and as to the functions of government. A determination of what th€ proper functions of the State should be is no part of our subject, but be- longs wholly to political science. ^ In general, it from the context " fiscal " is preferable to "financial." Thus, it is customary in Enj^lish to speak of the "fiscal year," but never of the " financial year," when referring to public affairs. 1 The modern conception of economics as a science which has less to do with political and more with individual activities, would, perhaiis, exclude jaililic finance. 2For disci ssjoMs of that part of the subject the reader is referred to Bluntschli's Thcimj nf the Stale, Wilson's State, Hoffman'a Sphere of the Statf, and Crane and Moses' Politics. 4 INTRODUCTION TO PUBLIC FINANCE has been found best to assume that the functions now actually performed by any government are proper for that government, provided they are not clearly contrary to some generally accepted princi- ples of political science. We are thus relieved of the burden, assumed by many writers on the subject, of attacking or defending the actions of different governments in matters the propriety of which is open to discussion; for example, the propriety of the contin- uance or assumption of State ownership of railroads, or the State monopoly of tobacco. All such matters will be treated purely from the fiscal point of view. Information concerning the facts with which the science of public finance deals can, in most instances, _ be definitely ascertained and the conclu- The art of -^ public sions drawn have often a sharpness and finance. distinctness lacking in many other parts of political economy and political science. Thei'e is consequently a strong temptation to create the cor- responding art of public finance. For when any science becomes at all " exact," it is easy and often desirable to point out possible direct applications of the truths learned. But although it is of the utmost importance that statesmen should be guided in their actions by correct principles, it is in no sense the duty of the scientist, as such, to make the application of the laws he may learn. Scientific investigation should precede, and ever remain inde- pendent of, any possible use of the truths discovered. In no other way than by the search for truth for INTRODUCTION 5 its own sake can we obtain absolute clearness of view.* Sec. 2. Public finance, as a science, is older than political economy. Indeed, it is not incorrect to say tliat it was the forerunner of both of the ^, , ,, Older than sciences to which it is now subordinate; political for the writings of the cameralists dealt ^'^°^°"^y- more fully with this part of the field of political economy than with any otlier. Cameralistic science, or public finance as an art, and as the subject of conscious study, necessarily arose as soon as there was a distinct separation between the income of the Government, or the State as such, and the income of the Prince ; that is, as soon as an}- direct levy was made upon the wealth of the citizens, or any prop- erty was administered, to secure a revenue for an ac- knowledged public purpose , broader than the mere support of the Prince's household. The demand for officials properly trained to administer the vast princely and public revenues which flowed into the public coffers led to extensive studies in just this line; and then the investigation into the origin and causes of the wealth of nations, as the foundation 1 Tliis must be regarded as the author's ideal and aim. But he found himself, even in writing the first edition, unable to live up to that ideal, in every instance, and occasionally entered the field of criticism, and advocated some reforms. This edition is still further "marred," or "enriched," whichever way the reader may regard it, by new excursions into the " art of public finance." On account of tlit- srtrength of his convictions the temptation to voice them luus beun too powerful to be resisted. 6 INTRODUCTION TO PUBLIC FINANCE and source of public revenues, was the step which led to the birth of the greater science of economics. The writers on the cameralistic science (which, because it at first embraced but little more than the matter now included in public finance, may be properly claimed as that science under another name) were stronger in Germany than elsewhere.^ On this account the science has always had a stronger hold there than in France or England. In Only parts of those countries the lead of the Physio- the subject cratic doctrine, the powerful influence of treated by c • ^ ir t • • English Adam Smith, and, after his time, the writers. intensity and rapidity of industrial de- velopment, directed the attention of students in such fields to the more general and more absorbing ques- tions. Although Adam Smith himself devotes one book to the discussion of finance, and other writers of note give it passing attention, it was extremely slow in obtaining recognition as an independent science. The predominance in both England and France of a theory of State which minimised the importance of government action may account in part for this neglect. The one portion of the sub- ject that did receive general attention — namely, taxation — dealt with an activity that was admittedly necessary. But other fields, like that of expenditure, were comparatively neglected. The tendency of English economists to underrate the imixirtance of a i For an account of thorn see lioscher, Ocsrhirliti- iJer Xntional Oekunomie in Dcutschland. INTRODUCTION 7 study of consumption, except so far as it led to new production, prevented them from seeing anything worth studying in State expenditure beyond, possibly its effect on new revenues. Hence it is that while Germany piled treatise on treatise, all deep, schol- arly, and broad, covering the whole subject of public finance, we had to wait until 1892 for a systematic treatment of the whole field in the Englisli language, and we still await such a one in French. ^ It must not be understood that portions of the subject were not investigated in those countries. There are, on the contrary, many important works on the various parts of the science. But what was entirely lacking until the appearance of Bastable's Public Finance, in 1892, was an attempt to systematise the whole subject. Financial problems are becoming more important, because the functions of government which depend on tliem have grown in importance and „.. ^ , number. Our industrial, conmiercial, and growth of . 1 ... 1 1 interest. social organisation has become more and more complex, and it lienee requires better and more effective governmental organisation to keep it running smoothly. The more important it becomes to perfect governmental organisation, tlie more do questions affecting the supply and ap[)lication of its material support rise into prominence. Whether we regard the constant expansion of tlie State's 1 Leroy-Beaulieu, however, covers all but expenditure in a masterly manner. 8 INTRODUCTION TO PUBLIC FINANCE activities with favour or disfavour, it is equally important that the financial problems arising from these activities should be solved. Consequently Professor Bastable's work has been followed by a flood of special articles and by a number of notable treatises. Especially prominent among such pub- lications in the English language are Professor H. C. Adams' Science of Finance, Professor W. M. Daniels' Elements of Public Finance, Professor E. R. A. Seligman's various essays and intensive studies of intricate and important questions, and the transla- tions of Professor Cohn's writings. During tlie past decade many governmental commissions have made extensive investigations and have published their findings in able and instructive reports.^ Sec. 3. On account of the close relation existing between public finance and economics, most of the The same discussions as to tlie proper method for methods avail- the latter bear with equal force upon the able as in o t» i r- i political former.^ But the nature or the materials economy. with wliich public finance deals is such that in general the inductive method has a wider possible scope, and tlie deductive a narrower field than in the larger science. The historical and com- parative method is most serviceable for ascertaining the conditions under which different kinds of taxa- tion develop. The general effects of taxation, its shifting and incidence, the effect of oxponditurc and 1 See Bastable, 3(1 edition, pp. 30 and 37, for other works. Also Staminhaminer, BihUofirnphir der Finanzuv'sscnsrhn/t, Jena, 1903. 2 Cf. Keyne.s' /Vtv*7>p and Method of Political Economy. INTR OD UCTION 9 public debts, can be studied deductively. The de- ductions in this case are derived from the conclusions reached by the previous method, and from principles derived from political economy. Inasmuch as the purpose of the present book is merely to expound principles already determined by tlie science and to use the facts of financial practice rather as illustra- tion than as proof of the doctrines advanced, it will not be necessary to acquaint the reader, in each case, with the method used to ascertain the truths stated. In the main, therefore, we shall follow what has been aptly called the method of instruction, which is in a sense an inverted induction, in which the principle is first stated and then sufficient facts are adduced to show that the principle is true. Sec. 4. The subject falls naturally into four parts : (1) public expenditure, (2) public revenue, (3) public debts, (4) financial adminis- Division of tration. Of these, public expenditure the subject. and financial administration have, until recently, not been the subject of important works in the English language, and, therefore, a few words in defence of their incorporation are necessary. Public expendi- ture is as much a part of public finance as consump- tion is of economics. While it belongs peculiarly to political science to determine what the lines of ex- penditure shall be, just as it belongs to ethics to teach the individual in what direction he should use his wealth, yet, when tlie lines of expenditure have been determined, its form, amount, and effect belong 10 IXTRODUCTION TO PUBLIC FINANCE to public liiuiuce, just as the form, amount, and effect of consumption belong to economics. Consumption, or the satisfaction of wants, is the end and aim of all production and distribution. So is expenditure the end and aim of the collection of revenues and of the other financial activities of the statesman. To ex- clude, at least, a statement of the forms and the cus- „ -., tomary direction of expenditure would should he be to overlook the purpose of all the included. ^,g^^_ g^^ ^ljgj.g .^ ^^.j^ .^,i„|-],^.j. consid- eration that emphasises the need of a statement of the general objects of expenditure. The amount of expenditure is generally determined first, and after that has been settled the required revenue is obtained. In this public finance differs mate- rially from economics. In the broader science it is generally assumed that the individual cannot regu- late his income by his wants, but must limit his wants to his income. In some cases this difference fades away. Cities often have to forego, temporarily at least, desirable improvements on account of tlie increased burden they would impose on the finances. But in general we find that the modern State is (piite as likel^^ to neglect some important and desir- able function which it could perform, as to increase its functions beyond what would b(! wise.^ If lliis is true, and that it is so will be seen in the course of the discussion, then it would be well to ascertain the main features of expenditure at tlie outset. But we ' C'f. Colin, Finamicissentichaft, p. 183. INTRODUCTION 11 are not obliged to justify or coudeniu the different lines of expenditure tliat ai'e deemed \)\ the leading nations to be wise or expedient. Financial administration is joroperly regarded as the fourtli division of tlie subject, because it is asnec- essaiy to know Imni the State gets its revenues as to know whence it gets them and for wJiat it spends them. This department, too, deals with a large num- ber of technical details which would only cumber the other parts if taken up in connection with them. Of the four divisions, public revenue is necessarily the largest; probably for reasons akin to those that influencedprevious English writers to give „ , , i- frs o Needed re- taxation their exclusive attention. It is fonns make here thatthe most urgent reforms are pend- ■^" ^f ''^"^- ° '■ nue (he most ing, and hence the need of understanding important existing conditions is most pressing. ^"'^ " The distribution of the various financial activities among the different divisions of the government, federal, national, or local, will be noted in connection with the discussion of each part of the subject. Sec. 5. In the present work the attempt has been made to use the same method of classification from beginning to end. The method used rniform is that suggested by Professor Cohn o^ethodof for all public charges, and afterwards for all parts developed in a somewliat different way of the subject. by Professor Seligman.^ The charges made by the 'Cohn, Finan:iWi)i.^enschiift. pp. 104-118, esp. pp. 117, 118; Seligman, Quarterly Journal of Economics, May, 185>2 and 1895, 12 INTRODUCTION TO PUBLIC FINANCE government upon individuals are regarded as vary- ing in character according as tlie special benefit con- ferred upon the individual is made the exact or the partial measure of, or is not allowed to affect at all, the burden imposed upon him. Public revenues and public debts have already been classified in this way, and it is very easy to classify public expenditure and administration in the same way. The nature of this classification and its applicability to the whole subject may be illustrated by reference _^ , -to the well-known customs of large ath- The nature of ° this ciassifica- letic clubs. For membership, and the tion i^ us- usual privilesres of the club, each mem- trated by the ^ ^ practice of ber is assessed the same sum, irrespec- athletic clubs. ^-^^^ ^^ ^j^^ .^^^^^.^^ ^^^^^^^ ^^ ^^j^.^j^ ^^ uses the club, and witliout reference to his ability to pay, that being assumed, for this purpose, to be equal to that of every otlier member, and certainly without reference to any known ability to pay more. This fee is justified by tlie common benefit conferred. If, however, the member makes use of the dining- room, or asks for special privileges, such as tlie private use of the club ([uarters, grounds, boats, appliances, etc., he pays an additional sum, measured, generally speaking, by the special benefit conferred upon him. Essays in Taxation, Chap. IX. Hints of the same classifications are found in Malchusand Hoffman. See, also, Plehn, Classification in Public Finance, Ptd. Set. Quar., March, 1807, and Nicholson, Principles of Political Economy, Vol. III., Bk. V., Chap. IX. Kspecially important and iliuminatinR is the "Appendix," begin- ning on page 140 in Iia.stablo's .'5d edition. INTRODUCTION 13 Again, if the club is in debt, or proposes to enlarge its facilities, not infrequently a subscription paper is passed around and each member is urged to contrib- ute, not the same amount all others have subscribed, nor yet in proportion to the use he makes of the club, but "as much as he is able." And lastly, there are not infrequently cases where poor but promising athletes have been admitted, in order that the club may have the glory of their prowess, and have been excused from dues. Now there is an almost perfect analogy between such a club and the State in respect to the contribu- tions demanded, the benefits conferred, and the method of operation. Generally speaking, the State endeavours, in collecting revenues, to impose an equal ^ burden upon all for the support of those functions that are regarded as conferring a common benefit, and a special burden for the support of those activities which confer a special benefit, and under certain circumstances to increase the burden imposed upon the very wealthy, who are regarded as able to bear more; and lastly, to tax all for the support of the poor. Not that the State always succeeds in its endeavour, nor that all Stales recognise equally the desirability of the attempt ; for in public finance ex- pediency necessarily plays a large part. But most States have come to recognise more or less clearly these ideals, and their policy can be conveniently summarised in this way. 1 Whal is meant by " ecjiial " will be discussed later. 14 INTRODCCTION TO PUBLIC FINANCE The various activities of tlie State can be easil}' classified, according to the degree of common or State activi- special benefit they are supposed, by the ties confer lawmakers, to confer upon the citizens, common bene- fit or special or taxpayers. 1 he various groups may benefit. blend or shade into one another at their margins, but those activities belonging to the centre of each group are easily recognisable and are funda- mentally different in each. Thus, it is universally admitted that the functions of the general adminis- trative and legislative departments are of such a char- acter as to give a common benefit, for which, ideally, every one should pay according to some scheme of supposed equality. But at the other extreme there are many things done by tlie State which confer so special a benefit as to justify a special charge. For example, when the State carries a passenger or a box of freight over its railroad, or carries a letter, or pro- vides the citizens with china or tobacco, it confers a sjiecial benefit. Between these two extremes there are any number of grades, according as the predomi- nant thought is that of common or special benefit, when both ideas are present. But there is one more consideration that must be introduced. There are a certain number of State activities which it is in the interest of the whole 'to have; perfonncd, but which accrue to the special benefit of certain classes, who on account of poverty are unable to |)ay for that benefit ; and if the State is to perform these functions, it must call upon the other classes for assistance, ex- J N TROD UCTION ] 5 cusing the poorer. Theoretically, the support of the poor and defective classes is an activity conferring a common benefit upon all the other members of society, and hence they are called upon to contribute accordingly. If we consider it tlie moi-id duty of society as a whole to help the weak, then the relief of the poor confers a common benefit. It is the same if we look upon poor relief from a less altruistic point of view, and consider that society is merely protect- ing its own interest, as, for example, in isolating the feeble-minded, so that they shall not propagate their weakness. Without going farther into details which will receive attention later in the book, it is now clear tliat this conception provides a feasible way of classify- ing public activities and public revenues. Wlien we once have a satisfactory classification of revenues, it is easy to classify debts, inasmuch as the}' rest upon the revenues. The administrative features of the financial bureaux will fall naturally into place also. A single method of classification will, therefore, pervade the work from beginning to end which will help us to get at the economic features , , ^ ° Advantages of expenditures, reveal the justification of t/tis dassi- and measure of taxation, and sliow us ■'"■''^'"^"■^ the essential character of each kind of public debt ; namely, the kind of credit upon wliich it is based. It must not be understood that the assignment of any activity to a particulai' group is permanent. 16 IXTRODUCTIOX TO PUBLIC FINANCE Activities that were once regarded us conferring The attitude special benefit — as, for example, a large toward puh- part of the administration of justice — chanqes A come in time to be regarded as of common (/enerai move- benefit. Such changes sometimes pro- ment toicard , . , . ,.. i .1 the idea of cecQ With rapidity, and the stages are common not passcd through synchronously by all benefit. -, , rr ^^ well as to its particular direction, the argument ^ill depend priinaiily upon considera- as to the limi- . ^ • ^ i ^■ ■^ • tation of state tions whicli belong to political science. functions. j^g amount will depend on the revenue- yielding strength of the State, and u})!)!! the effect which such cxpciiditurc will ha\'e thereon. 'I'lie danger made so much of by some writers^ lest, ' Koscher, sec. 109. CHAP. I THE NATURE OE THE STATE 23 revenues being oblainuljle l)y eonipulsion, that com- pulsion be exercised for tlie benefit of interested persons, who gain particuhirly by the increased spending, is in a democracy replaced by the corre- sponding danger lest too meagre supplies be granted by the voters wlio must themselves pay the larger part of tlie revenues, and advisable or even neces- sary lines of expenditure be omitted or seriously curtailed. Sec. 3. Expenditure, like ever}^ other feature of public finance, changed radically' in character and direction during the eighteenth century. Therefore, before proceeding to analyse present expenditure, we shall do well to take a brief survey of expendi- ture before this century. In the early stages of State life the forms of property were few, public life was identified with tlie family and with religious life. There was little call for definite public „ i,?- ^ Public ex- expenditure. The chief item was for pemiiture in religious observances, and for these ^'^'^^ *'"^*' purposes only was there a distinct public treasury. Foundations for the support of religious observ- ances, as seen in Greece and Rome, are extremely old. The temples have their own groves, lands, mines, and flocks, receive contributions, and collect payments for llu-ir services. Materials for the study of this period are scant. Services of a public char- acter are performed by all citizens as a matter of course. In war they are the warriors ; they furnisli their own arms. Their reward is in the success of 24 INTRODUCTION TO PUBLIC FINANCE part 1 their enterprise. By nuitiial effort, or by the slave labour of conquered peoples, they build their fortress- cities, sliips, roads, and temples. The simplicity of economic life and the absence of a money economy forbid the rise of any proper system of public reve- nues. Taxes are levied on conquered peoples, but the free citizen is usually exempt. There is practi- cally no division of labour in State matters which would call for a paid public service. Greece and Rome emerge from these primitive forms with a more complicated system of expenditure, but with relatively little advance in revenues. Sec. 4. In Athens we find a highly developed system of expenditures, almost communistic in char- Athenian ex- acter, and greater than that of other na- penditure. tions of Greece on account of the sources upon which the city treasury might draw and the peculiar circumstances in which the city was placed.^ The expenditure for public buildings and public works was particularly large, as were the extrava- gances of public festivals and sacrifices, of donations to the people, compensations for attending the as- semblies, and the like. Peculiar to Athens, among all the nations of that era, was the assistance ren- dered at the public expense to the poor and especially to the children of those fallen in war. Regular ex- penditures are said to have varied from 400 to 1000 talents, or from i|410,400 to i3p. 953 ff. All references to the classification of revenues have been omitted here as they are appended to Chapter I, in Part II. "Basis of Classification " The most fundamental of the many classifications of expenses, outlays, revenues, payments, and receipts of governments is that according to the nature of the governmental activities and transac- tions with which associated. From the standpoint of the student of economics the activities and transactions of a nation, state, or municipality are of two radically different types; these are here classified as arising from general fiuictiuns and from commercial functions. "The general functions of a nation, state, or municipality are those which are, as a rule, performed for all citizens alike, without any attempt to measure the amount of benefit conferred or the exact compensation therefor, the expenses being met by revenues obtained principally from compulsory contributions levied without regard to the benefits which the individual contributors may derive from any or all governmental activities. Most functions of this class are essential to the existence and development of government and to the performance of the governmental duty of protecting life and property and of maintaining a high standard of social efficiency. Cliief among such activities are those of general government ; the protection of life, health, and property ; the care of the defective, delinquent, and dependent classes; the education of the young, and the performance of other duties of a similar nature; the pur- chase of lands for government buildings, parks, and streets ; the erection, equipment, and management of state capitols, county court houses, city halls, and otiier buildings for general govern- mental uses ; and the purchase or coi,struction and operation of electric light and gas works for the exclusive purpose of lighting CHAP. 1 THE NATURE Of THE STATE 05 the streets and goveriimt'iital buildings, and of other structures and plants, such as printing offices, police and fire telepiione systems, and bridges; for furnishing free of charge any coiuuiodily or service required by the government in the common interest of ail its citizens. In the same category are included the opening, grading, paving, and curbing of streets, and the construction of drains and sewers, where such public improvements are made at public expense, without conferring upon particular individuals measurable special benefits for which, in the opinion of the i)roper authorities, compensation should be exacted by the government. To the same group belong the making and paying of loans and the payment of interest thereon, where such loans are made in connec- tion with other activities and transactions mentioned. " The general functions of nations, states, and municipalities may be classified in a great variety of ways, according to the point of view from which considered. The primary classification of general functions of municipalities which was adopted by the Bureau of the Census is based upon prior studies of the subject by Professor Adolph Wagner, of Germany, set forth in his Fi nan zwisttenschaf I, and reviewed by Professor Frederick R. Clow in tiie Quarterly Journal of Economics for July, 1896. The earlier treatment of the subject by American economists was ably discussed by Profe.ssor L. S. Howe of the University of Pennsylvania, before the conference of the National Municipal League in 1890. As a result of these studies and of conferences between accountants, economists, and others connected with the National Municipal League, that organisation arranged a tentative classification which was made the basis of the one later adopted by the Bureau of the Census and used in its statistics of municipal finance in Bulletins 20, 45, and 50. " The commercial functions of a nation, state, or municipality include those which create trade relations, industrial or semi-in- dustrial, between the nation, state, or nuuiicipality and the general public, including other civil divisions. Among the transactions which arise from the exerci.se of such functions are those involving the loan of public money at interest, the use of public property for compensation, the .sale of any commodity or article of commerce, or the performance of any work or service for pay. All these tran.sactions involve the perft)rmance of some service by the national, state, or municipal government, or the granting of some fav(mr by such government, for special compen.sation, whether tlie service or favour be primarily for this service or favour, or for the 36 INTRODUCTION TO PUBLIC FINANCE part ; revenue to be secured ; none of tliein is essential to the existence and development of the government, though tliey may be made to contribute to its support. " Commercial functions together with the commercial and semi- commercial transactions wiiich arise from them may be grouped into three subclasses — indui^trics, investments, and special services. "(1) Industries are those activities of nations, states, and mu- nicipalities — as the United States postal service, the national rail- roads of many European nations, the liquor dispensary of South Carolina, and such municipal activities as waterworks, electric light and gas works, and street railways — which are organised as more or less complete departments or offices of cities for the purpose of furnishing economic utilities to individual citizens, or to other civil divisions, on terms involving such a compensation as may be deter- mined by consideration of public policy. Such activities of cities are generally referred to by British writers as municipal trading. Those of nations, states, and municipalities are also frequently called quasi-private industries or enterprises. As economists use the term, a, quasi-private industry or enterprise of a nation, state, or municipality is one in which the purpose of realising a net income or profit controls the method of management and determines the charges, as in a private business of similar character. In this strict sense of the term there are few if any q^iasi-private industries or enterprises in the United States, the greater number of national, state, and municipal industries established in America having been called into existence solely or principally to promote the welfare of the citizens. Hence the Bureau of the Census uses the term ' in- dustries ' to include not merely those properly designated as quasi- private, as defined above, but all departments, offices, or activities organised by nations, states, and municipalities to furnish utilities to their citizens for a compensation, without exclusive regard to the question of profit. " (2) Under investments are included all transactions of national, state, and municipal governments connected with the purchase, sale, or possession of real property or securities held exclusively for investment purposes, and the loan of public money to individuals, corporations, or other civil divisions. Such transactions are of two classes: First, tiiose of the sinking, investment, and public trust funds in which or through which the nation, state, or municipality invests money for the .sole purpose of deriving interest, rent, or other income therefrom ; second, the transactions of a more temporary CHAP. I THE NATURE OF THE STATE 37 character by which the national, state or municipal government receives interest on current cash deposits and on deferred payments of taxes and special assessments. " G^) 'Special services include all activities and transactions other than those included in (1) and (2), which are engaged in by na- tions, states, or municipalities in the interest of the general public, but which confer measurable special benefits — or what are arbitra- rily so regarded — upon particular persons, natural or corpoi-ate, for which compensation is exacted. These services include the opening of highways ; the construction of pavements, sidewalks, drains, and sewers ; the sprinkling of streets, and similar services, the payments for which are forced by means of special assessments. In the same category belong also all services or special benefits ren- dered to private individuals or to other civil divisions under legal regulations, and paid for by fees, charges, rents, privilege rentals, and kindred remunerations. " It should be noted that special services, as above defined, are always performed or rendered in addition and incidental to the regular work of the various departments and offices. Receipts therefrom are always classified according to the office or depart- ment rendering the service, since the corresponding expenses cannot, save in rare instances, be fully separated from the other expenses of such department, office, or industry. " Expenses " Government expenses and revenues, when classified by the gov- ernmental functions with which they are associated, are primarily arranged in groups to which are given the designations ' General ' and ' Commercial.' '■'■General expenses. — The general expenses of nations, .states, and municipalities are those incurred by their governments in con- nection with the exercise of their general functions. These ex- penses and the payments thereof are subdivided according to the office or department on whose account they are incurred. " Commerrial expenses. — The commercial expenses of nations, states, and nninicipalities are those incurred by their governments in connection with the exercise of their commercial functions. They are divided into three groups, corresponding to the three sub- divisions of commercial transactions. " (1) Industrial expenses are the total costs of the operation and maintenance of the industries of a nation, state, or municipality, 88 INTKODCCTIOX TO FUBLIC FINANCE part i including the cost of materials used and the interest on loans made specifici\lly for such industries. " (2) Iiicefitment ej-pcnsfs are the total cost of administration of the sinking, investment, and public-trust funds of a nation, state, or municipality, inchiding tlie interest ]iaid on loans made for se- curities or properties purchased for those funds. " (3) Special-service expenses are tlie expenses incurred by a nation, state, or municipality in connection with special services performed or provided by any of its departments or ofiBces otlier than an industry, including the interest on loans which are to be met from the proceeds of special assessments." CHAPTER II EXPENDITURE EXCLUSIVELY FOR THE COMMON BENEFIT Section 1. In this chapter we shall consider ex- penditure of the first class ; that is, expenditure treated by the government as so clearl}'^ ^e< expen- for the g^ood of all that no special charge •^*<«''«- is made upon any of the individuals incidentally benefited. From one point of view expenditure of the second class, wholly for the benefit of certain persons, who ai-e, however, exempt from any special payments, the expense being treated as involving only common benefit, is sufficiently like that of class one to come under the heading of this chapter. But it has been made a part of the next chapter in order not to lengthen this one unduly. Both of these ex- penditures might well be called net expenditures in distinction from those which, unlike them, de- velop some accompanying revenues. The first item is that for general administration. Administrative expenditure is for the support of those officers of the government who Adminlstra- luive to do with civil airairs. ^ or con- , ,' . ., lure, the civil venience it is best to limit it to those ^.^•^ officers whose functions are absolutely indispensable to the execution of the laws. The officers who will 39 40 INTKODUCTIOX TO PUBLIC FINANCE part v be iiu;lu(U'{l vary, from country to country, \s\W\ the frame of the government. It has been customary fi)r linanrial writers, folh)wing the leail of the camer- alists, to limit their discussion of this expenditure to that for the crown and court. Tliis is, in Eng- land, called the civil list. The peculiar character of such expenditure in monarchical countries makes it advisable to isolate it. But it must be borne in mind that in republican countries there is no correspond- ing expenditure. The salaries of the highest execu- tive officials in republics are of the same character as those of tlie ministerial oiificials in monarchies. In England the civil list for his Majesty's priv}' purse, household, charities, etc., amounts to £470,000, and if we add the annuities paid to members of the royal family amounting to X48,000, tlie crown may be said to cost Great Britain nearly <|2,G00,000 per annum. ^ In most monarchical countries these expenses were originally met by the revenues from the crown es- tates. But the revenues from the domains having been absorbed by the general treasur}^ it became necessary to make provision for the civil list from the general revenues. To the civil list siiould be added the salaries and other expenses of the minis- tries, their clerks, secretaries, etc. In federal gov- ernments the administrative departments of the component parts or commonwealths, as well as that of the central government, should be included. Finally there are the administrative departments of 1 These figures refer to 1908. CHAi'. II EXPEXDITUKE FOR COMMOX BEXEFIT 41 the local governments. It is veiy dilTicult to ascer- tain the numljer of such officials and almost impossi- ble to ascertain all such expenses. According to the summary by the census bureau the cost of all the executive departments of the United States was $16,375,160 in 1902. This includes federal, common- wealth, and local executive departments. In monarchical governments, and to a certain ex- tent also in republican governments, traditional sentiment demands that the head of the Expenditure government shall hold a social position ^"''^^'^'' o ^ list largely of great })rominence and perform certain ornamental. merely ornamental functions, involving considerable expenditure. So that the expenditure for the ser- vices of the highest officials is often larger than the sums which would be necessary to obtain merely efficient service. This lavish expenditure may be fully justified on political grounds, but as it involves great waste, both directly and indirectly, by example, it cannot be justified on economic or fiscal grounds.^ It is a general fiscal principle, applicable as well to this part of expenditure as to any other, that the ex- penditure should not be larger than is necessary to secure the most efficient service. The justification of this lavisliness, therefore, must be found, if any- where, in tlie creation of some equal utility recognised by political science. The exceptions made in prac- tice to the general rule of economy do not extend be- yond the heads of tlie administrative departments. 1 Rau, Finamwissenschaft, sec. 48. 42 INTRODUCTIUN TO PUBLIC Fr.VAXCE part i In the subordinate positions tlie remuneration does not generally exceed and is often below that which Saving ill the must be paid for similar services in pri- lowerbraiiches ^^^^^ j.f^_ Indeed, there is a certain of the adiiun- istration. saving, in that many of the positions, especiall}^ where the tenure of office is secure for a relatively long period, can be lilled at a lower cost than the same services command elsewhere, on account of the honour attaching to them. In those coun- tries where the expenditure for the higher positions is largest much is saved by the lower pay attaching to subordinate positions. In this connection mention may be made of the diplomatic and consular service, which, while partly „. , ,. conducive to the better performance of Diplomatic ^ and consular other functions, as, for example, defence service. ^^_^^ ^|^^ regulation of commerce, is yet properly considered to be subordinate to tlie execu- tive departments. Here again the traditional opinion, that the dignity of the nation can only be properly sustained by a lavish expenditure on the part of the ambassador or minister, imposes on the treasury burdens far greater than the value of the services rendered, if measured by the ordinary business standards. As the means of communication improve and the general efHciency and reliability of the news agencies of the public press grow, it becomes harder ami harder to justify this extravagance even on political gi'ounds. The custom of lavish expenditure for diplomatic services has not been carried to such CHAP. II EXPENDirURE FOR COMMON BENEFIT 43 extremes by the United States as by other countries. As these positions were formerly more or less of the nature of p(>liti(;al pri/.i's, in that country, this has probably been to the improvement of the service. Foreign intercourse cost the United States #1,583,118, in 1894, and $3,204,522 in 1902, an increase due to the greater importance of her foreign relations since the Spanisli War, while Great Britain paid £531,392, or i!2,585,753, in 1894, and only £490,052, or about $2,450,000, in 1902, for that service, not including colonial services of practically the same character, which would bring tlie amount in 1902 up to over £1,000,000. Generally speaking, the executive de- partment costs comparatively little outside of the actual salaries. There are some election and similar incidental expenses, but not many. To the administrative department belongs the expenditure for tlie collection of the revenues. Al- though this is a part of the gross expen- „, J. fiG COS I 0/ ditures only, it is properly included in the collecting the general accounts so as to render control '*^'^'^""''*- possible. In 1908 England spent on the collection of the customs duties £1,050,832, on that of the in- land revenues £2,416,000, on the post-olifice gains £17,592,854 ; the cost of collecting the total revenues of about £154,000,000 is about £22,000,000 or about fourteen per cent. This seems an extraordinarily large deduction, but the amount is large because of tlie large amount of expenses connected with the rela- tively small returns of tlie post-office and the delicits 44 INTRODUCriON TO PUBLIC FINANCE paut i of the telegraph and some other services. The cost of collecting customs is only a little over three per cent, of collecting the inland revenues less tlian two and one-half per cent. In the United States the cost of collecting the customs duties was about three per cent in 1893, and five per cent in 1894. The receipts fell oiT in that period from ;i'200,000,000 to 5r"130,000,000, but the expenses did not fall off cor- respondingly. The cost of collecting the internal revenues in 1893 was about two and one-half per cent, in 1894 it was about three per cent. In 1906 the customs revenues were $300,251,877, and the cost of collection very nearly three per cent. In the same year the internal revenue was |!249,150,212, which cost one and lliree-fourths per cent to collect. The internal revenue department reports that the average cost of collection since the creation of the bureau has been 2.76 per cent. Sec. 2. The expenditure involved in the payment of salaries to legislative officers, when any such are The expense paid, is not the largest part of the ex- 0/ e egis a- pgj^ggg caused by the maintenance of such tive depart- '■ -^ ment. bodies. There are the clerks, aides, pages, etc., in immediate attendance upon the bodies dur- ing their session, the expenses of elections, which in this case swell to considerable amounts, the costs of investigations, pul)lic hearings, etc., necessary to put the legislature in possession of the facts upon which to base their actions, and the expenses of pro- mulgating laws, publishing speeches, reports, etc., all CHAP. II EXPENDirURE FOR COMMON BENEFIT 45 of which together form no inconsiderable burden on the finances of every nation enjoying legislative gov- ernment. These expenses also extend from the federal government down to the municipal govern- ments. The desirableness or undesirableness of pay- ing legislative officers for their services is a matter for political science to determine, and depends in large measure upon the traditions of the different peoples. In England relatively little is spent in this way in any of the legislative departments of the government from Parliament down to the parish. But in that country there is a tradition of unpaid public service that gives her much help in this direction. In the United States tlie dii-ect emoluments and other legitimate expenses of the federal Congress, and the direct and indirect, more or less illegal, raids by the common- wealth legislatures on the treasuries, as well as those made by the city councillors and aldermen, are very large. It has been estimated by Mr. Moffett^ that in the 52d Congress of the United States it jy^g ^os^ of cost 14,593,922.60 to maintain the House (Congress. of Representatives alone, for one year, exclusive of election expenses, or about ^6285 a day for each day of its existence, including Sundays and holidays. Of this amount $3,320,000 went for salaries. There were, tlierefore, •|!l,180,000 spent on travi'lling ex- penses, clerks, subordinate house officials, and contin- gent expenses (inchiding about !jl00,000for stationery and newspapers). Hut this is by no means all. 1 Sugycsdons on Government, p. 150. 46 INTRODUCTION TO PUBLIC FINANCE part i The expenses traceable mainly to this source in the rei)i)rts of the auditors, of wliich puhlic printing" for Congress is an iin[)ortant item, foot up to aV)out $7,000,000 per annum, or for the two years of the life of a Congress !3'14,000,000. The real cost of tlie federal legislature to the country is even larger than that, hut the items are not easily traceable in the re- ports, and some of them, like election expenses, are not reported. In 1906 the net dis))ursements for Congress, one year onh', were -95,555,663, public printing $5,746,177. Since then the salaries have been raised from $5000 to $7500. Dii'ectly traceable to the legislative departments of the federal, common- wealth, and local governnients were costs amounting in 1890, to $10,500,000, and by 1902 these had grown to $12,656,-309. . The only expenses directly attribu- table to this source in England are for the officers of The cost of the House of Lords, .£37,257 (in 1906), Parliament, and for the officers of the House of Com- mons, £55,576; total £92,833. But many expenses attributed to the dilferent departments should be in- cluded. The fact that the ministry is at the same time executive and legislative causes a different dis- tribution of the cost, and it is impossible to arrive at an estimate even as accurate as in the case of the United States. England does not print public docu- ments for free distribution, so that the expense for stationery and printing is less than half of that of the United States, being a litth^ over £500,000. Some mention sliould also be niadc of the expenses CHAP. II EXPENDITURE EOR COMMON BENEFIT 47 involved in the support of local or semi-local legisla- tive bodies. For the United States, there are the State legislatures and the city councils, pos^ of local and, for England, the local government council.^. boai'd and the county and municipal councils. Of these, only the commonwealth legislatures are purely legislative in cliaracter. The others perform func- tions which are better described as administrative. It is so difficult to obtain a correct estimate of the particular expenses for the support of these subordi- nate bodies as to be an unprofitable task. These bodies, too, are so intimately concerned in the ad- ministration of the other functions that we gain little by isolating the mere expenses of their mainte- nance. With the commonwealth legislatures, how- ever, the matter is different. These are purely legislative. In most commonwealths the The cost of legislatures are paid per diem, and thev '^■""''""'" . " i- .r ^ •' wealth legis- are prevented from running up too large latures. bills by the limitation of their term. The per diem remuneration and mileage are fixed by law, and range from $5 to iiilO a day and from five cents to ten cents per mile. A loophole for additional ex- pense is left by the necessity of allowing the legisla- ture to appropriate money for incidental expenses. In some commonwealths, as for example in Califor- nia, this power has at times been abused to such an extent that the contingent expenses amounted to much more than the mileage, regular clerk hire, etc., com- bined. Money was spent for thi' hire of personal at- 48 " INTRODUCTION TO PUBLIC FINANCE part i tendants on members, stenographers, clerks, etc., for tours of inspection to various institutions, and tlieliive. This abuse became so flagrant in California tliat it was eventually prohibited by a constitutional amend- ment limiting the expenses of the legislature. Most of this expenditure contravenes the rule of economy. England in the absence of the federal system is spared this expense. A very considerable part of the expense of main- taining the judiciary is treated as a matter of com- _ , ^ . mon benefit. These expenditures are Qo&t of main- ^ tainimi the sufficient to insure the continued exist- ju iciary. qhqq of the courts, whether they have any litigation before them or not. But as some part, and often a very considerable part, of the costs of actual litigation falls on the litigants, and as the courts are, in most places, almost continuously en- gaged in work of that kind, it seems more consistent with our classification to treat tliis expenditure as one partly for private benetit, under class three. Sec. 3. The construction and maintenance of public buildings for the convenience of the execu- Pubiic build- tive and legislative departments and for '■^^^- other purposes is one of the most impor- tant altliough not one of the largest items of expen- diture. The construction of such buildings is of course necessary. Tliat they should be imposing edifices, liandsomely decorated and e(iuipped, is a matter of national and local pride. That their con struction should not be wasteful is self-evident. The CHAP. II EXPENDITURE FOR COMMON BENEFIT 49 extravagances and tlieft wliich liave too often accom- panied the construction of such buildings in the United States are too well known to need discussion. They are purely abuses and need no further words of condemnation than they have alwa^'s received. The cost of construction may be regarded as a permanent investment, not yielding a money revenue, but im- portant utilities. Tiie federal government spends annually abt)ut •"#8,500,000 upon public buildings. In 1902, including new buildings and sites, the amount was 16,610,475. From 1789 down to 1882 it spent $85,591,590 for the same purpose, or an av- erage of about $900,000 per annum. In 1890, all the different branches of the government together in the United States spent $56,841,147 upon public build- ings. The British government spent, in 1894, £1,750,000 on the special account of public build- ings, but tliere are a good many similar expenses included in the other supply services. These expen- ditures are obviously subject to great fluctuations from year to year, so that the figures given are merely illustrative, not typical. The exact annual value of these utilities to the government cannot be directly estimated in money. Indirectly it might be estimated as the The value of equivalent of the interest on the sums public build- which it would cost to replace them in the most economical manner, less the annual cost of the repairs. As, in some cases, the original expendi- tures were extravagant and wastefid, this method of 60 INTRODUCTION TO PCBLJC FINANCE part I computation would result in a snuiUer sum than the interest on the original cost. Sec. 4. A nation differs from individuals in that no law can be imposed upon it by any external human power. The enforcement of the rights and obliga- tions of nations in their intercourse with one another is left to the different nations themselves. As long as international law offers no peaceful means of re- dressing wrongs, war is the only resource. " Inter- national law," says Woolsey, "assumes that there must be 'wars and fightings ' among the nations." This assumption is universally correct. There are no signs, as yet, in spite of the peace conferences at The Hague, that nations will cease to consider that war, or at least the actual preparation therefor, as its „. , . sole preventive, is an absolute necessity. The cost of ^ ^ -^ defence is un- The wliole theory of the independence avoi a e. ^^^j equality of sovereign States, upon which international law proceeds, throws the main- tenance of national dignity, honour, and recognised national rights upon the nations themselves. The extent and character of preparation for war in each State depends upon its history, national character, and geographical situation. Thus, tlie warlike tra- ditions, the mutual distrust, and contiguity of France and Germany, impel to extensive preparation for war, and similar considerations affect other nations of Europe. On the other hand, the traditions, national character, and geographical position of the United States, until after the war with Spain in CHAC. II EXPENDITURE FOR COMMON BENEFIT h\ 1898, led to a feeling of security, and a preparation so insignificant, compared to European armaments, as to call forth continual warnings and protests from military authorities. As a result of the acquisition of territory in the Pacific, and in the Orient, there has been thrown upon the United States the burden of maintaining the bulwark between the white and the 3^ellow races, on the western side of the territor}- occupied by the whites. The unavoidable expenses for this purpose, while they have not yet reached the magnitude of those of England and of Russia for the defence of the eastern side of their outlying posses- sions, are already large and are growing rapidly. The necessity and probable continuance of this bur- den on the finances of nations being thus predeter- mined, the only task for the student of finance is to ascertain how great a burden this imposes on the treasuries and what possibility there is for some return. There has been much discussion of the relative merits and economy of the different methods of army organisation. It is pointed out ^.,. •^ " ^ Dijferent sys- thiit the German system of compulsory temsofanny service of all citizens without remunera- <""£'""'*"'"'"• tion shows a much smaller cost, per man, than the English and American system of paid enlistment. But it is urged again that there are in Germany a larger number of expenses involved in the army system than those of the government, as the per- sonal expenditures of the soldiers, the cost to the 52 IXTRODUCriON TO PUBLIC FINANCE part v country from the disturbance of production, the extra costs of enrohnent, of free quarters during manoeuvres, etc., which ihj not appear in the budget, but which should be counted in before any fair comparison can be made. It would seem that, in the end, the actual net expenditure for this purpose could only be as much less, per man, as the standard of living of the soldier is less in the one country than in the other. And on this ground it might be urged that the German system, which gives the soldier but little spending money to waste, and by very strenuous measures inculcates thrift and almost penurious economy, is on the whole the cheaper. How much again this lessens the efficiency, per man, and necessitates a larger number of soldiers is hard to estimate. In England the volunteer system, while adding somewhat to the cost, does not make as heavy drains on the treasury as do the German reserves ; but as the expenditure by the individual members of the volunteer service is for a public purpose, it is a part of the cost of the system, and a part that is very difficult to estimate. On the whole no accurate comparison is possible. The act- ual expenses of the different nations as they ap- pear in the budgets are as follows : England, 1804- 1895, army £18,000,000, navy £18,700,000, together .£36,700,000 ; 1908-1909, army £27,459,000, navy £32,319,500, together £61,778,500. United States, 1895, army $54,500,000, navy ¥31,700,000, total 5,200,000, but this includes over -Vl 6,000,000 for CHAP, II EXPENDITURE FOR COMMON BENEFIT 53 the construction of new vessels. In 1006, the United States spent on tlie military establishment $117,946,692, and on the navy $110,474,264^ together 1228,420,856. Including the amounts spent by the commonwealths the total expenditure for military purposes and the navy in the United States were, in 1890, 157,544,617, and in 1902 over !S)200,000,000.i One of the main features of the American system is the establishment of training schools for officers, cost- ing 1360,000 for the military and ."ii220,000 for the naval academy. In most countries the preparation for war is a source of rapidly growing expenditure. Aside from maintaining the integrity and the dig- nity of the State, whicli are, of course, the greatest conceivable })ublic benefits, the expendi- meeconom- tures for the army and the navy yield ic and social TIT • rrii returns for little direct economic return. ihe navy miUtunj ex- protects the citizens abroad and contrib- penduures. utes thus to the pursuit of commerce ; while tlie army, likewise, keeps open the channels of internal trade. In those countries where the entire male population is passed through rigid military training, the military system supplements in a very important manner the general educational system and gives valuable mental and ]ih\'sical training. Countries ^ The exact amount cannot be stated as the census report, the only available cunipilatiini briui^ini; together the expenditures of the commonweal tli.s, includes the expenditure for police with those for the militia. The items are : Federal expenses, army ami navy, §1 ')4,2."]7,22n ; for increase of navy •S2(l,()ti7,104, and commonwealths' expenditure, militia and police, §54,551,82!). 54 IXTRODUCTIOX TO PUBLIC FINANCE part v with 11 simiU standing army participate in tliis benefit to a much smaller degree. The existejice of a strong military spirit fosters the virility of a people, and hence contributes to its manhood and efficiency in every direction, while the absence of tluit spirit be- tokens effeminateness and degeneracy. But these are benefits that cannot be measured statisticall}', nor in money, and must be left for the sociologists to discuss. The expenses of actual war are not a part of the regular budget of modern nations. They are always The expense treated as exceptional or extraordinary of war. expenses. Besides the sums actually ex- pended by the public treasury there are many indi- rect losses and expenses involved. According to the estimates of Wilson ^ the cost of wars to England from 1688 to 1882 was over £1,258,680,000. The esti- mated cost of the Boer War to England was over £182,000,000. The cost to the United States of the Civil War is hard to estimate. The debt incurred amounted to 11,815,900,000 ; i|800,000,000 of revenues were spent during the war ; commonwealtlis and cities spent a part of their current revenues and rolled up debts, and the pensions will probably amount to over .$2,000,000,000; 16,000,000,000 repre- sents approximately the actual expenditure by all the governmental agencies on the side of the North. The general preparation for internal peace and security and the prosecution or punislmu'iit of the ' The Naliunal Biidyet, etc. CHAi'. II EXPENDITURE FOR COMMON BENEFIT 55 disturbance of that security by individuals or small groups of persons is a very important internal peace item of expense. Such security is gen- andnecuriiy. erally maintained by the police and the military. In the United States the chief expense is borne by the cities. The states and counties have their own police officers for this purpose, as do also towns not cities. The cost of the police for the whole of the United States was, in 1890, 123,934,376. In 1902 the combined expenses of the police and of the com- monwealths' militia was $54,551,829. Sec. 5. The building and maintenance of roads is a source of expenditure which well illustrates the general trend of development. Adam Smith re- garded the maintenance of roads as an „, , ^ *=• The cost of activity conferring so special a benefit on roads, « com- the individual user that he should bear "'''" ^"'■'''"• the burden. Even Bastable places them among the " industries of the State." ^ But the universal ten- dency is to make the maintenance of roads a common burden because conferring a common benefit. The care of the roads is generally a duty of the local governments, and in the United States the first taxes laid in the colonies, and afterwards in the new states, were for this purpose. Tiie federal government stopped spending much for roads and canals after 1840. In the period from 1789-1882 the total ex- penditure by the federal government was only <|19,9G0,4G5. In the year 1890 the commonwealths 1 I'l). 193, 194. 66 INTRODUCTION TO PUBLIC FINANCE part i and local goverimients spent -^72,202,023 on roads sewers, ditches, and bridges. In 1U02 this amonnt, including street lighting, amounted to f 148,198,837. The maintenance of waterways, roadsteads, har- bours, rivers, canals, is also a public function. . Canals, to be sure, have passed, or are ance to navi- passing, through the same development gation. ^^ roads, and in some respects harbours and rivers have also done so. In the United States the dredging and improvement of the facilities for navigation in rivers and harbours are the only im- portant items of " internal improvement " that have been consistently held in the hands of the federal government. From 1789-1882 Congress spent $106, 882,717 on rivers and harbours, and in 1890, $11,737,438 were spent thereon. In 1902 the amount was $19,590,082. In the same line is the main- tenance of lighthouses, signal-stations, the weather bureau, and life-saving stations. The last-named is in some countries supported, in part, by pri- vate contributions : in the United States it costs $1,746,841. The construction of lighthouses, bea- cons, and buoys cost from 1789-1882, $77,080,509. In 1894 the lighthouse service cost the United States $3,250,000 ; in 1902, $4,537,316. Sec. 6. No expenditure connnends itself more than that for education. It creates the groundwork The cost of of all political institutions. No expen- education. diture in the opinion of (leffcken is more "reproductive" than that which the State makes CHAi'. II EXPENDITURE FOR COMMON BENEFIT 57 for the development of its future citizens. But the expenditure of the various countries for this purpose cannot very well be compared, because it is very difficult to obtain a complete statement of all tlie outgo under this head. The local govern- ments generally have certain lower branches under their control and \Y\y a part or the whole of the expense of those. In federal governments the re- mainder of the system is generally under the control of the component parts. The United States federal government has rendered assistance to the common- wealth and local schools by grants of land of un- known, but very large value, and by the collection and dissemination of information through a bureau of education, and in various other ways. In Eng- land the provision for education made by public authorities is generally less than in most other countries, the sole exception being the provision for technical education. Until very recently this line of public activity has been regarded by that country as one conferring a special benefit and to be paid for in part by fees. But it is now pretty clearly the accepted policy of all modern nations to provide at least the primary education necessary for Elementary every citizen as a common benefit and to ^dumtion ■, .. , , » 1, 1 treated as a make it compulsory and tree to all the coimnon recipients. In treatment, then, it is re- ^*'"f."''- garded as being as much a benefit to the rich child- less man to have the sons of his poorer neighbour educated as that he should have the protection of 68 LVTRODUCTION TO Pl'Rl.IC FLVANCE i-art v the police in the enjoyment of his property, and he is made to pay on that [)rineiple. In regard to higher edncation as given in the secondary schools, and technical edneation, tliere is no snch uniformity of practice. Education in the rudimentary mechani- Technical cal arts is in fact becoming as important education. g^ need of socicty as elementary education in the usual branches. As the pace of industry be- comes more rapid and its organisation more perfect, the possibility of giving this sort of instruction by the old apprenticeship system vanishes. There is no place for the boy in the modern factory. Pri- vate initiative cannot be depended upon to supply the opportunity for this sort of education. The State has to do so if it is done at all. In this re- spect many of the English cities are far ahead of any American city.^ Whether college and university education should be given the recipients free of charge at the common University cost is, in practice, also an open question. education not Yi-^n\ not liberal private endowments been yet treated as i <- i • • • a common made lor this purpose, it is probable that benefit. ^he question would long ago have been settled, and that this branch of education would have been treated as the primary was. University education, even though enjoyed by but a relatively small number of the citizens, is quite as " reproduc- tive " and as beneficial to the State as a whole as even a widely diffused system of primary schools. 1 Sliiiw, Mnniripal Gnvprnment in Great Britain. CHAP. II EXPENDITURE FOR COM MOM BENE FIT 59 It is f|uite US important, if not more iniportaut, to liave highly trained leaders of public action and thought as it is to have a low degree of intelligence widely disseminated. The university as a centre for research alone is worth many times what it costs if properly conducted. In proportion to the benefits which it confers on the State it is, where run at the general cost, the least expensive part of the whole system. The provision made by many of the west- ern commonwealths of the United States for the liberal support of universities from the public funds has been without exception the most beneficial and economical expenditure they have made. In Ger- many, too, a large part of the expense is borne by the State. Closely related to education is the main- tenance of museums, libraries, picture galleries, and scientific investigations. These comprise in most countries an important part of the provision for edu- cation. In 1906 the following amounts were spent in England and Wales for educational purposes : by the local educational authorities X 20,403,935, by the board of education out of parliamentary vote .£12,604,048. Parliament also voted X 1,708,201 for primary schools in Scotland and £1,466,574 for primary schools in Ire- land. In the United States in 1.S90 tlie total public expenditure for education was $145,583,115, which was by far the largest expenditure for any one purpose. By 1902 the annual expenditure for education of a public character had increased to !y2Sl,211t,27S. Sec. 7. Indirectly all public expenditure aids pri- 60 IXTRODUCTION TO PUBLIC FINANCE part \ vate industry and commerce. But there are nian}^ . . , - forms of direct aid that are treated and Assistance of industry and regarded as conferring a common bene- commerce. ^^ ^^^ ^^|^ alike although accruing to the good of certain persons. Bounties are sometimes offered for certain products. Enterprises of various kinds receive subventions or partial and even com- plete exemption from taxation. The so-called pro- tective system involves an indirect expenditure of the people's money in the same way. The expense of maintaining the currency, of building and keep- ing up roads, canals, harbours, and the like, is of tlie same character. So are many public buildings, as exchanges, markets, slaughter-houses, structures and grounds for public fairs and the like, and commis- sions and other organisations for collecting and disseminating knowledge concerning horticulture, agriculture, and various industries. Tlie mainte- nance of a system of weights and measures also belongs here. Besides all those mentioned and some others which are generally treated as expenditures for the common benefit, there are a great many things wliich the State does for the benefit and as- sistance of industry and commerce that are regarded as conferring special benefit and treated as such. The administrative control of private industry Q I I f and commerce has become a necessity on private enter- account of the growing })ower of modern TP^^^- organisations of capital and the grow- ing importance of the " public " functions which CHAP. II EXPENDITURE EOR COMMON BENEEIT 61 many of these private enterprises perform. The necessity has been widely felt of controlling indus- trial monopolies, and we have numerous commissions for the regulation of railroads and other public-service industries. To this branch of expenditure belongs also the cost of the control exercised over the pro- duction and sale of foods for the protection of the public health. This is mainly an expenditure of the local governments, although it occasionally enters into that of the central government, especially in the case of imported foods. In the United States the federal government has assumed this important func- tion, and many of the states are supplementing its work. The cost of the enforcement of sanitary reg- ulations of all sorts is another exjjenditure of the same character. CHAPTER III EXPENDITURE FOR THE BENEFIT OF INDIVIDUALS Section 1. In this chapter we shall consider the remaining three chisses of expenditure. These are not so very closely akin, but have one point of similarity; namely, that they are all regarded as to a greater or lesser extent for the particular benefit of individuals. The first, however, is not so treated by any nation, but is treated as though it were an expenditure for the Charitable benefit of all. The relief of indigence and expenditure, w^q protection of socicty against the insane and the criminal, the care of the feeble-minded and otherwise defective classes, and the care of the sick are among the most costly and most discouraging fea- tures of public expenditure. In the United States the expenditure for pensions, charities, and gratui- ties amounted, in 1902, to $19(5,820,069. Generally, even after the State has done all that it can he in- duced to do, there is still room for private effort in the same direction. The expenditure by private persons and socueties for exactl}' the same purposes is possibly larger than that of the government; so that this is one of the heaviest of all public expendi- tures. The relief of poverty has generally received more attention in treatises on economics than in G2 CHAi'. Ill EXPENDITURE FOR INDIVIDUALS 63 works on public finance. But it belongs very prop- erly to tlie latter science as well. It is generally a local, rather than a national, expenditure, but on account of its vast size and economic importance has often received the attention of the central authorities, and is in many cases, at least partly, under their control. There is almost no expenditure that fails so signally to accomplish anj^thing like permanent results. As frequently administered, poor relief has aggravated the very evils it has been intended to re- lieve. The words of Malthus are still true : " We have lavished enormous sums on the poor, which we have every reason to believe have constantly tended to aggravate their misery." ^ Yet the expenditure is necessary, indeed imperative, and will be so as long as the present sentiments on the subject pre- vail, unless we can remove the causes. That this may be done by the extension of educational facili- ties, especially technical schools, is a frequent con- tention. The systematic relief of poverty in such manner as to lessen its evils has recently become the study of scholars and of able administrators and some progress has been made. The student of finance need not enter into the question of the causes nor of the cure of poverty. Indigence there is, and tlie State has assumed the duty of relieving it. The modern methods of relief are fast coming to be as economical and efTicient as the conditions under which they are necessarily administered admit. Like war, this is a ^ Essay, p. 438. 64 nVTRODUCTIO.V TO PUBLIC FIXAXCE part l form of expenditure that shows little tangible result that can be measured in terms of money. The general principle applied in the granting of continued assistance to the poor is that the cause The prhicipies of poverty to be relieved must be such goveniing the ^^^^^ -^ ^^^^^^^ ^^ removed by the individ- granting of •' assistance. ual efforts of the candidates for assistance. In other cases, only temporary assistance is rendered. Those who can help themselves are desired to do so. The four agencies which really work together toward the same end are the civil, the ecclesiastical, the associated,! and the individual. These should all work harmoniously and should avoid duplication of work. The assisted persons should, so far as possi- ble, 1)6 put under conditions which will enable them to help themselves to the limited extent tliat they are able. The repression of vagrancy and the pun- ishment of wilful paupers, who are really able to support themselves but unwilling to do so, is left to the courts. Although poor relief is mainly a local duty. Great Britain contributes £710,000 annually from the cen- tral treasury for " non-effective and charitable ser- vices " ; of this, however, over £500,000 are for pensions. In the United States in 1902 public chari- ties alone (not including pensions) cost •'158,400,000 : but this sum does not include the value of provisions, etc., raised on the poor-farms, or at the workhouses, of which no accurate estimate can be formed. ^ Associations or leagues of charitable organisations'. CHAP. Ill EXPENDITURE FOR INDIVIDUALS 65 Very different from the older sort of poor relief is the institution of old-age pensions on the insur- ance plan. Such institutions, for example, as the German, for compulsory insurance may ^ be made self-supporting and in time ayuinst old promise to relieve the State of a part of "^^* the burden of poor relief. Still different in principle is the old-age pension system adopted in England in 1908. Under this system it is provided that every man or woman, who has attained the age of seventy years, and who has been a British subject and had his or her residence in the United Kingdom for twenty years, and wdiose means do not exceed „ British old- £31 10«. (or about ^150) per annum, age pension shall be entitled to receive a pension. ^^*'^'"- The amount of the pension, which is to vary with the private income of the pensioner, ranges from one to live shillings per week. Funds for the administration and for the payment of the pen- sions are to be provided by Parliament. This system appears to a foreign observer to amount to an ex- tension of the relief to some persons who would not otherwise receive it, and to a transfer of a part of the expense from the local to the central govern- ment. It also seems to tiike away some of the stigma that attaches to the acceptance of poor relief under the old system. There is some doubt as to the amount that this will cost. It is estimated that 500,000 persons will satisfy the conditions and be en- titled to pensions, and that the cost will be about F 66 IXTRODUCTION TO PUBLIC FINANCE part i £6,000,000 per annum. But no estimate is available as to how much this will be offset by the reduction in tlu' cost to tlie local governments. Modern society supports the insane and criminal classes at public cost. In this way the greatest Insane and possible Saving is made. Indeed, the criminal ^ost need not be nearly as great as it is. classes can be made self-sup- T^ o a large extent prisons can be made porting. self-supporting. It is perfectly feasible by a proper division of the field between the different institutions to make the prisons, insane asylums, and the like entirely self-sustaining. Hard labour is frequentl}^ a part of the criminal's sentence; the less violent insane can be made to work, and something can be got, by pro[)er supervision, from the feeble-minded and the paupers. By an exchange of products between the different institutions the necessary diversity can be obtained. There is little excuse for the too common uselessness of the labour imposed ; the tread-mill and oakum picking of our older prison discipline ; the digging of unneeded ditches by the insane, etc. Exchange of products, too, avoids the danger of conflicts with the labour unions, wliich so often arise when a prison attempts to maT^e a product for sale in the open market. This expenditure is very closely related to the one for the maintenance of internal peace and security. The burden falls mainly upon the finances of the central government, or, in a federal State, upon those of the component commonwealths. The policy of CHAP. Ill EXPENDITURE EOK INDIVIDUALS 67 isolating the defective classes, the insane and crimi- nal, the deaf and dumb, the feeble-minded, and the like, is an economy for society as a whole, and if it can be made to prevent the propagation of these weaknesses, is far-sighted. Hospitals for the sick are imperative needs in the case of infectious diseases ; they are great blessings and very desirable from the standpoint Hospitals. of expediency in all cases. The opposi- tion occasionally manifested by selfish private med- ical practitioners to public hospitals is a sufficient proof of their economy. Fortunately the modern attitude of the medical profession is strongly for preventive measures and consequently favours the erection and supp(jrt of hospitals. Generally this is a local expenditure. Certain branches of the government, like the military and the naval, have generally found it necessary, on account of the large number of persons in their employ, to make provision by hospitals for the care of their own sick. The maintenance of quarantine stations for the isolation of persons coming from infected countries or districts is a national affair. Its cost may at times rise to a considerable amount. But there is no question as to its necessit}^ and econf)my. In the United States there are arrangements for (quarantine between the different States, partly at the cost of the federal gov- ernment and jmrtly at that of tiie coramonwealtlis. Quarantine against phmt and animal diseases is similar in character, and the expense is met in similar ways, 68 INTRODUCTION TO PUBLIC FINANCE part • Sec. 2. 01i4.5,()04,(i()5 ; Indian wars (on account of service without regard to disability), $9,365,711; war with Mexico (on account of service without regard to disability), i?40.87(!,879 ; Civil War, $3,533,593,025 ; war with Spain and insurrection in the Phil- ippine Islands, .S'22,563, 035 ; regular establishment, .•$12,630,947; unclassified, $16,393,945. Total disbursements for pensions, $3,751,108,809. 70 INTRODUCrrOX to PURLIC finance part V Great Britain spends about £550,000 on "super- annuations and retired allowances," in various de- partments; but special pensions for distinguished services, military and naval, civil and judicial, amount to over XI 10,000 more, and some others are covered bv the supplies for the different departments. Si:c. 3. Under this class belongs also that expen- diture which is made for the development of indus- try by bounties and the protection of home industries against foreign competition. The latter expenditure differs from the former only in that the sums spent do not pass through the hands of the officers of the treasury. The recipients of this assistance collect it Assistance to directly from the contributors in the industry in shape of higher prices for their wares the form of bounties and than would Otherwise prevail. With the "protection. " economic side of this expenditure, and the possibility or impossibility of adding permanently to the wealth of a nation by this process, public finance has nothing do. But as many important nations practise this form of expenditure, we cannot avoid at least a statement of its character. The revenues derived by the government from taxes on the commodities actually imported will be considered in Part II. But so far as any actual "protection" is afforded the home producer, it is an item of ex- penditure. In effect it is practically the same as if a subsidy or bounty were paid to the producers out of taxes collected from the consumers of the goods in question. This expenditure is made n«• Such industries are carried on from the highest 78 INTKODCCT/OX TO PUBLIC F/XAXCE part i branches of the government (h)\vii to tlie lowest. We find, for exani[)le, many Ameriran towns supply- ing a part of the support of the inmates of its public institutions by cultivating the lands of the poor- farms. Some of the most striking instances of such in- dustrial expenditure are connected with communi- cation and transport, and with those industries the management of which, on account of the tendency to monopoly, is frequently put into public hands. Examples of this are numerous among those already mentioned. Many industries have been at different times and places so managed as to cost more than they brought in. That is, they have resulted in a net deficit, not a net profit. They thus pass into class three. A rather significant list of enterprises has in modern times been entered upon by the State, which might be, but are not, managed so as to yield a revenue that offsets their cost. These are museums, libraries, parks, baths, and the like. They belong under class one. PART II PUBLIC REVENUES CHAPTER I THE CHARACTER AND CLASSIFICATION OF PUBLIC REVENUES Section 1. German writers on public finance generally begin the discussion of revenues with the statement that the State requires services The state re- and commodities. The services are fur- Q^iires services ... and cominodi- nished by the citizens ; in primitive com- ties. munities freely, by all, in virtue of membership in the State, later by particular ones who are paid for them. The commodities or wealth re- quired may be produced by the State or taken from the citizens. In the ancient primitive community, services are rendered by the citizens as their proper contribution to the State. The commodities needed are for the most part furnished by the individuals without any recognition of a transfer of ownership to the State. The division of labour necessary for the successful administration of more complex affairs of the modern State demands a separation of the 79 80 INTRODUCTION TO PUBIIC FINANCE part n persons permanently in the service of the State from the other chisses. These must then be sup- ported from somewhere, and in classical times this is accomplished by giving the State, or what is the same thing in classic thought, its special otBcers, the income from certain sources, as mines or productive enterprises, and taxes upon tributary peoples, or certain inferior classes of citizens. Out of these funds the public officers were supported, and those in the service of the State who were paid for their services were maintained. Again, in the middle ages, feudalism furnished a mode of support for public officers by giving them a certain control over land and its occupants. This was a means which, without the use of money, pro- „ , ,. vided services and commodities for the Feudalism provides for public needs. ^ But later as money be- tf'^^^Y"^ came more plentiful, and in ordinary without iheuse transactions payments in kind and in of money. • i. i • j. i. • •^ services were commuted into payments m mone}-, the government in turn commuted services due into money payments. At the same time, lands oi'iginally conveyed to public officers in considera- tion of their public services, and to enaljle them to perform those services, passed absolutely into their control and were treated, in part at least, as their pi'ivate })roperty, and the services and com- moditi(!s they yielded became tlu; private income of those individuals and their families. But although ^ Maine, Early l.mn and Custom, p. 148. CHAP. I THE CHARACTER OF PUBLIC REVENUES 81 the revenues from the domains, retained in this same way by those families which became the sovereigns, were still applied to public expenses, they soon be- came insuthcient, as the State's functions grew, and other resources were sought. In the mad scramble for public revenues, old rights to dues and services were tenaciously retained by rulers or their officers. Especially were the claims to military and similar general services held. These claims, too, were finally commuted into money payments, which became com- pulvsory just as the services from which they were derived had been compulsory. The names used for the first revenues, which differed from the receipts from domains and the customary services, show very distinctly ,„, ^ ^ J The voluntary the voluntary character of the payments, character o/ They are called beggings, requests, gifts f^ll2''thT' (heden^ petitiones, benevolences, (7o/m), or receipts from' from the point of view of the assistance '^«"^«'««- given, aids (^aide, steuer)} With the gradual growth of the needs, for which these demands were made, into permanent needs, with the further centralisation and concentration of the public functions, with the neglect of public duties by the feudal lords, and by the quasi-public officers quartered on the land, and with the consequent performance of these duties by the government, the demands upon the people be- came permanent and compulsory. Sec. 2. Since the emergence of the monarchica' ' St'lij;maii. Kssai/s, pp. 6-7. o 82 INTRODUCTION TO PUBLIC FINANCE taki ii State froni feudalism, the trend of [)ul)li(' tiiiaiict-' has been directed by the growth of constitntionalisni, — or the representation of the people in the government. As the whole advance of this movement turned upon the success of the people in obtaining the control of The growth of t^ie purse, it is evident that tlu; resulting constitution- changes in the financial system must alism results . in uniformity li^ve been very important. 1 he long in the revenue history through which the different rev- st/stems of the . „ different coun- euues have passed, the necessity of con- ^'*'^*- stant compromise between the dift'ei'ent interested parties, and the various changes made neces- sary by the growth in the economic life of the world, all these have left modei'ii States with a most confused jumble of revenues. Yet with all the irregularities and anomalies that can be found in the revenues of any modern State, there is still in every case a more or less clearly traceable systematic development. Tliis growth of system is clearly due to the work of the representatives, in whose hands the development of constitutional government finally placed the control of the collection and spending of the public money. As these representatives realised the need of revenues, they naturally sought for some principles of right and justice to guide them in the choice of sources. The result has been a partial uniformity in the systems of the different countries. It should not, however, be imagined that this uni- formity is very great, imr that tlie systems of the CHAP. I THE CHARACTER OF PUBLIC REVENUES 83 different countries are alike in details. But some- what the same fundamental ideas seem to underlie all. There are also great differences. Thus one country chooses to obtain the larger part of its reve- nues from a tax not used at all in another. Histor- ical practices and differences in the frame „,. ., ,.^ ^ blujht aiffer- of government necessitate modifications, ences in de- even of the same principle. That bug- bear of the student of public finance, practical ex- pediency, which has ruined many a fine theory, works in the most astonishing ways to prevent the execution of approved principles. Sec. 3. The uniformity above noted came about as a natural result of the general search by the agents of constitutional government for some good reason why, in each case, the particular person con- tributing should be called upon to do so. As the representatives of the people, they naturally had to satisfy, in some wa}-, the reasonable desire of the people for some clearly defined method of apportion- ment. As it is generally hard enough to convince men of the need of contributing anything, the plea put forth must be a strong one. If we confine our attention, foi- the purposes of illustration, to taxes alone, which are the hardest of all revenues to justify, we can see more clearly how the necessity of thus showing good reasons led to uni- DitTerent formity. It is evident that if the repre- «<"^« •"■'»'/'''' sentatives had, for instance, informed thno/taxps. their constituents that "taxes are one-sided transfers 84 INTRODUCTION TO PUBLIC FINANCE part ii of economic goods or services," ^ they would have had considerable difficulty in getting consent to any taxes. But when they announced, " taxes are paid in return for the benefits conferred upon you by the government," it was easier to collect them. When they proceeded to assess taxes on the basis of a more or less definite attempt to measure the benefit con- ferred, or where, in the nature of things, an actual measurement was impossible on some other basis of supposed equality, they clearly had a very good case to present to their constituents. It requires but the slightest knowledge of the history of constitutional legislative bodies to prove conclusively that such Avas the process of reasoning. And this fully ac- counts for the similarity of the systems of various countries. Whenever it was perfectly clear that a certain function conferred a special benefit on an individ- ual citizen, the charge was made on him, and those persons not so clearly benefited were wholly or par- tially exempt. Thus we have the practice of taking tolls from persons using the roads, of collecting fees from the suitors at court, or making a sale of some priv- ilege or commodity to the citizens for a price, as in the case of granting a monopoly, or the sale of manu- factured wares, or of lumber, or ore from the domains. But many of the more important functions do not result so clearly in a special benefit to the individual, and recourse is had to some other mode of justifica- 1 Part of the definition of taxes by Professor Ely, pp. 6, 7. CHAP. I THE CHARACTER OF PUBLIC REVENUES 85 tion. At first, naturally, the older ideas are devel- oped. The services traditionally due from the citizen to the State, of which that of military service is the most prominent example, are recalled and ap- pealed to. It is claimed that money should be given in commutation of these services. Then the ground is shifted again and again, and many apparently different reasons are advanced. But in all these changes one thing is clear, — the shifting of argu- ment is made in order to enable the use ^ Changes in of some new measure of the amount of the forms of taxation, and at basis the justification '«^««'o« «'-e •* due to the remains practically the same. The citizen search for new is asked to pay, because he shares in the "*^"*"''^*- benefits common to him and his fellows. But this common lienefit does not suggest any particular measure. Sec. 4. Another point of similarity between dif- ferent nations must be studied historically; that is the feature of compulsion. This feature ^, '■ iompulston is old and universal. It is, perhaps, older a universal than any one of the nations and began in •^^"*'"■^• that feudal system from which they emerged. The citizen had to be compelled to render his service to the State, whenever the special benefit to him was not clear. That feature the most advanced consti- tutional governments have retained. There have, to be sure, been instances where States, and especially cities, have had recourse to voluntary contributions to meet the expenses giving a special benefit. But 86 INTRODUCTION TO PURIJC FINANCE pakp ii tliese soon passed into compulsory contributions. A fine example of the (U'veloi)ment of a voluntary con- tribution into a tax is found in the English })oor-rate. In the twenty-seventh year of the reign of Henry VIII., 1536, collections were made for the impotent poor (voluntary). In the first Edward VI., lo-lT, bishops were authorised to prosecute all who refused to contribute for this purpose (compulsion enters). In the fifth Elizabeth, 1563, the justices of the peace were made judges of what constituted a reasonable con- tribution (compulsion as to the amount). Aud from the fourteenth Elizabeth, 1572, regular com- pulsory contributions were levied, and so they have continued. k5EC. 5. We have already classified expenditures according to the character of the benefit conferred.^ Now the almost uniform practice is to Classification of revenues collect compulsory revenues from all the accordnig as citizens for those expenditures that they are justi- fied by com- Confer a common benefit, or one that mon or special j^ gQ treated ; then to collect special benefit. compulsory revenues for a part of the cost from those persons regarded as specially bene- fited by expenditures of class three ; wiiile the I'evenues for meeting the fourth class of expendi- tures are raised by the sale of the commodities or services. Professor Seligman finds that there are three dis- tinct classes of revenues, each resting on a different 1 See I'art I., Cliap. I., sec. 6. CHAP. I THE CHARACTER OE PL'BfJC REVENUES 87 justification.^ The first of these three we shall call taxes. This is a slightly narrowed use of the term. In the broadest sense an exercise of the taxing power of the State occurs whenever a compulsory conti'ibu- tion of wealth is taken from a person, private or cor- porate, under the authority of the public powers. But such a broad definition of taxes would include, also, the charges for expenditures of the third class levied to pay the cost or part of the cost of a special service. As these are certainly different from those charges levied to meet the expenditures con- ferring a common benefit, it is necessary to adopt the narrower definition. In this sense, then, taxes are general compulsory contributions " Taxes defined. of wealth levied upon persons, natu- ral or corporate, to defray the expenses incurred in conferring a common benefit upon the residents of the State. A tax is justified, but not necessarily measured, by the common benefit conferred. When a distinct attempt is made to levy the charge only where a traceable or assumed special benefit is conferred, and to make it cover the cost, 1 See Seligman, "Classification of Revenues," in the Quarterly Journal of Economics, April, 1893, and April, 1895 ; Essays, Chap. IX, In my opinion Trofcssor Seligman has not improved his clas- sification by the refinements introduced in the second article. Nor is the necessity for distinguishing between fees and special assess- ments clear. Special assessments are a kind of fee, even within the terms of the professor's definition of fees. Nothing is gained by raising classes logically .secondary in character to first place. It is iiopcd that the simi)le general outlines of l'rofe.s.sor Seligman's classification, as given in the text, may find general acceptance. 88 INTRODUCTION TO PUBLIC FINANCE \\\\lls. Of the foregoing, sales, interest, and rents generally come wiiiiin the definition of quasi-privatf price, the others within that ot public price. The prices connected 100 INTRODUCTION TO PUBLIC FINANCE part ii with investments are therefore qnasi-prhvitp ; those connected with industries are more Uirijeiy ptihUr ; and those connected with special service are quite variable, depending much upon the nature of the special service rendered by the individual nation, state, or munici- pality. "In tabulating the receipts from sources involving the element of price the Bureau has observed the following distinctions : "Under sales are included sales of real estate of the nation, state, or municipality ; sales of securities belonging to their sinking, . investment, and public trust funds ; and minor sales by the various departments and industries of their discarded equipment, and of material discarded in connection with the different activities of the government. " Under interest and rents are included all receipts of nations, states, and nuinicipalities corresponding to those commonly so des- ignated in private finance. Receipts from so-called interest levied on account of non-payment of taxes and special assessments at the time required by law are, however, tabulated as interest when col- lected at the legal rate of interest in the several divisions collecting the same, and are tabulated as 'tax penalties' when collected at a highei rate. ^'- Receipts from special-service privileges include all periodical receipts, other than general or special property taxes which are collected from individuals or corporations enjoying the special priv- ilege of using the highways or for providing some public service, such as that furnished by street railroad, subway, electric light, telephone, and water companies. "All receipts from individuals and corporations in payment for special-service privileges sold outright are designated as receipts from special-service privilege sales. "The receipts derived from special-service privileges and special- service privilege sales, which are commonly spoken of as taxes, differ from taxes in being payments for services and also, in the majority of cases, in being voluntary or contractual instead of compulsory. However, when a payment made by a public-ser- vice corporation to a nation, state, or municipality is in lieu of all taxes, or is levied upon franchises classed as property, and at the same rate as other taxes, such payment is included among general or special property taxes. " Under privilege rentals are included all periodical receipts from licenses other than tho.se defined above a.s receipts from special- CHAP. I THE CHARACTER OF PUBLIC REVENUES 101 service privile{/es, which, in addition to conferring the privileges usually bestowed by such instruuients, grant the use or enjoyment of, or right upon, some property of the government granting the same, as the streets, parks, or public buildings. ^^ Receipts from minor privileges include all periodical receipts collected, without the granting of a license, from those enjoying special privileges in or upon the public highways, other than receipts derived from puhlic-service privileges and public-service privilege sales. "All receipts from minor privileges sold outright are designated as minor-privilege sales. It is to be noted that practically the only respect in which ini nor privileges and minor-privilege sales differ from privilege rentals is that privilege rentals always involve the issuance of a license, which in the other cases is not issued. " Special -service privileges, privilege rentals, and so-called minor privileges differ from general privileges, as granted by licenses and permits, in that while the bestowal of the four classes of privi- leges always involves the right to conduct a business or perform some act, the bestowal of a special-service privilege or a privilege rental or minor privilege gives — what the general privilege does not — the right to use some property of the nation, state, or munici- pality making the grant. " All receipts included under labour, manufactures, rates, and tolls are derived from services or commodities furnished by the industries of nations, states, and municipalities. Receipts from labour include the receipts for work performed by convicts in penal institutions and by inmates of charitable institutions. Receipts from manufac- tures include the receipts from the sale of articles manufactured in penal and charitable institutions. Receipts from rates include all payments for water, electric light, gas, and other utilities furnished by governmental industries. The word 'toll' has been used ex- clusively to designate the specific charges made for bridge and ferry passage across streams and harbours. " Fees and charges, as distinguished from taxes, are compulsory contributions of wealth which are exacted from persons, natural or corporate, to defray a part or all of the expense involved in some service rendered by the government. "Tiie greater portion of the amounts classified by the Bureau of the Census as fees is for .services which can be performed only by the governments. They are mainly clerical in character, and their cost is so well establisheil that the payments therefor, which 102 /X7R0DUCT/0.y TO PUBLIC FIXAXCE part il are made in advance and are often only nominal, are fixed by statute or ordinance eslablisliing a scale of fees. " In contrast with the foregoing, the amounts classified as charges generally represent payments for services which an- similar in character to those rendered by one individual to another in private life, and as a rule are other than clerical in their nature. With few exceptions the amounts to be charged for such services are definitely established only upon completion of the work or service. Among the special privileges of governments paid for by charges are the making of connections with sewer and water pipes and the removal of snow from sidewalks. "In passing it should be mentioned that a great proportion of the receipts from fees and charges, as tabulated by the census, approximate in character if they are not identical with, those to which is given above the designation of price. However clear in theory may be the distinction between these classes of revenue, in practice they so merge one into the other that the drawing of a hard and fast line between them was found to be as impossible as it was in the case of puhllc and quasi-private price. The diversity in public policies of different governments produces a correspond- ing diversity in the methods of performing any given service and of exacting compensation therefor, as has been pointed out by Professor E. R. A. Seligman and many other writers. As a result that which is a ' price ' in one city is a ' fee ' in another, and vice versa." CHAPTKR II THE VARIOUS KINDS OF TAXES, FEES, AND RATES J ALSO DEFINITIONS Section 1. Considerable confusion in the dis- cussions of the different modes of taxation is due to the failure to distinguish clearly between the justi- fication of taxation in general (i.e. why The measure there should be any taxes at all) and tlie «/'«^«'^'«'* fhstingid-thed measure of taxation (z.g. what should from the justi- be the basis upon which to decide how Z""^'''"'- much each citizen should pay). The universally accepted justification of taxation is the common benefit conferred upon the individuals by the action of the government. But the common benefit is, strictly speaking, equal,^ while the taxed citizens are unequal in wealth and al)ility to pay taxes. 1 " The protection of the subject in tlie free enjoyment of his life, his liberty, and his property, except as they might be declared by the judgement of his peers or the law of the land to be forfeited, was guaranteed by the twenty-ninth chapter of Magna Charta, ' wliich alone,' says Sir William Blackstone, ' would have nierrited the title that it bears of the (rrcat Charter.' " Cooley, Constitu- tional Limitations, 5tli edition, p, 4.']0. " Equality of riglits, privi- leges, and capacities unquestionably should be the aim of the law ; ..." " The State, it is to be presumed, has no favours to bestow, and designs to inflict no arbitrary deprivation of rights.'' Tlnd., pp. 486 and 487. lo:] 104 INTRODUCTION TO PUBLIC FINANCE part ii Therefore recourse liiis to be liad to some othei measure of taxation. It lay nearest, in the search for such a measure, to overlook the distinction between the measure and the justification and to assume that there was a difference in the benefit enjoyed b}' the different citizens. Thus one theory assumes that protection to life, libert}^ and property The benefit is the cliief benefit conferred, and that theory. i\^[^ benefit, or at all events its cost, varies as the property varies, generally in exactly the same proportion. This theory has been called the benefit theory of taxation, because it attempts to estimate by the benefit conferred the amount of tax each individual should pay. The dififtculties involved in measuring benefit, with sufficient accuracy to serve as a basis for taxa- tion, led anotlier school of thinkers to abandon that entirely. These writers feel that each citizen was necessarily a part of the organism of the State, one of the nourishing cells, as it were. And, as in all organisms of nature each organ or each cell con- tributes to tlie life of the whole, in accordance with its powers or strength, so each citizen should con- tribute as he is able. They claim that it is easier to measure ability than it is to measure benefit. This The faculty theory is called the faculty theory, the theory. term " faculty " having been found in this sense in early tax laws. (Jcncrally s[)eaking, this ability is supposed to be indicated in some way by wealth or by income. But the advocates of CHAP. II TAXES, FEES, AND RATES 105 faculty as a measure of taxation encounter a serious difficulty in attempting to ascertain whether faculty is proportional to wealtli or income or increases more rapidly as these increase in amount. A negative side of the same idea is presented when it is claimed that the tax should impose an equal sacrifice upon every citizen. In determining what constitutes equal sacrifice, we encounter the same difficulty as in determining how to measure ability. ^ Sec. 2. It will be noticed that the basis from which each of these measures starts is individual wealth. The first argues that benefit is indicated by wealth, the second that faculty is so r>ifficuUies in indicated. If wealth is the basis, then the way of ,1 1 -r-j' e i_ -lii 1 finding a natu- the classification or taxes miwht be made , , .^- o ral ciassifica' to depend on that of wealth. Such a Hon of taxes. method, although tried, has been found impracti- cable, because the processes of shifting render it impossible to ascertain the final incidence with sufficient accuracy for classification. It has also been suggested that we might use the different specific means employed by nations to measure benefit or faculty. lUit here again we meet with difficulties that are almost insuperable ; for in that case the classification will depend on the theory adopted as to the correct measures. If we adopt ^ See Chap. III. for further discussion of this point. A full and instructive discussion of these theories is to be found in Seligman's Proyressive Taxation in Theory and Practice. See also, Professor Kdgeworth's three articles on the " Pure Theory of Taxation," Economic Journal^ Vol. VII 106 IXTRODUCTION TO PUBLIC FINAXCE part n the benefit theoiy, our classification will depend on the different indices of benefit chosen. If we adopt the faculty theory, then our classification will be accord- ing to the indices of faculty. But we are not at liberty to adopt one or the other of these theories exclusively, because no nations have done so in prac- tice, and their taxes are some of them based on the one theory, or at least best exphiined thereby, and some on the other, while many combine both or may be interpreted in either wa}'. At the same time many taxes that could not be justified on either basis are retained by the nations on grounds of general expediency, because they yield considerable revenue, or because they have been long in use. If, there- fore, we adopt a classification presupposing either theory, w^e shall find many taxes that do not con- form to it. Inasmuch as no consistent plan for the measurement of taxation has been adopted by any country, no uniform method of classification upon " natural " grounds can be found. These difficulties are inherent in the matter that we are attempting to classify. The librarian gen- erally desires to arrantje his books ac- Theae difficul- -^ ° ties are insu- cordiug to the subjccts treated. lint perabie. encyclopedias could not be so arranged witliout tearing tlie books to jjieces. We might theoretically dissect each tax, and assign its i)ar(s to the different categories according to the real nature of each part. But we gain little by this painful process. In this case classification will not CHAP. II TAXES, FEES, AND HATES 107 help US to ascertain the real nature of tlie things studied. These difficulties have not always been regarded as insu})erable, and many brave attempts have been made to overcome them, but with so Previous little uniformity as to mark the failure, attempts at -rii 1 , 1 •/> • classification. 1 here are almost as many classmcations as writers.^ The least satisfactory of all are those that attempt to find some natural arrangement. Those which have the most apparent success accept the olBcial names used by the treasury departments of the different nations, and give them merely such limitation as is necessary to use them scientifically. Sec. 3. Perhaps the most common distinction is that made between direct and indirect taxes. This distinction first obtained theoretical im- _^ ,. . J he distinc- portance in the writings of the Physio- Hon between crats. By direct taxes they meant any 'J'>'''^' ""^ »«- •' ./ ./ direct taxes IS of those taxes which were levied imme- old. and im- diately upon the " produit net." 2 There P"'^""^' alone, they argued, could be the fund out of which taxes could be paid. To levy taxes anywhere else was indirect, because the burden would be shifted from one to another until it rested there. The assignment of any particular tax to one or the other of these categories was with them a mark of approval or condemnation. Willi the recognition that other economic processes besides those which added to tlic 1 See Nicholson, Principles of Political Ec(hi(i))nj, Vol. III., p. 21)1 ff. -'Cf. iliggs, The Physiocrats. 108 INTRODUCTION TO PUBLIC FINANCE pari- ii material property of the world created wealth, this peculiar theory of taxation drifted into abeyance. The same terms, however, have been widely used by officials and writers and have such prevalence that a recognition of them cannot be avoided. Ran and Wagner have made the most elaborate attempts to define the modern usage. ^ In this they w agner' s defi,- were Only partly successful, because of ^direct and n- ii'^'^gularities in ollicial usage. Hut de- direct taxes. Spite these irregularities the terms are valuable. Wagner's distinction is practically as follows. There are two ways in which direct and indirect taxes differ. (1) In the case of direct taxes, the taxpayer is also tiie tax-bearer, at least in the expectation of the law-giver; any shifting of the burden to another is not expected, not desired, and sometimes, even, forbidden, or subject to penalty. Indirect taxes are, vice versa, those in which the tax- payer is not permanently the tax-bearer, or is not in- tended to be ; but a shifting of the burden to another is expected and desired, and may even be prescribed. ^ But the element of shiftijig is not the only one that is essential to the idea. The second character- Adminisira- istic is wluit may be called the techni- tivc concep- ^^^^ administrative conception of direct tion of direct and indirect ^ud indirect taxcs. It is based on the taxes. method of procedure. (2) Direct taxes 1 Cf. Bullock, "Direct and Indirect Taxes,'' Political Science Quarterly, Vol. XIII. -Wagner, Fina>izicinsc)is<'hfift, II., l.st ed., p. 2(50 ; 2d ed., sees. 97-100. Schiinberg's HamWurh, ;Jd ed., III., p. 171. CHAP. II TAXES, FEES, AND KATES 109 are such as are laid regularly according to some fixed fact (or one so treated, and at least somewhat fixed), something regularly recurrent, and hence previously ascertainable, — a fact as of personality, of rank, of property, of earning, etc., — and are, consequently, assessed according to some list or roll (cadastre). Indirect taxes, on the other hand, are such as are laid according to some changing, temporary, more or less accidental fact which is, consequently, not previously ascertainable, — something the result of processes, events, transactions, — and are laid and collected according to tariffs.^ These two methods of distinction follow quite closely the usages of theoretical writers and of offi- cial bureaux. There are important exceptions in some countries. Thus in France the customs duties are not officially classed as indirect Exceptions in taxes, but form a class by themselves «#"<2^ usage. akin to direct taxes. In the United States at the time of the Civil War the income tax was viewed by the courts as an indirect tax, or at least not as a direct tax in the sense of the Constitution. ^ Tliis decision, however, was reversed in 1895, by a bare majority of the same court, which decided that a somewhat similar income tax was a direct tax in the 1 Wagner, Finamwissenschaft, II., 2d ed., p. 239. 2 Springer v. United States, 102 U. S. 508. See article, " The Direct Tax of 1861," Quarterly Journal of Economics, July, 1889 ; Seligman, "The Income Tax," Forum, 1895 ; Bullock, "The Origin and Effect of the Direct Tax Clau.se," Political Science Quarterly, XV., p. 470 ff. no IXTRODUCTION TO PUBLIC FIXAXCE part ii lufaiiiiiL;' of the Constitution. This decision was in ai'i'ord with \.\w disl iiut ion made al)ove. The principal diiccl taxes are: tlie land taxes, building taxes, property taxes, poll taxes, class taxes, ^ . , income taxes, industry taxes ; theindirect Taxes belong- •' inij to each taxcs are : the custom duties (with the ex- "' ' ception of the French), internal excise taxes, transaction taxes, most fees and licenses. The inheritance taxes, or death duties, as they are called in England, are not easy to classify. In the first sense they are direct taxes, and in the second they are indirect. This is, perhaps, the only impor- m^ , tant tax that cannot be easily classilied. The inhcri- -^ tance lax hard The inheritance tax wherever it exists is tocassify. nsed bccausc it is expedient and witliout much cost yields a large return. It is levied at a time when the persons paying it are not in position to de- mand a sti'ong justification. It is sonu>times jn.stilied on the ground that it compensates for previously un- paid taxes. If this justification holds, then the in- heritance tax must be classed as a direct tax. Sec. 4. A few other terms which are often used as the names of different groups of taxes and help, Taxes on per- in a Way, to classify them must be men- sons, prop- . 1 ■ 4\ ■ i- \\T , tioned m this connection. We some- erly, or in- come, times speak of taxes as being separable into (1) those on persons, (2) tiiose on property, (3) those on income. These terms do not indicate the final source from wliich the tax is })aid, but the basis ii[)on which it is levied. CHAP. II TAXES, FEES, A. YD RATES 111 1. Ill tlie case of personal taxes the different per- sons who are to pay the tax are listed and assessed either (1) individiuiUy, as in tlie case of per capita taxes, or (2) as representatives of a group, as in the family or hearth taxes, or (3) according to some characteristic, as rank in life, office, personal employment, age, income, property, etc., '<'^^*- su[)posed to be indicative of the benefit they receive from the government or their ability to pay. A com- plete system of such taxes might be built up, and it is possible to suppose that all the requirements of justice could be met thereby. 2. Taxes on property are those taxes which take the property owned by a person as the index either of the benefit received or of the ability to pay. These taxes may be considered as ])ursuing prop- erty wherever it is to be found with little or no regard for t!ie personality of the owner, property They are not, of course, in any but the '''^^*- most exceptional instances, paid out of property. But no particular regard is had to the real source of payment. 1'hey may be levied u[)(»n any and every kind of property. They are sometimes called real taxes trom res, things. But this usage has no established sanction in English ; in that language real taxes are taxes upon real estate. 3. Taxes on income in the broadest sense are all those taxes which make wealth in the « ... 1 1 • p Income taxes. process or acquisition the basis or assess- ment. These are of two piincipal kinds: (1) those 112 INTRODUCTION TO PUBLIC FINANCE part II which are levied u[)cni the annual increment of wealtli as such, irrespective of the person wlio is the recipi- ent thereof. That is, they treat the various items of wealth increment as the basis of taxation without regard to the grouping of these increments into a whole in the income of any particular person, and consider the person paying the tax only in so far as lie is an income producer through his own activities. This is the character of the British income tax. (2) Those which demand of each person, or seek to obtain concerning each person, a summary of the total income he receives. This latter tax is sometimes fjo treated Jis to make it difficult to distinguish it from a personal tax, for the different persons are listed and classed according to amount of income they receive. By a peculiar and entirely unwarranted use of common English terms in a strange and foreign Subjective seusc, property, income, and the like and objective jjave been called the tax objects, and taxes. An unallowable t-lic Corresponding taxes objective taxes, distinction. meaning that they are taxes on things in distinction from taxes on persons. On the otlier hand, the persons are called the tax subjects, and personal taxes called subjective. This usage, althougli it has the sanction of a great author- ity, in Bastable, lias fortunately not been favour- ably received. Seligman, in a review of Bastable's book, pointed out that by the oljject of a tax we usually mean tlie purpose of the tax, and CHAP. II TAXES, FEES, AND RATES 113 the tax subjects may be things as well as persons subjected to the tax.^ Sec. 5. Following the lead of Adam Smith, va- rious attempts have been made to classify Classification taxes according as they fall upon one or of taxes, ac- the other of the different shares in dis- (^o^ding as . . n 1 they fall upon tribution, — rent, interest, pronts, and j-ent, interest, wages. But, as Bastable has well shown, profits, or wages, fails. the sources from which the different taxes are paid are generally a combination of several of these. The wealth or income of very few persons consists of simply one of these shares. The attempts to carry out such classifications consist- ently have failed. Bastable's attempted compro- mise by calling such taxes as can be traced directly to one or the other shares in distribution primary, and all others secondary, brings us to practically the same results that were gained by Wagner in the discussion of direct and indirect taxes. His primary taxes are those called direct taxes above, his second- ary are the indii-ect. One other imi)ortant set of distinctions must receive our attention, because it has the sanction of two prominent authorities. Wagner suggested and C'ohn accepted the classification into taxes ^"-f^* "h ac- quisition, paid out of wealth at the time of its taxes on pos- aquisition (^JErwerb), or while in posses- «<'««»o".«"«' . . on consump- sion (^Besitz), or upon its consump- <,„„. tion (^Verhrauch). 'i'his distinction, according to 1 Political Science Qitarlerlij, \'II., p. 717. I 114 LXTRODUCTION TO PUBLIC UNANCE part ii the stage in which the tax finds the wealth from which it is paid, is often useful in showing the effects of certain taxes. Another very valuable distinction is that made by Taxes on the term "taxes on revenue." Taxes on revenue. revenue are those that fall or are assessed on the revenue or income yielded by different kinds of property. These are a species of taxes on acquisi- tion. The three sets of terms which we have used in this work are: (1) direct and indirect taxes; (2) j^ersonal, property, and income taxes; (3) taxes paid on wealth at acquisition, in possession, and at the time of con- sumption. Sec. 6. We now come to the important task of classifying fees. The essential consideration to be Classification h«ltl in uiiiid ubout these payments is of fees follows ^jj.^t; ^^ey covcr a part of the total cost of that of govern- , , . . i • i mentactivi- Certain governmental activities, which ''^^*- are performed for the benefit of all, but yet confer a real or assumed special benefit on the individual. When the payment covers the whole or a little more than the whole cost, it is a rate. Since fees are levied upon the receivers of certain benefits from the government, it follows that tlie only classi- fication for fees is that whicli shows what activities of the government convey the benefit. We can thus classify according to the different de])artments of the government, for the services of which fees are collected. CHAP. II TAXES, FEES, AND RATES 115 1. The most numerous are the judicial and legal fees, the character of which has already judicial and been made clear from the discussion of legal fees. the nature of these expenditures.^ Examples of these are the regular court costs and fees, probate fees, the charges for recording deeds, mortgages, contracts, marriages, etc. 2. Next come the administrative fees for the special services of that department. They are : police fees, charged for the special bene- Administra- tis accruing or supposed to accrue to the ti^efees. individuals from the exercise of the police poAver of the State ; the fees for education, when charged ; a large number of industrial and commercial fees for services rendered individuals in their industrial and commercial undertakings. The industrial fees in- clude license charges for permission to carry on certain businesses (care must be taken not to confuse these with police fees, nor with business taxes assessed on the same plan). Commercial fees include road and canal tolls, harbour dues, and a number of similar charges. A very important class of administrative fees are those known as special assessments, or in England as " betterment " taxes, usually levied for louiU improve ments affecting property, as streets, sew- special assess- ers, etc. Seligman has defined these as ^^<^"^- follows : " A special assessment is a compulsory contribution paid once and for all to defray the cost t See Part I., Chap. HI,, sec 4. 116 rXTRODUCTIOX TO PUBLIC FfXAXCE part is of a s})ecifie improvement to [)i()pi'rty uiulertakeii iu the public interest, and levied by the government in proportion to the speeial benefits accruing to the prop- erty owner." He regards them as of so much impor- tance as to make them a class of revenues coordinate with taxes and fees. Strictly speaking, they are fees. Sec. 7. The revenues derived from the rates charged for the services rendered by the indus- trial activities of the State, or from the production and sale of commodities, so long as these enterprises are conducted for profit, are of the same The nature of public general character as the earnings of the rates. people. Early writers on public finance devote a great deal of attention to the income of the State from the public domain, forests, and mines, which were at one time of great relative importance. These have shrunk in importance, in modern times, but in their place have come the earnings of the so- called " public service " enterprises, like the rail- roads and the street railways, telegraph and telephone service, water works, and others of a similar character. As stated in another connection, these enterprises are usually monopolies. Even when they are not of such a character that they would be monopolies even under private control, the government makes them monopo- lies by refusing to allow any private enterprise to compete. The French tobacco monopoly affords in part an example of this. Industrial enterprises con- ducted by a government for profit, under competitive conditions, are rare. The general analjsis of these CHAP. II TAXES, FEES, AND RATES 117 earnings, whether monopolistic or competitive, can be found in any good treatise on Economics and need not be repeated here. Public rates, however, differ in some respects from the charges made by similar private enterprises. The differences can be most readily shown by an illustration. Let us suppose that a certain city is supplied with water by two private companies, both of which have the right to lay pipes wherever they wish. They will then sujDply water, supposing that they actually compete, at rates determined mainly by the costs, which are those of manasrement, „ , " ' Example, interest on the " plant," the cost of water, the water and of the supplies and the general run- *"^^ ^" ning expenses. The average rates will be consider- alily higher than need be by virtue of the duplication of the plant, etc. Suppose, however, before any ma- terial duplication is reached the companies unite, forming one company which has the monopoly. The charges will now be regulated by " what the traffic will bear," and provided the supply is ample will tend to conform to those rates which will yield the largest net returns. The principles by whit-li mo- noply rates are regulated are Avell known to students of economics. Tlie charges in this case cannot be greater than tlie cost to the citizens of operating their own wells, nor even so high as to induce the citizens to economise materially in their use of water. But suppose that the townspeople are not content with the rates or with the service. They 118 tXTRODVCTlOM TO PUBLIC F/iVA.VCE i-aki i. attempt regulation and fail. Tlicy may determine to buy out the plant. Once the eity owns the The four plant it may run it in one of four ways. methods of ^■^\ j^ ^^^^ ^^^ j^. ^^ ^|^g companv did, to public man- ^ ^ "^ _ _ i ./ ' agcmcnt. make the liighest possible profits, charg- ing all or nearly all the traffic will bear. The sur- plus over costs goes into the treasury and helps to defray the other expenses of government. The rules determining what the tratlic will bear are rules of pure economics. There is absolutely no difference between this public business and a private business. The method of " chargfinGf what the traffic will bear "is the method in economic life of deter- mining the value of commodities so sold. It takes the place in the sale of monopoly goods of the "free dickerings of the market" by which the price of other goods is determined.! The private company had to pay expenses, so does the city ; the private c(niii)aiiy enjoyed a surplus or made an " unearned increment," so does the city ; the private company spent this sur- plus to the satisfaction of the wants of its stockhold- ers ; the city spends the surplus for tlio benefit or for the satisfaction of the general wants of the citizens, who may be regarded as its stockholders. Even if it foregoes taking quite all the surplus, the principle is the same. A private company sometimes does that in deference to public opinion. (2) The city 1 See Sidgwick, Bk. II., Chap. X.; Andrews, Inslitiites of Eco- nomics, i). 122; Marshall, Ec. of Ind., pp. IHO ff. ; Senior, pp. 103-114; Sumner, Essaf/s, p. 4(5; Hadley, li. B. Trans., \k 100; Seligman, Railway Tariffs, etc., pp. 8 ff. CHAP. II TAXES, FEES, AND RATES 119 may decide not to make money, but to charge only what the service costs and make the service as good as possible. It then foregoes taking the full price of tlie wealth that it lias produced and allows each con- sumer to enjoy the surplus. Then the payment by the citizen is a fee. (3) It may charge a fee much smaller than the cost, or a fee for all water consumed over a certain amount, l)ut provide a certain amount of water for each citizen at the common cost. (4^ It may distribute the water free of charge and pay for it out of tlie common fund derived from taxation. Now tlie sums received in the last three cases only are fiscal in character. In this connection it is important to note that there is a strong tendency for a government to abandon the economic, or profit making, method of managing such enterprises and to pass to some one of the fiscal methods. That is, the government's method of con- ducting a public service does not usually continue to follow that of private management. The tendency Thus, for example, it would be natural, ''^abandon rates for fees and perhaps proper, for a private water and fees for company to keep a "large capital account " ^°'^^^- and to carry a heavy interest or dividend charge against the earnings. But when a government has paid off in whole or in part the debt contracted when it acquired the plant, it is not uncommon to drop tlie interest charge and toreduce the rates in proportion to tlie reduced costs. The reason for making such an enterprise a government function is 120 INTRODLCTION TO PUBLIC FINANCE i\\rt u the recognition of some public interest or benefit, and, for the same reason, the fiscal method of admin- istration is the more appropriate. Some writers have even gone so far as to suggest this as a sort of test as to whether any given enterprise should be taken over as a government function. They say, in substance, that if the people are not willing to see the enterprise in question conducted on fiscal princi- ples, they should not make it a government function, for it will probably pass on into one of the three fiscal methods of management above outlined and may in time reach the last. As Cohn has so well pointed out, it is a very dif- ferent problem that we have to deal with when the Taxation by management of some industry is made means of in- i j^i r i- ii i- , , . , merely the lorm or means lor collecting duatrial mo- J o nopoiy. a tax from certain classes of persons. The French tobacco monopoly, for example, is not in any sense to be looked upon as an industry under- taken in the common interest, or even in the interest of a particular class. It is the aim of the French government to tax the users of tobacco. This aim is attained by other governments through different pro- cesses. The form of a monopoly has been found to be remarkably easy, expedient, and successful as a method of indirect taxation. Sec. 8. This section will be devoted to the definition Definitions : of terms uscd in connection with revenues. The "base." 'p}je base of a tax is the thing, character- istic, or phenomenon by the possession of which the CHAP. II TAXES, FEES, AND RATES 121 amount that each taxpayer shall contribute is to be measured, or it is that upon which the tax is "levied." The base is not always, although it may be, the source from which the tax is paid. Thus a tax based on prop- erty is generally paid out of the income, or revenue, which flows, sometimes from the property, sometimes from other sotirces, while a tax on income would be, normally, paid from the same income that constitutes the base. The direct taxes are almost always called by the name of the base ; indirect taxes are seldom so named. The base is often expressed in units of value ; as, for example, ■'^100 worth of property. It may, however, be expressed in terms of some other units of measurement, as yards, tons, acres, barrels ; or again by mere count, as, one poll, one ox, etc. When the base is expressed in terms of value, the tax is sometimes called an " ad valorem " tax. ,, . , , Ad valorem When the base is expressed in terms of and"specific" some unit of measurement other than ^^^*' value, the tax is sometimes called "specific." But neither of these terms is applied to certain kinds of taxes, such as poll taxes, income taxes, or inheritance taxes. Sometimes the unit of the base is complex and arbitrary. For example, in Vermont, the base of the general property tax is each dollar in the " Grand List." But only one per cent of the true value of the property of each taxpayer is "set in the list," while his poll is also " set in the list," at an arbitrary valuation of sj^lOO. This complexity of the base arose, originally, from the custom of fixing an 122 INTRODUCTION TO PUBLIC FINANCE part ii arbitrary uniform value for each piece of property, as so much per acre of land, so much per head of cattle, so much per horse, irrespective of actual value. Other cases of such complex bases usually have some similar historical origin. The rate is the amount of tax that falls upon each unit of the base. The rate, whether for specific or ad valorem taxes, may be proportional The "rater .',.., or disproportional. It is proportional when it is always in the same proportion to the base, whether the amount held by a taxpayer or subject to the tax be large or small. Tlie important thing to observe in connection with proportional tax rates is the way in which the rate is "Propor- arrived at. It often occurs that a gov- tioned" and i ^ • i • i z; -^ i. ,„ eminent desires to raise a definite amount apportioned taxes. of money by a given tax, but the aggre- gate of the base is not known at the time this amount is fixed. It may therefore direct tliat when the ag- gregate of the base is ascertained, the amount to be raised shall be divided by the aggregate of the base and the quotient, or the rate thus obtained shall be applied in turn to the amount of the base held by each taxpayer, thus determining his taxes. Or again, and this is perhaps more important, a central government may apportion among its local divisions the total ;i mount to l)e raised, assigning a lump sura to each, and the local government of each divi- sion may apportion its share among its taxpayers in the manner above described. In the latter ease the CHAK II TAXES, FEES, AND RATES 123 " rate," SO far as individual taxpayers are concerned, will vary from one local division to another. When either method is followed, the rate, or even the tax itself, is often called "apportioned." This distinc- tion is especially important in the United States, where most of the state taxes are apportioned in this manner. In many instances, however, the govern- ment fixes the rate in advance, and is content to ac- cept the revenues, be tliey large or small, which the rate so fixed will yield. It is true, however, that even in these cases there is a rough sort of appor- tionment made before the rate is fixed, otherwise the revenue miglit be too large or too small. Fixed pro- portionate rates are sometimes laid down by some superior authority to limit the extravagance of lower governmental bodies. Disproportionate rates are rates which in them- selves vary as the amount of the base held "Di^^propor- by different taxpayers varies. These ^"""^ "^ r J rates. rates may be progressive or regressive. Progressive rates are the most important general class of disproportionate rates. This t^-rm is applied when the rate is proportionately higher for a taxijayer who is taxable for a large rogresstve ^ -' f' rates. amount of the base than for one who is taxable for a smaller amount. That is, the fraction taken is ever larger, the larger the amount of the base possessed by the individual taxpayer. Progressive rates may be regular or irregular ac- cording as the}' increase by some fixed mathematical 124 INTRODUCTION TO PUBLIC FINANCE part II rule or increase in some more or less arbitrary man- ner. There are very few regular progressive tax rates in actual practice. Arithmetical, or geometri- cal progression would give regular j)rogression and so would many other mathematical formulas, notably, some of those of calculus. Of course, many forms of regular progression would, if continued long enough, reach a rate equal to one hundred per cent of the base. As this results in practical confiscation, such an extreme is seldom provided by law. Usu- ally, after a certain relatively high point is reached, the progression is more or less arbitrarily stopped and a proportional rate is substituted. Were the progression to be continued until it resulted in con- fiscation the motive would not be a fiscal one, for such a policy would diminish the revenue by ulti- mately cutting down the aggregate of the base. In fact, as we shall see later, the motive for a progres- sive rate is always something other than the purely fiscal one. One of the most common, and certainly one of the most important forms of progression is that called "Degressive" "degressive." lu this case the rate (as rates. distinct from the tax) increases but by an ever decreasing increment. In perfectly regular degression the rate would be so arranged that it would constantly approach but never quite reach a given propoi'tional rate as a limit. It would be cum- bersome to accom})lish tliis result by varying the nominal rate. But practically the same end can be TAXES, FEES, AND RATES 125 reached by tlie simple expedient of deducting from each of the ascending amounts of the base a fixed amount, that is, technically untaxed, and applying to the remainder, in each case, a nominally proportioned rate. Diagram A illustrates a theoretical form of regu- lar degressive taxation, which may be regarded as an ideal. The diagram is drawn on the assumption that a constant amount " C " is deducted from each and every amount of the base, be the base large or small, and that tlie remainder is subject to a propor- tional tax of " R," which thus becomes the limit, which the rate constantly approaches but never reaches. DIAGRAM A A Typical Form of Regular Degression C Wi HI 2 "'3 "U »«6 *«» *"7 '"s "*9 '"10 '"1 2/ = r - ^ i,2 7Hi3 7«i4 In actual practice such regularity as is assumed in the chart is seldom found. The regularity may be broken by changing the amount of the deduction al- lowed at different stages, or by cutting it off alto- gether. Diagram B represents the beginning of the sched- ule of rates of the British income tax, as it was under 126 INTRODUCTION TO PUBLIC FINANCE part ii tlie law of 1898, when the rate was fixed at eight pence per pound. The deductions allowed were <£160 up to an income of £400 ; then X150 up to an income of .£500 ; then X120 to £600 ; £70 to £700; after which no deduction is allowed. As will be readily seen this carries fairly regular degression up to £700, after which the rate is proportional. DIAGRAM B British Ixcome Tax, Form of 1808. Rate, 8d. per £ Slightly Irregular Degression, ending in Proportion 6 4 2 £ 100 200 300 400 600 600 700 800 900 1000 1100 1200 1300 1400 Progressive tax rates are often graduated ; that is, the rate increases by grades or stages of the amounts of the base, and is either proportional or fixed within each grade. From this practice it is very common to speak of all progressive taxes as " gradu- ated taxes." It is probably safe to say that the term "graduated" is more widely used in this connection, and perhaps better understood than the term " pro- gressive." Diagram C represents a somewhat complex form of the graduated tax. But it is a form which with modifications as to details and rates is very frequently TAXES, FEES, AND RATES 127 found and is found in connection with many im- portant taxes. The diagram shows the first ten grades of the long series of grades in the Prussian income tax, as it was in 1891. It is a form that is intended, broadly speaking, to result in a series of rates that impose a generally degressive tax. But on account of the fixed rate within each grade, and of the change in rates from grade to grade by round numbers only, the resulting scliedule is regressive within each grade, and occasionally regressive from grade to grade. If the rates were proportional within each grade, the chart would show a series of horizontal steps. DIAGRAM C First Ten Grades of the Prussian Income Tax, 1891 Graduated Degression, Regression in Each Grade MAHK8 GOO 800 1000 1200 1400 1000 ISOO 2000 2200 2400 2000 2600 Many other forms of progressive rates have been devised. They are found in a great many tliffereiit kinds of taxes, but are most common in income and inheritance taxes. The theory of progressive taxa- tion is discussed in another connection. The rate is regressive when it is the reverse of the 128 INTRODUCTION TO PUBLIC FINANCE part ii progressive, that is, when it is higher for the taxpayer wlio has a small amount of the base than for one who "Regressive" ^^''^^ '^ large amount. This is usually re- taxation. gartled as an unjust mode of taxation, and when it occurs, it is usually an accidental or un- intentional result. Sometimes it is brought about by the evasion or partial evasion of taxation by those who should be the heavier taxpayers. It is occasion- ally adopted intentionally, as when it is desired to exterminate small saloons and drinking places by a higher license tax than is imposed on the larger ones. It is safe to say that whenever regressive rates are found, they are either accidental or their purpose is distinctly non-fiscal. The regressive rates are in practice never very regular in form, even less so than the progressive rates, but theoretically they can be quite as regular in form as the latter. It should be noted that graduated taxes are usually regressive within each grade; that is, the tax is a smaller proportion of the base for a taxpayer who Graduated is just ovcr the lowcr limit than for one taxesarere- ^^|^^^ j^ ^^^ ^^. j^^,^^. ^|^^ ^jpper limit of the gressive in '■ '■ each grade. grade. Strictly Speaking, evcry so-callcd proportional tax is graduated and consequently re- gressive within each grade. This is because the rec- ognised unit of the base, be it a })ouiid, a dollar, a penny or a cent, constitutes a grade and necessarily takes the same rate throughout. But when the unit of the base is small, this graduation and regression is of so little iiiq)()rt;iiice that it is ignored. CHAP. II TAXES, FEES, AND RATES 129 Impost is a general term for any tax, but there is a tendency to make it synonymous •^- J J "Impost." with indirect taxes. Customs duties are indirect taxes levied on the goods imported into or exported from uQ^gf^^^ certain territories. duties." Excises (English) or internal revenue taxes (Amer- ican^ are indirect taxes levied on goods ,<„ . „ >' ° Excises or produced or consumed within certain ter- "internal rev- ritorial limits. enue taxes." Toll was originally a general term for many taxes, but it has come to have a special mean- 11 r "Toll." ing, and applies only to tlie charges tor passage over roads, bridges, canals, etc. A tax is said to be shifted when the taxpayer reimburses himself from some one else. „ol .-.• „ Shifting The final incidence of the tax is the and " ind- falling of the burden upon some per- *"'^^' son who does not shift it. Two terms of great importance in connection with taxation are "levy" and "assessment." The term " levy " covers all the legal processes of imposing a tax and making its payment compulsory. It is an act of the supreme authority of "Lcvij" and government. " Whatever else it may be," "assessment." says ]Mr. John Fiske, ^ " the government is the power that taxes." Conversely no tax can be imposed ex- cept by governmental authority. In England and the United States the ])()wcr to levy taxes is a jeal- ^ Civil Govcnnneitt in the United Statei<, p. 7. K 130 INTRODUCTION TO PUBLIC FINANCE part il ously guarded prerogative of the legislative depart- ment. Two of the commonest provisions of the constitutions of the commonwealths of the United States are in effect : (1) that " the power of taxa- tion shall never be surrendered or suspended by any grant or contract to which the State shall be a party." (2) "No tax shall be levied except in pursuance of law." Only in countries having a system of administrative law is there a seeming departure from this principle. After the legislative or the equivalent authority has levied a tax, the next step is the "assessment." This term covers the acts and proceed- "Assessment." ings of the administrative officers in de- termining the amount of taxes eacli taxpayer is to pay. By metonymy it is often restricted, in com- mon usage, to the most important process involved. Thus in the United States in connection with the administration of the general property tax, the term " assessment " is often used as though it were synon- ymous with the " valuation " of the property. While legally and logically the levy of a tax in- volves fixing the rate, and wliile theoretically this The icvxj of a part of the levy can no more be delegated 'nxxsa egis- i ^j^^ legislative authority to any one lull ve June- jo j j Hon. else than can any other part of the levy, nevertheless, a seeming delegation of this power often occurs. Thus some executive department may be instructed to ascertain tliat rate which will yield a certain sum of money, and this rate, although un- CHAP, II TAXES, FEES, AND RATES 131 known at the time the hiw is enacted, is declared therein to be the legal rate. This is only a seeming evasion f>f \\w, fundamental principle ; for the execu- tive department on which this duty is imposed has no discretionary powers and merely makes a mathe- matical computation, the result of wliich it has no power to alter. Unquestionably illegal is the not un- common practice of such executive boards of round- ing out the rate to some whole number, or to some convenient fraction, so as to simplify the extensions on tlie tax l)ilLs. But this is such a trivial matter that the courts do not regard the tax levy as invali- dated by such a proceeding. The tax list or roll, which is also known by many other names, contains the record of the assessment. In many cases, notably on the continent r ^ •, T P . The"taxlist." of hiUrope, these lists are, for certain taxes, elaborate, permanent or partly permanent rec- ords, which may serve various legal purposes as well as the fiscal, as for example the record of titles, and are called "cadastres." When the same tax is used by several different departments of government, as, for example, by the cities, counties, provinces, or other divisions of local governments and also by the State or central government, the initial tax list or the orig- inal, may be retained and filed in each local office or tax bureau, and a duplicate tliereof sent up to tlie liigher dei)artment or division of government. AVhen a number of these duplicates are brought togetlier, the combined list is designated by some distinguish- 132 INTRODUCTION TO PUBLIC FINANCE part il ing name, such as the "graiul duplicate," the "grand list," or some otlier simihir term. "Rate," wlien used ahjne without the prefix "tax," is a term applied in England to many local taxes, as "Rate" mean- the " poor rates," or simply "the rates," ing a tax. y^mj in that country often carries the dis- tinction between local taxes and general taxes. In America local taxes for the maintenance of the water systems are not infrequently called " water rates," but the term does not carry the same meaning as in England. There is a tendency among careful publicists to use the term " rate " to designate the price paid by a consumer for some product of a public industry when the government has a monopoly thereof. Thus "R t " s ^^^ generally speak of postage rates, tele- charges/or graph ratcs, railroad rates, water rates, public sermce. gag rates, and the like. The term "price " would, if this usage were universal, be applied in public finance only to those charges which are made for goods produced by public industries under com- petitive or quasi-competitive conditions. If this usage could become universal, it would be conducive to clearness. CHAPTER III THE TAX SYSTEM Section 1. No nation has ever found it feasible to adopt any single tax as the sole source of its income. No nation at all advanced in civilisation has attempted to conduct its government entirely from the earnings of its domains or industries. Every civilised nation of to-day combines the three sorts of revenues, those produced by its own activi- ties and those obtained from taxation and from fees. And furthermore, no nation attempts to exist with only one of each of these kinds of revenues. These different forms are combined into a y, " system " or general scheme, which con- of various e 1 1 1 X J.1 1 sorts are com- lorms more or less closely to the general , . , . , ,. •' ° bined into the ideal of justice which may have been national sys- adopted by the nation. To judge of the justice or expediency of any tax it should be studied in its place in the "system." We have already seen the two main tlieories as to the proper measure of taxation ; the one, that taxation should be measured by benefit; the other, tliat it should be measured by faculty. A perfect system would so combine the different forms that the total burden imposed would be in accord with the ideal adopted. 133 131 INTRODUCTION TO PUBIIC FINANCE part n 'Plu're is a constant tendency toward the simplifi. I'iilitiii of tax systems, allliougli most modern systems The dream of ^^'^ '"^till extremely complicated. It is a single tax. tjjg dream of financial theorists, and has been ever since the science began, and it is the aim of many wonld-be reforn)ers, to find a single tax that will furnish all the necessary funds for the support of the govei'nment. The physiocratic impot 'unique on the prodult net is well known, as is also the jus- tification therefor. It is also well known wherein this fails. Modern proposals generally involve some- thing more than mere tax reform. The socialistic Single pro- demand for a single, exclusive income gressivein- ^.^^ with a progressive rate is advanced come tax, and ■ t ^ r iv • t -i • the Georgian With a hopc of eftecting a redistribution land tax. q{ the Wealth of the world. Henry George's well-known scheme for a single tax on land has a similar ulterior purpose. Ilis object is to free industry from trammels which he supposes are due to the appropriation of land values by private indi- viduals. In form his proposition is not very unlike that of the Physiocrats. He is an extreme individu- alist, but he aims, like the socialists, at a new distri- bution of property. Of these two modern schemes for a single tax the first is perfectly feasible from the fiscal point of view. Such a tax could probably be administered and could be UKuh; to yield ample revenue. It fails, however, to answer the simplest requirements of justice. For examj)le, it would not, unless our whole scheme of economic life were first CHAP. Ill THE TAX SYSTEM 135 altered, seem just that the man whose property was benefited by the grading and metalling of a street should he entirely free from a special The socialistic charge for the special benefit. Tlie "''^"'"f '"-^ " ■'■ Jensible out scheme is inexpedient for three reasons : unjust. (1) it presupposes for its successful administration a method of distribution of wealth very different from that which the worhl now lias ; (2) it demands a perfection in the technique of administration as yet absolutely unattainable ; (3) it would need, in order to be fairly administered, more honesty than men have yet shown in their dealings with the gov- ernment. None of these reasons militate in the least against the incorporation of an income tax in the tax system, beside other taxes. They apply only to its use as the sole source of revenue. Mr. Louis F. Post, official lecturer for the Single- tax League, gives the following explanation of the second most prominent form of a single tax. "The practical form in which Henry George puts the idea of appropriating economic rent to the com- mon use is ' To abolish all taxation save that upon land values/ This is now generally known as 'the single tax.' Under its operation all classes of workers, whether manufacturers, merchants, bankers, profes- sional men, cleiks, mechanics, farmers, farm-hands, or other workiiiij classes, would, as such, .. be wholly exempt. It is only as men George's sivgia who own land that they would bo taxed, '«-^'^'-'""^''- the tax of each being in proportion, not to the area, 136 IXTRODUCTION TO PUBLIC FIXAXCE i-akt ii but to the viilue of his land. And no one would be compelled to pay a higher tax than others if his land ■were improved or used while theirs was not, nor if his were better improved or better used than theirs. The value of its improvements would not be con- sidered in estimating tlie value of a holding; site value alone would govern. If the site rose in the market, the tax would proportionately increase ; if that fell, the tax would proportionately diminish." ^ A full discussion of the economic and social effects of Henry George's single tax would carry us far be- yond the scope of this book. The argument for the single tax, as a mode of taxation alone, is far from complete by itself. In so far as it can be stated ^, , separately it has been well given by Fille- The argument r j q j for the single browu.^ His statement is as follows: "a. The site value of land is a social product, b. A land tax cannot be 'shifted.' c. The selling value of the land is an untaxed value." From a he would have us draw the conclusion that the ground rent should belong to the community as a whole. This, of course, involves the economic argu- ment for tlie single tax. From h lie would have us infer that the only person affected would be the landlord, and from c that "if all taxes are ulti- mately taken from rent, it follows that in the course of two or three generations taxation may cease en- 1 " Tlie Siiif^le Tax," p. 1. Ilciiry George, Progress and Poverty^ «k. VIII., Chap. II. •^ A. B. C of Taxation^ p. 166. CHAP. Ill THE TAX SYSTEM 137 tirely from being a burden upon any one." ^ In the first edition of this book there was a discussion of the probable sufficiency of the revenues which could be obtained from this source, and figures were presented from Avhich the author was inclined to draw the con- clusion that the entire ground-rent would in most communities be less than the revenues now ^^«' «"#- being spent by the government. Those ZvenuVfrom figures have been questioned, and it is t^« single tax. difficult, if not impossible, to get any that both sides to the controversy would be willing to accept. But it appears to the author on more mature considera- tion that the point is not quite pertinent. Because, if it were admitted on the one hand that all taxes other than those on land values were unjust, then it would become the duty of the government to keep its expenditures within the revenues available. But on the other hand some of the ablest among the modern disciples of Henry George do not lay full stress on the word "single." "It is a question of applying land values to the common use as far as they will go, or as much of them as may be needed, as the case may prove to be." ^ Aside from any question as to tlie probable suffi- ciency or insufficienc}' of the revenues, the single tax presents a great many practical administrative difficulties for the solution of which no detailed 1 Op. rit., p. 103. ■■2 Louis F. I'ost, The Single Tax, p. 80. Quoted approvingly by Fillebrown, op. cit., p. 151. 138 rNTKODUCTION TO PUBLIC FINANCE part n suggestions have been offered. Thus we cannot Difficulty of easily foresee how, under the changed minister- (jouditions, the assessment would be made, tng the sinijlc ' tax. or how the actual ground-rent would be ascertained. It is especially dilHcult to see how the revenues would be apportioned among the various divisions of government, or what would be the as- signment of governmental functions to different divisions of government under the new regime. All these ditliculties make governments hesitate to plunge into so comprehensive a change, the outcome of which it is so difficult to foresee. If on economic grounds, or on the ground of general public policy, we deny that any such f unda- . , mental chancres in the modern svstem of Economic ob- '^ jection to the land Ownership, possession, or enjoyment Ring e tax. ^^^^ desirable, or that the "private ap- propriation of ground-rent " is in any way a wrong, or the cause of any social or economic evils, then the case against the single tax is clear. It would be fundamentally unjust because it laj-s an unduly heavy burden on certain classes and allows others to go free or at least to enjoy a very considerable abate- ment in their contributions to the common ends of society. An apparent application of the single-tax idea is Modern taxes fouiid III the reccut exteusiou of a system on the incre- p • ^ l xI • j. r , ,, , 7 volume of the Economic Jotirnal. CHAP. Ill THE TAX SYSTEM 151 We cannot, within the limits of this work, attempt an exhaustive criticism of all tlie different theories as to justice in taxation. But the conclusions reached by Selifi^man after an exhaustive „ ,. •^ " Ciehgman s study of all the different theories are too conclusions as important to be omitted. i He finds the ^'^ P'^^ression. benefit theory, like the socialistic and compensatory theories, wholly inadequate. But the faculty theory is satisfactory and seems to him to justify a moderate progression. Greater faculty is represented by the higher income : (1) because, after the initial dis- advantages have been overcome, it is easier to acquire more ; (2) because the sacrifice of the same propor- tion of the larger income is less than in the smaller income. Neither of these reasons suggests a defi- nite rate of progression. He says : " If, therefore, we sum up the whole discussion, we see that while progressive taxation is to a certain extent defensible as an ideal, and as the expression of the theoretical demand for the shaping of taxes to the test of individual faculty, it is a matter of considerable difficulty to decide how far or in what manner the principle ought to be actually carried out in practice." It would seem, then, that, in general, faculty is the ideal basi; of taxation ; that faculty can be measured either by property or by income, but best by the lat- ter ; that faculty increases somewhat progressively and is affected by the consideration of relative con- * Progressive Taxation, 2d ed., p. 302 ff. 152 IXTRODCCTION TO PUBLIC FINANCE i'ART n (litions, as the kind of propertj^ the source of the income, or the burdens already resting upon the ,,,.,. individual or property. All these consid- Modifying r sr j relative con- eratious havc to be applied in determining I ions. whether the tax system of any country complies with the rules of justice. They do not apply with the same strictness to the separate taxes. ^ ^ The recognition of tiie principle of progression in the recent reforms of taxation is very marked. See Seligman, Essays^ 305 ff . CHAPTER IV THE DEVELOPMENT OF TAXATION BEFORE THE INDUSTRIAL REVOLUTION Section 1. Feudalism placed a large number of economic receipts directly in the hands of the rulers. These receipts were generally sufficient rp^^^^ for the discharge of the customary pub- found under lie activities. It is a mistake, therefore, ' " ^^^' to search for taxes proper in the period of the su- premacy of feudalism ; that is, from the capitulary of Charles the Bald, 877, to the end of the thirteenth century. Taxes begin to emerge with the transfor- mation of feudal rights and dues, the commutation of obligatory military services, and the like into pay- ments in kind or in money. Greek and Roman forms of taxation had even less influence on modern systems of taxation than Greek and Roman forms of expenditure on modern spending. For the study of Roman law and the traditions of the glory of the Roman Empire determined many State activities that involved the spending of public wealth. But new methods of obtaining the funds were devised. Information concerning the taxes of the period fi'om the fall of Rome to tiie capitulary of Charles the Bald is rather meagre and too vague to be of much value. 163 154 LXTRODUCriOX TO PUBLIC FINANCE part ii The first taxes to emerge from tlie darkness of this period are a number of fee-like contributions of Earixj taxes the nature of commuted feudal services, "'^TjT* "j ; or directly connected with feudal rights, muted feudal -^ *=* ' dues. certain market dues and customs duties, tolls for protection to travellers, for the use of roads, bridges, and ferries, and two forms of property taxes, land taxes and family taxes. The land taxes of this period are just emerging from the character of rent payments and ac(|uire only by degrees the character- istics of pure taxes. Even in the case of land left to the original possessors after con(;[uest, the payments demanded are more of the character of rents tlian of taxes. But tlie combination of these charges with hearth or family taxes leads to the formation of a sort of mixed property and personal taxes. The fact that land is practically the only kind of revenue- yielding property and that no considerable earnings are made without the use of land makes this tax suf- ficiently universal for the demands of justice. Direct taxes are in this period, as in classical times, never paid by the freeman. They are regarded as The freeman derogatory and as the badge of a servile exempt. position. The freeman could give his services to the State, he could risk his life for it, but he would regard it as a deadly insult if he were asked to pay taxes. Indirectly, of course, he was taxed, as, for exam[)le, when lie bouglit merchandise, for permission to sell which the trader was taxed. As soon, however, as industry began to develop, CHAP. IV THE DEVELOPMENT OE TAXATION 155 as soon as the crafts sprang up in the cities which clustered around the market-places, and classes which had lived in part from industrial pursuits found it possible to obtain so wide a market that they could live entirely from their industry, then, there arose such a differentiation of the sources of wealth that the old forms of taxation were insufficient. Tax- ation had, therefore, to be extended to Taxation ex- . . 1 <. n 1,1 mi /> 1 tended to meet meet the new torms ot wealth, ihenrst , _ , new forms of methods of taxing these were dictated wealth. solely by expediency and the desire of obtaining as large revenues as possible, rather than by any defi- nite ideas of justice, and were mainly indirect in character and partly an extension of the older market dues, excises, customs, and tolls, together with new taxes of the same kind. Of old Roman taxes none can be strictly said to have survived the conquest. Some lasted through- out the Merovingian period in a greatly changed form. Finally they were merged into various feudal payments, and took on the nature of rents. A few relatively insignificant market dues and fees constitute the only taxes which regularly formed a part of the reveiuies of the State or of the State's officers, the feu- dal lords. The regular feudal burdens, while economic in character and not fiscal, really fill the Feudal dues placeof the later direct taxes. In propor- -'"'"'"" "'"*''* •^ i ir a,s iivavij as Hon to the prosperity of the people they taxes. were certainly as heavy as any modern systems of taxes. The I'apid disiutegration of the German 156 IXTRODUCTIOX TO PUBLIC FIXANCE part n Empire into smaller territorial lordships after the sixteenth and seventeenth centuries rendered the question of imperial taxation at once less pressing and more complicated. On some eleven different occasions, according to Wagner, between 1427 and 1550 the Empire as such stood in need of extra rev- enues, for purposes so clearly of common benefit as to The" common j'^^stify a demand for common contribu- penny." tious. Sucli an instance is that of the Hus- site and Turkish wars. The tax used was the " com- mon penny." This direct imperial tax was a mixture of poll and personal taxes with income and property taxes. We find very similar taxes in France and England. It fell upon all imperial subjects whether holding from the crown or not, provided they held property. The rate was an irregular regressive one, being smaller for all above a certain amount of property. It was very badly administered and not universally collected.^ In the (xerman principalities that were formed out of the German Empire the first direct taxes were the bedes. These were extra payments, simihu" in form to the existing feudal contributions. They were made by those already paying such dues and were measured in somewhat similar ways. The basis was generally landed prop- erty. The first iec^es were more or less voluntary, pri- vate contril^utions for the support of the J^ogt, count, or lord for some recognised public purpose. By con- 1 Cf. Wagner, Schoiiberg's Handbuch,Sd ed., III., 184. CHAP. IV THE DEVELOPMENT OF TAXATION 157 tracts entered into between the contriljutors and the lords, they became compulsory and formed part of the regular income of the lords, who then in extraor- dinary cases of need would again come forward with the demand for extra or " necessity " hedes. This was frequently done in times of war. Hence, these hedes were often called "army hedes.'''' Some of these in turn became customary or fixed. With the rise of the idea of public life and public needs, the hedes easily be- came compulsory public contributions, and were re- garded as distinct from the feudal dues, which by virtue of longer standing and the absence of a recog- nised public purpose were treated as the private rev- enues of the prince. A peculiarity of the earlier as- sessments of the hedes was the method of apportion- ment to, or assumption by, the different orders or cities of a certain lump sum, which was then distrib- uted by their own rulers among the different mem- bers, according to some measure agreed "Donative ■ upon. Prelaies, clergy, and knights Avere monies." exempt from the ordinary hedes. They sometimes rendered similiir c-ontriljutions, hedging themselves in with all sorts of reserves and precautions, to pre- vent the payments becoming regular. These were called " donative monies." It was in the cities that retained a large degree of political independence that the highest development of the fiscal system was to be f(->und in the middle ages. This is owing to the fact that they were in ad- vance of the rest of the country in their econonni- dv- 158 INTRODUCTION TO PUBLIC FINANCE I'art ii velopnieiit.. Long l)efore the principalities were able „.. , , to abandon payments in kind and ser- High develop- i •' menio/city vlces, tliB clties wcre Collecting taxes in jinancei.. nioncj, making some use of public credit and developing regular fiscal oHices. " The art of taxation," says Wagner,^ " the use of public credit, and the practical organisation of the financial administra- tion in the cities had been an important part of public institutions for centuries before the- territo- rial State had even recognised the need of such." This lield has, however, not yet received the atten- tion of historical investigators sufficiently to allow us to draw conclusions as to the generally prevailing forms. ^ Sec. 2. In France the early growth of a strong central power led to an intensification and sharp differentiation of the royal feudal dues from the other feudal charges, which gives them something Royal feudal the character of taxes. But inasmuch dries in r^g ^|^g French State was peculiarly a France not . , properly proprietary State, and the territory was taxes. rather a i)art of the private property of the king than public j)ro[)erly in tlie modern sense, these early charges are not taxes proper, but rents, or, to use the more general term, feudal dues. But the rapid growth of the central power, and the higli development of puljlic neetls in the kingdom, neces- sitated moi'c revenues. Tliese needs were at first 1 Schf)iiberg's//«H(Z/y?(c/i, 8(1 ed., III., 185. 2 See Scliunbeig's Investigations into the City of Basel. CHAP. IV THE DEVELOPMENT OF TAXATION 159 met by the collection of indirect consumption and trade taxes. The tendenc}' toward the development of indirect taxes grew apace after the seventeenth century. The mercantile theory, which was su- preme for most of the time after Colbert, prompted a high development of custom duties, and these ran parallel with internal consumption taxes. In the eighteenth century there were three, or possibly four, important taxes which had grown up in vari- ous ways out of the feudal dues. These were the " taille " 1 (tallage), the " vingtiemes " (twentieths), the " capitation " (poll), and possibly the " dimes " (tithes). 2 The taille is of feudal origin. Originally it was arbitrarily assessed with extreme rigour upon the serfs by the lords, and occasionally upon the great vassals by the king with the assent of the peers. It became a permanent charge when royal power was firmly established on the ruins of fuedalism. Charles VIII. made it permanent at the same time with the ^ The term " taille,"' in English, tallage, also spelled tallia(/e, tail- age, &nd taillaye, is from a root meaning " to cut." It is explained as derived from the general metliod of keeping accounts by means of notclied sticks. A taille was any sum of whicli accnunt was kept, then the amount scored up (tallied) against any person. Slender sticks with notches called " tally-sticks" were used by the English excheijuer for accounts, until abolished by the statute of 28 Geo. III., 0. 82. Similarly, the (lerman Kcrbe, tally sticks. Otlier roots meaning " to cut" are common in the names of various taxes ; viz. incisio, inrisura, cise, later accise, adcisio, Eng. excise ; in these Latin roots the tluniglit is, that a pari of the taxed article is cut out for the government. See Vignes, Ed., Traite des Impvtsen France, lb72, p. 10. IGO INTRODUCTION TO PUBLIC FINANCE part u establishment of the royal army. The taille was both real and personal. On the one side The taille. it was based on the revenue from landed property ; on the other, it was based on the faculty of the taxpayer, measured by the revenues from his landed property, and active rents, as well as the prod- ucts of his own industry. This tax, suppressed in 1790, yielded 44,737,800 livres the year before. Necker obtained 91,000,000 livres from it. Nobles and clergy were exempt. The vingtiemes consisted of one or more twentieth parts of the revenues from either landed or movable property. This tax had a varied history. At first it was used with the taille^ but when that tax was The ving- uiadc permanent under Charles VIII., tiemes. ^]^g vingtieme disappeared. It was re- vived in 1710 by Louis XIV. as a war tax. It remained as the occasional resource of the treasury up to the Revolution. Only the clergy were ex- empt. It produced 40,000,000 livres (under Necker, 55,000,000). The capitation^ or system of poll taxes, was the variable tax of the ancient monarchy. It dates The capita- from 1695. It was first regarded as a ''"'^- temporary expedient, but was continued to the Revolution. It was assessed according to a tariff of twenty-two classes. But the base was fre- quently changed. The clergy were exempt, the nobles were taxed on the basis of their presump- tive ability, and those who pai.d the taille were CHAP. IV THE DEVELOPMENT OF TAXATION 161 taxed according to the amount of that tax they paid. In 1786 it yielded 41,500,000 livres.i The dime^ or tithe, was an assessment i)aid in kind from the fruits of the soil for the benefit of the clersfv. The tax was not always the Th rl' tenth, but varied from one-seventh to one thirty-second. The ecclesiastical purpose of this payment has led some to refuse to call it a tax in the strict sense. Since the Church exercised a power that differed little from that of the State and the burden was a regular one maintained for a public purpose, it should probably be called a tax. The corvees were more strictly taxes than the dimes. These were personal services applied to the construction of the roads and other pub- lie works. They were regarded as feu- dal dues. They were of two kinds : the first were levied on property and rendered by the proprietor for his lands, and the second were levied on persons and rendered by all, irrespective of land-holding. The nobles and the aliens were not subject to the personal corvees. The clergy could commute them into money payments or have them rendered at their own cost. The land corvSes were due from all hereditary proprietors irrespective of rank, but they were not bound to furnish them in person. Louis XVI. suppressed the eorvi'es in 177G, but they were reestablished. They disappeared in 1793. The most important indirect consumption taxes ^ For further detail-s .see Parieu, Traite de Imputs, I., p. 144 ff. 16:2 l.\TK0DUCT10i\' TO PUBLIC FINANCE part a were leased for 106,000,000 livres, and those collected , ,. , by the rj<^>veniment were 51,500,000 Indirect con- j n sumption livrcs. Thesc together nearly equalled taxes. ^YiQ revenue from direct taxes. The in- direct taxes of the ancient monarchy were : first, the aides, whieli consisted of taxes on drinks, on articles of gold and silver, on iron, oil, skins, starch, bills, paper, etc., and tlie octrois, levied at the city gates on all sorts of goods when brought into tlie towns ; second, the gabelle, or salt tax, whicli was so ar- ranged as to amount practically to a direct tax. For the people were obliged to buy each year from the management of the monopoly an amount of salt determined in eacli case by the size of the family. There was a similar "salt conscription " in Germany. Thirdly, there was the tax on tobacco. Sec. 3. In England ^ we find in Anglo-Saxon times three principal taxes : (1) The ship-geld, or Early English sln[) money, a tax imposed on those taxes. shires and towns along the sea-coast wiiich were unable at time of need to furnish ships for defence, when invasion was tiireatencd. It was levied intermittently and was used exclusively for naval purposes. The attempt of Charles I., in 1637, to impose tliis tax on all of England and for pur- j)oses other than the navy, was one of the contribut- ing causes of the civil war. (2) The tribute-like " Danegeld " was levied after 991 at so much a hide (piece of land) and paid to tlie Danes to prevent 1 See Dowtll. Ilistunj of Taxulion and Taxes in England. CHAP. IV THE DEVELOPMENT OE TAXATION 163 tlieni from raiding the coasts. After the cessation of the orig-inal cause, it was collected by the kings as private revenue. (3) The " fumage," or " tax of smoke farthings," was a tax on every hearth. This seems to have been a traditional form of tax with the Saxons. It was in effect a family tax, as the heartli stood for the family. In Norman times, the feudal character of the gov- ernment was such that it obtained revenues from the demesne, from feudal dues, and from the roj'al prerogatives so great that no real taxes exist. The Danegeld was levied by the Conqueror as an annual tax, but disappeared after 11 03. With the reign of Henry II. came a more ordered and regular s^^stem of taxation. This began with the well-known commutation of the mili- ^ L ommutation tary obligations of tenants. It w^as due of military to the continental position of the Ange- •^''"'*'^^*- vin kings. The distance at which war was waged and the length of service demanded rendered tlie military obligations particularl}' burdensome, and tenants were anxious to commute them. An army of mercenaries, too, suited the king better, as easier to control than the feudal army. Hence arose the commutation of the duty to foreign service into a money payment of two marks, i;l (>«. 8tf., on each fee of .£20, known as the " scutage," or shield-money. Henry II. collected three sucliscutages, and this tax did not fall into disuse until after 1322. It was practi- cally a land tax, levied each time for a special purpose. 164 INTRODUCTION TO PUBLIC TINA NCR part \{ The tallage in Knglaiid was the tax that was coL lected from the tenants on the royal demesne on occasions of unusual expense. Those The tallage. • i i i • i who paid the hidage or Danegeld were generally exempt. Cities and towns not exempt in this way paid the auxilium or aid. The tenants were liable for these taxes up to one-tenth of their goods. In the city of London the tallage was treated as a "benevolence." It was superseded after Edward III. by the general taxes on movables. The taxes on movables began with the " Saladin tithe " in 1188. ^ It was one-tenth of rent and mov- ^, , . . ables paid by all except crusaders. Out rhe beginning x ./ j. of taxes on of this insignificant beginning grew a movables. system of taxes on movables which finally included all the taxes so far mentioned. Richard I. levied a tax on all ploughed land in 1104, known as the " carucage," from the area upon wliich it was levied ; namely, the amount of land that could be covered by one plough (^caruca) in a season. After 1224, this was merged in the tax on movables. The tax on rents and movables, which began, as just ^, „ ,. stated, with the Saladin tithe, was contin- The thir- teenths and ued from 1189 to 1334. This was a grant fifteenths- ^^ one-thirteenth in 1207, one-iifteenth in 1225, one-fortieth in 1232, one-thirtieth in 1237, 1 The tithe, or tenth, as the rate of taxation appears in many taxes in Christian countries. It is especially common in Catholic countries. The idea of taking a tenth lias its oriirin in Mosaic law : *' And concerning the tithe of the herd, or of the flock, even of what- CHAP. IV THE DEVELOPMENT OF TAXATION 165 one-fifteenth in 1275. Up to 1283, the method of obtaining the grant was by separate negotiations with each section of the country. But after that date, general grants were made by Parliament and other taxes were discontinued. Besides these direct taxes, the crown had the privilege of taking "customary" tolls upon merchan- dise imported or exported. Hence our customs modern term, " customs duties." These duties. tolls were of the character of licenses and protec- tion money. Their early history is obscure. Be- fore the Magna Charta they had become so fixed and regular as to call forth the well-known clause of that historical document : " Let all merchants have safety and security to go out of England, to come into England, and to remain in and go about through England, as well by land as by water, for the purpose of buying and selling, without the pay- ment of any evil or unjust tolls, on the payment of the ancient and just customs" (sme omnibus malis toltis, per antiqiias et rectas consuetudines). In 1275 tliese " ancient customs," slightly raised, were granted Edward I. by Parliament. The chief duties were on wine imported and wool exported and a poundage on all other imported goods or exported. From 1334 to 1453 there are a number of changes to note. Tlie fiftt'cnths and tenths were appor- soever passeth under the rod, the tenth shall be holy unto the Lord." Lev. 28 : 32. A half a tithe and other convenient fractions give rise to the rates, which otherwise appear irregular. 1G6 IXTRODUCTIOy TO PUBLIC FINAXCR iwrt n tioucd among the coimnuiiitics, cities, and boroughs, ^, ,,., the townshiiis and the demesne tenants, 1 he jif- ^ iccnOisand in 1334, and the assessment then made ''"' *■ remained the basis of taxation. The tax thus became a fixed charge. It varied in rate from one-half a fifteenth and tenth, to two-fif- teenths and tenths, as the need for revenues changed. Sometimes no sucli grant was made. In 1377 Parlia- ment granted to the king a tax of " four pence, to be taken from the goods of each person in the kingdom. The "tallage men and women, over the age of fourteen of groats." years, cxccpt Only real beggars." This was known as the " tallage of groats." Subsequently a classified poll tax was employed, in which an at- tempt was made, by the arrangement of the payers into classes and a gradation of the rates, to get a larger return by taking advantage of the greater wealth of certain classes. The rates were : for the Duke of Lancaster, who was the higliest subject, £6. 138. 4c?. ; earls X4, barons X2, and so on down to the lowest ; ever}' one, except beggars, was to pay at least a groat or 4c?. In 1379 this yielded X2;),000, whicli was only slightly more than the previous tallage of groats. The clergy were included in both these taxes. After the peasant revolt, which was occasioned partly by the oppressive metliods used in collecting these taxes, return was made to the fifteenths and tenths. From 1382 the landowners take the whole burden of the old " fifteenth and tenth." In 1435 this was supplemented by a graduated tax on in- CHAP. IV THE DEVELOPMENT OF TAXATION \?A come from lands, rents, and annuities, and offices of freehold. In the reign of Edward III. the customs yielded, large returns. They consisted as before of tunnage on wine, customs on wool and leather, and poundage on all other merchandise. The popu- larity of Edward IV. enabled him to add to his other sources of revenue the " benevolences," demands on the rich for special contributions. « Benevo- These "benevolences" were not always fences." cheerfully paid. It was more often " as though," says More, " the name of benevolence had signified that every man should pay not what he himself of his good will list to grant, but what the King of his good will list to take." Throughout the history of taxation in England the grant of monopolies of new industries was made a source of income to the govern- ment. The multi[)lication of these under Elizabeth did not yield much revenue, although it gave rise to much discontent. There is little in the varied application of these taxes that is important as showing the line of de- velopment until tlie seventeenth century. At that time they proved unequal to the task of meeting the growing needs of the treasury. The chief auxiliary lay in the extension of the indirect consumption taxes. The year 1(592 (revision, 1097) saw the estab- lishment of a i^ermanent land tax. This 7,. . '■ I fie perma- grew out of the apportionment of the "fif- "f"' ictnd teenths and tenths," It became a fixed charge on land, a real burden, not having, as time 168 IXTKODUCTION TO PUBLIC FINANCE part ii went on, any definite relation to the income from land. In 1708 Pitt made this redeemable by the payment of a Inmp sum down, after which no annual tax would be collected. This privilege has been taken advantage of to the extent of removing half the charge from the lands. In its operation the land tax became rather a rent than a tax. The Avars of the period of the French Revolution and the consequent need of revenue introduced the The income general income tax (1798, 1802, 1803, ^^^- 1806). This tax was no departure in principle from the older taxes, although a departure in method. It has been well characterised as a com- bination of several taxes into a system which has for its aim the proportional taxation of all incomes, with the exemption of a certain fixed sum (degressive). The form which it took in 1803 is the best to study. Two separate acts were jiassed, tlie one taxing all incomes from holdings of real estate, rents, and pub- lic salaries at the source ; that is, so far as possible the tax was deducted before the revenues passed into the hands of the recipient. The second taxed industrial earnings and interest on capital on tlie basis of a declaration by the taxpayer. The tax began with an income of X60 (later c£r)0), and this amount could be deducted from all incomes below <£150 ; after that the full rate was paid. Each per- son was required to declare his whole income and could claim reimbursement for any tax stopjjcd at the source if he could show that his total income CHAP. IV THE DEVELOPMENT OF TAXATION 169 was below the minimum. This tax, set aside in 1816, was restored in 1842, as a substitute for the indirect taxes, removed in consequence of the de- mand for commercial freedom. The rate is changed from time to time as the needs of the government change. Sec. 4. Local taxation in England has been partly independent of ro3'al taxation. England has not followed the continental plan of collecting revenues for local purposes in the form of additions to the national taxes. While the weight The poor rate of national taxation fell u])on customs eprooype '- of local taxes duties, excises, and certain direct taxes, in England. measured roughly by income, local taxation was based exclusively upon revenues from real estate. The prototype of all local taxation was the poor rate. Previous to the reign of Elizabeth local ac- tivities were of such a character that they could be discharged from feudal dues. In the manorial villages and the boroughs with semi-feudal guild, and close corporation governments, which owned landed property, feudal incomes paid the few public expenses. But the removal of the monasteries, hos- pitals, and other charitable foundations, threw upon public charity a number of well-developed paupers ; and the rapidly changing character of industry and of economic life constantly gave rise to the problem of what to do with the unemployed, who at times became very numerous. The result was the famous poor law of IGOl. The principle of the tax for the 170 IXTRODUCTION TO PUBLIC FINANCE part ii support of the poor liud been of slow growth. In the reign of Henry VIII. the giving of alms was prohibited, and collections for the impotent poor of the parish were required to be made in each chureli. In 1547 the Bishops were authorised to prosecute all persons who refused to contribute for this pur- pose, or should dissuade others from contributing. In the fifth year of Elizabeth the justices of peace were made judges of what constituted a reasonable contribution for this purpose. After 1572 regular compulsory contributions were levied. Out of a purely voluntary contribution, then, there emerged in two-thirds of a century a compulsory tax. The basis of this tax was the annual rental value of real property. The tax was collected not from the owner but from the occupier. Most of the otiier taxes for local purposes which have developed in England since then are of the same general char- acter. They are too numerous to mention here. Besides the direct taxes, there were a few indirect ones, market dues, road tolls, coal and wine duties. Sec. 5. In the American colonies we meet with entirely new conditions. Public needs were simple Peculiar con- and fcw, and were mostly local in charac- 'tioiismt ^^^, Customs duties were for the most A merican colonies. part Controlled by the mother country in the interests of her general colonial jiolicy. So the colonists were driven to otlier forms of taxation. Practically free trade in land existed. Land at a known selling value early formed a large part of CHAH. IV THE DEVELOPMENT OF TAXATIOIV 171 the property of each citizen, and differed in no essential particuhir from his other property. There were in some colonies, to be sure, charges of a feudal nature known as quit rents, which were a recogni- tion of the king's interest in the land. 1 liese never l)ecame oi hscal importance, and never developed into taxes. Nor do they seem to have ever seriously modified the essentially free character of land-owning, since they were so irregu- lai'ly and meagrely collected. They were " acknowl- edgments His Majesty receives of the People's Tenure and Subjection." ^ At times they devel- oped into an apparent tax on certain lands. They seldom formed a part of the revenues of the colonial treasuries, being generally payable to the king.^ Just as tiiere were three different forms of gov- ernment among the colonies, so there were in the beginning tiiree different tendencies in The New taxation.3 New England began with a ^«»^««<^'«^ ° o ofi property tax on property and faculty. The Gen- and faculty. eral Court of Massachusetts laid down in 1634 the following principle : "In all rates and })ublic charges the towns shall have respect to levy every man according to his estate, and with consideration all other his abilities whatsoever, and not according to ^ Spottiswood Letters, quoted by Ripley, Financial History of Virginia. '^ See Wood, History of Taxation in Vermont, p. 13. Also Scliwab, History of the Xcw York Property Tax. » Cf. Seliymaii, Essays, p. 1'.) ff. 172 INTRODUCTION TO PUBLIC FINANCE part u the nunibei' of his persons."^ Later, however, poll taxes were used, and the general property tax was ex tended to cover property in the process of acquisition, or the earnings of labour. In all the New England col- onies the resulting system was practically as follows: Each person was to contribute as he was able. Abil- The New ^^J ^^'^^ measured, first, by property, real England and personal; secondly, by the person ^ '"" himself; thirdly, in the case of wage- earners, merchants, and others, by earnings. With a few notable exceptions, as in the case of law- yers, the third measure of ability gradually fell into disuse. It has been repeatedly pointed out^ that the New England people had the habit of saving. All earnings were soon turned into property. So that the demands of justice were fully met by the general property tax and the poll tax. In addition to these direct taxes, there were a number of indirect taxes, "imposts," some collected in tlie form of licenses, and many as excises. In the Southern colonies, of which Virginia will serve as a model, the first taxes were the poll taxes. " Personal responsibility," says Ripley, " was thus the basis of taxation at first, but as the burden of taxation became heavier this liability was partly transferred to real estate."^ This transfer of the 1 Massachusetts Records, quoted by Douglas, Financial History of Massachusetts, p. 18. 2 W^alker, "The Bases of Taxation," Political Science Quar- terly, Vol. III. ^ Financial Uisto)-y of Virginia, p. 21. CHAP. IV rilE DEVELOPMENT OF TAXATION 173 burden to real estate began with the practice of makinsf the personal tax a lien upon the •.,■■■ „ r> i- -f Vxrgxma poll property of absentees, or of persons dy- taxes and ing before the payment of the tax. The '^"*''"^- general property tax in a form like that in use in New England did not exist in Virginia before the Revolution. The grossness of the poll tax was modified by some reference to the different kinds of property owned. In consequence of the failure to develop a good system of direct taxes Virginia re- sorted to indirect taxes, export duties on tobacco and hides, import duties on liquors and slaves, and some general tunnage duties forming the main features. The third or central system is fairly represented by New York. There, under the West India Com- pany, 1621-1664, taxation first took the New York form of moderate indirect taxes on goods «a^i«««- imported and exported and imposts on the consump- tion of beer, wine, and spirits. It was after the passage of the colony into the hands of the English that attempts were made to develop the property tax. The actual existence of this tax begins with the formation of the Assembly after 1683.^ In all parts of the United States after the Revolu- tionary War the main reliance for local revenue was the general property tax. The commonwealths, as such, had little need for revenues until after 1840. ^ See Schwab, Die Entwickehmg dei' Vennogenstener im Staate JVeto York, Jena, 18!)0. Also Sclivvab, Histury of the Xexc York Property Tax, Pub. of the Amer. Econ, A>isn.f \,, 6. 174 INTRODUCTION TO PUBLIC FIXANCR iakt ii In the foriiiatioii of the I'nion indirect taxes were made tlie prerogative of the federal government, sd that the commonwealths had to resort to other means. The character of direct taxation in tiic United States since the formation of the Union will be treated in the next chapter. The differences in the forms of taxation in the dilTerent parts are due both to political and economic differences. CHAPTER V THE DEVELOPMENT OF TAX SYSTEMS SINCE THE INDUSTRIAL REVOLUTION Section 1. Tlie trend of the development of taxation was abruptly changed })y the industrial revolution at the close of the last cen- changes in tury. On the one hand, the development taxation due . . . .to the indus- of constitutionalism, vesting, as it did, trial revoiu- the control of the purse in the people, '**'"• and especially in the taxpayers, had the inevitable effect of changing the ideas underlying the tax systems. New ideas as to the justification of taxa- tion developed, and with tliem a tendency to seek new measures of taxation. On the other hand, the rapid increase in wealth, the growth of new forms of wealtli, such as invested capital, the birth of new kinds of property, and of w ays of holding property, as the many kinds of credits, and tlie rapid change in the distribution of wealth among the different classes in the community, — all of these and other similar causes led to the constant extension of taxa- tion to the new forms. Old taxes which were well suited to certain simpler conditions of society become under new conditions unjust, and give rise to dissat- isfaction, to many attempted and some accomplished 175 17G IXTRODUCTIOX TO PUBLIC FINANCE part il reforms. These reforms in turn prove no more satis factory in the long run, for the conditions they were intended to meet change again. Just as the attention of economists was chiefly directed to the study of productive agencies during Taxation of ^^^^ ^^"^^ three-quarters of the century, the agents of so the general tendency of the same production. . -. . ^ ■, -. n i period in nuance may be broadly charac- terised as an attempt to compel the different agen- cies of production to contribute to the support of the government. It is claimed that economists have, during recent years, turned their attention more to the consideration of questions of distribu- tion, and it is certainly true that the most recent tax reforms have been in the direction of securing a better division of the burden among the sharers of Taxation f ^^^^ ^^^^^ Wealth rather than among the the shares in produccrs thereof. Subordinate to this distribution. , ^ ■ i j j. tendency are various proposals and at- tempts to alter the distribution of wealth by the use of the taxing power. The demands upon the revenues increased vastly during and immediately after the period of war which followed the French Revolution. Large debts had been accumulated ; great armies and navies Effect of tran- claimed support even in times of peace. ion oa New functions were being thrust upon money econ- ° ^ amy." the governments. Moreover, the new economic era demanded the payment of all charges upon the State in money and necessitated the col- CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 177 lection of revenues in money. The old feudal receipts and services became more and more inade- quate ; new industrial receipts were, in general, not calculated to be much larger than the sums neces- sary to support the service or institution which furnished them. Consequently, taxation on an ever increasing scale becomes the basis of all State finances. Taxation is no longer regarded as a temporary expedient to meet passing and extraor dinary needs. It is admittedly a necessary and permanent policy. Tlie doctrine of political equality when generally accepted leads to a demand for universality and equality of taxation. The difficulties Effectsofpoiu- that arise are no longer as to the justi- icai equality. fication of taxation in general, but as to the justice of certain forms and measures of taxation. The main question is, what is equality, and what the best method of attaining it. The methods and direction of reform were necessarily prescribed by the constitutions of the various countries and differ much from laud to land. Different economic and social conditions have also an inevitable effect. Among the constitutional features that determine the direction of taxation the following may be mentioned. First, federal governments have gen- erally been excluded from the field of Federal gov- direct taxation. The central govern- ^""l"]'';,'- ° sort to indirect ments of the German Empire, Switzer- taxes. land, and the United States depend for revenues 178 INTRODUCTION TO PUBLIC FINANCE part n from taxation on customs duties and internal ex- cises. The sense of personal loyalty to the central government is inferior to that to the commonwealth governments so far as willingness to contribute directly to its support is concerned. Those who pay a direct tax wish to see the money expended near at hand and under their own eyes. The partial concealment or at least lack of prominence of the indirect contribution permits of its collection with- out calling the attention of the contributors forcibly to the fact that they are taxed by a new authority. Just that advantage of partial concealment in this tax which appealed so strongly to tlie monarchies, before the birth of political consciousness on the part of the people, appeals to the federal govern- ments. At the same time the practical necessity of uniform rates over the whole country, which arises from the fact that these taxes disturb the economic balance of industry and commerce, and the greater ease of administration with a larger territory and a single boundary, make it advisable to put all of them in the hands of the central organ. It was the latter considerations in regard to custom duties that led to the establishment of the Zollverein and eventually of tlie German Empire.^ On the other hand, the different States of which the federal governments are composed have shown ' See Bowrin^'s Report on the Prussian Commercial Union, ParUmiicnliinj Documents, 1840, Vol. XXI., pp. 1-17. Keprintt-d in Rand, Economic History, p. 170. Also Legoyfs La France et V Etranger, Vol. I., pp. 250-255 ; ibid. CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 179 themselves inclined to restrict their taxation to the direct taxes, leaving all hut a few of the indirect ones to the central governments. But this separation of the assessment of direct and indirect taxes between different authorities has been productive of great difficulties. Difficulties For it is impossible to assess any tax '^^^^^^^^ '■ *' from a divi- justly and equally without reference to sion of the tax- the other burdens already imposed on ^^9 power. the contributors. It would seem that the demands of justice which dictate that the whole system of taxation should work toward a definite and single purpose, will necessitate either the coordination of these forms or the placing of both of them in the hands of the same authorities. The proper co- ordination of all taxes is hard to accomplish when the taxing power is in different hands. This is one of the hardest problems of American taxation. The development of direct taxation will now be traced in detail by reference to some of the more important countries. Indirect taxes cannot prop- erly be said to have undergone any process of development. Many changes have, indeed, been made, dictated by different economic theories and purposes. Hut it has been simply a flux backward and forwar'. Sometimes ulterior aims, as protec- tion, have been abandoned and strict fiscal principles allowed sway. In those cases we find a simplifica- tion and a decrease in the number of articles taxed But no general principles have been developed. 180 INTRODUCTION TO PUBLIC FINANCE part n Sec. 2-. Probably the most thorough attempts to reform taxation in accord with clearly recognised principles of theoretical justice have been in Prussia. That country has taken advantage from time to time of the advice of men of science. It has been Pru.siamadc. ^^^^'^^v happy (1) in having a goodly use of men of number of unpartisan financial scientists "^ ^' to draw upon ; (2) in being able to draw upon them for advice, either by counting their pupils among its fiscal officers or placing the scientists themselves on its tax boards and commissions. It has been able to make changes with a broad conser- vatism that looked toward the gradual realisation of accepted ideals. With characteristic visionary eager- ness, France has several times started out to obtain Little advance at a single bouud somc new ideal, but in France. ]^,^g each time fallen back upon forms and methods but little better than those in vogue before. In England, special difficulties and objec- tions have been met with little reference to any ^ , , general plan. The result has been a England re- ° ^ moves special steady approach to a better state of •'"" '^' affairs, with only an occasional intensi- fication of existing evils, due to the attempt to cure sym[)toms rather than to seek the underlying causes of the trouble. In the United States there ,, . , , have been spasmodic and ill-directed at- N o consistent '■ reforms in the tempts at the rcuioval of a few clearly United States. • i i ^ • t\ t- „ recognised abuses ; and without any con- sistent attempt to change the system, tiie result lias CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 181 been a decided modification. The general failure of the property tax to reach pers(Mial property gave rise at first to vigorous efforts to extend and sharpen the methods of assessment. These attempts fail- ing, other methods of reaching the mass of personal property were devised, which have resulted in a partial change of system wherever they have been successful. Sec. 3. The most instructive country to study is Prussia. The line between the old and the new may be drawn at the reforms of Stein and Harden- burg in the forms of land tenure. These reforms may be regarded as having been accora- Establishment plished in 1811. Briefly stated, their «/A^«"-«^« '■ ''in land in result was to abolish personal serfdom, Prussia. dissolve the feudal partnership between tenants and proprietors, and establish free trade in land.^ Al- though these reforms had to do mainly with land and although the accompanying edict of 1810 prom- ised speedy reform of the land tax on the basis of a new survey, or cadastre, nothing material was accomplished in the reorganisation of this tax until 1861. In that 3'ear the land tax was re- . The land tax. arranged tor the entire kingdom on the basis of a new and rapidly executed survey. Some twenty different provincial land taxes, with up- Seeley's Life and Klines of Stein, Vol. I., pp. 187-297. Morier, "The Af^rarian Legislation of Friussia during the Present Century," in I'robyn [Kditor], Systems of Land Tenure in ]'arious Countries, pp. 800-316. See Selections iu Hand. 182 LVTRODUCTION TO PUBLIC FINANCE part li wards of one hundred minor viiriations, which had existed before that time, were merged into an ap- portioned tax upon the net product of each piece of land as given in the cadastre. This tax recently yielded about 40,000,000 M. annually. The reforms which preceded this were those of the indirect consumption taxes, out of which finall}' Consumption emerged the personal class tax. Tiie taxes trans- q([[q^ of 1810, wliich was referred to formed into personal taxes, above as promising a reform of the land tax, seriously attempted to remove inequalities by destroying many feudal exemptions and privileges, and removing local differences. A general scheme of consumption taxes on necessaries, of which the excise on meal is a type, was planned for city and country alike. It was, however, immediately found that the meal tax was hard to collect in rural parts. As early as 1811, therefore, a poll tax of one-half thaler from every person over twelve years of age was substituted for the meal tax in all places except the larger towns. In 1820 this tax, still applying to the same places, developed into a classified poll tax ; i.e. all persons were grouped according to rank, profession, and general prosperity, into a few classes, which were then taxed jo^r capita at different rates for each class. Somewliat modi- The class tax. fied the next year, so as to make twelve classes, in groups of three each, and with rates which ranged from one-half thaler to 144: thalers, and covering all persons over fourteen years old, CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 183 this tax endured thirty years. As before, this tax did not extend to the harge cities, where the excise on meal and meat was regarded as placing the same burden on the people. Such a remarkably clear perception of the fact that indirect taxes are practi- cally the equivalent of direct taxes in the individual burden tliey impose is not often met with in fiscal history. In 1851, this tax was changed in order to make room for the introduction of an income tax on all persons having an income of over 1000 The income thalers. Those persons whose incomes *^^- were below this amount were taxed in the larsre cities by the meal and meat tax ; in the country and in small towns, by a class tax, like the old one, with rates ranging from one-half thaler to 24 thalers, according to the supposed income. Persons living in large cities who paid the income tax were allowed to deduct 20 thalers from their income as com- pensation for the meal and meat tax they were supposed to have paid. Later reforms removed these gate excises except for local purposes. As the income tax forms a special topic in a later chapter, we will not at present follow the details of its development and reform. It is sufficient to say that it was a progressive tax on the income of every person.^ When the land tax was reformed in 18G1, the building tax was separated from it, having been 1 See Cliap. IX. 184 IXTKODiCTION TO PUBLIC FINANCE part i\ until that, time a part of it ; and all old taxes of a similar sort were merged in the new one. This tax is assessed in the cities according to the rental of the buildings, and in the country ac- Building tax. -. ,"" . c ^i i i cording to the size ot the lands con- nected with the houses, and other characteristics. One of the reforms that was made after the peace of Tilsit to strengthen the weakened economic re- sources of the country was the establishment of general industrial freedom. Naturally, such a change would have been regarded as a failure from the standpoint of the statesmen of the times, if it could not be made to yield a revenue to Industry tax. , . , . the treasury ; so the new industries were burdened with a new tax. This tax, which was very weak, and which, wisely, perhaps, failed to meet all the new forms of industry which came into existence, was subjected to a thoroughgoing reform in 1891. But it was at that time transferred to the local governments. Capital invested and some of the permanent features of each business form the basis of this tax. The Prussian system, as it existed before the great reforms of 1893, may now be seen as a whole. It consisted of two parts : (1) There was a group Siimmari/o/ f^f three complementary taxes upon the the Prussian producc of property and capital, — the system before , i ., t i i • the recent land tax, the building tax, and the in- reforma. dustry tax ; (2) there was a system of personal taxes culminating in an income tax. CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 185 The former group, true to the economic tenets of the first tliree-quarters of the century, taxed tlie productive agencies. The latter, although it orig- inated as a consumption tax, aimed at taxing the shares in distribution. Thus the older consumption taxes, which were originally assessed without any very clear idea of what the justification was, but were used because productive of large revenues, yielded to new taxes supposed to be more fairly in accord with the modern system of distribution. We are now in position to see the significance of the great reforms of 1893 (all of which went into effect in 1895), made under the The great re- leadership of Finanzminister Dr. Miquel. Mmsof 1893. These reforms place Prussia far in advance of all other countries in the theoretical perfection of her tax system.^ The income tax, which has long been correctly regarded as the foundation of the Prussian tax system, was subjected to a thorough reform in 1891.2 It was strongly urged at that time that income from property represented a far higher fac- ulty, per unit, than income from labour and personal exertion, and, therefore, that a perfect system should contain two kinds of progression : one that taxed larger incomes more heavily than smaller ones ; another that taxed incomes from property more heavily in propoition than inct>mes from labour. 1 See Seligman, Essays, pp. 330-339. References to larger and more detailed statements are given there, •i See Chap. IX. 186 INTRODUCTION TO PUBLIC FINANCE part i\ It was felt that the existing produce taxes i^Er- tragsteuern'), the . kind, building, and industry taxes, failed to accomplish this end. Hence one of The general the reforms of 1893 was the surrender property tax. of tlicsc taxcs to the commuues, and the initiation of a general property tax as supplement- ary to the income tax. Tliis tax, which can be properly understood only when its supplementary character is held in mind, is arranged as follows : The tax is one-half per mill on the lower limit of the class within which the property falls. The classes go by stages of 2000 M. from 6000 M. to 40,000 M., of 4000 :\I. up to 60,000 M., of 10,000 M. up to 200,000 M., and above that of 20,000 M. each. Thus : Pkopertt Tax Up to 6,000 M. . exempt. From 6,000 " 8,000 " . 3M. 8,000 " 10,000 " . 4 " 10,000 " 12,000 " . 5 " 20,000 " 22.000 " 10 " 40,000 " 44,000 " . 20 « 60,000 " 70,000 " . 30 " etc. Above 200,000 M. the stages are 20,000 M. each, and the tax increases 10 M. in each stage. This tax being supplementary to the income tax accomplishes the result of imposing a differential rate on funded income as against unfunded income. The abandonment by the State of the three old taxes on land, buildings, and industry rendered the CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 187 reform of local taxation possible. As has already been said, the proper coordination of all tax burdens is one of the chief problems of modern tax ^^^ reform of reform. With the exception of the beer ^°'^'^^ taxation. taxes, and the meat and meal taxes still used by some of the cities, local taxation in Prussia is mainly direct. Most of it, until 1895, took the form of percentages additional to the rates of the royal taxes. In some cities there were important special local taxes, like the house rent tax in Berlin. Prussia, also, grants subsidies from the royal treasury to tlie local bodies for special purposes. But the symmetry of the national system was somewhat destroyed by these additional rates. Such additions to the income tax were especially intolerable. Real estate is, moreover, a particularly good basis for local assessment. It cannot evade the tax, and it is the recipient of par- ticular benefits from good local government. The same is true of businesses of a local character, al- though it is not safe to let the rate vary from place to place. Hence these three taxes were handed over to the local bodies. At the same time the attempt was made to regulate all other sources of local revenues. The Prussian system as it now stands comes nearest to the realisation of the taxation of faculty of any in the world. The chief dilhculties that have arisen are those of assessment. The progressive rate gives rise to a special incentive to tlie concealment of larger incomes, and not even the general excel- 188 /XTRODUCTIO.V TO PUBLIC FINANCE part il lence of Prussia's admiiustnition has been preventive of under-assessment.l Sec. 4. In France indirect taxation has probably found a higher development than anywhere else. Indirect taxes yielded in 1908 over 2,000,000,000 francs, against 560,000,000 francs from direct taxes. Some of the main taxes are on the consumption of wine, spirits, beer, sugar, salt, tobacco, etc. ; there are also the octrois or gate duties collected by some High develop- of the citics as a means of contributing mentofindi- ^^^g-^. ^^^^^^ ^^ ^^^^^^ ^^ ^j^^ ^.^.^^^ ^^^^^ reel taxes in France. to the general treasury. There are also the taxes on acts and transfers, which will be treated under fees, since they assume a private benefit, and the customs duties. Not peculiar to France, but receiving a high development there, is the mode of collecting a tax on consumption by a monopoly of the manufacture of tobacco in the hands of the government. The imperative necessity under wliich France has laboured all through this century of continually increasing her revenues, and the danger of making the burden unbearable if thrown upon the existing direct taxes, as well as the desire on the part of the legislators of concealing so far as possible the actual burden, lest an impatient constituency rebel, accounts well for the relatively high develop- ment of iiidii-ect taxation. The preference for in- 1 See the revi^lations of the Bocliuin investigations, quoted by Wagner in Srhanz FiiuDizarrhic, XVllI. year, Vol. II., \t\). 107, 108. CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 189 direct taxes as the main reliance of the public revenues argues, however, a low stage of political ethics. Tlie more highly developed the conscious- ness of citizenship and membership in the State, the easier it is to make direct taxation effective. Direct taxation in P'rance dates in its present form from the Revolution. All the taxes of the ancient monarchy were abolished at that time and a fixed scheme of taxes on revenue-yielding property substituted. This system of direct taxes The French has four chief members: (1) the tax direct taxes. on real estate, known as the " imp6t fonder " ; (2) the apportioned tax on polls and rents of dwellings, " cote personnelle et mohiliere " ; (8) the tax on doors and windows, '-'■impot siir les portes et fenetres'''' ; (4) the tax on business, " impot des patentes/' ^ Sup- plementary to these taxes are a number of taxes classed as "assimilated to the direct taxes." These, so far as they flow into the central treasury, are : (1) the mining dues, or the royalties from the min- ing rights, " redevances des mines'' ; (2) the fees for the certification Q^ verification"^ of weights and measures ; (3) the tax on property held in mort- main, that is, property held in perpetuity by the ^ '■'■ Patentes'''' is translated by Leroy Beaulieu by "licenses." Science des Finances, Vol. I., p. 395. There is no exact English equivalent. The "license" in this case is little more than evidence of the payment of the tax. The term "patent" does not seem to imply, as the term " license" does, the granting of a special privi- lege. The term "license" is, however, not infrequently used in English to indicate a tax on business. 190 INTRODUCTIOX TO PUBLIC FIXANCE part ir communes^ hosjjitals, e'liurches, seminaries, charitable institutions, and the like, '■^ taxes des Mens de la main morte " ; (4) the taxes on horses and carriages, '' im- pSt sur les chevaux et les voitures^\' (5) a number of miscellaneous fees and charges of which the charges for the inspection of pharmacists, grocers, druggists, and herbists are examples. The real estate tax, the poll and rents of dwellings tax, and the door and window tax are, in most part, apportioned taxes. The real estate tax was, down to 1890, a combined tax on agrarian lands and on impdt land with buildings. It was apportioned fonder. qj^ ^j^q basis of a very elaborate survey and valuation completed in 1850 and carefully kept up to date. These taxes, like the other apportioned taxes, were apportioned in successive ste[)S, first to the departments, then to the arrondissements, and then to the communes, by the several legislative bodies, and finally divided among the individuals in each of the communes by a '•'•conseil de repartition.''^ In 1890 the tax on dwellings, that is, the tax on land with buildings on it (propriSt'i hdtie'), was separated from tlie agrarian land tax and tlie amount levied on the land was somewhat reduced. In 1897 fur- ther relief was granted to small landed properties. In 1908 the impot fancier yielded 200,000,000 francs. The land tax is still an aj)portioned tax, but that on dwellings, or on jyrojrrieff^ hdtie, is now pro[)ortioned, and the uniform rate is about 3.2 per cent. The tax on polls and rents of dwellings is peculiar CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 191 to France, the same combination not being found in the tax systems of other countries, although the ele- ments thereof are not uncommon. This tax, the personnel-mohilier, as it is called, is two Personnei- taxes in one, a tax on polls and a tax mobiUer. bearing the somewhat misleading designation " mo- hilier.''^ This latter tax was originally designed to cover personal property, hence its name, and thus to supplement the impot fonder. The personal or poll tax element of this tax is due from every citizen of France and from every resident enjoying civil rights, except paupers, married women living with their husbands, and children, whether of age or not, living with their parents or guardians, and not enjo3ang an independent income. It is the same in rate for all the inhabitants of a given locality and the rate is fixed at three days' wages. The rate at which the wages shall be assessed is determined each year by the general council of each dSpartment. It may, however, not be fixed at less than one-half franc, nor at more than one franc and a half. Thus the minimum tax is one franc and a half and tlie maxi- mum four francs and a half. The other element of this tax, the mohilier, is assessed according to the rental value of inhabited houses. It is in this part of this two-headed tax that the apportionment is worked out. The poll tax falls short of raising the commune's share of the combined taxes, and the bal- ance of the quota is assessed upon the rentals of dwellings {loyer de habitation'). Some of the large 192 IXJKOnrCTIOX to public FIXANCE part II cities, Paris, L3'ons, Marseilles, and a few others, raise a part or even tlie whole of their (piota by means of duties on goods brought into the cities, i.e. octrois, and do not levy on rentals. The door and window tax is an apportioned tax rated according to the number of windows and Fortes et doors in the houses. It was intended fenHres. ^q Supplement the personal and dwelling tax, but it is really an addition to the real estate tax. It is paid by the owner and he is allowed to shift it if he can to the tenant. The business tax is an old one. Established in 1791, remodelled in 1844, it is now enforced under a hiw that was adopted in 1880. Unlike the other direct taxes it is regarded, not as an apportioned, impdtdes but as a proportioned or rated tax. The patentcs. u i^npot chs patentes " is imposed on every person, native or alien, who carries on any trade or profession in France, except agriculture and a few others that are especially exempted. The aim is to tax the profits of industry or of a profession, as nearly as may be proportionately. The methods of determining the rates for the different occupations or industries are extremely complex, so much so that only the most general outline can be attempted here. The objects of this complex system of rates are to avoid on the one hand any incpiisitorial prying into the affairs of the individual taxpayers, and on the other hand to shun the danger of receiving false declarations as to the amount of the profits. This is CHAP. V THE DFA'EI.OPMENT OF TAX SYSTEMS 193 done by sei/.insj^ ii[)Oii certain concrete, external signs, or natural and obvious characteristics, as evidence of the size of the profits. In general the rates fall into two parts. The first is called the fixed duty (taxe determinee). This is the same for each occupation of the same sort, and is largely independent of any of those conditions which make one occupation more profitable than another, of the same kind. The second is the proportional rate, based on certain characteristics that are assumed to indicate that a given industry is more or, as the case may be, less profitable than another of the same kind. The fixed duty, however, is not the same in all towns, for it is assumed, for example, that a druggist in a large town makes larger profits than one in a small place. For the fixed duty occupations are grouped in three classes and fall under schedules A, B, and C of the law. Class A includes the general run of merchants and artisans. Merchants are again divided into three classes, according as they sell entirely at wholesale, partly at wholesale and partly at retail, or entirely at retail. In this class the fixed rate is based on two considerations, (1) the nature of the business and (2) the size (population) of the place in which the business is conducted. Thus occupations are divided into erght general classes according to their nature, and for each of these there are nine ratings according to the size of the place in which they are located. Class B contains a number of businesses in coiniection with which it seems neces- 194 IXTRODUCTION TO PUBLIC FINANCE part n sary to consider the size of tlie enterprise as well as the size of the place and the nature of the business. So a third set of characteristics is introduced sup- posed to show the size of the enterprise. In this class are bankers, department stores, water works, hack and omnibus companies. Class C includes the smaller industrial pursuits, handicrafts, and the like. In this class the size of the place is not taken into consideration, but some concrete index of the size of the establishment is taken in connection with the nature of the business. Such indices are the number of appliances, or machines used, the number of work- men employed, and the like. The proportional part of the rate is based mainly on the rental of the place of business and the rental of the home the pi-oprietor occupies. It varies for each of the main classes and also within the classes. These rates are for class A from two to five per cent of the rental, for those in class B ten per cent, in class C from one and two- thirds to ten per cent. The " liberal " professions, such as those of lawyers, doctors, and the like, pay only the proportional rates. Direct taxation in France may be summarised as falling maiidy on the agents of production and the sources of wealth. Sec. 5. The English system of taxation can be very briefly treated here, because the principal com- ponent parts will be discussed in detail in later chapters. What is necessary here is to give an outline of the system as a whole. The greatest CHAP, V THE DEVELOPMENT OF TAX SYSTEMS 19o change in the F>riti.sli scheme of taxation within this century was the elimination of the There/ormsoj protective principle from the customs i840-i850. duties, — and indirectly from the excises also, — brought about in the period from 1840-1850, by the abolition of the corn laws and the agitation leading tliereto. Tlie consequent simplification of both tlie import duties and the excises rendered it possible to manage them purely as a source of revenue with a view to obtaining relatively larger sums. The customs duties, the entire tariff of which now contains only 40 rates, and the some- what more numerous excises and stamp duties, pay one-half the total annual revenue. The property and income tax, which was restored in ^, / he property 1842 and has since been the variable or and income elastic element in the system, will also '^^' receive special attention in another chapter. Inas- much as this famous property and income tax is a system, in itself, of five taxes which are calcu- lated to fall upon the chief sources of wealth, it complies, ''n a way, with the requirements of uni- versality. Its rate is degressive, so that it attempts to comply with the requirements of justice. It may be looked upon as the complete system of direct taxation. Outside of the system there are two remnants of older taxes which are anomalies and destroy, somewhat, the logic of tlie system. This lack of any logical reason for retaining them does not necessarily form any good reason for abolishing 196 L\n RODUCTION TO PUBLIC FINANCE pari il them. Tliev give rise to no serious complaint, they are old and have been in the main capitalised, so that they form no real burden at present. They are the land tax of the eighteenth century, which is now a redeemable rent cliarge, and the house duty. This latter developed out of the hearth tax of 1662. In 1688 it had been replaced by a window tax. In 1778 a tax on the annual rental The house tax. i i t • i i r. was added to the window tax, and finally after 1851 this tax on the rental value was left to stand alone. There is still another tax which supplements the property and income tax, and tliat is the inheritance The inherit- tax. The most reccnt changes in these ancetax. inheritance taxes, — "death duties," — which have existed in England since 1694, will receive attention under another heading. The im- portant thing to note in this connection is that these taxes have introduced the principle of progression very extensively into the tax system of England. The English system as it now stands, consists (1) of the customs and excise duties ; (2) of the so-called property and income tax, a degressive tax upon five kinds of income ; (3) two older taxes, the land tax and the house tax ; (4) a graduated inheritance tax, and (5) a number of stamp taxes on deeds, receipts, and so forth. ^ 1 Williams' The King's Revenue contains a fine outline of the revenue system of En L introduce a which the untaxed funds were invested, new principle. The resulting corporation taxes worked some im- provement. They supplement the general i)roperty tax very effectively. Within the past decade (1899- 1909) a number of states have been remodelling their tax system, by selecting certain sources of revenue for the use of the state or central governments onl}-, leaving the general property tax to the minor civil divisions. One general result of this movement has been the taking over of the taxation of corporations by the state, with corresponding increase in effi- ciency of administration. Sometimes the legislatures have attempted to tax mortgages, as if Taxation of they were a part of the property on mortgages. which they rest. As mortgages have to be recorded in order to be legal, it is possible to get at the full value. In some commonwealths, then, the mort- gagee is taxed on his interest in the property and the owner is exempt to that extent. In California, where this plan has been most extensively tried, the result has not been at all what was desired. The only effect has been to raise the rate of interest on mortgages by the amount of the tax plus from one- fourth to one per cent. That is, the mortgagees have succeeded in shifting the burden of the tax to tiie real owners with a iiandsome ailditit)n for 200 IXTRODUCTIOiV TO PUBLIC FIXAXCE takt u their trouble. Such a shifting- is always possible when any one form of capital is taxed, leaving other forms untaxed, either because they are exempt or because they escape the tax. A recent development in some states has been the exemption of mortgages from taxation as property under the general property tax and the substitution of a tax at a low rate, known as a recording tax. But in general and in most of the commonwealths the American system remains what it has been since 1840, — a regressive tax. on real estate, supplemented in part by corporation taxes in some commonwealths, and by an ever increasing number of inheritance taxes. It is a sys- tem condemned by every scientific writer and im- partial statesman, but retained as the only source of revenue. The difficulties which have prevented persistent attempts at reform remain, and it is hard to see how T'fc w« ;/• they can be overcome. No one common- in the way of wealth cau alTord to pursue personal reform. property with so much vigour as to act- ually impose a tax on all of it. Only concerted action could accomplish this. Capital is sufficiently mobile to move easily from commonwealth to com- monwealth, and if compelled to bear its fair share of the burden in one and not in another, it will surely migrate. Legislators are extremely desirous of attracting capital and very wary of repelling it. The owners of capital cannot be taxed personally. They change their residence from city to suburb CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 201 and even to unfrequented rund parts on the slight- est increase of local taxation and move from com- monwealth to commonwealth with equal facility. Residence, too, is a matter of intention, and it is easy if personal taxes are proposed to plead residence in another commonwealth. Concerted action being practically impossible, the tax-dodger is safe. But while the present system is very bad, it has been tolerated in the past, and arouses less discon- tent at present than might be expected „ ^ .. ^ o i Reason for the because it falls mainly on the receivers toleration of of economic rent. The value of land in ^ *^* ^"^' many parts of the United States has increased very rapidly and is still increasing steadily ; so that in those parts, while the taxed owner feels the burden severely, lie consoles himself with the thought that he is largely or wholly reimbursed by the increased i^rice which he hopes to get for his land. The gen- eral practice, too, of assessing real estate at a fraction of its value, even though so universal as to work no actual lessening of the burden in any individual case, tends to stifle murmurs of discontent. For the owner secretly congratulates himself on not having to pay on all of it, — Jin illogical basis for self-congratulation, to be sure, but still not infre- quently effective. The same person, too, is not infrequently the owner of taxable personal property which he conceals, and he is less uneas}' about the tax on real estate so long as he is able to save the other. 202 INTRODUCTION TO PUBLIC FINANCE part ii Another reason for the absence of a concerted niovenient of real estate owners to lessen the burden arises from the fact that the real estate tax is a real burden on the property, and shifts itself by the The tax on process of Capitalisation. For the new real estate be- i ^ i. i • x i. i purchaser gets his property at a lower comes a rent ^ " i l j charge. pricc than he would have to pay if the tax had not been imposed. The frequency and ease with which real estate changes hands gives con- stant occasion for this capitalisation of the tax. Every real tax, when not a part of a well-organised system which taxes every kind of property or all receivers of wealth, can be shifted in this M'^ay. It becomes a rent charge on the property to which it is thus attached. A dim perception of this, and a possi- l)le realisation of the fact that a reform of the tax system might transform this tax into an actual burden again, may lie at the bottom of the indiffer- ence with which the average landowner views pro- posed reforms. All of this selfish indifference is, of course, mis- taken. It defeats its own ends. The burden of taxation is only light when properly adjusted to all the shoulders. The serious effects of an unjust, unequal, and ill-arranged system of taxes upon the economic forces of the country has been treated else- where. The property tax forms the subject of a special chapter. We have spoken merely by courtesy of an Amcii- can system. As a matter of fact there is none that CHAP. V THE DEVELOPMENT OF TAX SYSTEMS 203 is worthy of the uaiiie. Federal aiitliorities tax with no reference to commonwealths and munici- palities ; commonwealths and municipalities, with- out reference to federal action. Municipal taxes are, however, generally adjusted to the Entire ah- existing commonwealtli taxes, but <»iily senceof in such a way as not to make the result- *^*'^- ing burden appear too large. Their efforts in tliis direction have only served to intensify the existing inequalities. CHAPTER VI EXCISES Section 1. Generally speaking, indirect taxes are older than direct taxes. They are suitable to a more primitive organisation of society. Hence, it will not be amiss to treat them before we analyse the direct taxes. By far the larger part of the „ . indirect taxes are on consumption (Auf- of excises and wandsteuern'). Most of the taxes on con- customs. sumption fall under one or the other of two heads : they are either excises or customs duties. In the United States the excises are called internal revenue taxes. Excises may be defined as all those taxes levied within a country on commodities des- tined for consumption. Customs duties fall on com- modities as they enter or leave the country. In their effect on the economic condition of the country and on the tax-bearer they are practically the same. In both cases the persons who first advance the taxes are generally supposed to reimburse themselves from the persons to wliom the wares are sold. In both cases, although less often in tlie case of excises, it may be true that only a part of the funds taken from the tax-bearer flows into the treasury. Eor l>oth of them enable producers who escape, or whom 204 CHAP. VI EXCISES 205 it is not intended to tax (as the home producer in the case of a tax ou imported commodities), to collect on each piece of goods sold a hounty or a tax in the form of a price higher than he could otherwise ob- tain, the amount of which goes into his own pocket. Sometimes this subsidising of certain producers is intentional, sometimes only accidental. In any case the ultimate effects which will result from such an interference with the ordinary currents of trade can- -not be fully traced. It is comparatively seldom that excises have been intentionally used to change the movement of economic life. But customs duties have regularly been used for that pur- Excises have pose. Excises have, to be sure, been used sometimes . . a • 1 Tf A 1 ^1 heenus^dfor to influence socuil lire, to lessen the con- ^„rai re- sumption of certain commodities the use forms. of which is regarded as injurious to the individual or dangerous to society, but the object, in that case, is social, not economic. There used to be a large number of the so-called direct consumption taxes. A few of these still sur- vive. They are direct in the first sense j^. , ■^ Direct con- of that term, but not in the second, sumption These direct taxes on consumption are ''^^*' either remnants of the older taxes on movables, or arose from the attempt to frown on the use of luxu- ries. They differ from excises in that tliey are levied directly on the consumer and not on the per- son or persons w ho supply him with the commodities. They are to-day few in iiuiubt'r and of little fiscal 20() INTROnrcriO.Y to PVPI.IC FlXAyCE FART n importance. I'lie cliicf iiistaiR-us in modern times and the most universal are the (h)g taxes. There are, in England, similar taxes on guns, carriages, armorial bearings, and men servants. In the United States watches, clocks, and firearms have been made contributory in this way. Plate, houses, clocks, hair powder, and a great many other articles have been taxed. It is regarded as just and proper to make articles of luxury the subjects of taxation because their use is supposed to be evidence of ability to pay. The tendency now is to leave the administration of direct consumption taxes to the local bodies. They are sometimes combined with police regulative laws and are assessed as a means of enforcing those ordi- nances. This is the case with the dog tax in America. Sec. 2. It is the excise tax in all its forms that has displaced the direct consumption taxes. The distinguishing feature of this tax is that some resi- dent seller of an article, whether produced in the country or abroad, or the manufacturer of such an Seme excises article, advauccs the tax either during have the name ^^iq proccss of its production or at some purpose as ^ sumptuary time before it reaches the consumer. '""'*• The main purpose of the excise is to obtain revenue, but the ideas underlying the sump- tuary laws, and the desire to use taxation as a means of social and moral reform, have dictated some of these taxes or at least the selection of the commodi- ties to be taxed. The fact that the consumption of certain articles like spirituous liquors, tobacco, and CHAP. VI EXCISES 207 playing cards is coiKlciniied in itself, and that sucli articles are regarded as unnecessary luxuries, has led governments to disregard, or, indeed, to favour, the repressive tendency of the tax upon the use of them. It is felt that in case the tax sliould lessen the con- sumption, tlie gain to the community in moral and social well-being would more than offset the loss to the treasury in revenue. Moreover the consumption of such articles is not, it has been found, liable to serious diminution on account of the tax, unless, as in the case of the French tax on tobacco, it is very high. In the seventeenth century there was a marked tendency to multiply excise taxes. So strong did this tendency become that not a few able writers advocated a general excise as the most An exclusive just form of tax.i Many of the recent ^y^tem of ex- cise taxes suggestions for the reform of taxation in would be un- France are in the same direction. This ^"*'- tendency can be easily explained by the rapid multi- plication of taxable commodities. It was urged that the ease with whicli sucli taxes were shifted insured in tlie end perfect justice. It was also often urged that consumption is more or less volun- tary, and any one who finds the tax too heavy can avoid it or lessen it by curtailing his consumption of the taxed article. Thus if tlie taxed articles are not important necessities, the contributor has a certain control over his share of the tax and can suit it to his means. It" tlic tax is on a hixurv, he lias presum- • Cf. Colin, p. 880 ; St'ligiiiaii, Shi/tiny tiiid Incidence, p. 12 F 208 JXTKODrcriox ro ruRi.rc i-vxaxce vart n ably absolute control over his contribution. Hut modern investigations into the character of distribu- tion and consumption would seem to indicate that these views are erroneous. There is no doubt that consumption is a very poor criterion of tax-paying ability. What a man spends is no indication of liis tax faculty. There are, also, some important admin- istrative difficulties. The yield of these taxes is An exclusive beyoud the control of the fiscal officers. system of ex- jj ^^^^^^ revcuues are needed, it is not cises inexpe- dient, always possible to obtain them by rais- ing the rates, since a rise in the rate may, in fact, lessen the revenues by lessening the demand for the articles. Therefore, they are not variable at the pleasure of the treasury. It follows, further, that a system of excises alone would be extremely inelastic. But as parts of a system, the elasticity of which is provided for by other elements, tliey have proved very valuable on account of the relative ease of -., , . collection, and the large returns wliich Used in con- ° nection with they Can be made to yield. In England, other taxes. jjugsia, and France the returns of the excises and customs duties are one-half, or more of the national revenues. In Germany the consti- tution confers upon the Imperial legislature the power to regulate the customs and excises uj)on domestic productions of salf, tobacco, spirituous liquors, beer, sugar, and sj'rup.^ The common- wealths of the Empire do not levy excises on the 1 Burgess, PiAiticnl Science, II., p. 174. CHAP. VI EXCISES 209 articles al)Ove mentioned except Bavaria, Wiirtem- berg, and Baden. The Empire cannot tax any other articles. In the United States the federal govern- ment derives nearly half its revenues from excises and an almost equal amount from customs. The following principles have been developed as governing the returns obtainable from excises : (1) Articles which are regarded as neces- Excises on saries, and which naturally have or can necessaries. have a wide consumption, are very suitable under this tax for obtaining large revenues. In this case tlie operation of the tax is like that of a poll tax. The old French gabelle^ a tax on salt, is an example. The effect of these taxes, if high, is possibly to cur- tail consumption and possibly to cause a substitution of other similar articles not taxed. Possibly, too, they may curtail the consumption of other articles by lessening the money available for their purchase. But even with a low rate, these taxes are extremely productive of revenue, on account of the large number of contributors. The objection to burdening neces- saries and rendering the existence of the poor harder, leads, however, sooner or later, to their abo- lition or to a reduction in their rates. These, like the poll taxes, recognise to too small an extent dif- ferences in ability. They are, however, Excises on good sources of revenue in cases of ex- luxuries and , 1 / i\ I • 1 p . comforts. treme need, (z) Luxuries and comtorts may be taxed licavily. This applies especially tc hixurii's the use of which has become a fixed habit 210 IXTRODUCTION TO PUBLIC FINANCE part il witli large masses of people. The general principle is to select those luxuries of the widest consumption as the objects of the heaviest taxes. Thus alcoholic liquors and tobacco are universally taxed in this way. In the United States they form almost the sole objects. In times of special need it is customary to press the semi-luxuries or comforts into service. Here again, the choice is made of articles of widest consumption ; such as coffee, sugar, silks, chocolate,- etc. In most modern excise systems, the heaviest burden falls upon luxuries. In England, where the receipts from excises are nearly one-fourth of tlie total revenues, the chief burden falls upon spirits (1908, £22,830,000) and beer (1908, £13,550,000). In France, aside from the octroi, the chief excises are on beer, wine, spirits, and tobacco, then on sugar, salt, and playing cards. In Germany, apart from the city gate taxes, they fall upon alcoholic drinks, tobacco, and sugar. There are special diiliculties which (lermany encoiniters in the administration of these taxes, due to deep-seated historical prejudices on the part of the conniion wealths of the Empire. Modern excises are, then, mainly taxes on alcoholic drinks and tobacco with the addition of a few other duties upon [)laying cards, etc., and in cases of great need, upon a few articles of large consumption. Sec. 3. By far the most interesting features of Methods of ^^'^ cxcises are the ukUIkxIs of assess- aaaeasment. nieut and collection. These are practi- cally of three kinds, which may be variously combined; CHAP. VI EXCISES 211 (1) A tax on the producer or seller so levied that the failure to pay it deprives the person of the right to sell, and renders him liable to penalty. That is, a so-called license ^ is sold. (2) An impost on each unit of the article. This demands the registration of the dealers therein ; and sometimes they are re- quired to give bonds as surety for the payment of the tax. Wlierever it is possible, this impost is collected by means of the sale cf stamps purchased of the government to be affixed to each package, hogshead, etc., or by means of brands, or otlier marks affixed by officials who thus receipt for the payment. The stamp or brand serves as evidence that the tax has been paid. Goods not bearing these would, if taxable, become contraband and liable to sei/Aire. (3) By the retention of the monopoly of manufac- ture and sale by the government. England and America use a combination of (1) and (2). Thus in England every barrel of beer is taxed 7s. 9t7. (1908) and every dealer and brewer pays a license besides. ^ 1 For the distinction between a license and a permit see the United States Census Bureau delinitions cited in the Appendix to Chap. I. of Part II. of this work. A license to conduct some busi- ness illegal in itself diffei-s from a license required merely to com- pel the payment of a tax. 2 The following; applies to 1908 : Beek Dltv, Excise £ s. d. Beer of specific gravity of 1055 degrees, per 36 gal. ..079 Anndal Licenses Brewers of beer for sale ....100 Other brewers : Brewing solely for their own domestic use, exempt 212 IXTRODUCTION TO PUBLIC FIXANCE part n In the Tnited States all internal revenue taxes are payable by stamps. These stamps are pasted upon the packages containing the taxed commodi- ties in such a way as to be necessarily broken wlien the package is opened. Or else they are pasted up from beer duty, if the annual value of tlio house oc- £ s. d. cupied does not exceed £8 . . . . . (exempt) Same, if animal value of house exceeds £8, but does not exceed £10 4 Same, if annual value £10 to £15 Same, but liable also to beer duty, over £15 . , ..0-40 Same, or for consumption by farm labourers, if annual value of house does not exceed £10, exempt from beer duty 040 Same as last, if over £ 10, liable also to the beer duty .040 Beer dealers 3 1 Beer dealers, additional to retail, off the premises ... 1 5 Beer retailers, on the premises 3 10 Beer retailers " on," occasional (license per day) ...010 Beer retailers, grocers, "off," Scotland, to £10. ... 2 10 Beer retailers, grocers, "off," Scotland, £10 and up- v?ard 440 Beer retailers, grocers, "off," England 16 With varying and additional licenses for combination of sale of beer with wine, spirits, etc. Spirits are taxed in a similar way and so are the dealers therein. In the case of tobacco the import duty forms the tax on tiie com- modity, and the manufacturer pays a license graded according to the size of his business. Tobacco manufacturers : £ .s. d. Under 20,000 lb 5 5 20,000 to 40,000 " 10 10 40,000 " 00,000 «» 15 15 60,000 " H0,000 " 21 80,000 " 100,000 " 20 5 100,000 . . . .- 31 10 CHAP. VI EXCISES 21 3 or exposed in the places of business. The table below illustrates the whole system. Scliedule of articles and occupations subject to tax under the internal revenue laws of the United States in force August 28, 1894, as amended to 19U8. Special Taxes Rate of tax Rectifiers of less than .500 bbl. a year iSlOO.OO Rectifiers of 500 bbl. a year, or more 200.00 Retail liquor dealers 25.00 Wholesale liquor dealers 100.00 Retail dealers in malt liquors 20.00 Wholesale dealers in malt liquors 50.00 Manufacturers of stills 50.00 And for stills or worms, manufactured, each .... 20.00 Brewers, annual manufacture less than 500 bbl. . . • 50.00 Brewers, annual manufacture 500 bbl., or more . . . lOO.OO Manufacturers of oleomargarine 600.00 Retail dealers in oleomargarine 48.00 Wholesale dealers in oleomargarine 480.00 Distilled SriuiTS, etc. Distilled spirits per gallon $ 1.10 Wines, liquors, or compounds known or denominated as wines, and made in imitation of spai-kling wiueor cham- * pagne, but not made from grapes grown in the United States, and liquors, not made from grapes, currants, rhu- barb, or berries grown in the United States, but produced by being rectified or mixed with distilled spirits, or by the infusion of any matter in .spirits to be sold as wine, or as a substitute for wine, in bottles containing not more than one pint, per bottle or package 10 Same, in bottles containing more than one pint, and not more than one quart, per bottle or package 20 And at the sanx^ rate for any larger quantity of such mer- chandise, however put up, or whatever may l)e the package. Stamps for distilleil .sjjirits intended for export, for ex- pense 10 214 TXTHODCCTIOX TO PUBLIC FINAiVCE part il Tobacco and Snuff Rate of tax Tobacco and snuff, however prepared, niaiuifactured, and sold, or removed for cousuinptioii or sale, per pound 1*2 cents, or with discount of 20 per cent .... $.09 j^ uet Cigars and Cigarettes Cigars of all descriptions made of tobacco or any substi- tute therefor, and weighing more than 3 lb. per thou- sand f.J.O0 The same, weigliing not over 3 lb. per thousand, per thou- sand 54 Cigarettes, weighing not more than 3 lb. per thousand and of a wholesale value or price of more than f2 per thou- sand, 36 cents per pound, or per thousand 1.08 The same of a wholesale value or price of not more than |2 per thousand, 18 cents per pound, or per thousand . .54 Cigarettes, weighing more than 3 lb. per thousand, per thousand 3.60 Fermented Liquors Fermented liquors, per barrel, containing not more than 31 gal $1.60 More than 1 bbl. and not more than 1 hogshead, 63 gal., in one package 3.20 Oleomargarine Domestic, per pound $ .02 Imported, per pound 15 OriUM Prepared smoking opium, per pound $10.00 Playing Cards Playing cards, per pack, containing not more than 54 cards $ .02 CHAP. \i EXCISES 215 Sec. 4. We may now look at a few characteristic excises. The taxation of salt by means of au ex- cise, collected in the form of a tax on The salt tax. producers, a tax on sellers, the sale of a monopoly to a private company, or state manufac- ture, is one of the oldest forms of taxation. On ac- count of the nature of the commodity, a necessity for which there is no substitute, and of which poor and rich consume about the same amount, this tax acts practically as a poll tax. With the modern tendency to abolish or at least to lower poll taxes, as unequal and unjust, the salt tax has been largely abolished. or its rates have been so lowered as to practically nullify the returns. France in 1908 received about 10,000,000 francs from the salt excises. The Eng- lish salt tax yielded at the time of its abolition only X380,000. The United States war excise upon salt yielded only $300,000. The best, but not by any means the sole, example of the tobacco monopoly is in France. This interesting tax scheme began in 1674 under Colbert. It contin- ued with slight interruptions for over a century as one of the most productive parts of the rev- enue system. It was leased to n ferme ^'"^'"•^ '''^«''- ^ CO monopoly. gSn^rale, who paid the government, at the time of Necker, 32,000,000 francs annually. At the time of the Revolution the monopoly was abol- ished, and an attempt was made to introduce a series of taxes on tobacco. Hut the monopoly was restored in 1810 l)y Xapok'oii I., and lias coiitiinu'd ever since. 216 INTRODUCTIOX TO Pi'B/JC F/XAXCF. takt il UikUt llic present law the culture of the plant is forbidden outside of certain localities. Each year the estimated amount required by the depart- ment is apportioned among the different applicants within the district where it is permitted to raise tobacco. Several thorough official inspections of the fields and crops are made, and even the number of plants and leaves is counted to insure obedience with the regulation which demands the delivery of the whole crop to the government. Tobacco raised for export is similarly watched to see that none of it escapes into the channels of the French trade. The price for each quality is determined by a commission of officials and experts. A part, about one-half, of the supply is imported. The manufacture is carried on in public factories, which employ about 20,000 workmen. The sale is in the hands of some 40,000 petty officials, who receive a percentage of their sales and whose appointment is a part of the party spoils system. The revenues obtained in this way are enormous : 1815 40,000,000 francs. 1869 107,0(10,000 " 1872 21S,70(),()00 " 1876 26-2,:300,000 « 1880 281,000,000 " 1885 ;5()(),0()0,000 " 1890 ;^7:5,(l(lO.O0O « 1895 ;5S 1.000,000 «« 1900 415,000,000 " 1904 447,000,000 " 1908 with matches 516,000,000 " CHAi". VI EXCISES 217 The prices charged for tobacco are higli compared with the prices prevalent in other countries, so high that tlie consumption is apparent!}- checked thereby, it being per capita less than one-half that of Ger- many. Austria and Italy have very similar state tobacco monopolies. France added a monopoly on matches in 1890. Sec. 5. On account of tlie large returns obtain- able from an excise on luxuries, and in view of the fact that any repressive effect of such „, •J >■ 1 he proper excises is not felt to be harmful, but is field for often desired, it is probable that these ^■^'^**^*- taxes will be long retained. Tliey are ap[)licable to any luxury the consumption of Avliich is l;ui;i' and of which the j)ro(luction is sufliciently simj)le or con- centrated to allow of supervision. But in general, excises as taxes on expenditure or consumption are unfair. What a man spends is no indit-ation of his ability to pay taxes, and what a man spends on a certain limited list of commodities is less so. When these taxes are made a subordinate part of a system and due allowance is made in the other taxes for the existing burdens, there is less objection to them. CHAPTER VII CUSTOMS DUTIES Section 1. Customs duties are tart n sumption tax systems, whicli usually tax luxuries more heavily than other commodities. But the great saving in expense, and tlie great ease of collecting and administering specilic duties, go a long way in recommending them. Ad valorem duties demand more machinery of administration, as, for example, the certification of the consul in the place where the goods come from to the correctness of the invoice, a corps of appraisers, and a careful examination or in- spection of all incoming goods. Little of this is necessary in the case of specific duties. Specific duties are now retained mainly for simple commodi- ties of uniform value per unit, or for rough groups of articles, whose value is easily ascertained. The watching of the frontier and the prevention of smuggling is one of the primar}^ difficulties that have to be overcome in the administra- Smuggling. tion of customs duties. Goods of high value and easily portable are not very well adapted to pay such duties, unless they can be obtained only from distant countries and are thus easy of identifi- cation. Whenever there is a heavy excise on any commodity there is generally a correspondingly heavy customs duty as well. Sometimes the im- ported commodity pays both the duty and the excise or a part of the excise. The political or protective element in customs duties lias been gradually retreating in importance, and the fiscal has correspondingly advanced. Stein^ iVol. II., Part II., p. 377. CHAP. VII CUSTOMS DUTIES 229 makes tliis the sole law in the history of customs duties. It would lie best churacterised as an ad- vance of the fiscal interest, leaving the The rise of political or protective interests the same \T^"'^ T^*^ • ■t^ ■■• the fiscal pnn- as before. The pressing wants of na- dpie. tions, and the fact that federal governments have been well-nigh confined to these taxes, has necessi- tated this advance. Sec. 8. We may now look at some examples of customs duties. Those of England are particu- larly instructive. 1 The term "eon- „. , , •^ History ofcus- suetudines,^^ or customs, applied to the toms duties in duties levied upon imported and ex- "^"" ported commodities even before the Magna Charta, bespeaks their antiquity. In the time of the Nor- man kings, however, trade was insignificant and the duties not very productive. The original duty on wine was one cask from every cargo of between ten and twenty casks, two from twenty or more. What the original duty on wool was is not known. Finally the system settled down to a 5 per cent tax on all imports and exports. Down to 1700 these duties were entirely for revenue purposes and had no intentional protective features. At one time their yield was nearly £1,500,000. The eighteenth cen- tury saw a changed policy. Special protective and prohibitive duties were established. This was the })olicy of the entire century, except during the iSee Hall, Ilixtonj of the Customs licvenue, and Dowell, History of Taxation. 230 LXTRODUCTIOX TO PUBLIC F/XA.VCE part ii " long peace " of Walpole, 1722-1789. By 1759 the general charges were 25 per cent, while many commodities, like tea, coffee, sugar, wines, and spirits, paid even more. The expenses of the wars which marked the turn of the century led to a general increase of charges on revenue- yielding commodities. Yet with all the many increases in the tax charges there was not a corre- sponding increase in revenues. In some cases the high duties of the war period exceeded the limit of what the goods would bear. For example, sugar paid duties ranging from 20s. to 39s. per hundred- weight during the first fifteen years of the nineteenth century. But the annual income was least when the duties were highest. Consumption fell off half a million hundredweight under the higher price. It must be noted that this result was obtained in the case of a commodity not produced in the country itself. Salt, also, bore' a heavy duty in this period to the lessening of the consumption. Tea, coffee, tobacco, wine, and other foreign products were also subject to revenue duties so high as to be close to, if not beyond, the limit of greatest productivity. Interesting and instructive is the experience of England with protective duties. Export duties on „ , ,, raw matei'ial, or tlie prohibition of the England s ^ protective exportation tliereof, as in tlie case of "^''*' wool, was originally one of the most prominent features of the English system. From the middle of the seventeenth centui-y down to 1825 the CHAP. VII CUSTOMS DUTIES 231 exi)Oitation of home-grown wool was forbidden. Until 1802, however, the importation of wool was free. Then the import duty rose rapidly from 58. Zd. per hundredweight, in 1802, to 508. per hundred- weight, in 1819. To encourage the production of raw silk, heavy duties were placed upon that com- modity in 1765, and not lessened until 1825. Linen manufacture was encouraged by bounties. The chief battles over the customs duties in England were waged around the "corn-law."^ Two things among others of minor importance seem to have contributed mainly to the establish- ment of protective duties on bread-stuffs. ^ The first Avas the existence of heavy public burdens upon land, and the desire to compensate land owners and land users therefor. The other was the desire to make England as independent as possible of all foreign nations for her food supply, and to keep even the poorer lands in cultivation. According to the advocates of this policy, protection was needed to enable the proprietors and tenants to buy manu- factured products. It was the political power of the proprietors that enabled the policy to be maintained. The various tariffs that prevailed may be conven- iently summarised as intended generally to maintain a chosen price, which it was assumed would enable ^The American student must bear in niiiul that in England "corn"' means wlieat, or, in general, bread-stuffs. 5^ See McCnlioch, Taxation, p. 20(5; Wilson, Xational Budget, p. 02 ff. ; Levy, IJistnnj of Bi'itish Commnrc, 2d ed.. Part II., Cliap. 7 ; Kand, p. 207 ff. 232 IXTKODi'CTIOX TO PUBLIC FINANCE iaki' h the producer to live, and would not place too heavy a burden on the consumer. Hence the frequent re course to a sliding scale by which a liigher duty was imposed as the price fell. The best example is the scale adopted by Sir Robert Peel (5 and 6 Vict. c. 14), by which the dut}' was to be 20s. per quarter when the price was 50s. and 51s., and decreased Is. per quarter for every rise of Is. in price ; so that the duty should only be Is. per quarter when the price rose to 70s. and over. The idea was, clearh-, to maintain, if possible, a price of at least 70s. A similar purpose underlay the earlier prohibition of importation, until the price rose above 80s. jier quarter. Popular agitation, headed b}^ the Anti-Corn Law League, was based upon the hope of cheaper food The eiimina- supplies. It was Supported by the rapidly- lion oft oprowinc: manufacturing interests in the protective o o .-> features. expectation that cheaper food would re- sult in a fall in wages. After j-ears of effort it brought about the repeal of the corn laws in 1846. The sympathy aroused by the Irisli famine of the same year contributed to this end. Just before the repeal of the corn laws Peel had, in 1842, simplified the whole tariff by eliminating many of the protective features, especially by removing duties on raw material and freeing a number of small articles. As a substitute source of revenue the income tax was restored. Gladstone, in 1860, completed the re- moval of protective features. Since that time it has CHA1>. VII CUSTOMS DUTIES 23'3 been true, in the words of Bastable, that " the English customs system is remarkable for its vigor- ous adherence to the principle of purely financial duties. All traces of a political aim in the imposi- tion of customs duties have now disappeared." The corn duty was, however, restored as a revenue measure at the time of the Boer War. It lasted but a short time, namely, from April 15, 1902, to July 1, 1903, and during that time yielded X 2,448,000. ^ During the fiscal year 1907-1908 the customs yielded X32,500,000 as follows : tobacco, X13,739,000; tea, £5,807,000; coffee, X184,000; cocoa, etc., £287,000 ; chicory, £47,000 ; currants, raisins, and other dried fruits, £456,000; sugar, £6,708,000; beer, £23,000 ; spirits, £4,133,000 ; wine, £1,177,000. There are now only about 40 rates in the English customs tariff. In 1875 there were 53, as against 397 in 1859, and 1046 in 1840. Sec. 9. The difficulty of administering customs duties in the small and scattered areas of the differ- ent States of Germany led to the for- „, ^ •> 1 he German mation of the Geniuin customs union cusioms {ZoUvereiii) in 1833. This union, which ""''"'• at tirst embraced a population of 25,000,000 and a territory of 80,600 square miles, grew in size and in permanence witli the renewal, from time to time, of the treaties which bound together the States com2:)Osing it, and with the entrance of new States, 1 The so-called " rpsistration " duty, 18()!1-1870, yielded £1,000,000 during the entire period of its existence. 234 LXTRODUCriON TO PUBLIC FINANCE pakf ii SO that in 1854 it embraced 98,000 sciuare miles and 35,000,000 inhabitants. It was tlie core of the present German Empire. At the beginning the moderate, mainly revenue, duties of Prussia were adopted. In the tariff of 1865 the rates were lowered and many removed. Duties on grain and on almost all raw materials were removed, and the duties on manufactured goods reduced. The free-trade tendency which accomplished this change lasted until long after the formation of the Empire, indeed down to 1877. The constitution of the Empire confers upon the imperial legislature the exclusive power to regulate customs. It may levy taxes to any amount U[)()ii The customs 3,11 articles exported or imported, for of the Empire, reveuue purposcs or for protection or for both. But the imperial legislature cannot tax any- thing else. Further revenues, if needed, can be raised in the form of an apportioned requisition upon the commonwealths of the Empire. The growing need of the Empire for revenues was ac- companied by a wave of protectionist sentiment, so that the increased duties were more and more pro- tective in character. It is true, however, that the revenue features were increased at the same time. Particularly interesting is the duty (M1 griiiii, intro- duced in 1871>, and raised several times since then. The rate is now 5 M. per 100 kilograms f..r wheat and rye, 4 M. for oats, "2^ M. for barhn'. These duties are in some measure protective in ordinary CHAP. VII CUSTOMS DUTIES 235 seasons. It is frequentl}- found that a part of the revenue -whicli fltjws into the treasury from this source, especially in extraordinary years, is paid by others than the consumer. ^ Generally, however, the consumers pay the home producers a goodly sum in the shape of higlier prices. The operation of these grain duties has been materially modified in recent years by the conclusion of commercial treaties with some of the grain-producing countries. The main revenues from customs duties in the Empire come from coffee, tobacco, wine, and grain. Sec. 10. France has a highly developed system of customs duties. By the edict of 1664 Colbert attempted to reduce to a single uniform History of the scheme all the confused and multifarious French tariff. customs charges that had come down from feudal times and were in the hands of many different authorities. The tariff tlins established was pro- tective in ciiaracter and was dictated mainly by the mercantile doctrine. But many provincial duties were left, and as time went on confusion increased. The Revolution swept all the old taxes away, and in 1791 the system which is the basis of the present one was established. The development since then has been gradual. Prohibitions of imports and exports, so nunu'rous in the tariffs of the ancient monarchy, have now all been removed. Since 18()3 the only exceptions to this statement are books that infringe the copyright 1 See example cited above ; also Colin, p. o(35 ff. 236 INTRODUCTION TO PUBLIC FINANCE part ii law and inuiiitioiis of war. To iiisuri' tlu' propei registration, for statistical rest'aich, of all traffic, there used to be an import cliarge on all goods of 15 centimes per 100 francs' worth or 50 centimes per 100 kilograms, and an export charge of 25 centimes per 100 kilograms. These have been removed.^ During the period subsequent to the Revolutitui, and down to 1814, war measures left no opportunity to test the tariff of 1791. The Restoration estab- lished, a highly protective system at the instigation of the Chambers. The Second Republic continued the same policy. Napoleon III., finding himself unable to persuade the deputies to change the tariff, removed many of the prohibitive duties by treaties. The first of these treaties, with England in 1860, fixed the maximum ad valorem duty on English goods at 30 per cent for the first four years and 25 per cent after that. Other treaties followed, extending similar privileges to other countries. In the si)irit of these treaties the tariff itself underwent many amend- ments, raw products were admitted free, duties on foods were removed or lowered, and the duties protecting the stronger manufactures were lowered. By 1873, that is, after the struggle with Germany The two was over, and after the revenue system tarijfss. \y^^{ been rearranged to meet the tremen- dous burden which was the consequence of tlie war, 1 On the whole subject see Levasseur, " Recent Commercial Policy of France, "./o?art n commodities ranged from 5 per cent to 100 per cent ; the last on spirits. Some purely revenue duties were removed entirely, as, for example, the duty on tea and coffee. The protected textile industries re- hiiued their duties for the most part ; woollens 20 to 30 per cent, cottons the same, iron 30 per cent. All the duties were made ad valorem, a change which involved an increase in the cost of administration. A more substantial reduction was made in 1857. The crisis of 1857 resulted in a serious decline in the revenues, and just before the Civil War broke The Morrill out, Congress passcd the so-called Mor- tariff. rill tariff, March 2, 1861. This tariff in- creased the protective duties, especially on iron and woollens. From the technical side this act made two changes of note. First, specific duties were again restored ; second, the system of so-called compen- sating duties was initiated. This second feature, which afterwards received a very broad application, can best be made clear by an illustration. The Morrill tariff increased the duty on raw wool. To compensate the manufacturers for this, a specific duty, supposed to represent the duty on raw ma- terials, was placed on manufactures of wool, to- gether with an ad valorem duty for protection. Immediately after tlie i)assage of tlie Morrill act the war broke out. Under the pressure of the need The war for revcuues Congress passed a long tariffs. series of acts increasing the duties on purely reveiuK^ artichis, putting duties upon articles CHAP. VII CUSTOMS DUTIES 241 hitherto free, and raising as compensation the pro- tective duties. The idea of giving compensatory duties was extended to cover tlie burden of internal taxes also. Thus the manufacturers were, in 1864, given special compensator}^ duties to offset the heavy internal taxes. This remarkable protectionist meas- ure, embodied in the act of 1864, was rushed through Congress with only one day's discussion in each house. It represents the highest limit ever reached. Nearly 1500 articles were enumerated ; the average rate was close to 50 per cent. It shows the effect of three different forces : there was (1) the desire to increase the revenues, (2) the feeling that the manufacturer had a good claim for compensation for the high taxes in general, (3) the mad scramble to gain all that could be gained from this class of legislation. This act afterward received a number of amend- ments to meet tlie changes made in the other parts of the revenue system, but the character of the tariff was not materially changed until 1883. One of the most interesting changes, technically, was the fixing, in 1866, of the niethod of ascertaining the value upon which the duty was laid. It was provided that the value should be determined by adding to the value, at the place of shipment, the cost of trans- portation, packing, commission, warehousing, and other charges which fell upon the goods before their arrival. The protection policy thus extended gave strength to vested interests which thereafter supported that 242 INTRODUCTION TO PUBLIC FINANCE part II policy. The only changes of note down to 1894 are the attempted reforms of 1870, 1873, and 1883, Modifications. -urT'-i •pnc^r^/^ i-i and the Mckinley tariff of 1890, which re- duced the income by removing the duties on purely revenue articles and on very strong, self-sustaining industi'ies, but increased the protective features. In 1894 came a change that at first appeared to be very important. The McKinley bill of 1890 had be- D , ,. ^ come practically the platform of the Ke- Keduction of ^ j l protective publican party, and the Democratic party went into power pledged to the reduction of protection. They j)roceeded slowly to the fulfil- ment of these pledges. The famous Wilson bill was reported December 19, 1893, and became a law August 27, 1894, without the approval of the Demo- cratic President. It failed of his approval because of the objectionable features introduced in the Senate. Two things prevented the change from being sweep- ing. The first was the power of the vested interests in the protected industries. Every sort of pressure, short of illegal, was brought to bear in favour of the existing system. The second was the patent danger of too sudden a decrease. Sweeping reform would ruin industries and create a depression. The reduced tariff was not destined to remain long in force. Within three years, that is, in 1897, tliere The Dingley was a deficit ill the treasury, which gave tariff. j^j^ excuse for new tariff legislation. By this time the protectionists liad rallied and were again in power. Congress was called together in special CHAP. VII CUSTOMS DUTIES 243 session and passed the so-called Dingley tariff, as a strict party measure. This tariff restored most of the protective features that had been removed in 1894. Protection was again granted to avooI as a raw material, and compensatory duties were placed on manufactures of wool. In some respects the wool and woollen schedule was made higher than ever before. Hides, which had been on the free list ever since 1872, were given a protective duty of 15 per cent ad valorem^ while, to quiet the protests of the shoemakers, manufacturers of leather received a compensatory duty that fully made up for the in- creased cost of the raw material. On cotton goods, however, the duties were slightly reduced, although not all along the line. Silk and linen received a rather substantial advance. The iron schedule was not materially changed from the condition in which it was left by the McKinley bill. The greatest struggle was waged around the sugar tariff. The duty placed on raw sugar in the Wilson bill was retained and slightly increased, while the refiners received a differential tliat afforded them very hand- some protection. On the whole the Dingley tariff raised the protective wall higher tlian ever. Having reached this stage, the protective system rested for twelve years. During this time there developed, very slowly, a sentiment for tariff re- form. The protectionists yielded a little to this sentiment, and won the privilege of having the tariff "revised by its friends." In April, 1909, 244 IXTRODUCTIOM TO PUBLIC FIXAXCE i'Akt ii Congress was again asseinhlfd in special session to " provide revenues to meet a deficit " and to consider a bill known as tlie Payne bill, which had been pre- pared by a conmiittee of Republicans with a view to propitiating the sentiment in favour of tariff reduction. Of this bill the committee said: "-While it makes a number of reductions in the rates on industries that can admittedly stand alone, it raises the rates on certain industries, that in the opinion of the com- mittee need more protection/' This bill was heavily amended in the Senate where the protectionists were strongly intrenched. It was again amended under pressure from the Republican ['resident who inter- preted the election promises of his party as favouring a revision downward. When the President signed the bill, August 5, 1909, he summarised it as follows: " This is not a perfect tariff bill, nor a complete com- pliance with the promises made, strictly interpreted, but fulfilment, free from criticism in respect to a subject-matter involving many schedules and thou- sands of articles could not be expected. It suffices to say that except with regard to whiskey, liquors, and wines, and in regard to silks and to some high classes of cottons, all of which may be treated as luxuries and proper subjects of a revenue tariff, there have been very few increases in rates. There have been a great number of real decreases in rates and they constitute a sufficient amount to justify the state- ment that this bill is a substantial downward revision and a reduction of excessive rates." One of tlie CHAi'. VII CUSTOMS DUTIES 245 interesting features of the bill is the provision of two tariffs in one, which is popuLarly supposed to be a partial adoption of the idea of the French maxi- mum and minimum tariff above referred to. But there is a fundamental difference, for if the French system is properly described as a "maximum-minimum tariff," tliat proposed for the United States is a " mini- mum-maximum tariff." That is, the French system applies the maximum as a norm, from which deductions may be made for favours received. But the Ameri- can system applies the minimum as a norm, to which additions may be nuide b}- way of reprisal in the case of those countries whose tariff policy does not please the United States. In other words, the French sys- tem is one of reciprocity, the proposed American system one of retaliation. Possibly no other posi- tion can be adopted by the United States. She has steadfastly maintained that the " most favoured na- tion" clause in her commercial treaties cannot be construed as a[)plying to the tariff, and many of tlie duties in the tariffs of European nations are directed specifically against the trade of the United States by way of retaliation for her own high duties. The bill is not generally regarded as a final settlement of the tariff question. It contains a provision for the appointment of expert agents to assist tlie President in administering the maximum-minimum clause and many hope that this will lead to the collection of information which will render a systematic and Unprejudiced revision possible. CHAPTER Vin PROPERTY TAXES Fart 1. Tlie General Property Tax^ with Special Reference to United States Section 1. The general property tax may be defined as a tax in vvliich the base is tlie entire amount of the property, real and personal, owned by the taxpayer. This tax is old and is a favourite tax for local purposes. The general property tax can be studied to the best advantage in the United States, The general where it is uscd morc extensively, perhaps, property fax than in any other country, and where it exemplified . , . in the United ^^ the main sourcc of revenue for very im- States. portant parts of the government. It is also used in Switzerland as the main source of revenue for some of the component parts of the federal State. In Pi'ussia, Holland, and some other countries it is used to supplement other taxes, but wlien so used, it takes on a different character. The federal govern- ment in the United States does not levy any tax on property in general. If under the constitutional provision, which rc(j[uires tliat direct taxes shiill l)e apportioned among the states in proportion (o popii lation, the federal governinent should levy a tax, that tax would presumably be a[)portioned among the 240 CHAP, viii PROPERTY TAXES 247 people by most of tlie states in accord with tlieir own laws, and collected as their own state taxes are collected. We need to see first the relation in which this tax stands to the other taxes in the system of state and local taxation. The individual states, the cities, and the other local divisions of government in the United States derive their revenues from a considerable number of sources. They each use some or all of the following The position taxes: (1) the general property tax ; (2) of the general the poll tax, payable either in money or property tax , , ,- in the com- in services or in both ; (-3) taxes on se- monweaith's lected kinds of business ; (4) taxes on revemie , . p 1 . • 1 • system. certain ways or conducting business, as the corporate form; (5) inheritance taxes, and (6), in a few instances, income taxes. They also use license taxes or fees for permits which are distinguished from taxes proper by the fact that regulation rather than revenue is the more important consideration. They also receive other fees of many sorts, mostly small, for special services to individuals, recording of docu- ments, and the like. Streets, sewers, and other simi- lar public improvements are mostly constructed from the proceeds of special assessments on the property immediately benefited. The cities, especially, not all, but many of them, and to a very small extent the states also, receive revenue from waterworks, gas and electric works, street railways, canals, and other public service enterprises and to a very small extent 248 INTRODUCTION TO PURIJC FINANCE part ii from industrial and commercial enterprises. A few of the states receive revenue from the sale or use of public lands. Tliere are in addition a number of yj ^nes and penalties for various infractions of law. Among all of these sources of revenue the general property tax stands preeminent. It is the struc- tural iron which holds the building together. It is The preemi- the largest siuglc sourcc of revenue and ncnceoftie is uuiversallv rcsfarded as ijreeminently general prop- jo i j ertytax. the tax for all purposes. There is no state in the Union in which this tax does not exist at least as a tax for local purposes, although there are six states in whicli it is not used to supply reve- nue for the state or central government. Without a single important exception, it is used in every city, in every town or its counterpart in local government, in every district, be it a road district, school district, drainage or irrigation district, or a district organised for some other purpose. The few exceptions are insignificant, and are in each case due to conditions clearly peculiar. The general property tax of the United States was, in its original conception, a direct personal tax for local purposes. It was a tax on persons, natural or The (jincral corporatc, iu proportion to all tlieir prop- propcrtytnx ^.^ The ouly excmptious were origi- orujiiKilli/ a J J L o personal lax. nally pcrsous, usually corporate, like municipalcorporations, schools, colleges, and churches which were regarded as performing some public or quasi-public functions. Sometimes natural })c'rsons, CHAI-. viii PROPERTY TAXES 240 like ministers of llie gospel, paupers, invalids, or vet- erans of war, were exempt from pious, religious, charitable, or patriotic motives. The present statutes still show marked traces of the personal character of this tax as originally conceived. As an illustration of the older conception we may cite Vermont, where every person was "rated" or "listed" for his poll, his property, and all his " faculties." In all the older laws the "person" came first, and his estate was the attribute by which the amount of his tax was measured. It was a local tax intended primaril}- for the appor- tionmentof neighbourhood charges among neighbours. The functions of government were at (irst „, " 1 he general exercised maiidy by the local divisions, property tax Even as late as 1840, when the functions «'^' « ^"'^"^ '«-^- and activities of the state or central governments had reached the first stage in their development, this tax was used to a very limited extent only, for sup- plying revenue for other than strictly local purposes. By slow degrees the larger unit of government, the commonwealth, began to draw upon this source by way of ratesadditional to the local taxes. Strangely enough, these added rates rarel}', if ever, took the form of a surtax so common, for example, in Spanish taxation, nor did the surtax conception enter Ameri- can financial thought anywhere until after 1890. Yet the effect of these additional tax rates is distinctly the same as that of tiie surtax. By degrees, also, the strictly personal conception of 250 INTRODUCTION TO PUBLIC FINANCE i-akp ii the tax has been nioditied, and it has steadil}' become The general more and niorc of an objective tax, or a propertu Slates ; Bryce, American Common- wealth; and Hinsdale, American Government. 2 The reader who wishes to delve into the multitudinous details and variations is referred to the present writer's contribution to the Census Volume on Wealth, Debt, and Taxation. Sjn'cial Report, 12th Census, 1(K)7. CHAP, viii PROPERTY TAXES 253 very small. In the "West" it is a township, six miles square ; in older settled states it may be even smaller, it may be a city ward. Sometimes this dis- trict contains only a few hundred inhabitants, rarely over five thousand, and the number of taxpayers is, of course, very much less, perhaps a fifth or an eighth of the population. Consequently there may be con- siderable common knowledge of each other's affairs among the taxpayers, at least outside the cities, and the assessors may be assumed to have some knowledge of the property which they are to assess and of the value thereof. The assessors, for there are often several in one township, are elected for short terms, one year or two years, and in some cases perform their official functions without interrupting their ordinary vocations. Their work can usually be per- formed in a few weeks. In short, the administration is democratic, springing from the taxpayers them- selves and ever under their control. There are many variations of this t^^pe. There are some in which there is no central control at all, or so little that it has no influence, and others in which the administration is quite highly centralised. Between these two extremes are many y^^i^tionsof degrees. We have space only for two the Xrw Eng- examples, one at each extreme, Rhode '"' '^^' Island and Indiana. Rhode Island affords an excel- lent illustration, possibly the best, of a highl}' de- centralised system. Rhode Island, as has often been pointed out, is, as a state, a sort of federation of small 254 INTRODUCTION TO PUBLIC FINANCE part ii towns, each rt'taiiiiiig a degree of autonomy and independence greater than .such units enjoy anywhere else in the country. Here the state has very few functions to perform, and the "county" is a mere grouping of towns into court districts, a geograpliical rather than a political conception. The tax for state and county purposes, the county expenses being met from the state levy, is less than 10 per cent of the total amount raised by means of the general property tax. Consequently there is no fiscal reason, or at least not a strong one, for central supervision. The state levy was until very recently apportioned roughly among the towns at long and irregular intervals, of about sixteen years each, by a sort of contractual agreement between the towns made through their representatives in the legislature and taking the form of law. The administration of the tax is, therefore, almost purely a matter of local concern, although pro- vided for by a general statute. Each of the towns, many of which contain less than two thousand in- habitants, elects each year in town meeting not less than three nor more than seven assessors, also a tax collector. The assessors are all-powerful, their action nearly final. There is no })rovision for review or for equalisation between individuals. The only re- course an aggrieved taxpayer has is to take the matter into the courts. Not even the date when the assessment is to be made and to which it applies is fixed for the state at large, each town selecting these to suit itself. Such is the extreme of the CHAP. VIII PROPERTY TAXES 255 democratic or New England type of the general property tax. In most of the other states having the same general type of this tax there are local boards of review, usu- ally consisting of the local council, ^, , . ^ , The befjin- " trustees," with power to revise the ningso/cen- assessments made by the assessor. In trai control. still others, owing primarily to the greater importance of the central or state functions, and the consequently larger proportional amount of state taxes to be ap- portioned, there is more c2000, but would pay in state taxes only !|1000. CHAP. VIII PROPERTY TAXES 25' throwing iJ'lOOO unjustly on other towns. The other controlling reason for greater centralisation is the existence of railroads and other great public ser- vice corporations whose property lies in many town- ships. The local assessor may know all about the value of farni lands in his little town, and how much a cow or a hog is v/orth, but he cannot possibly know how much six miles of railway track, part, per- haps, of a great transcontinental railway system, are worth. Such properties can only be valued as part of a whole. Hence, the application of the so-called " unit rule '' necessitates a state board. This reason for the centralisation of the administration of the general property tax exists, also, in states not having the New England type of this tax, but it is far more potent in states where that type exists because of the extreme smallness of the assessment district. A second type of the general property tax is found in tlie Southern states, and may, for that reason, be called the Southern type. In general, it The Southern is found in the territory south of the Ohio ''/p<'""'^^<'"- •J eral property River and as far west as LtJuisiana. It is tax. almost everywhere accompanied by an extensive system of business license taxes wliich till in certain gaps in the general property tax, and hence modify tlie classes of pro[)erty to be included. On its ad- ministrative side it has been determined by the county system of local government which exists in those states where it is in force. The county being a very much larger unit of local government than 8 258 INTRODUCTION TO PUBLIC FINANCE part ii the township, both in p()[)uhiti(>ii and territorial area, its government is necessarily move representative and the type of property tax developed is less demo- cratic. The county performs all the functions of local government, outside of the cities which are usually separately incorporated. The county reve- nues collected from the property tax are in most cases equalled or exceeded by those collected for the state, a condition almost the reverse of that in New England. From the beginning the state or central government loomed larger and had more functions to perform in the South than in the North. Ignoring, for purposes of brevity, the differences between in- dividual states, we may venture to generalise as follows : Under the general supervision of the county court, which has administrative as well as purely judicial functions, the assessor or a small board of assessors makes the valuation of property. As this officer cannot, in the nature of things, know many of the taxpayers whose })r()perty he is to value, nor much about values in portions of the county re- mote from his home, his duties are far more difficult than those of the town assessors in the North and very different in character. Personal declaration by the taxpayer is required, at least by law, and, in general, more respect is assumed to be paid to the values de- clared by him. Penalties for failure to make a dec- laration are more severe and more often enforced. The diligence of tiie assessor is stimulated by com- missions, it being •customary to compensate him by a CHAP. VIII PROPERTY TAXES 259 percentage of the taxes levied. Nevertheless consid- erable property escapes and it is not uncommon to find so-called " back tax conimissions" or other officers authorised to assess pr()[)erty not placed on the rolls by the assessors. Tliese commissions are more nearly a j^art of the regular machinery of government and quite unlike the guerilla or private "inquisitors" of Ohio, to which, as an anomaly, much attention has been devoted. ^ There is also a more pronounced tendency in these states to use the general machinery of government for the levy and collection of this tax, and not to create a special and entirely separate set of officers. Thus the sheriff or the treasurer is often ex-officio tax collector. State supervisory boards are usually composed of ex-officio officers of the state, such as the governor, the auditor, and the treasurer, or the attorney-general, and property of a general character like the railroads is assessed by them. Everywhere else in the country the rate is always determined by apportionment, but in many Southern states a proportional (percentage) rate is fixed by stat- ute and changed only at comparatively long intervals. The third and last type is the Pacific coast type. This prevails in the states on and west of the Rocky Mountains, and in a modified form in Texas. Al- though, like the other types, it takes on The Pacific various forms, yet it is rather more uni- <^<'«-^' '^p*" "/ •^ general prop- form than the other two, and this in spite ertytax. of the tendency of the people of this part of the * Carver, Tux Inquisitors in Ohio. 260 INTRODUCTION TO PUBLIC FINANCE part n country to ex[)L'riineiit witli weird, fantastic, and evanescent theories. This type resenihli's the Sontli- ern type more than the New Enghmd type. In fact, the State of Missouri was one of the acknowledjTed sources from which this type was drawn. It differs from the Southern type more in spirit and traditions than in outward form. The county is here an ad- ministrative district of the state government. But the county has less autonomy than in the South, most of its activities being directed by general statutes under the supervision of state officers or bureaus. In New England and in the South authority flows to a certain extent from the local units to tlie state, in the far West it flows only from tlie state down to the local units. The state's share of the general property tax is usually about one-third of the whole, including what the state raises for the purpose of equalising the expense of maintaining the school system, which is paid over to the counties for expend- ing, but under general laws. The assessment is made by a county assessor elected for a long term, usually of four years. He is assisted, usually, by many deputies and may assign tliem districts. Per- sonal declarations by the taxpayers are required by law, but very irregularly enforced. The county ad- ministrative board acts as a board of review or "equalisation" as between individuals. There is always, in this type, a state board of equalisation whose fimctions, however, diffei' from those exercised by boards of a similar name in the states of the East CHAP. VIII PROPERTY TAXES 261 and of tilt' Middlf West. As has been stated above, those Eastern l)oaids usually make a nominal valua- tion for the purpose of apportioning the state taxes, and the " state tax rate " resulting may differ in every town, because each town in assuming its al- lotted quota of state taxes again apportions it on the basis of its own valuations. That is, in the New England type the valuations placed against individ- ual properties are not changed by state board action. In the Western type, if the state board of equalisa- tion decides that it is necessary to raise the valuation in a given county, say, 10 per cent, that 10 per cent is added to each individual assessment on the rolls, and the state rate is the same for every count}' and every taxpayer. The county " rate " might, conse- quently, be reduced by such action. Property of a general character like railroads is assessed by a cen- tral or state board, usually by the state board of equalisation. In thus marking out and attempting to describe briefly the three main types of the general property tax on its administrative side in the „, , I he dangers United States the writer is fully aware of this ciassi- that he is treading on new ground. ^'^*"*''"- He is also keenly conscious that his broad general- isations are dangerous. It may well be that he should have made a fourth group of states like ^Michigan, Minnesota, Wisconsin, and Ohio, which present many peculiarities. It may be possible that the differences noted arc not tlic most distinctive that 262 INTRODUCTION TO PUBLIC FINANCE part il might have been selected. I lis purpose was, liowever, to point out that there is not " a " general property tax in the United States, but fifty-one different prop- erty taxes, whicli fall into three or four general groups. Since it is the administrative side of this tax which breaks down and, as we have seen, since there are many different types of this tax, it follows that there is no universal remedy for the existing evils. Sec. 3. Passing now from the administrative fea- tures, let us turn to the content, the property subject The -property ^^ ^^^^ ^^^- "^^^^ statutcs quitc generally subject to this define the locus of the taxable property, the time at which its value and amount shall be taken, and the kinds and character of the })roperty to be included. There has been no par- ticular difficulty so far as real estate is concerned with the place concept, it is real estate within the town, or the county, or the state that is taxable, irrespec- tive of the residence of the owner. But when it comes to personal property, especially to intangible personal property, there has been and still is much trouble, and no clear principle t)f interstate comity has yet emerged. The original theory was, as we have seen, that this tax was a personal tax, and that theory very naturally adopted the legal theory that personal prop- erty takes the situs of its owner. l)Ut, in general, Thi' situs of the practice now is to tax ])crsonal prop- properttj. Qj.^y ^yhcre fouud, if found at all, and the residence of the owner has little significance. A CHAP. VIII PROP.ERTY TAXES 26-^ notable example of the uncertainty of ideas on tliis subject was afforded when, a few years ago, the state of Vermont expressly exempted all personal property outside the state belonging to residents. Although it was generally assumed that this was done from the alleged unwortliy motive of tempting rich New Yorkers to take up a nominal residence in Vermont and thus evade taxation in New York, whose laws make the situs of personalty follow tlie owner, yet this action merely legalised what has become a very general practice. The difficulty of determining the situs of personal property is the reason Aviiy the attempt to tax stocks and bonds to the owner has been practically aban- doned, and in its place it has become customary to tax the property represented by such securities to the corporations, and to ignore the stockholder. Many anomalies have arisen from this conflict of the theory that the property tax is a personal tax with the fact and practice that it has become a real tax. A very pretty illustration of this is afforded in the case of national l)anks. It will be recalledthat the national banks were established at the time of the Civil War to aid in the sale of the federal bonds, and that to induce the national bankj to hold these bonds, those ])aiiks were allowed to issue notes The situs of secured by the bonds. These national personal . . . , property as bank-notes came into competition with uiu.straiedbij notes issued by banks chartered by the '""'A■•^■^"•^•• states. To drive the state bank-notes out of the 2G4 INTRODUCTION TO PUBLIC FINANCE iart ii way and to thus make room for the luitional l>aiik notes, Congress imposed a tax of 10 per cent on all l)ank-notes except those of national banks. It liad long before been decided by the courts that the states could not tax a federal bank except by express grant of Congress. It was feared that the states, if allowed to tax national banks at all, might retaliate by prohibitive or discriminating taxes. Hence Con- gress did not, in the first act, convey to the states the power to tax tliese banks. Later, however, it re- lented andprescril)ed a method, aiul one metliod only, by whicli tlie states should tax national banks. In this federal statute permitting the taxation of na- tional banks we find embodied the prevailing theory and practice of the property tax of that period. The statute says, in substance, that the shares of stock in national banks must be assessed to the stock- holder, not to the bank, although the bank may be the agent of the stockholder in paying the tax, also that the shares must not be taxed at a higher rate than is imposed on any other like moneyed capital. Then to prevent double taxation which might Iiave arisen where tlie stockholder resided in a different state or town from that in which the bank was located. Congress defined the situs of the stock as in the place where the bank was located. It is hard to trace the origin of a practice which may have sj)rung spontaneously in iiuiiiy different places from similar conditions which liad to be met. But one cannot but be impressed by a reading of the CHAP. VIII PROPERTY TAXES 265 statutes, and by the frequency with which the plirase- ology of the federal law is repeated therein, with the idea that this law has had a great deal to do with destroying the theory of personal situs. On the other hand, it has certainly not checked in the least (except so far as the banks alone are concerned) the very general tendency to regard a corporation as an artificial person and to levy the taxes on its property without reference to the stockholders. The time element, the date to which the assess- ment refers, is usually defined so as to work the practical exemption of the current prod- The date to , r 1 1 'T'l r J.1 i_ L which the as- ucts of land, ihus tor the most part i scs-snient the assessment is made as/of some day in refers. the winter or spring, befoi'e the crops of the year have been planted and long after the crops of the year previous have been sold and taken to market, at a time, that is, when barns and warehouses are empty. This strikingly illustrates the prevailing American conception that the property tax is a tax on capital, not on income or revenue. With a sort of grim humour " All Fools' Day " is often chosen as tax day. Even in those states, mostly among those having the Southern type of tliis tax, which make tiie day to which the assessment refers fall in the autumn, the crops and produce of the year are usually expressly exempted by law. The j)roptMty included in the base of this tax is most commonly delined as " all property, real and personal, in the state not specifically exempt." The 266 mTRODUCTION TO PUBLIC FLWAXCE part ii exemptions will be discussed below. The terras ''real The terms and pcrsoiial property " are most com- rea esta e jj^Qniy taken in their ordinary common law and personal '' "^ estate." meaning. But this is by no means the universal rule. In many cases certain items are arbi- trarily defined " for purposes of taxation " as real or as personal property. Ordinarily, land and the le- gally immovable physical improvements thereon are real estate. Certain rights, however, attacliing to land, mortgages secured on land, and franchises over lands are arbitrarily called real estate or personal property for purposes of taxation, irrespective of their common law character. As these arbitrary defi- nitions are not uniform from state to state, they give rise to considerable confusion. Sometimes even the following of the common law princij)le makes curious shifting. One of the most striking illustrations of this is the classification of possessory claims to govern- ment land and of the improvements upon it as the personal property of the settler thereon during the five years that he is acquiring his title, and before the government patent has been issued. The census of 1890 published tables and charts which made it appear that the then "new" State of Montana had a remarkably high proportion of personal property and com[)aratively little real estate. This was due in large part to tlie above rhissitication. 'i'lie arbi- trary nature of these definitions vitiates almost all direct comparisons of the statistics of assessments be- tween different states. CHAP. VIII PROPERTY TAXES 267 It occasionally happens that for tax administrative reasons or to avoid special difficulties arising from some peculiarity of the law, very illogi- Arbitrary cally arbitrary definitions are made, definitions. Thus telegraph poles and lines are defined in one state as personal property, a device intended merely to give the assessor an extra commission ; again, in New York special franchises or the right to use the public streets are defined as real estate. The reason for this latter definition is that in that state each taxpayer is allowed to deduct the amount of his debts from the entire amount of liis personal prop- erty, and under that law, if franchises were defined a^ personal property, the corporations owning them would deduct their bonded indebtedness, leaving nothing taxable on the franchise. (. Occasionally certain items of income are defined as property for purposes of taxation. These in- stances are usually of receipts, like those , •^ ■■• Income de- from ships plying in foreign water, or in- fined as prop- surance premiums, or brokers' commis- ^^^^' sions, which are not represented by any taxable capital in the state. This is a survival of the old personal theory of the property tax. The classes of personal property taxable and actu- ally taxed, at least to a limited extents are usually household and office furnishings, stocks of goods in shops and wai-ehouses, farm tools, machinery, and live stock. Other forms of pei'sonal i)ro[)erty gener- ally ta\al)lc according to law, but rarely taxed, are 268 IXTKODCCTIOX TO PUBLIC I'/XANCE part ii mouey and credits. Tlie moot questions in regard to the taxation of the hitti-i' will bi' discussed below. Sec. 4. Property exempt from taxation comprises in the first place all public property, also greenbacks and federal bonds exeniiit by federal law. Property ex- '- '' emptfrom The Only exce[)ti()n here is that in a few taxation. states public property may be included wlieii the apportionment of state taxes is made to towns or other assessment districts. Next in i^eneral extent come exemptions granted from religious, pious, charitable, or benevolent reasons, such as churches, cemeteries, asylums, and homes for the aged, the in- firm, and widows. The bieadth and extent of these exemptions varies considcral)l\' from state to state, but even in the most meagre cases includes all church buildings and cemeteries. An interesting extension of this idea is the exemption in many states of the secret societies, like the Masons and Odd Fellows, on the grouud of their charities. Another very gen- eral class of exemptions comprises those for educa- tional pur{)Oses, such as schools, colleges, aud the like, usually only those eiulowed, also public libraries, aud literary, scientific, and jiliilnsophit-al societies. A smaller group is com[)()sed of associations like agri- cultural societies, volunteer fire companies, and others doing some work assumed to be of a public character. Lastly, tliere are numy miscellaneous exemptions granted for social or ecouoniic reasons or for reasons relating to the fiscal administration; among these are limited amounts of certain classes of personal CHAP, viii PROPERTY TAXES 269 property, as a few hundred dollars' worth of household furniture, tools of mechanics and farmers, a limited amount of land, machinery, etc., for promoting new industries for a limited period of time. But there is little uniformity among the various states with reference to this group of exemptions. In general it may be said of the exemptions granted that while they liave, of course, been granted only to those who had sufficient political influence to secure them, they do not in any but a very few exceptional cases represent an abuse of political power. The motives were in general altruistic or for the public weal. It is, furthermore, a thoroughly well-estab- lished principle of fiscal law that, whenever, and in so far as, any such property yields any private profit, it loses its exemption. Sec. 5. The assessment roll, or list of taxpayers with their taxable property, is usually made up an- nually and does not assume the form of a fixed ca- dastre in any of the states, although in some states it approaches that form slightly. The original concep- tion of the tax, as a personal tax, is the 7/,,, asaess- chief reason why the roll usually begins "^^*' ^°^^- with the taxpayer and not with the propert}', and the consequent frequency of assessment prevents the roll from attaining a permanent form. In the case of real estate, however, there is here and there a provi- sion which contains the possible germ of a cadastral system. In a few states real estate is revalueil only once in four years, but alterations and new improve- 270 INTRODUCTION TO rUBLIC FINANCE part n nients are assessed auinially. In some states the county surveyor provides maps and l)lock books which the assessor uses as the basis of his work. But even in those states there is little permanence imparted to the roll by this practice. Two reasons for the ab- sence of a cadastral system, especially in the more recently settled states and in those parts of the coun- try which are growing rapidly in population, is the constant and frequent change in ownership of land and the rapid fluctuation in land values. The criterion of value for purposes of taxation is always the selling value, and rarely the rental value. ^ The criterion The reader should remember that there is of values. practically no tenant class in the United States, that agricultural land is for the most part cul- tivated by its owners, or by tenants who expect to become landowners. The annual value of the use of land is a conception rarely used in business. It is the capital value or selling value that is almost always re- ferred to and used. Lands change hands with consid- erable frequency, and with great ease and freedom. How much land is worth per acre in the country and per square, or per front, foot in the cities at purchase is usually a better-known fact than rental values. While admittedly the value of land depends on the prod- uct, yet rental values, when determined, are usually computed on the basis of a percentage of the capital ^ Delaware and New Jersey and parts of Maryland and Pennsyl- vania offer the necessary exceptions to prove the rule. In tliese old states rentals are considered. CHAP. VIII PROPERTY TAXES 271 values ratlier tlian of tlie product. Assessors in iimk- ing up their rolls depend upon prices paid when trans- fers are made, or upon appraisements, for determining the value of land, and rarely, if ever, seek any infor- mation as to rentals. This isequalh' true ,, ... , '■ - hcllinij value of city real estate and of farm lands. In vs. rental the same way boards of equalisation in at- '^^ "^' tempting to chei^k up the work of as.sessors investigate selling prices, and not rentals. In fact, the leasing of land is so rare, and usually occurs under such peculiar circumstances, that rentals never afford a satisfactory basis of valuation. According to the United States Census Bureau, only 35 per cent of the farms of the country are cultivated by tenants, but among these rented " farms " are many truck farms, dairies, nursery gardens, and florists' gardens in the vicinity of cities, which are more often rented than is agricul- tural land proper. Another reason why rental values are not used for taxation purposes is that in many states there are large tracts of land not under culti- vation. Less than 50 per cent of all land in the United States is "improved" ; that is, under cultiva- tion, and less than three-fourths of that actually in farms is "improved." Yet the unimproved, unused land has a selling value in the market, and is tax- able. In the same category fall the unimproved city lots, held for speculation. The use of the selling value, or a ca})ital concei)t, instead of tin; rental \alue. introduces an element of uncertaint\ into the assessment or valuation of land •2~-2 LVTRODUCTIOS^ TO PUBLIC FINANCE part il for purposes of taxation. A great deal is left to the discretion of the assessors; they have no uiathematical rule which they can follow. In the British property and income tax, Schedule A is the most sure and cer- tain group, on account of the prevalence of a univer- sal system of leasing, and in the German states the values in the cadastre can be fixed with a hig:h deg^ree of certainty and accuracy on the basis of annual rental value or known annual produce. Nothing of that sort is possible in the United States. What is "Full cash usually meant by the terms "full cash vaiw.." value," or " true value," is perhaps best defined as in the terms of the California statutes " the amount at which property would be taken inpayment of a just debt from a solvent debtor." It is not what would be paid by the highest bidder, nor what the property might bring at a forced sale, but more nearly what it would be appraised at in the settlement of an estate for division among the heirs. This conception is at best vague, and leaves much to the discretion of the officers. Hence it is, that in order not to err by excessive valuations, the assessors, in practice, universally fall below the true Undervaitia- valuc as dctiued by law. In states '*''"• where a heavy state tax is apportioned on the basis of local assessments, there is a further motive for undervaluation; namely, the endeavour on the part of the assessor to save money for his constit- uents by evading part of the state tax. Tlic pre- vailing practice of undervaluation has l)t'cn recognised CHAP. VIII PROPERTY TAXES 273 by law in some states. Tims in Illinois only one- fifth of the true value is to be entered in the roll. But, nevertheless, undervaluation goes on just the same and the 20 per cent is computed on less than 100 per cent of the true value. Far worse than the general undervaluations which create inequalities between districts are special or individual undervaluations. These are in inequalities rare instances the result of corruption or *" valuation. conscious favouritism; more often they arise from the natural inertia of the officials who do not make the roll keep pace with the changes in property and its value. Various devices have been resorted to, to obviate or lessen these inequalities. The official boards of re- view usually become mere umpires to decide disputes between assessors and dissatisfied taxpayers. Some- what more successful in cities has been the introduc- tion of a graduated scale of values in each block, the inner lots being valued according to their distance from the corner. In tlie West it is quite common to find a provision to the effect that unimproved land must not be valued at less than improved land of the same quality and similarly situated. This is doubtless a provision suggested by Henry George's theory. A rather important provision, as tending to stimu- late the assessor to take greater pains in his work, is that which requires that land and the im})rovements thereon shall be valued andassessed separately. This seems to have originated in Califi)rnia. It has re- T 274 LXTRODUCTION TO PUBLIC FINANCE part n cently been rediscovered by New York, and adopted there with great enthusiasm. Tlie assessment of personal property presents the greatest difficulties. The main difficulty is to find Assessment it- Somc kinds of tangible personal prop- of personalty, erty, sucli as cattle and animals on farms, wagons, machiner}', tools, etc., are not difficult to tiiid, and as easily valued. In states where there are large herds of cattle, as in Nevada, it is the custom for assess- ors to agree upon a uniform value per head. House- hold furniture can as easily be found, but difficulty at once arises over values. In every state, except New York, the taxpayer is by law required to fill out a minute inventory of all his furniture, and other per- sonal property. But he frequently ignores the law, and the assessor proceeds by a sort of doomage pro- cess, which amounts usually to a guess based on the general character of the house the taxpayer lives in, his household equipment, and his general financial standing. In New York, where no statement is re- quired, the taxpayer is allowed to ai)pear on "grievance day" and "swear off his taxes," if he feels that the guess made by the assessors is too high. The enforce- ment of the statement and the reliance placed upon it varies from state to state, and even from locality to locality within each state, to such an extent that no generalisation can be made with safety. It is certainly the intention of the law that every taxpayer should file a statement of his entire property, and the penalties for failure to do so are severe. Hut it is CHAP. VIII PROPERTY TAXES 21b equally true that this provision is not uniformly en- forced, and that the vast majority of the statements filed are incorrect and incomplete. These statements usually have to be sworn to when filed, and the wide- spread perjury and consequent contempt of law con- stitute a sad and a menacing feature of the political life of the country. Sec. 6. One of the moot questions in the United States is whether credits and money should be con- sidered property for purposes of taxation. The taxation The debate on this question has been of mortgages. especially lerxgthy in connection with mortgages, because they are usually of record, or will be reported by the bon-ower, so that they are more easily discov- ered than other credits. If we include the evanes- cent forms of discussion, it is safe to say that there has been far more literature on the taxation of mort- gages than on all otlier subjects relating to taxation in the United States. In most states a note secured by a mortgage is taxable as property of the mortgagee, and the prop- erty which secures the mortgage is taxable to the mortgagor without deduction for the mortgage. It is obvious that this procedure rests on the old concep- tion of the general property tax as a personal tax. The thought of the legislator is that the lender is able to pay a tax by virtue of the interest income he receives. That in most cases the lender will reimburse himself b}' shifting the tax to the borrower in the form of higher interest does not, in the o[)inion of tlie legis- 276 INTRODUCTION TO PUBLIC FINANCE part n lator, present any good reason why an attempt, at least, should not be made to reacli the lender. Tlie most recent departure from this rule is to impose a special tax on the mortgage of the nature of a regis- tration tax at a rate considerably lower than would be the result of taxing it as property. The property by which the mortgage is secured is then taxed, in full to the borrower. This is in substance the out- come of the long struggle in New York State. This method assumes that the holding of the mortgage represents taxpaying ability of some sort vested in the lender. It is not unlike the conception under- lying the Prussian law which imposes an additional tax on funded income in the form of a i)roperty tax, even though the income from the property has already been taxed as part of the taxpa3'er's income. Another solution of the problem is to treat the mort- gage as an interest in the property and to try to divide the burden between the two parties. This in any case avoids double taxation. In California the attempt was made to compel the lender to pay the tax by at least making him advance it. It became evi- dent, however, that he shifted the tax to tlie borrower, whose last state was worse than his first, because he had to pay not only the tax but the cost of shifting as well. In Massachusetts a similar com- promise was made in that tlic mortgage and the surplus of the property over the mortgage were assessed separately, one to tlie lender and one to the borrower, but these two i)arties were allowed to agree CHAP. VIII PROPERTY TAXES 277 who should pay the mortgage tax. Generally the borrower assumed the whole burden with correspond- ing reduction in interest. This is obviously a round- about way of accomplishing a very simple thing, lience some few states simply ignore the mortgage entirely. Thus the statutes of Washington provide " that mortgages and all credits for the purchase of real estate shall not be considered as property for the jiurpose of taxation." Recently that state has ex- tended the same principle to all credits. This latter provision simply legalises a prevailing practice, for credits other than mortgages were rarely found by the assessor. It is the law in most of the states (Washington by recent enactment is one of the exceptions), and it is prevailing public sentiment, that money y'^j.^^^- „ on hand, or on deposit, and credits are money and taxable pr()i)erty. But it is only in rare instances that they are taxed. Of the more usual attempts to uncover personal property of this class through the machinery of oaths, ali[ida\its, and the like. Professor Daniels, in his work on Public Fi- nance, says: "The effectiveness of such laws is in- considerable. If Jove laughs at lovers' vows, he probably guffaws at taxpayers' oaths. Even the Psalmist's hasty allegation of universal mendacity needs little qualification in this province of finance. Where the taxpayer's conscience is tender, he find.s (as one puts it) that virtue is ])erforce its own re- ward. This phase of the system is described in one 278 INTKODUCTIOX TO PUBLIC FINANCE part u tax report as ' a tax upon ignorance and honesty,' and in another report we are told that 'the payment of the tax on personalty is almost as voluntary and is considered in pretty much the same light as dona- tions to the neighbourhood church or Sunday-school.'" There are two consequences of this almost uni- versal evasion. The first is that when money is loaned under circumstances which make it at all likely that it will be found by the assessor, the rate of interest is raised above what it would otherwise be by an amount sufficient to cover the tax, together with another extra charge for the cost of shifting and attendant risk. The second is that any " igno- rant and honest taxpayers" who may report this class of property are unduly taxed. It seems, then, to be futile to try to tax this class of property, and the underlying reason for the failure to reach it, and for the objection which people in general have to paying it, is jjrohahly to he found in the fundamental fact that it should not he taxed at all. Although credits may l)e included within the terra "property," from the point of view of law, they are not property in any true economic sense. Like money, credits are represent- ative wealth. The following citation from the report of the Cali- fornia Commission on tlie reform of the revenue Credits should systcm ol" that statc explains this point: not be taxed. n jf ^^g take the view that the propei-ty tax should be a real tax, based upon things or pr()})erty without respect to who may own them, then it is CHAP, viii PKOPEKTY TAXES 279 illogical to regard a credit as property. A credit is merely a right on the part of the creditor to receive and to enforce payment of the obligation due from some other person. The notes, bonds, or other docu- ments embod3-ing the credits merel}' stand as evidence of the existing contract. The very existence of the documentary proof and the phraseology in which many of these documents are couched demonstrate very clearly that the creditor himself is not in pos- session of the money, or lands, or the goods which secure the loan, and the transfer of which to the debtor brought the credit into existence. The cred- itor has only the riglit to receive these things, or similar things, back at some future time. If the United States government borrows $100,000,000 upon bonds, — which are merely its promise to pay, — there is a transfer of .^100,000,000 in gold from the buyers of the bonds, or the creditors, to the United States treasury. The creditors who hold the bonds feel themselves no poorer than before, but no one would seriously contend that by this simple transac- tion the property or wealth of the countr}* has been increased a particle. There is only -"^100,000,000 of real wealth involved, which has passed into the pos- session of Uncle Sam from that of his creditors, and wiiich will be returned when the bonds are paid. Nor would any one seriously contend that the pay- ment by the United States of some of its indebted- ness and the cancellation of the bonds destroyed any wealth. Standing against every credit there is an 280 INTRODUCTION TO PUBLIC FINANCE part u equal ainounl of indebtedness, and the maturing of this indebtedness destroys no material wealth, noi does its creation add anything to tlie material wealth of the world or to the substantial property which has to bear the burden of taxation. To consider that credits are property as well as the goods and other property by which they are secured is like adding together two sides of an account — the assets and the pliabilities. To treat credits as property, and also the lands, goods, and other forms of wealth in the hands of the community, would result in an obvious dupli- cation of values, and if taxes were levied upon that basis would result in double taxation, unless the debtor were allowed to deduct tlie amount of his debts in the same way that we permit him to do in the case of mortgages. But the existing laws do not usually permit that, save and except that the debtor may deduct his debts from the amount of his credits. Illustrations of the way in which the taxation of credits works objectionable double taxation might be multiplied and the argument extended indelinitely, but the above illustrations ought to be sufficient to make clear the fundamental principles involved." Sec. 7. As has been stated above, corporations, when subject to the general property tax, are gener- „ ,. , ally regarded as legal iiersons and are Taxation of '' '^ o i corporation taxcd iu tlic samc mauiicr as any other franchiHiH. » • i ti-i- i^ • • i i ^ persons. A special dilncnlty is involved in tlic taxation of the so-called intangible personal property of the corporations. This class of property, CHAP. VIII PROPERTY TAXES 281 sometimes called "the franchise," sometimes ''the corporate excess," and often simply " the intangible property," is the capitalised value of that part of the net earnings that is in excess of a reasonable return on the amount invested in the real estate, machinery, and other tangible property of the corporations. Its value for purposes of taxation is usually obtained by ascertaining, first, the value of the realestate and other tangible property; second, the aggregate market value of the stock, bonds, and other funds represent- ing the property; and third, by deducting the first from the second. The remainder is assumed to be the value of the intangible propert3\ When the market value of the securities cannot be ascertained, the net earnings are capitalised in order to ascertain the aggregate value of the property. This whole process presents great diiliculties and leaves much to the discretion of the assessing officials. The legal theory is that this excess value is the value of a class of property called tlie franchises, con- ferred upon corporations by governmental authority. The courts have defined franchises as: "special privi- leges conferred b}' government on individuals and which do not l)elong to the citizens of the country generally by common right." ^ As these franchises are legally jjiopcrty, they an* iiu-ludt'd in tlii' taxable property. It is generally recognised that there are three, or possibly foni-. different kinds of fram-liises 1 Such f ranch isi's air not to be coiifusotl witli tlie riuhl to I'xer- cise the plectmal power. 282 INTRODUCTION TO PCBIJC FINANCE part ii that (Miter into and coiitiibutt.' to tlu' corporate excess. But the attempt to assess or value them separately is rarely made, and in the nature of things is not suc- cessful. Their value merges in one mass with other elements analogous to "good-will,"' and the only practical method of valuation is to treat them as a unit. The first of the franchises recognised by the courts is the right "■ to be " a corporation, a privilege The right "to accorded to any three or more persons ^^•" who associate together in the maimer pre- scribed by law for the formation of private corpora- tions. This franchise conveys the right to use the corporate name, to have a corporate seal, to sue and be sued, and in general to enjoy the [)iivileges ordina- rily permitted to corporations. While this franchise is theoretically included with the others in the corpo- rate excess, it is also subject to a fee at the time it is granted and may also, together witli tlie second, be subject to an annual fee-like tax, in addition to the taxes imposed upon it as jjart of the property. These charges may be uniform or they may be graduated. The second sort of taxable franchise is called the The right" to franchise "to do and to act." This is ^"- inevitably conferred at the same time as the (ii'st mentioned and is but slightly different in Special and character. Tliird, the revenue laws, as general/ran- interi)reted by the courts, seem to recog- nise two other kinds of franchises, which we ma}' call, for convenience, special and gtiueral, but they are so closely analogous as to be exceedingly CHAP. VIII PROPERTY TAXES 28^3 ditticult to distinguish one from anotlier. These are both subject to taxation as property, and are included in the assessment of the [)roperty of the corporations. One of tliese franchises re({uires a special grant; the other is acquired automatically under the enjoyment of the powers conferred by the general law for incor- poration, and is, as will be explained below, %'ei'y closely akin to "-good-will." These two classes of franchises are here grouped together and treated as one class, simply because they are to be valued for purposes of taxation in practically the same manner. The first of all to be recognised as taxable fran- chises were the special franchises enjoyed by public- service corporations,- such as water companies, gas companies, street railway companies, and the like, which use the public streets, under some special per- mission. These are "special" in the sense that they have to be specifically described in each case and cannot be conveyed by general statute, and they virtually convey the right to use some public prop- erty. They are often very valuable, and that they were so was early recognised. From the practice of assessing these special fran- chises there grew up the practice, which has fre- quently been sanctioned by the courts, of assuming that every class of corporations enjoys a sort of general franchise that is distinct from the mere right to be a corjioration, or to act as a corporation. Thus banks have been taxed for tiu'ir " franciiises "' and their value ascertained in the manner described 284 INTRODUCTIOX TO PUBLIC FINANCE part il above. Wliile these two classes of francliises, which for convenience we have calletl the special and the general, are apparently, in the opinion of the coni'ts, almost precisely alike and are treated in the same manner for the i)nr])oses of taxation, they are, from the economic point of view, fundamentally different. The franchise of a bank, in this sense, is closely analogous to that kind of property known as "good- Certainfran- will." This is a chiss of property wliicli c uses ana o- x)XQ?,\\^xi2^\^[ might be taxcd as property, goxis to good ^ jo sr r j ^ will." but which as a rule is never taxed except in those cases in which it is enjoyed by corporations, and then it is taxed as a franchise. It is a question, open for serious consideration, whether the taxation of such a franchise, tantamount to the taxation of the good- will, against corporations, while similar items of property, if this be property, are not assessed against individuals and firms, does not constitute an unjust discrimination against corporations. Sec. 8. The general property tax has been sub- jected to severe criticisms and has frequently been condemned. We may now examine the grounds on which this condemnation rests. Among many there are two of great importance. (1) It is urged that the tax is unjust because property forms no criterion Objections to 0^ tax-payiug ability. It is maintained this tax. that income is a far better basis. (2) It is urged that the general property tax is inexpedient because so dillicult to administer justly, especially in the matter of the discovery and assessment of per- CHAP. VIII PROPERTY TAXES 285 soiiiil property and because of its effect on the move- ment of capital and forms of investment. Against these serious objections it is urged that when there is a tolerably just system of income taxation already in existence, a property tax in addition thereto fulfils the requirements of justice because it imposes a heavier burden on " funded " income, which is re- garded as indicative of more faculty, since it is less precarious. It also supplements the income tax by making property in enjoyment, the use of which is an indication of tax faculty, a part of the base, as, for example, picture galleries. And, lastly, the com- parative steadiness of the return from the property tax is a great recommendation from the fiscal stand- point. It would seem, then, that the objections to the general property tax as the main part of a sys- tem may still stand, but that there may when this tax be room for such a tax as a subordinate ^^ justifiable. part of a larger system, the demands of justice being met by the proper relation between the different parts of the system. In Switzerland and Prussia the general property tax is part of a more elaborate sys- tem. In the United States it stands almost alone for commonwealth purposes, supplemented in some states by other taxes intended to reach certain forms of revenue-yielding property'. The universal con- demnation of the American commonwealth general property tax is therefore not due to the defects in the tax itself, but mainly to the fact tliat it is not properly supplemented by other taxes. / 286 IXTRODCCTION TO PUBLIC FINANCE part ii The first question that arises when the general property tax stands alone, and a question which, although not so prominent, also arises in other cases, Can the as- ig ; Q^n the method of assessment be properiij made sufficiently effective to reach uni- madef fonuly and equitably all forms of prop- erty, especially personal property? The answer to this question that has been given by the experience of the United States is emphatically in the negative. This is especially true when the administration of the assessment is left to officials popularly elected for a short term, in small districts, and by the tax- payers whose property they are to assess. It is also in the negative, but somewhat less unanimously so, when the assessment is under the control of an imj)artial bureaucracy appointed by some higher authority and not beholden to a local constituency. In the one case the assessor is apt to be too friendly to the assessed, in the other too ignorant of local conditions. Much light is thrown upon the question of assess- ment by the experience of the United States. In 1890, and again in 1!H)0 and in 1004, the United States census office undertook to ascertain the true value of property, i.e. its fair selling value. This . , . serves as a basis of comparison for the AssessTnent m ^ the United asscssed vulucs. The investigations of aesja s. the ccusus wcrc conducted with the ut- most care, and although they inevitably contain many unavoidable sources of error, they are yet very CHAP. VIII PROPERTY TAXES 287 serviceable. Tlie following tables show the results of the investigations into the trne value of prop- erty : 1890 Real estate, with improvements thereon . . $:i9, 544,544,333 Live stock on farms, farm implements, and ma- chiiiiry -iJO^.Ol.'j.OlO (iold and silver coin and bullion . . . 1,15.S,774.!US Mines and quarries, inclnding product on hand l,2!»l,291,57y Machinery of mills, and product on hand . 3,058,593,441 Railroads and equipments, including street rail- roads 8,685,407,323 Telegraphs, telephones, shipping, canals, and equipment 701.755,712 Miscellaneous 7,893.708,821 Total §65,037,091,197 The total assessed valuation in 1890 was $25,473,173,418, or about 40 per cent (41 per cent if we allow for §3,833,335,225 exempt by law). Of real estate, — land and its improve- ments, — the true value was $39,544,544,.333, of which all but 83,833,335,225 was legally subject to taxation ; the assessed value of the §35,711,209,108 taxed was §18,956,556,675, a little over 50 per cent of its true value. The §25,492,546,864 of personal property was assessed at §6,516.616,743, about 25 per cent. But if we make allowance for the §1,291,291,579 worth of mines and quarries which might be well classed as real estate, personal property was assessed at about 22j\j per cent of its true value. As the statement of the total amount of personal property erred admittedly on the side of moderation, there being some forms which were not ascertainable, this showing was more favourable to the assessment tiian the truth would have been. It is well within the truth to say that in the United States as a whole not more than 20 per cent of jxTsonal property was taxed in 1890. Tioliably considerably less than 288 INTRODUCTION TO PUBLIC FINANCE part il tliis is the true figure. Tu many important commonwealths the assessment of jjersonal property, even according to the favour- able showing of the census, was far below tlie average for tlie whole country. In the country as a wliole. jiersonal property is about 71 per cent of real estate, or 41 /g per cent of all taxed property. In New York it was assessed at a trifle over 11 per cent of tlie real estate and about 10 per cent of ail property. According to tlie census valuation, there was in New York in 1890 $.3,817,701,007 worth of real estate and $2,758,997,;5:2-l worth of personal property. Real estate was assessed at $3,403,751,246, or about 58 per cent of its real value, while personal property was assessed at $382,159,067, or not quite 14 per cent of its real value. When it is remembered that the census report omitted some imascertainable items of personal property, it is fair to say that 90 per cent of the personal prop- erty in New York was untaxed, where at the same time only 42 per cent of real estate was untaxed. This means that the assessment of personal property was being evaded and that real estate was assessed below its actual value. The latter fault is not so bad as the former, because general uiider-assessment means merelj' a higher rate than would otherwise prevail, but does not, if uniform, affect the distribution of the burden. Pennsylvania, Massachusetts, and Ohio showed a somewhat better assessment of personal property. Thus in Pennsylvania the assessed value of personal property, was 018 millions against 2042 millions of real estate; Massachusetts, 554 millions ngaiust 1600 millions; Ohio, 516 millions against 1232 millions. IJut no one supposes that there was any more personal property owned in these commonwealths than in New York. In fact, the contrary was the case. In some of the newer Western states the assessment of personal pi'operty was larger than the assessment of real estate. 'I'lms in Montana personal property was valued at 58 millions, real estate .55 millions; in Wyoming the ratio was 20:13; New Mexico, 28:15; Arizona, 18:10; Nevada, 17:9; Idaho, 16:1(1. Miit this is easily explained CHAP, vm PROPERTY TAXES 289 1890 ASSESSED VALUATION OF PROPERTY TAXED. Personal Property. Tr, T^ e As ess Tie It 1 ■ Real Estate Personal Real Estate Personal MINN. WIS. MD. KY. IOWA TENN. VA. CONN. WASH. LA. COLO. ALA. N.C. N.H. 0. C. W.VA. MISS. NEB. VT. ARK. GREG. S.D. S.C. UTAH N.D. DEL. FLA. MONT. N.M. WYO. ARIZ. IDAHO NEV. 200 INTRODUCTION TO PUBLIC FINANCE part ii (1) Tn these states, land values had not yet developed. (•J) Tlie real propeity assessed was only such lands, with tlieir iiuprovenients, as had fully passed into the hands of private owners. (3) Personal property was swelled by including in it the improvements upon public lands, the fee to which was still vested in the United States, and upon railroad lands the title to wliicli was still vested in the railroad companies. (4) The list of personal property was swelled by the nature of some of the industries that prevail, — cattle. A certain amount of it was due to the assessment of railroad property as personal property. (5) The possibility of concealing property is less in a country where population is sparse and the conditions for investment well known to the assessors. (G) The need of revenues was very great, and real estate had not enough value to bear the burden. Personal property had, therefore, to be called in to raise the necessary amount without inordinately higli rates. The chart on the preceding page taken from the Eleventh Census shows the relative assessment of personal and real property in all the states in 1890. In matters of larger import the conditions revealed by the investigations of 1900 and of 1904 are not materially different from those in 1890. Hence the foregoing coininents are practically true to-day. The new figures, for reasons that were unavoidable, are not strictly comparable with the old, but they are somewhat better in themselves and may be re- garded as more reliable. CHA1-. VIII PROPERTY TAXES 291 EsTIMATKS OK WeALTH FOU 1004 AND 1000 Fol'.M OF Wkai.iIi 1904 1900 Total Real property and improvements taxed Real property and improvements exempt Live stock Farm implements and machinery . Manufacturing madiiucry, tools, and implements Gold and silver coin and bullion . Railroads and their equipment . . Street railways, etc. : Street railways Telegraph systems Telephone systems Pullman and private cars . . Shipping and canals .... Privately owned waterworks . Privately owned central elec- tric light and power stations All other: Agricultural products. . . . Manufactured products . . . Imported merchandise Mining products Clothing and persdnal adorn- ments Furniture, carriages, and kin- dred property Taxable Exempt Assessed valuation of taxable prop- erty Percentage of assessed valuation to the true value of jiroperty taxable $107,104,192,410 $88,517,306,775 55,510,228,057 6,831 ,244,.570 4,073,791,7:36 844,989,863 3,297,754,180 1,998,603,;303 11,244,752,000 2,219,966,000 227,400,000 585,840,000 123,000,fH)() 846,489.804 275,(X)0,000 562,851,105 1,899,379,652 7,409,2<»l,6(i8 495,543,685 408,066,787 2,500,000,000 5,7.-»0.O0O.00O 1(H),'_'72.947,S40 6,.S31, 244,570 38,'.HW,:381,120 36.4 46,324,839,234 6,212,788,930 3,.306,473,278 749,775,970 2,541,046,639 1,677,379,825 9,035,7.32,000 1,576,197,160 211,650,000 400,324,000 98,836,()00 5.37,849,478 267,752,468 402,618,653 1,4.55,069,.323 6,087,151,108 424,970,592 326 851,517 2,000,000,000 4,880.000,000 82,;«M,.".17,S45 6,212,788,9.30 31,280,;i32,443 35.3 In 1000 personal property, including railroads, street rail- roads, telegrapli and telephone systems, aiul privately owned 292 INTRODUCTION TO PUBLIC FINANCE paut u waterworks, and electric light and power stations, wliich are better assessed than most other classes of property included, was assessed at 22 per cent, and in 1904 at 19.8 per cent of its true vakie, as against 44.4 and 48 per cent for real estate in the respective years. The failure to assess personal property in the United States is due largely to the laxity of admin- The failure to istratiou ; the tax laws on the subject reach personal are usually strict euougli to answer every ^uf to faults requirement. What constitutes personal in the laws. property is explicitly stated ; the assess- ors have ample power to ascertain its exact amount. In all but one of the commonwealths the taxpayer is, or may be, required to make a declaration of his property. In all the states the assessors have the advantage of large powers of investigation, and can ascertain the amount of the property if they will assert their power. But this is what locally elected assessors are very reluctant to do. Much improve- ment has resulted in a few states from the introduc- tion of strong central controlling boards. But this has not been in force long enough to enable us to deter- mine how permanent this improvement is likely to be. The advisability of extending the assessment to legal persons so as to cover a certain amount of The assess- property tluit might escape in the guise meni of legal ^f personal property depends upon the persons under the general strictncss in the assessment. The stocks property tax. ^^^j^j bonds of railroad companies are easily concealable personal ])r()perty of the individual stockholder. But the road and buildings are easily CHAP, viii PROPERTY TAXES 293 ascertainable real property of the companies. For ease of assessment, therefore, it is best to tax legal persons as well as real persons. But in that case stocks and bonds in the hands of private persons should be exempt, unless it is intended to tax such property more heavily than other property ; i.e. to in- troduce a partial progression. Wliethtu- in addition to including legal persons in the general property tax a special corporation tax should be imposed is a question of policy affecting the whole tax system. When the general property tax stands alone, all tax faculty that exists in the form of receipts of the economic character of wages — salaries, The taxation fees for professional services in indepen- ('f J^'^^'^ty in ^ ^ the form of dent professions, profits and earnings of wages not ac- management — are untaxed. In the '^omphshed. earlier forms of the property tax in the United States this omission was seen, and a special tax levied upon sucli income. But at present that method of taxation lias almost entirely disappeared. Sec. 9. The property tax as tlie sole or chief form of direct taxation has few supporters among scien- tific writers. So universal and unani- Scientific mous has been the condemnation heaped {'' ^""" , i the general upon this tax that we must consider in property tax. detail some of the objections that have been raised. Professor Seligman sums up his interesting discus- sion of this tax in words to the following general import : The general property tax is a failure as the main 2'J-t L\7^K0DUCTI0X TO PUBLIC FINANCE part u source of revenue from the ti-iple stiiiulpoint of his- tory, theory, and practice. 1. Historical!}-, it was once well-nigh universal. In a community mainly agricultural it was not alto- gether unsuited to the conditions. Hut as soon as industry and commerce became important, it failed to extend so as to comply witli tlie requirements of justice. It became, in fact, even where not so con- sidered, a tax on real property. Everywhere but in America it has been (a) divided into a number of suboi'dinate property taxes, (i) allowed to become a subordinate member of another system, or (c) en- tirely abandoned. Sooner or later it will have to be abandoned in America. 2. Theoretically the general property tax is defi- cient in two respects. First, it assumes that there is an ascertainable general property. But since prop- erty is a composite of inseparable but widely differ- entiated elements, this assumption is contrary to the fact. "The general mass of property has disap- peared, and with it vanishes the foundation of the general property tax." Secondly, "-property is no longer a criterion of faculty or of tax-paying ability." Two equal masses of property may be unequally pro- ductive, because used b}'^ men of differing talents, and thus differently joined with the ])ersonal element, or because the pf)ssessiou of them may give rise to fortuitous gains, or because the owner of one mass of property may ])e laboui'iiig under peculiar economic disadvantajres. CHAP. VIII PROPERTY TAXES 295 It is the income which property yiehls that is the best index of the tax-paying power which the prop- erty represents. 3. Practically, " the general 'property tax as actiially administered to-day is beyond all peradventure the worst tax known in the civilised world.' As at pres- ent administered, it fails entirely to reach intangible property. It debases public morals by putting a premium on dishonesty. It is regressive and presses hardest upon those relatively least able to pay.^ This is strong language, — even stronger has been used. Part 2. Special Property Taxes Sec. 10. The land tax is one of the oldest contri- butions. It has three forms: (1) it may be based upon each unit of area, sometimes with pormsofthe an attempt to classify the different units i^'id tax. as to fertility; (2) it may be based upon the esti- mated value of the land or upon an estimated average annual yield or surplus ; ('5) it may be based upon the actual yearly yield, and be as it were a share in the product. The tax was common in the latter part of the middle ages as a recognition of the mon- arch's right of i)roprietorship in the soil. A good example of this, among many others, is afforded by the so-called quit-rents in the American colonies.^ In their first form these payments are not strictly 1 Seligniaii, Essnijs, pp. 28-(51 * See Ripley and Wood. 29() INTRODUCTION TO PUBLIC FINANCE part il taxes. They are acknowledgments of tlie people's tenure. But they frequently grow into taxes. In France, as we have seen, the taille developed from feu- dal dues. The impot fonder now yields 200,000,000 francs. In England the old land tax has been con- verted into a redeenuible rent charge, but the reve- inu' from land is still taxed in the general income tax and yields ,£1,500,000 annually. Local taxation in most countries falls largely on land. In Prussia the laud lax was in 1895 transferred entirely to the local bodies. Economic rent as the surplus of revenues from land, after all expenses have been deducted, has always been regarded as a legitimate object of taxa- tion. It has been strongly argued that this tax can- not be shifted. But as the land tax is not always confined to rent-bearing land, being generally im- posed upon all land, even the poorest in cultivation, and as modern economic theory does not regard rent as an inevitable surplus, this old argument needs thorough revision. (See Chap. X.) It is in the assessment of this tax that the cadastre has been most widely used. The principles upon which the best cadastres have been built are the following: (1) A careful meas- urement of the land is made and recorded. In the older ones tin; land is entered in rough historical units: the "yoke," the "hide," the "seed." Some- times the cadastre is intended to serve other })urposes, as that of a record of titles. In any case the names CHAI'. vm PROPERTY TAXES 297 of the owners or occupiers are entered with each piece. (2) A record is made of the yield of each unit of area, and from that is estimated either the gross revenue or the net revenue, — more frequently the latter. As a rule tlie cadastral revenue is less than the actual net revenue. Another method is that of recording the market value. The cadastre^ when finished, is subject to more or less frequent revision. A partial revision which in- volves the recording of changes of title, etc., is gen- erally made currently. An entire revision is only undertaken after periods of considerable length. The making of a complete cadastre is a matter of considerable expense and takes no little time. In many cases more than the mere land is recorded, buildings and other improvements being frequently entered in the same cadastre. It is generally urged in justification of the reten- tion of the land tax, even in countries where there are other taxes that fall upon the revenue Justification from land, that the income accruing from ^Z ''*'"^'^"'»^" " by the side of land is constantly increasing in every other taxes. growing community, and that the expenditure of the government accrues largely to the benefit of the land- holders, and ai)pears in the form of an increased value or rental. Tlie same reasons are urjred in support of a higher rate for the land tax. On the basis of a cadastre the land tax is generally apportioned ; less fre(juently it is proportioned. In general, the tax lends itself better than most olhers 298 INTRODUCTION TO PUBLIC FI NANCE vaktu to the apportionment melliod. With a fixed valua- tion as a basis whicli varies comparatively little from year to year, it seems perfectly natural and easiest to apportion the amount that it is desired to raise, among the different pieces or units. Sec. 11. The older forms of the land tax often included the building tax^ with which it was closely The btdidiyig Connected in character. At present, this ^^°/^]^^ y contribution afenerally forms an indeiien- part of the o j l land tax. dcut tax on the revenue from the site and the building. It is, like the land tax, a tax on a fixed source of income. Its incidence will receive special attention elsewhere. The buildings taxed may be classified according to value, or according to the uses to which they are put. Forms of the ov according to their location, whether building tax. urban or rural. There are two very dif- ferent forms of the building tax : one is intended to fall on the income derived by the owner from the building; the other simply taxes the occupier ac- cording to the rent, taken as the index of a certain amount of tax faculty on his part. The second is very much like a consumption tax. The first re- gards the revenue derived as a source from which the tax may be paid. But even this first form, when paid by an owner who is also an occupier, is veiy much like a consumption tax. The building tax, wherever in use, is one of a number of other similar taxes ; it never stands alone. In ease of assessment it lias many advan- CHAP. VIII PROPERTY TAXES 299 tages. The valuation is simple and inexpensive. Alterations affecting the base can be easily and accu- rately ascertained. Unlike the land tax, the building tax is regularly assessed each year. Hence this tax is more often proportioned than apportioned. The building tax may be ex- tended into a sort of industry tax, as when it is assessed with higher rates upon buildings used for industrial or commercial purposes. An example of this metliod of assessing the business tax is that of France cited above. Sec. 12. The taxes we have already considered cover most fixed capital. Circnlating capital also, in all of its many forms, has been sub- Taxation of jected to separate taxes. This is as true '^«/"'^'- of those countries which have the general property tax as of those which attempt to accomplish the desired results by the taxation of the various ele- ments of revenue. How to reach this kind of reve- nue and to nuike the faculty which it represents bear its share of the public burdeu is one of the most difficult practical problems of taxation. The chief dif^culties arise from the elusive nature of circulating capital and the intimate way in which it is connected with many of the processes of indus- trial life. Justice and equality demand its taxation. But various pleas of expediency are against it. Capital is hard to reach, and if it is not fairly taxed, the result may be injurious to trade. There are two forms in which this tax has been applied 300 INIRODUCTION TO PUBLIC FINANCE i-aki ii with some effectiveness. One is that of a tax on mortgages, the other that of a tax or taxes on corporations and banks. Some results have also been attained by the attempt to tax stocks and Taxation of bonds. Public stocks are especially casy public bonds. Qf assessment. But there is an objec- tion to taxing them when the otlier forms of invest- ment escape, because of the bad effect on public credit. If it is distinctly declared beforehand that the bonds are to be taxed, their selling price is lowered. If it is not so declared, at the time of issue, and the tax is subsequently assessed, the process is regarded by the holders as equivalent to a partial repudiation of the debt, and subsequent loans are looked upon askance. When, however, all forms of revenue-yielding capital are, nominally at least, subject to taxation, this objection to taxing public securities disappears. If the tax is not to have the effect of reducing the capital value of the stock, bond, or other security, it must fall upon every form of capital. But so great are the diffi- culties of making it thus universal that, as a general rule, such a tax affects the rate of interest on all new investments in the taxed form. This question will receive further attention under the head of Incidence. Where there is a complete system of public rec- ords for deeds, mortgages, and contracts, necessary Taxation of to their Validity, it is comparatively easy rnortgagcs. ^q ^^.^^^ thcsc rccordcd sccuritics. Thus it is that mortgages are generally easily taxable. CHAP. VIII PROPERTY TAXES 301 This, however, results in inequality if tlie tax is not extended beyond the recorded contracts. When the mortgage is upon property already taxed, as, for example, by the building tax or a general prop- erty tax, the question arises whether both the bor- rower and the lender should be taxed, or only one, and if so, which one. An able writer says on this point, " Tax the mortgagee on the amount of the mortgage, and the mortgagor on the value of the property minus the mortgage. That is the only rational system." ^ Indeed, it would be, if every other form of capital were taxed ; but when that is not the case, the result is in every respect the same as though the owner were taxed alone. Generally he pays more. Taxation at the source has been warmly recom- mended for reaching interest on capital; i.e. to have the debtor advance the tax and shift \t sto-ppage at if he can to the lender or share it with ^^^ source. him. In the case of corporations, this method is ap- plied to the dividends. As Bastable" lias well shown such a tax is a combined tax on interest and on profits, and is therefore partly outside our present purpose. The taxation of corporations Taxation of is not always the taxation of eirculat- corporations. ing capital nu'it'Iy. Corporations often own other taxable property, — land, buildings, etc. But in the United States, one of the main objects of the intro- 1 Political Science Quarterly. V, , 35. 8 P. 422. 302 IXTRODUCTION TO PUBLIC FIXAXCE part ii duction of taxes on corporations was to reach forms of personal property that generally escaped. The other object was, of course, to extend the general property tax to cover all property. We find that the basis of the corporation tax is, in many instances, the capital stock at its par value, or at its market value ; and in a good many instances, the bonded indebtedness is also included. When the nature of the business is such that the capital stock and bonds do not represent all the capital concentrated in the hands of the corporation, as, for example, in the case of banks and insurance companies, then the business transacted, the gross earnings, the divi- dends, or the net earnings become the basis, lint no clear line is drawn between the taxation of in- terest and profits, so that corporation taxes often approach, in character and operation, business taxes, ^ Sec. 13. There remains but one other very im- portant property tax, and that is the inheritance tax, „ . . ,,, or the succession tax, sometimes called Orxgin of the ' inheritance de.i^h dutics.^ The feudal " relief " and " heriot " were payments made from the estate of a dead vassal, or by his heirs, in recog- nition of the lord's authority. Similar payments were made upon the transfer of property. But the 1 The best discussion of this interest ina; field of taxation is con- tained in Chaps. VI., VII., and N'lII., of Seligman's Essays on Taxation. 2 See Max West, " The Inheritance Tax," Columbia College Studies, IV., 2 ; also the excellent chapters in Bastable, 2d ed., and Seligman, Essays, p. 307 £f. CHAP. VIII PROPERTY TAXES 303 direct connection between these feudal dues and the modern inlieritance taxes is liard to trace. It is probable that the older dues suggested the feasibil- ity of the modern inheritance tax. But no closer connection than that lias been established. The modern inheritance tax is a sj)ecial exercise of tlie taxing power. It is resorted to on account of the comparative ease with which large returns can be obtained at relatively little expense and without great friction. It is generally justified in one of two ways: (1) It is claimed that the , ,.^ ,. •' ^ ^ Justification deceased person has probably not paid o/ the inheri- his share of the general taxes during his ^^^'^^^°^- lifetime, and that the publicity necessarily connected with the transfer of his property to his heir affords an excellent opportunity for the fiscus to " get even " with him. If this were the sole justification, it would require that the exact history of every estate should be investigated, and only those subjected to the tax that Oonld be shown to liave escaped taxa- tion. But this would be a laborious and costly process. Another justification is, therefore, sought. (2) It is claimed that in all cases of collateral in- heritance, the newly acquired wealth comes to the heir as a fortuitous, more or less unexpected gain. He had been living without it, and this sudden increment of wealth represents, temporarily at least, a sudden increase in his ability to pay taxes. Tliis justification points to the necessity of exempting the inheritance by iniincdiatt' d('[)enih'iits of the de- 804 INTRODUCTION TO PUBLIC FINANCE part h ceased. They were aheiuly living upon that prop- erty ; and the death and breaking up of the family and of the estate represent to them not an increased, but a decreased, tax faculty. An examination of the many forms of inheritance taxes reveals two main tendencies. The first is to ,, , . , exempt small estates and to establish a / enaencies of '^ modern inheri- progressive rate for larger ones. The tance taxes. gecond is to exempt that portion of the estate passing to the immediate heirs. The grounds for this second exemption have already been exam- ined. The grounds for the first are wrapped up in the general principles of a proportional or progres- sive rate. A very good example of these principles is afforded by the new English death duties of 1894, and the older " Legacy and Succession Duties " of 1881, which, however, are not progressive as to amount of property. Under the new law, the estate of every person dying after the 1st of August, 1804, must pay a duty which varies according to the fol- lowinof schedule as amended in 1907 : Estates from £100 to £500 pay £1 Ox . per hundred. Estates from 500 to 1,000 i.ay o per hundred. Estates from 1,000 to 10,000 pay ;3 per hundred. Estates from 10,000 to 25,000 pay 4 per hundred. instates from 25,000 to 50,000 pay 4 10 per hundred. Estates from 50,000 to 75,000 pay 5 per hundred. Estates from 75,000 to 100.000 pay 5 10 per hundred. Estates from 100,000 to 150.000 pay (i l)er liundrod. Estates from 15(t,(H)(t to 2.")0,00() pay 7 per hundred. Estates from 25().()()0 to 500,000 pay 8 ])er hiuidred. Estates from 500,000 to 750,000 pay 9 prr huiuhrd CHAi'. VIII PROPER I' Y TAXES 305 Estates from £750,000 to £1,000,000 pay £10 O.s.per hiiiidred. Estates from £1,000,000 to £1,500,000 pay £10 per huudred on £1,000,000, and £11 on the remainder. Estates from £1,500,000 to £2,000,000 pay £10 per hundred on £1,000,000 and £12 on the remainder. Estates from £2,000.000 to £2,50(),0()() pay £10 per hundred on £1,000,000 and £18 on the remainder. Estates from £2,500,000 to £3,000,000 pay £10 per hundred on £1,000,000 and £14 on the remainder. Estates from £3,000,000 and over pay £10 per hundred on £1,000,000 and £15 on the remainder. The older legacy and succession duties are also pro- gressive, but in a different way, rising' as the degree of relationship of the recipient of the legacy becomes more and more remote from tlie deceased, from XI 108. in a hundred to £11 lOs. in a hundred. Thus the total burden that may fall upon the share of any one person, that is, of a stranger to the blood receiv- ing £3,000,000 or over, is 24.8 per cent. In the United States the inheritance tax is growing rapidly in importance. This growth dates from 1885, but assumed greater dimensions after Growth of the 1900. As early as 1826 Pennsylvania tax in the adopted an inheritance tax, and a few United states. other states followed her example. Tiie federal gov- ernment enacted such a tax in 1862 to meet the exi- gencies of war. But this tax was discontinued after the war, when the need for extra revenues ceased. Hut prior to 1885 the tax was of no importance, either from point of view of yield or influence. In the tirst edition of this book it was stated that at that time (1896) thirteen states were using the inheritance 306 INTRODUCTION TO PUBLIC FINANCE pakt il tax. At the present time (1909) only sixteen of the fifty-one states and territories do not impose this tax. Wliile tlie use of this tax has been spreading from state to state, those having first adopted it have been busy intensifying it. At first it applied only to col- lateral heirs ; since then it has been applied also to direct heirs. The rates, at first low, have been raised. The feature of progression, at first introduced with a trembling hand, has been more freely and boldly used. These taxes are now levied on all property passing by will, or by the intestate laws, or by transfer in- Property sub- tended to take effect after death. But ject to this tax. ^^^ ^^^^^^ states property passing to institu- tions of learning, to churches, or in short into hands where it would be exempt from the general property tax, is exempt from the inheritance tax. The widow and children usually enjoy large exemptions. The rates are usually graduated and are progressive in one or in two ways. They are almost always pro- gressive as the relationship of the beneficiary to the deceased becomes remote. They are frequently pro- gressive as the bequest (or as the estate) increases in amount. Although the states have copied freely from one another, there is as 3'et little uniformity, and it is not possible, so frequent are the changes, to distinguish a type. The most elaborate laws are those of Wiscon- sin and California, and these may possibly prove to be the type toward whicli the states are working. That of California will serve as an illustration. The CHAP. VIII PROPERTY TAXES 307 following table shows the principal features of that law : Application of Rates to Value of Pkopeetv Exemption Inheritance or Bev(UE8T8 CLARSIFirxTIOK OR Indication of Relationship On Excess after De- $25,000 $50,000 $100,000 In Ex- duction of to to to cess of Exemption $50,000 $100,000 $500,000 $500,000 from $25,000 Husband, wife, lineal Widow or minor child, $10,0(10. Others, $4,000 issue, lineal ances- tor, adopted or c 1% li% 2% 2i% 3% mutually acknowl- edged child . . . Brother, sister, or descendant of either, wife or widow of a son. • $2,000 li% 2J% 3% 3J% 44% husband of a daughter . . . Fncle, aunt, or de- scendant of either [ 1,500 3% 44% 6% ■VI- 9% Grand uncle, grand ) aunt, or descend- \ 1,000 4% 6% S% 10% 12% ant of either . . ) Other degree of collateral consan- guinity, stranger 500 5% ■\% 10% 124% y->% in blood, body pol- itic, or corporate A few examples will show how this law is expected to work. Thus, for example, a widow inheriting $25,000 from her husband would pay 1 per cent on $15,000, or *150. If slie inherited only -f 10,000, she would be entirely exempt. If slie inherited 8500,000, she would pay 3 per cent on !J400,000, or 5^14,700. A stranger in the blood inheriting 825,000 would pay 6 per cent on 824,500, or 81225 ; and inheriting8500,000 would pay nearly 875,000. This tax is paid by the ex- ecutor or administrator direct to the county treasurer under the jurisdiction of the superior court of the 308 INTRODUCTION TO PUBLIC FINANCE i-ari m county ill which prol)ate proceeding's are being taken. The county treasurers are aUowed ratlier liberal fees for the collection of this tax in addition to their salar}', or other compensation allowed by law. The most radical inheritance tax ever enacted by any of the states is the one in the new State of Okla- homa. The rates are progressive in both ways, and for strangers to the blood confiscate all but $100 of the entire bequest if it reaches $94,500. An examination of the statutes and of the discus- sions of this tax shows that the arguments in justifica- tion of it which have appealed most strongly to the American lawmakers are two in number: (1) "That the state has a right to curtail the right of bequest"; (2) " Tliat it is desirable to curb the perpetuation of large fortunes." It was a sort of grim humour which led the Louisiana lawmakers to enact that if the heir could prove that the property he received had paid its full quota of taxes during the last five years of the life of the deceased, there would be no inheri- tance tax levied on it. But doubtless the "getting even after death " argument has had its influence elsewhere. The fact that here was a source of revenue, easily collected, which could be availed of to meet the growing expenses of the state govern- ments without increasing the apparent tax burden, as revealed in the state tax rate on property, has, however, been the most potent of all the forces lead- ing to the extension of this tax. It affords a revenue which, like tliat from indirect taxes. Hows into the ciiAi'. VIII PROPERTY TAXES 309 treasury unseen by the legislator's tax-paying con- stituents other than the heirs affected. The yield of this tax is coining to be large. In 1894 two states collected $663,000 from this source; in 1892 six states collected 83,107,000; The yield of in 1902, twenty-eight states obtained "^^« '«^- *7,138,000; and in 1905, thirty states raised over il0,600,000 by this means. The yield is, of course, irregular, varying from year to year by large amounts, so that it is not a suitable source of revenue for meeting regularly recurrent demands. Most governments regard the inheritance tax as current revenue and do not attempt to treat its yield as a permanent endowment fund for any fp^^^ purposes specific purpose. Inasniucli as the tax to which the , , , p ^, 1,1 inheritance tax IS SO clearly drawn rrom the accumulated gfiouidbe capital and not from the current income applied. of the people, tins appears to be an improvident use of the proceeds. While it might not be a wise policy to attempt to invest the entire proceeds and to spend only the interest thereon, 3'et it would seem wise to use this income solely for buildings or improve- ments of an enduring character. As, however, most governments do put into permanent improvements sums equal to or in excess of the yield of the inherit- ance tax, the failure to set it aside specifically for such purposes is not, perhaps, of immediate importance.^ 1 It seems straiii^e tliat the state universities in the t'nited States have not (leniandcd that the proceeds of tlie inheritance tax sliould be turned into tlieir en(h)\vnient funds. Such a use would be emi- nently litting and would lessen the opposition to the tax. 310 JXTRODUCTION TO PUBLIC J-'LVAA'CE I'ARI it Of recent years there lias bec'ii iiiui'li clist'ussion of the advisability of a federal inheritance tax in the The proposal United States. The "legacy tax" en- to enact a per- acted in 1862 as a war measure was re- manent fed- eral inheri- pealed when the need for heavy taxation tancetax. ccascd after the close of the war. Such a tax is now urged as a means of reducing swollen fortunes, or as a substitute for the tariff. But be- hind the arguments advanced lies the desire to cur- tail the powers and importance of the states, and to correspondingly enhance the power of the federal government. It is a movement supported only by extreme federalists. The whole discussion seems to present a modern phase of the old " States' rights " problem. It is easy to show that the states can at- tend, just as effectively as can the federal government, to the punishment of men who acquire " tainted for- tunes," if such a use of the inheritance tax is not a mis- use, which it is in the opinion of many economists.^ It is also easy to show that the federal government should continue to depend on indirect taxes, or that it is unwise to interfere with the states in working out a great experiment, but to do so would be beside the point. Until the states are forced to abandon all control over family relations, and to surrender to the federal government the entire field of legislation relating to property, and the inheritance thereof, it will be illogical and harmful for the federal govern - ' See the address by Hnllock, before the National Tax Conference at Columbus, Ohio, 1!»07. CHAP. VIII PROPERTY TAXES 311 ment to tax inheritance. But that will not tic the hands of those who wish to force an issue as to the rehitive rights of the states and of the federal gov- ernment in this field. The question is one of deep political import. CHAPTER IX PERSONAL TAXES Section 1. The simplest form of personal taxa- tion is the collection of an equal contribution from each citizen. But such a tax cannot be Tfe poll tax. large, because if it were it would impose a burden beyond the ability of the poor. A poll tax by itself cannot yield sufficient revenue to support tlie government. The uniform j^ei- capita tax is not just unless all wealth is equally distributed, and only in a very primitive community is such equality found. Hence it is that, outside of the United States, the poll tax now possesses little more than an historic interest. In the United States the poll tax is used either for local purposes (usually for roads, or for schools) or for state purposes, or both for local and state purposes, in every state and territory except the District of Columbia and Maryland. In Illinois it is not used in all parts of the state. It is usually levied on all males between the ages of 20 or 21 years and 45 or GO. In Wyoming women are also subject to this tax. It is very laxly and poorly col- lected in almost all cases, being in general successfully evaded by many of those who have no other tax to pay. In four cases it takes the form of a fee for the registration of voters. In the early taxes of the commonwealths of the United States there was fre- 312 CHA[>. IX PERSONAL TAXES 313 quently an assessment of eacli person at so much per poll as a part of the general property tax. In some commonwealths the poll tax still exists in this form. Originally this contribution was very generally used for road purposes. In many commonwealths there is still a road tax of so mucli jper capita assessed upon those individuals who are found by the authorities in the road districts. The road tax is generally payable either in labour or in money. ^ The returns from the poll tax are generally insig- nificant. Despite the apparent ease of assessment, the poll tax is expensive to collect. It frequently causes much opposition and friction. It militates against the demands of equality, and has been superseded by other forms of personal taxation, which recognise differences in faculty. Sec. 2. We have already seen how the poll tax in one instance developed into the income tax. That tax will now be studied more closely. ^, ,, , J The theory of While it is true that, since the abolition the income of the federal tax, the income tax has ""^^ little more tlian a theoretical interest for American readers,^ yet inasmuch as the hopes of many reformers 1 No comprehensive stiuly of the American poll tax has ever been made, and no satisfactory account of it can be found in print. Its historical interest is so great that it would repay a careful investigation. - Sixteen .states have at various times used an income tax, and a few still use it. But the revenues obtained are insignificant, and the tax is of little importance in the United States. See Kinsman, The Income Tax in the CommouioeaHhs of the United States. 314 IXTRODUCTION TO PUBLIC FINAXCE part ii centre in it, iind inasmuch as it may any day, again, become a live question, it is well to give the theory of the tax some consideration here. While the general, or special, property taxes rest either on the benefit theory or on the faculty theory of tax- ation, income taxes are better defended from the standpoint of the faculty theory. It is easier to make it clear that income measures faculty than it is to show how income can measure benefit. To be sure, it has been claimed with some plausibility that income is a sure indication of the benefit en- joyed under the government. But that proposi- tion requires more argument and explanation than does the simple statement that a citizen is able to pay more or less because he has a greater or a smaller income. Besides this advantage of easier justification, the income tax has in common with all personal taxes another recommendation. It levies directly on the taxpayer. The nation's income from taxation is derivative. As such it is abstracted from the an- nual increment of wealth of the citizens. Any tax which is actually paid out of capital or property may be ruinous. Property taxes, as we have seen, are, theoretically, paid from the revenue earned by the propert}^ or out of other income of the owner, the property being at best but the indication of faculty or of benefit. But the income tax finds the indica- tion of faculty in the source of the tax. There is a certain directness about this identification of base CHAP. IX PERSONAL TAXES 315 and source wliieli theoretically, at least, is a strong recommendation for this form of tax. From the standpoint of the faculty theory no gen- eral property tax, and no system of special property taxes which has not, incorporated in it, a tax on wages, salaries, profits, and the like, can be called ecjual. Many persons enjoying comparatively little property live in luxury and ease from their personal gains, while many others possessing comparatively large property may be from time to time in serious straits. For example, to be " land poor " is to be poor indeed. Large propert}' does not always imply ability to pay taxes, and the absence of property does not always imply absence of ability. There has been a feeling in the United States, not always clearly expressed, yet strong enough to influ- ence legislation, that the earnings of personal exer- tion, professional fees, and the like are not good subjects for taxation. This is the result of an ex- treme laissez-faire view, which decries every sort of interference with indivdual freedom. Every tax is seen or felt to have a repressive tendency, which is sometimes supposed to be one of the main objects in assessing taxes.^ It is feared, then, that to tax the earnings of men would discourage exertion, would discourage industry. That this is a mistaken view 1 A liquor license in a certain Western town cost .SIOO. A tax of i$100 was put upon banks. The bankers lield up their hands in horror: '^Tlie people think the banks are as undesirable as ti»e saloons 1 " 316 INTRODUCTION 70 PUBLIC FINANCE iakf h of the nature of taxation, will, in the light of our whole discussion, be evident from the mere state- ment. A general tax on all ini;()mc would not dis- courage income getting, but might even act as a stimulus thereto, more income being required to meet the tax and the same expenses as before. It may be true that this form of income represents less faculty than income from property, because more precarious than the latter, which furthermore leaves the owner free to engage in the getting of other in- come. But the entire exemption of personal earnings cannot be justified. Sec. 3. The form of the income tax will be deter- mined by the place given it in the system of taxa- ^, , , tion. If it were possible to administer / he place of '- the tax in the a single tax of any sort in accord with system. ^j^^ demands of justice, the income tax would be, theoretically, the one to be chosen. But the objections to any single tax, already stated, bear upon this as well as upon any other. Theoretically, it is best to make the income tax the central one of the system, the gaps of which are filled in by other taxes. If this be the intention, then the income tax can be arranged in the form in which it is most easy to administer. Thus the very small incomes can be exempt from the income tax, being covered by direct and indirect consumption taxes. In tliis way one source of difficulty and friction is avoided. Then no distinction need be made in the assessment of income from different sources. For if it be decided CHAP. IX PERSONAL TAXES 317 to tax income from funded investments at a higher rate than othei' forms of income, this additional tax can be laid on in the form of a property tax. How far tlie exemption of smaller incomes should go, or to what extent funded incomes should be more heavily burdened, depends upon the concrete facts in each case. An abatement of the burden in cases where there are already more than the usual claims on the income, as of a large family, is also some- times given. Sec. 4. As an example of such a tax, not, per- haps, ideally perfect, but still laid down in accord with the general principles enunciated Prussian in- above, we will study somewhat in detail <^o'"<^'«^- the Prussian income tax.^ In order to have in mind the main features of the development already out- lined above, Chap. V., we quote from Mr. Hill the successive stages in the growth of personal taxation in Prussia : "1. A uniform poll tax, 1811. " 2. A class tax, collecting somewhat more from the prosperoiis, and not less from the poor, 1820- 1821. " 3. To supplement the class tax, an income tax with comparatively few classes, a uniform rate, and a maximum limit, 1851. ' For history see Hill, Qnnvtprhj Juunial of Economics, VI., 207; Wanner, '-Die Heforin der directen Staatsbesteuerunij in Preussen ini .laluc IHltl." Srhnnz'' Fhiniiz Arrhir.. VIII Jahr- gang, II. Band. A full .statement of the law i.s there appended. 318 INTRODUCTION TO PUBLIC FINANCE part ii "4. Classification made finer, the maximum limit removed, and the class tax below made practically an income tax with a progressive rate, and the exemption of incomes up to 420 M., 1873. "5. Exemption of incomes up to 900 M., reduc- tion of the remaining rates of the class tax, and of the two lowest rates of the income tax, 1881-1883. " 6. Principle of progression extended to all in- comes under 100,000 M., incomes under 10,000 M. taxed less tlian before, and higher incomes more ; a declaration of income by the taxpayer required, and a finer classification adopted, 1891." To make the new tax still more clear, we quote the rates from the law itself : Tariff of Rates Incc MES Rate Incomes Kate From To (inclusive) M. From To (inclusive) M. M. M. M. M. 900 1,050 6 3,900 4,200 92 1,050 1,200 9 4,200 4,500 104 1,200 1,350 12 4,500 5,000 118 1,350 1,500 16 5,000 5,500 132 1,500 1,050 21 5,500 6,000 146 1,650 1,800 26 6,000 6,.500 160 1,800 2,100 31 6,500 7,000 176 2,100 2,400 36 7,000 7,500 192 2,400 2,700 44 7,500 8,000 212 2,700 3,000 52 8,000 8,.5O0 232 3,000 3,300 60 8,500 9,000 252 3,300 3,600 70 9,000 9,500 276 3,600 3,900 80 9,500 10,500 300 CHAP. IX PERSONAL TAXES The rate increases 319 Kkom To Ix Stages of By M. M. M. M. 10,500 30,500 1,000 30 30,500 32,000 1,500 60 32,000 78,000 2.000 80 78,000 100,000 2.000 100 In the case of incomes from 100,000 M. to 105,000 M. the tax is 4000 M. And from that point on the proportional rate of 4 per cent is assessed upon the lower limits of stages of 5000 M. each. Tliis rate is progressive from about two-thirds of 1 per cent at 900 M. to 8 per cent at 10,000 M. Then the rate is nearly proportional at 3 per cent up to 30,000 M. Then progressive again, until at 100,000 M. 4 per cent is reached, after which it is proportional again. Each taxpayer having an income of over 3000 M. is re(|nired to "declare" it. He has to fill out a blank calling for a statement of income from each of four sources : (1) from capital invested, interest and dividends ; (2) from landed property and houses, including all ci'ops, whether consumed in the house or not, „, , 1 he form of but deducting the cost of cultivation; the dedara- (3) from trade, industry, or mining, de- *''"■ ducting the cost of maintenance; (4) from any employment, wages, salaries, fees, and iiuluding pensions and every source of income not covered by 3-20 IXTKODUCriOX to public FIXANCE part i> (1) (2) and (3). Dediictioiis are allowed (1) for interest on debts, except tliat on bnsiness debts; (2) for permanent legal bnrdens (example, mainte- nance of reserves) ; (3) contribntions to sick funds ; (4) life-insurance premiums. This division of the income into different parts is for the sake of accu- racy of declaration, not for the sake of assessing different rates on the different kinds of income. Persons with large dependent families or labour- ing under any special economic conditions seriously Abatements affecting their faculty are allowed an allowed. abatement of not more than three grades, provided their incomes are not over 9500 M. Per- sons having less than 3000 M." deduct 50 M. for each child under fourteen years of age, and if there are three such children, a reduction of one grade is made. Corporations and stock companies pay the income tax on all dividends over 8| per cent. This makes double taxation of this income, which is regarded as particularly "capable." In other ways the attempt is made to tax funded income more heavily. The exemption of incomes below 900 jNI. (•i<225) and the lower rate for smaller incomes is justified on the ground that the consumption taxes already impose a burden on these persons. The assessment of the tax is not perfect. It is said to be considerably better, however, than the assessment of proj)erty in America. Large incomes escape in irdit. It has, however, an advantage in CHAP. IX PERSONAL TAXES 321 that the evasion of tlie tax does not in Prussia as it does in Anu'iica intensify existing differences and inequalities. Other parts of the system tend to offset the failure in this case. Sec. 5. The British income tax, correctly called "•the property and income tax," may serve as an- other illustration, hut it differs very The properixj much from the Prussian. Logically, this ''"^ income ° ^ tax m Eng- tax might have been treated in the land. previous chapter, but it is as well to discuss it here. In the first place, as has already been stated, it is rather a system of taxes on revenue than a tax on the aggregate income of each person. It is a system of modified property taxes, with a wage and salary tax appended. In Prussia the intention is to make the total income the base irres[)ective of the source, and reference to the sources is called for in the declaration merely as a means of getting at the total with greater accuracy. In England tlie different sources are kept strictly apart, and there is a difference made in the treatment of each kind of income, the tax being in some cases "stopped at the source." The total income is with some excep tions called into use only in estimating the exemp- tions and abatements. The taxpayer has the right by summing up his whole income to show that he has been taxed too much, or is entitled to exemp- tion. In that case he is reimbursed. In 1907-1908 the abatements proper amounted to ^885,070 ; ex- emptions on account of small incomes amounted Y 322 INTRODUCTION TO PUBLIC FINANCE part ii to X886,134. The total abatements of all sorts, X2,798,289. So separate are the different parts of this tax that Mr. Wilson says of it : ^ " To the bulk of the people it is known in its most obnoxious (?) form as a tax upon ordinary incomes, sahiries, profes- sional earning, profits of trading, etc." Bastable (p. 449) says : " Inequalities are, however, removed by the comprehensiveness of the tax." The various revenues are taxed in five " schedules," known as Schedules A to E. Tlie following outline of these schedules from the Acts of 1842 and 1853, with subsequent amendments, is taken mainly from Williams' The King's Revenue, a most admirable compilation, wliicli sliould be fre- quently consulted by every student of British finance. " Schedule A. — For and in respect of the property in all lands, tenements, hereditaments, and heritages in the United Kingdom, and to be charged for every twenty shillings ^ of the annual value thereof : " Schedule B. — For and in respect of the occupa- tion of all such lands, tenements, hereditaments, and heritages, as aforesaid, and to be charged for every twenty shillings^ of the annual value thereof: " Schedule C. — For and in respect of all j)rofits arising from interest, annuities, dividends, and shares of annuities payable to any person, body politic or corporate, company or society, whether corporate or ^ V. 115, National Budget. ^ See below for "deductions" allowed. Under 7? only one- third tlie annual value is now charged. The text gives the old law. CHAP. IX PERSONAL TAXES 323 not corporate, out of any public revenue, and to be charged for every twenty shillings of the annual amount tliereof : '"'•Schedule D. — For and in respect of the annual profits or gains arising or accruing to any person residing in tlie United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere, and for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any profession, trade, employment, or vocation,^ whether the same shall be respectively carried on in the United Kingdom or elsewhere, and to be charged for every twenty shillings of the annual amount of such profits and gains : " And for and in respect of the annual profits or gains arising or accruing to any person whatever, and whether a subject of His Majesty or not, al- though not resident within the United Kingdom, from any property whatever in the United Kingdom, or any profession, trade, employment, or vocation, exercised within tlic liiited Kingdom, and to be charged for every twenty shillings of the annual amount of such profits and gains : "And for and in respect of all interest of money, annuities, and other annual })rofits and gains not charged by virtue of any (jf the other schedules con- tained in this Act, and to be charged for every twenty shillings of ilu' annual amount thereof: 1 See lower ratos for " eariied " iiaouies, explained below. 324 rXTRODUCTIOX to PrB/.IC F/XAXCE part n '"'' Schednle E. — ^ For ;iii(l in resjiect of every public office or t'in[)loyinent of profit, ami upon every an- nuity, pension, or stipend payable by His Majesty or out of the public revenue of the United Kingdom, except annuities charged to the duties under the said Schedule C, and to be charged for every twenty shillings of the annual amount thereof." All incomes not exceeding XI 60 are exempt. The following "abatements" are allowed on all classes of income: XIGO on all incomes exceeding X160 and not exceeding X400; £150 on incomes exceeding £400 and not exceeding £500; £120 on all incomes exceeding £500 and not exceeding £600; £70 on all incomes exceeding £600 and not exceeding £700. The following "deductions" (not called abate- ments) are allowed under Schedide A, namely, one- eighth in respect of lands, and one-sixth in respect of houses for repairs, etc. That is, income from lands is charged at 17s. 6c?. for each pound, and that from buildings at 16s. 8c?. per pound. "Relief," in the form of a reduced rate, is given by an act passed in 1907 to "earned" incomes, in addition to all other exemptions, abatements, or deductions. "Earned" income means — (a) "any income arising in respect of any office or employment of profit held by the individual, or in respect of any pension, superannuation, or other allowance, deferred pay, or compensation for loss of office given in respect of the past services of the in- CHAP. IX PERSONAL TAXES 325 dividual, or of tlio husband or parent of the indi- vidual, in any office or employment of profit . . . ; and (5) ''any income from any property which is attached to or forms part of the emoluments of any othce or employment of profit held by the individual; and (c) " any income wliich is charged under Sched- ules B or i), and is immediately derived by the indi- vidual from tlie carrying on or exercise by him of his profession, trade, or vocation, either as an indi- vidual, or, in the ease of a partnership, as a partner acting therein," This "relief" extends only to earned incomes up to £2000. The reader should note the careful distinction made in the law between "persons" and "individ- uals." Tlie former includes legal persons, such as joint stock companies and corporations other than governmental. This is especially important under Schedule D. "The annual value of lands, etc., charged under Schedule A, is understood to be the rent by the year at which the same are let at rack-rent, if the amount of such rent shall have been fixed by agreement com- mencing within the period of seven years preceding the fifth day of A\)y\\ next before the time of making the assessment, but if the same are not so let at rack- rent, then at the rack-rent at which the same are worth to be let by the year." This rule does not 326 INTRODUCTIOX TO PUBLIC FINANCE part ii apply to tithes, quarries, mines, etc., but does apply to lands, etc., capable of actual occupation, no matter how enjoyed. " Only one-third of the annual value is charged under Schedule B ; nurseries and gardens are charged untler Schedule 2)." Mortgages are taxed under Schedule A, owners being allowed to deduct what they advance in taxes from the interest they pay. Owners in occupation pay under Schedule B. Clergymen or ministers of religion are allowed a deduction of one-eighth on the value of any dwell- ing-house for which they pay rent, in respect of the portion of it which they may use for official purposes. The greatest dithculties of assessment arise under Schedule B, and in 1907 the assessors were empow- ered to require an employer to give particulars of name, residence, and pay of any emplo3'ees, and every person is made liable to be called upon to make a full return of his or her income. Normally the in- come taxable is the average of the profits or gains for the past three years, but if the taxpayer so elect, he may be assessed on the actual amount of profits and gains for the year. Commissioners are empow- ered to make deductions in respect of " wear and tear " of machinery or plant used, and, generally sj)eaking, the assessable profits are what are left after deduction of all outgoings attributable to the ex- penses of materials, labour, etc. Individuals are allowed to deduct life insurance i)remiums paid. Many of the terms used in the scliednles as quoted CHAP. IX PERSONAL TAXES 327 above will probaljly be unintelligible to American readers, as some of tlie forms of income to which they apply are not found in the United States, or at least are not commonly recognised as distinct classes. On that account the following exhibit of the amount of income "brought under review" b}' the depart- ment administering this tax will probably prove instructive. The details of gross income are for the fiscal year 1905-1906, and the whole table is from Williams, The King's Revenue. Schedule A. Profits from the owiiersliip of: Lands £52,151,543 Houses 205,486,455 Other property .... 1,310,673 £258,948,671 Schedule B. Profits from the occupation of lands (farmers' profits mainly) .... 17,460,062 Schedule C. Profits from British, Indian, colonial, and foreign government securities . 46,925,674 Schedule D. Profits from businesses, con- cerns, professions, employments (except the last of a public nature, see Schedule E) and cer- tain interest: I. Businesses, professions, etc. (including sala- ries of employees), other than those enu- merated below . . £367,814,155 IT. Railways in the United Kingdom . . . 41,241,692 III. Mines .... 19,999,972 IV. Gasworks . . . 7,413.611 Carried fonrard £323,334,407 328 IXTRODUCTION TO Pl'RI.lC FIXANCF. part u Brought foru'ari, New Series, 8,- December, 1889. Also the Special Report of the United States Census Bureau (1907) on Wealth-Debt and Taxation, and Kinsman, The Income Tax in the Commonwealths of the United States. CHAPTER X THE INCIDENCE OF TAXATION Section 1. We postpitiicd a treatment of the q[uestion of incidence in connection with each tax, , . , , because the incidence of any tax depends Incidence ae- •' '- pends upon upon its phicc in the system. It seems, le sjjstem. therefore, better to treat the subject by itself in such a way that every tax can be considered in its connection with other taxes. The problems of this part of the subject are many and difficult. In an elementary treatise, all that can be done is to suggest methods of study and a very few of the more simple principles. By the term -'shifting" is meant the transference of the burden of a tax from the payer to some The meaning other pcrsou or persous. By the "• final oj s ijtng incidence" is meant the fallinjx of the ana of mci- ^ dence. burdcu, witliout possibility of further shifting, upon some particular revenue, joroperty, expenditure, or person. This may be illustrated by two very simple cases. An American Ijooksellcr in a college town imported some books from Kngland for the use of the students. He paid the duty to the custom house, but collected it again from the stu- dents in tlie sliape of an atldition to the [)rice of the 336 CHAP. X THE INCIDENCE OF TAXATION 337 books. The booksolU'i- shifted the tax. The final incidence was on the students. In this case, the shift- ing was expected by the lawmaker. It was to save the expense of hunting up and taxing each user of the books in question, that the seller was made to pay the tax, or to be the agent of the government in collecting it. Since the students thus taxed cannot shift the burden, we need not investigate this case further. Again : in California, the commonwealth and local taxes paid by the mortgagee amount on the average to about \\ per cent. The current rate of interest on the best untaxed loans, in and around San Francisco, is about 6 per cent, but on mortgages, in spite of the good securit}-, it has been almost invariably 8 per cent, or more. In this case, the morgagee shifts the tax, and its incidence is on the mortgagor. This may be its final incidence, or it may be conceivably possible for the mort- gagor to shift the burden to the tenant of the mortgaged property in the shape of higher rents, or to the purchasers of the commodities raised on the property in higher prices. This last illustra- tion shows how complicated the problem of incidence may be. Sec. 2. Each and every tax must be studied in its proper connection if it is desired to know to what extent tlie aims of taxation are Shifting may realised. Sometimes the shiftinjj of the '^'^ '""•' "" ^' ° Jeat the pur- tax defeats the general purpose, as in pose of the tax. the case of the tax on the mortgagee's interest in 338 INTRODUCTION TO PUBLIC tlXAXCR part ii California, while in otlieis the geiu'ial pnijxisi' can only be accomplished when the tax is shifteil. The process of shifting, like every other economic trans- fer of burdens, costs something. No person ad- vances the amount of the tax with the intention of ti'aiisferring it to some other without desiring to be paid for liis trouble and risk. Unless the conditions are against him, he will succeed in getting paid for it. Thus, the importer of books tries to get a certain profit on the cost to liim, which is composed of the price in England plus the cost of transporta- tion and the duty. If the rate of profit or commis- sion which he reckons is 10 per cent, he adds 10 per cent of the duty as well as of the other items. The money which he has advanced on the duty must bring him its share of the earnings. So in the case of the mortgages in California. One-quarter of one per cent interest, or more, is usually charged above the rate plus the tax. If the lender has to suffer tlie annoyance and run the risk of paying Shifiingisa ^hc tax, lie wiU luivc to be reimbursed. cosUy process. Shifting is, therefore, an undesirable and costly process, and is to be avoided unless there is some clear saving, as in the case of the customs duties. Sec. 3. The aims of taxation, the accomplishment of which shifting may aid or defeat, have been stated in the form of canons. The oldest and most famous are the four of Adam Smith. ^ The fourth of these » Wealth of Nations, Bk. V., Chap. II., Tart II. CHAP. X THE INCIDENCE OF TAXATION 339 famous canons bears directly upon the proV)lem in hand. Sliifting adds to the burden without adding to the revenue coming into the treasury. Sometimes a SI- 1 1 • i-i i shifted Inx is ometimes, however, by assessing the tax , •^ " more produc- upon a part of a great economic process tive. and permitting of a certain shifting, the tax is made more productive to the treasury. Now it is clear that the first duty of the fiscal officer is to fill the treasury as quickl}' and easily as possible. He has, therefore, no right to pass over a tax that is produc- tive, in favour of one that is not, simply because the one is shifted and the other is not. If, however, it can be seen that the incidence is such as to entirely derange the system adopted and defeat the general aims, an attempt must be made to prevent it. If a tax can be found that is productive and at the same time is not shifted, it will be j)referred to one that is shifted. It follows directly from the fact that a tax should be as " productive " as possible, that those taxes chosen should have as little repressive effect as pos- sible. ^ For, to destroy the phenomenon is to lose the return. Sec. 4. Let us suppose that the ideal by which all systems are to be tested is that the total taxation shall impose a slightly progressive burden upon all incomes. Then it is necessary to examine all the 1 See Bastable, pp. 388, 38!), for the same idea ; also Ross, " A New Canon of Taxation," Political Science Quarterly, Vol. VII. Tiiis is no very new canon. Adam Smith said ; "Taxation should retard as little as possible the growth of wealth '" 840 IXTRODL-CTION TO PUBLIC FINANCE part iv taxes with their various shifting^s and to see liow the total shifting affeets the liiial result. i It is a fundamental principle, too often overlooked in the discussion of incidence, and one that cannot he too frequently restated, that the possibility of shifting Shifting can- depends largely upon the relation of the luLn the^ta'^^ ^^^ ^'^ qucstiou to the other parts of the is universal. System. Let US use an old illustration : the tax on mortgages is in California shifted to the mortgagor because there are other investments for capital that escape taxation. If every j^ossible channel into which capital might go led to the pay- ment of a similar tax, it would not be so possible as it now is to shift this tax. It is not quite true that the tax would not be shifted at all, but it certainly could not be so universally shifted. We shall see later when it may be shifted. If we had a tax system so arranged as to fall, in the first instance, upon, all parts of each individuaFs income, — an unattainable ideal, — there could be but little shift- ing. But when a part of the nation's wealth is exempt, taxes upon all wealth that might be trans- ferred into this exempt form are peculiarly liable to be shifted. Sec. 5. We shall now look at the incidence of the 1 There have been many theories which have undertaken to explain the final incidence of all taxation on some other plan than that of an examination of all the different taxes. Professor vSelig- man discusses ten different classes of theories in regard to inci- dence of which only two require this method. See Shifting and Incidence of Taxation. CHAP. X THE INCIDENCE OF TAXAlION '?A\ more important taxes, taking them in the order of our previous discussion. P^xcise taxes and customs duties, so far as the latter yiekl a revenue Shifting of and fall upon citizens of the countrv ^-^"^^ -^^^ ^ '■and customs laying them,i .^^.^^ foj. q^. pi-esent purpose duties. the same. They are classed by Professor Seligman as " virtually one form of tlie profits tax," which, ''in tlie great majority of cases," will be "shifted in whole or in greater part." Wiiat Professor Seligman says upon this point ^ is true enough and very clear, but we shall follow a somewhat different analysis. In the case of these taxes it is the intention of the lawmaker that the tax shall be shifted to the con- sumer. If any of it remains on the producer or importer, it may be said to have been shifted back. This takes place sometimes : (1) if the taxed com- modity is produced as a monopoly, and the price is already as high as the traffic will bear, i.e. the addi- tion of tlie tax to the price would lessen the sale, then a part or the whole of the tax comes out of the profits of the monopolist ; (2) a new tax on some commodity produced by a large plant of fixed capital, not easily transferable to other lines, may remain on the producer. In all other cases an excise or an import tax cannot be shifted from the consumer. Sec. G. The general property tax consists of a number of different parts which are best considered ^ See Chap. VII. for shifting to foreigners. 2 See p. 140 ff., and p. 177. 342 IXTRODrCTIOX to PVRI.IC I-IXAXCE I'ARr u separately. Such a separation is legitimate since the „, . ., tax falls apart in the practice of assess- Trie incidence ^ '■ of the general meut. It falls naturally into at least two property tax. g^Qr^^ divisions, a tax on real estate and a tax on personal property. The tax on real estate nia}'^ be regarded as of two parts, a tax on land and a tax on buildings. In the general propert}' tax, tlie tax on land is assessed according to the selling value. When the land is used for agricultural i)urposes, the incidence of the tax lies between the owner and the user of the commodities produced.^ Can the owner shift the tax to the consumer? If this happens, it means a rise in prices which again means an exten- sion of the mai-gin of cultivation, marginal lands being untaxed, as having no })rice, or less heavily taxed. But such a rise in price may affect consump- tion and lessen the demand at the same time that it tempts to the creation of a new supply, thus induc- ing a fall in prices. But as cultivators of land do not readily withdraw from their position, tliose on or near the margin of cultivation will suffer severely, but will generally hold on until their profits are gone, often until they are ruined. The conditions under which agricultural products are sold to-day are beyond the control of any one set of producers. The full burden of the taxes upon agricultural land, therefore, falls u})()n tlic faiiners. In the ' For AiiKiicii, tlie tenant may be consideiTcl as a consumer of utilities. resi/ ^ farmers are more than their proportionate sluire of the overtaxed. commonwealth taxes and often also of the local taxes. When land is used for other purposes than agri- culture, it is generally best considered in connection with the buildings on it. The incidence , ., '^ Incidence of a of the general property tax on houses and tax on buUd- the land they occupy will vary from lo- "'^*" cality to locality Avith the demand for such houses and the supply. Houses cannot be readily torn down or fundamentally altered without great- loss ; conse- quently if the supply of rentable houses is larger than the demand, the tax on the buildings will fall wholly on the owner. It can be shifted to the tenant only when the supply of houses is very limited. In America these two cases are both frequently illustrated. The incidence of that part of the general property tax which is assessed upon personal property or upon invested capital is very difficult to trace. ^, . .^ ^ "^ J he incidence If the tax were well and universally as- on personal sessed upon all such capital, it could not, P^°P^^y- regularly, be shifted from the owner at all. There would then be no free field for this capital to invade. I)Ut when the tax is evaded by a considerable pro- portion of the capital, then the tax can be shifted to the borrower and will be so in the main.^ 1 For the rest of this intricate subject the student is referred to the larger treatises. 344 IXTJ^ODUCTIOM TO PUBLIC FINANCE part i\ It will be seen even from this brief statement ol the facts of shifting concerning the general property tax that the incidence is different from the intended incidence wherever that tax fails of forming a com- plete system. Sec. 7. The incidence of a land tax like the Eng- lish differs somewhat from that of the land tax as ^^ . ., part of the general property tax, inas- The incidence '■ *=* i. j. ./ of a special much as it stands entirely apart from the land tax. systcm. Still there are some points in common. Both these taxes may be capitalised. That is, the taxed property will sell for less than it would bring untaxed by the amount of the capital sum which, if put at interest, would yield the amount of the tax. In the case of the general property tax, which really falls upon well-nigh all land of any value whatever, the tax, as we have seen, falls most heavily upon the producer of agricultural commodi- ties, liut the English land tax has been capitalised and was paid for all succeeding owners by the owner at the time of its assessment, since it did not affect all lands and has become a fixed charge upon the property. The same is generally true of all taxes upon land which are in addition to a regidar system of taxes, a part of which covers the revenue from land. The same may be said of a special building tax.^ • Special taxes upon certain forms of fixed capital, especially when they stand beside a general systcm ^ See Seligman, p. 117. CHAP. X 77/^5' INCIDENCE OF TAXATION 34-5 which is fiiirly universal, may be capitalised in tlie same way. The incidence of taxes on , ., •^ Incidence of profits is determined by the control which special taxes the recipient of profits has over the profits. ^" '^'^P^^'^l- If the control is so great that he can virtually raise them at will, tlien he can shift tlie burden. But, in- asmuch as it is generally true, that he is taking all that he can whether lie be taxed or not, it is clear that he cannot as a rule shift them. Generally speaking, then, taxes upon profits are not shifted. A tax on successions, also, cannot in any conceivable way be shifted. Poll or capitation taxes cannot be shifted at all. The only conceivable case in which they might be shifted is when levied upon a wage-earner oi. .-.■ ^ '=' Shifting of at the point of starvation. The same is poll taxes and true of a tax on the lowest wages. The ""'^''* '"^^*' burden would mean liighcr wages in order for the la- bourer to live and meet the tax. But when the wage- earner is of a higher class, it is to be presumed that he cannot shift his tax at all, for that presupposes that he can control his wages sufficiently to raise them. If that were the case, we may safely assume that he would raise them wliether the tax were imposed or not. He cannot therefore shift them at all. A tax u[)on income cannot be shitted if the assess- ment is general and uniform. But as a matter of fact no such tax is general or uniform, and it will be shifted or not according as it splits up into other taxes upon rent, interest, wages, etc. 346 IXTRODUCTIOX TO PUBLIC FIXAXCE part ii In conclusion : the intention of the hiwgiver as to the incidence of taxation will be fully realised only, (1) when the system is theoretically perfect, and (2) when the execution of the law is perfect. The worst cases of shifting arise when serious gaps are left in the tax system, or when the administra- tion of the system is so lax in parts as to result in a crippling of the whole. Shifting always acts to intensify existing inequalities. The problems of incidence are among the most important of our sub- ject. The lawmaker may with the best of inten- tions work the greatest imaginable injury ; and the necessity for a careful study of the probable effects of each new tax cannot be overestimated. CHAPTER XI FEES AND INDUSTRIAL EARNINGS* Section 1. There is the closest sort of connection between fees and the industrial and commercial earnings of the State. In the case of The connec- the sale of goods or services by a State ^'^"^ between . fees and in- the private persons pay the price of the dustHai earn- vvealth which they obtain. The price is ^"S'*- fixed by economic conditions. It cannot exceed a certain sum, for if it does, the citizen will not buy. But in most cases considerations of a public charac- ter induce the State to enter upon the industry or commercial enterprise, and these very considerations are inducements to a lowering of the charges. As the public element comes to be more clearly recog- nised, a part of the economic forces fail to act. The State sacrifices part or all of the gain, but makes no loss. As the public element presses still more to the front, the State pays, at the general cost, a part of the expense, and charges the particular persons specially benefited merely a fee for the service. Many modern public institutions have gone through a process of development from one stage to the other, and the different stages are found contemporaneously 1 For dcliiiitioiis and classiKcation, see Chap. II. O I - »4 I 348 IXTRODUCTIOX ro PUBLIC hlXANCE I'AUT 11 in dift'ereiit countries. But while this is the order of progression iu new functions, it is not the historical order of the rise of these two forms of payment for public services. Fees are the older of the two. Fees are not to be found in the ancient civilisa- tions, because of the intimate relation between the Fees and the individual aiul the State. Only when consciousness .\ • t i* i ■ c ... „ there is a distinct consciousness ot of public life. " public " functions can we have fees. Payments in the middle ages for the services of the courts, of the church, of the schools, etc., were mainly of the nature of private remuneration. As soon, however, as any function comes to be recognised as public in character, fees arise. At first contributions are more or less freely and willingly rendered for the use of markets, roads, bridges, protection, and the like. Frequently there is an arbitrary assumption made that a special benefit is conferred and a fee is charged. As the State emerges from feudalism, the growth of public consciousness is marked by a rapid multiplication of these fees, which form a system of public revenues without taxes. After that the line of development is in the direction of the curtailment of the fee system and the growth of the tax system. Fees mark the transition stage in the division of labour in the public service. There is a growth of the conception of coiuinon benefits as distinct fioni •special private benefits, and a corresponding removal of functions from one to the other categoiy. At the same time new functions arise which are supported CHAP. XI FEES AND INDUSTRIAL EARNINGS 349 by fees, until fiiKilly the- recognition of public in- terest outweighs that of the intlividnal interest. Some fees, however, become fixed in fees emerge character and are not subject to these ^"'^ taxes. transforming tendencies ; but the public interest is recognised in this case by limiting the fees to a very small part of the total cost. Thus many court fees are retained, but the larger part of the rapidly grow- ing expenditure for the support of justice is now met from taxes. Those functions, in connection with which there are fees, are regarded as conferring a divided benefit. The individual pays for what he receives, the State for what the public gains thereby. Sec. 2. The extension of the fee sj'stem by the courts to cover a very large part of the cost of the judicial system, even to such a degree as judicial nt,d to make litigation impossible to all but legal fees. the rich, was a transition stage in the develop- ment from the middle ages to the present. No- where was the fee system for court costs more abused than in England. Later practice, while placing more of the burden on the general treasury, has re- tained an extensive tariff of such "costs." More- over, in not a few instances, the assessment of the "costs" upon the party responsible for the litigatii»ii. as shown by the fact that he loses his suit, makes these fees approach in character punitive fines. This is the characteristic of American practice. In many cases the special benefit conferred is not 350 INTRODUCTION TO PUBIiC FINANCE i-art ii very clear, but is arbitrarily assumed to exist and the fee levied as though it were for such benefit. Since the middle of the seventeenth century, a large part of many of the legal fees have been col- . . lected by means of stamps or stamped of fees by paper, tlic latter being necessary to le- stamps. galise the transaction; the officer who furnished or cancelled the stamp being supposed to investigate and vouch for the propriety of the transaction. A notarj^'s fee in most of the American commonwealths is of this character, the fee being receipted for by a stamp embossed upon the paper. Similar fees or taxes on acts and transfers are very common in France. Other such fees are collected in the form of tlie sale of a license to per- form certain acts which would not be legal without such a permit ; and then there is a charge for record- ing the act after it has been performed in accord with the permit. Of this character are the fees for marriage licenses and recording of marriages. The act itself is, also, often subject to the payment of a tax. The general character of the legal fee is seen from the following list: fees for passports and similar papers of identification, fees for recording and legally recognising births, deaths, marriages, and divorces, changes of residence or legal standing, for papers in evidence of honours, degrees, orders, titles, offices, etc., for patent rights and copyrights, for consular services in vouching for invoices, etc. Sec. 3. Many of the acts of the various adminis- CHAP. XI FEES AND INDUSTRIAL EARNINGS 351 trative departments are of such a character as some- times to coiifer a special benefit upon individuals for which a fee is charged. The police Administra- may render extraordinary services as in t^ve/ees. the protection of property on special occasions, in the control uf masses of people, preventing intrusion, etc. Exam[)les of these special services are very frequent. The same is true of the special services of detectives for private persons. Fees for public education are graduall}^ falling into disuse. They were originally charged for all grades of instruction from the lowest up Educational to the university. The importance of f^^^- primary education to the general welfare of the people and to the prosperity of the State, when governed by popular franchise, led to the abolition of fees for that grade of instruction at a very early date. In England, owing to the prevalence of an extreme laissez-faire view upon this subject, fees for education were continued longer than in most countries, having only very recently been entirely abolished. In the higher grades, wherever such were in charge of the State, fees were retained much longer than elsewhere. The great univer- sities of the American commonwealths have set the example of free tuition for their thousands of students, although they still retain a number of small fees for registration, diplomas, and certain incidental expenses connected with laboratory and similar instruction. European State universities 352 INTRODUCTION TO PUBLIC FINANCE part ii still oeneriilly retain the fee system for most of the lecture courses. Schools intermediate between those giving rudimentary education and the universities are generally managed without fees, like the lower grades. Educational functions of governments seem to have been going through the same transformation which roads have gone through. Already the larger part of the cost is met from general taxes and but a small part from fees. Finally the remaining fees will fall away. In those countries in which the State supports the churches, or churches of a certain denomination, there are a number of fees connected Church fees. i • i i therewith, such as those for the use of churches and churchyards, for baptisms, christenings, marriages, burials, confirmations, and communion. The means for meeting the rest of the expenses are drawn from two sources. A part is sometimes taken from the general taxes or from special taxes collected for the purpose, and the remainder from voluntary contributions by tlie attendants, or from the sale of sittings and the like. Tliis is the only important remnant of voluntary contributions in any part of the financial system. In most instances the voluntary contributions are for special purposes, organised charity, missions, etc., which are, perhaps, not properly considered of a [)ublic character. The fees rendered by individuals in connection with their industrial and commercial enterprises are very numerous. The oldest and simplest are charges for CHAP. XI FEES AND INDUSTRIAL EARNINGS 853 the use of market-places, later for the use of public exchanges, etc.; then come the charges The fees for for statistics collected by public officers, state to pri- and the charges for the use of bridges, v«^ -J in the United results that arise from the desire to give property owners full control over the improvements for which such assessments are to be made. Thus, in some commonwealths, street im- provements are only made with the consent of the owners of a majority of the property concerned. The result is tliat streets are opened irregularly, and some of the main streets are untouched, while side streets are improved. But this is an evil of expen- diture rather than necessarily connected with this mode of collecting the revenue. The abuses of spe- cial assessments are few, and, on the whole, it is a part of the tax system of which America can be justly proud. Professor Bastable's criticism (p. 377) of these fees rests upon a misconception of the method of handling the assessments. They are assessed according to the cost of the improvements ; the special benefit is the justification of the contribu- tion, not its measure. There is seldom any difficulty in apportioning the cost fairly. No charge need be made for any additional benefit beyond the cost, and the contributor has, usually, a voice in deciding whether the proposed improvement shall be under- taken or not. In view of the fact that the prevailing theory of taxation in this country is that which we have designated as the benefit theory, it is natural that Americans should iiave been the ones to have made CHAF. XI FEES AND INDUSTRIAL EARNINGS 357 the application of the theory in this ])aiticulai- case. The special assessment is ai)i)lied in iust „ . , ■t 1 1 J Special assess- those cases in which it is easiest to mcnts and the measure the special benefit. And al- ^"^■^'' ^°^^' though the principle cannot be given a wider appli- cation with any degree of satisfaction, it does, in this instance, comply with the demands of justice and equality. It would, moreover, be rather hard to find under the faculty theory any better justification. Sec. 5. The post was included above among those functions for which fees were charged. Whether that be quite correct or not, depends upon ^ . . ' r i Postal fees. the way in which the postal system is run. If it is run so as to yield the largest possible revenue over and above expenses, it is of exactly the same character as any other industrial enterprise upon which the State enters. The State sells postal ser- vices for the highest price it can get, or rather, for the largest net return. Its profits, the post-office being a monopoly, are regulated by the principle of charging \\^lat the traffic will bear. But no post- office is run on this principle. The importance of the public service rendered has led to the recogni- tion of a large element of common benefit. This recognition has not resulted in the entire abandon- ment of charges for the service except in a few in- stances ; for example, the free carriage of news- papers in the county in which they are published. But it has led to the attempt to run the service in such a way that expenses shall be met, and only a 358 JXTRODUCT/OX TO PUBLIC FIXANCE part U small surplus, if any, shall accrue to the beuelit of the treasury. Whenever the surplus tends to grow, the rates are lowered or the service improved. Of all the powers, Great Britain is the sole exception to this rule, about one-third of her postal receipts be- ing profits. (1895, receipts .£10,760,000, expenses <£ 6,869,000. But the allied telegraph service ran beliind; receipts £2,580,000, expenses £2,674,000.) The postal rates in Great Britain are as low as in other countries, but the surplus is accounted for by the extremely small size of the territory covered by the land service, the concentration of population, and the cheapness of water transportation, all of which makes it particularly easy to do a large and profitable business at low rates. There are some writers who regard any surplus acquired in this way as practically the result of tax- o , , , ation, and class any charge for the pub- Postal surplus ' j r> r not the result lic scrvicc, abovc the cost thereof, as a of axa ion. special tax. This classification presup- poses that the service is, by nature, of a public char- acter, an assumption contrary to the fact, for no function except that of governing itself, in the nar- rowest possible sense, is bi/ nature of a public charac- ter, nor, on the other liand, bi/ nature of a private character. On this consideration, therefore, it is better to class these gains, not as taxes, but as the earnings of a public industry. Skc. 6. \\\ niodei'u times [)ublic industries can be quite as properly considered under the head of ex* CHAP. XI FEES AND INDUSTRIAL EARNINGS 359 penditure as under that of revenue. Historically, State industries, like public or princely domains, lands, forests, and mines, were mainly Public indus- sources of revenue. But a railroad is irtcs not pn- 1.11 1 c 1 c • •! marilij for the placed in the hands of the State primarily gake ofreve- because of the [)ublic interests involved, ""^• and the expenditure for that purpose is more signifi- cant than the moderate surpluses that accrue, in some cases, to the government. For that reason we called attention to these activities under the head of expenditure. We have now to consider them as productive of so much total wealth, a part of which is immediately spent for the purpose which led the State into this activity, and a part, generally a very small part, saved to assist in the accomplishment of other purposes. The oldest form of public property is land. The public land originally embraced all the territory of the State. Gradually parts of it were Public lands. alienated to a private purpose subject only to the law of eminent domain ; but considerable portions even to the present day belong to the State, or, what is the same thing, to the local governments. In the monarchies of Europe such lands were once considered the property of the prince. These lands were the iimin reliance for public revenues in the feudal State. As the people gained a voice in the government, they laid claim to these sources of rev- enue for public purposes. From that time on, the pul)lic domain diniinislied both absolutely, by sale 360 INTRODUCTION TO PUBIIC FINANCE part ii or alienation, and relatively as the wealth of the people swelled. Some countries adopted a very conservative policy in this respect, and retained their domains in land and forests, while others adopted the plan of steadily disposing of them. German states are examples of the former policy, while England, France, and the United States have been examples of the latter. England receives onl}^ £520,000 annuall}^ of " Woods, Forests, and Land Revenues of the crown." In the United States it was the possession of vast tracts of land by the federal government, acquired by gift from the com- monwealths, and by purchase, which gave that gov- ernment an independent territory over which its control was absolute, and formed one of its strongest supports, contributing most materially to the growth of federal influence. But the public lands have not been a source of revenue to the government. The money received from settlers has amounted to little more than fees for the registration of titles, and except for the ten years from 1830 to 1840 the lands have not yielded a clesar revenue. The extensive surveys which the goveriunent carried out have been a large expense attributable to this source. Under constitutional government there is little danger of the failure of taxation as a permanent and regular source of revenue. So that public lands are not re- garded as necessary for the integrity of the govern- ment. The retention of public lands in Germany and Austria is not explainable by any danger of the CHAP. XI FEES AND INDUSTRIAL EARNINGS 361 failure of taxation, but by the greater tenacity of the older communistic idea. Democrat- No reason for ically governed cities and towns cling to ' / ■retention •' ° o of public lands their lands as strongly as the royal gov- to-day. ernments. Prussia's public lands and forests yield about 50,000,000 marks annually after all expenses have been met. Cities and towns get as much more, and in many cases supply burgher families with wood without charge. In Russia the process of emancipating the serfs has changed the receipts from public lands into taxes, and left practically little rev- enue of the older character. In spite of the absence of constitutional government, Russia has gone faster in proportion to wealth and revenues, in the aboli tion of public domains than many German states. Russia's gross receipts from domains are about $12,500,000, while Prussia's are nearly !&22,000,000. The alienation of public lands in Russia is recent, and it has progressed as that country advanced in civilisation. Except when in charge of a highly trained body of expert officials, as in Germany, the public lands do not form a satisfactory source of rev- Public control enue. They are not as a rule as well "•^{'l';''*'* " •^ public neces- raanaged as similar lands in private sH;/. hands. Forests form an important exception to this statement. A private owner cannot afford to wait long enough for economical use of timber land. The destruction of forests at private hands is a seri- ous danger. Only a perniaiiont, long lived institu- 862 INTRODUCTION TO PUBLIC FINANCE tart n tion like the government can take proper care ot forests. Closely allied with the public ownership of lands and forests is the public ownership of mines. This is Ownership 0^6 of the oldest State industries, which of mines. jg Qf jj^^g falling iuto disusc. The work- ing of mines by the government is being replaced in Europe by a system which allows of private opera- tion, but guarantees the public interest by the collec- tion of royalties, or mining taxes. In the older countries, where the idea of public territorial owner- ship is stronger, the old system still prevails, and, even where it is partially surrendered, the revenues derived from royalties and taxes are proportionately large. But in the new countries of the American continent and Australia private ownership generally prevails, and no more revenue is derived from this source than from any other taxed industry. The feudal idea of territorial ownership, a remnant of which still survives in those countries of Europe which retain their interests in the mines, is ver}' dif- ferent from that of private ownership in fee simple as in America. This accounts for the difference in the revenues from this source. Sec. 7. But while the modern State has surren- dered the extractive industries, a great many others Other indus- have been undertaken, not so much as tries. sources of revenue as because of the im- portance of the public interests involved. Before the nineteenth century the most striking instances are of CHAP. XI FEES AND INDUSTRIAL EARNINGS 363 the production of some commodity needed for the public service or of articles of an artistic and costly character. Examples of the latter are the Gobelin tapestries and the Sevres ware. In supplying arms, forts, vessels, public buildings, and the like there is no uniformity of practice among the nations. In only a few cases is the method regularly that of government production. There is a similar absence of uniformity in practice in regard to all those industries which in- volve large public interests for the conservation of which there is under private management no good guarantee. In some cases, as the water-supply, there is a general tendency in the direction of public own- ership. Whenever, as in this case, a public interest is absolutely paramount to every other consideration, there is little attempt to make the industry a source of revenue beyond what is necessary to maintain the service. These industries, therefore, tend rapidly to be supi)orted by fees or taxes. Inasmuch as it is generally the importance of the public interest tliat led to the assumption of the industry by the govern- ment, this tendency is universal. Roads, canals, the water-supply, the post-office, telegraph, telephone, and the railroads all pass more or less rapidly through these stages according to the importance ascribed to the public interest in them. As already seen, the post-office is now primarily supported by fees. The funds for the support of waterworks are generally collected from the users, as fees, or from certain classes of persons as special taxes, but seldom as 364 IXTRODUCTIOX TO PUBLIC FINANCE part ii prices for the service. The experience of nations with State-owned railroads is too recent and too varied to be very instructive. States have been led into the ownership and operation of railroads : first, be- cause the roads needed the support of public credit : second, because of military interests ; third, because of the failure of private companies to prefect public interests. Railroads have more often been a source of public expenditure than of public revenue. In Prussia alone have the financial results been such as to add materially to the income of the treasury. The question of government ownership of railroads is one involving considerations broader than merely fiscal ones, and does not properly belong to our sub- ject. In no case is it at all likely that merely fiscal considerations will have more than a deterrent effect upon the solution of the problem of the government's action in regard to the management of the railroads. While the industrial, commercial, or other eco- nomic functions of the State are of continually grow- Puhiic Indus- ing importance, they are not likely to be try not likely , , "„ ' xt to be a source largely a source of net revenue. No- of net revenue, where do we find principles that would lead us to anticipate that revenues of this character will ever supply the place of taxes. Indeed, if the usual evolution continues, these functions may be performed by the State without a special charge upon the benefited persons, and, wliile the liberties of the pe()})le in. respect to the enjoyment of these facilities will be greater, the burden thrown upon CHAP. XI I'EES AND INDUSTRIAL EARNINGS 365 general taxation will be ec^ually so. If a city now supplies a sewer system to citizens free of special charge except for first construction, it ma}' with the same logic supply water. If a State furnishes roads at common cost, it may certainly so far modify the management of railroads as to apply the fee system and forego the collection of any surplus, though in this case, as in that of the post-office, there would seem to be as yet no sign of any tendency to go beyond the fee system. PART III PUBLIC INDEBTEDNESS CHAPTER I THE GROWTH AND NATURE OF PUBLIC CREDIT Section 1 . The national governments of the civ- ilised world owed in 1908-1 !M)9 more than thirty-six The size of ^^^'^ onc-half thousiUid millions of doHars, public debts. Qy. seven and one-half thousand million pounds sterling. With the addition of the debts owed by the local governments this sum will ex- ceed forty thousand millions of dollars, or eight thousand million pounds. The nearest available figures are: — National (lcl)t of all countries, lSf)0 . . !$27,524,970,ni5 Natioiial debt of all countries, 1908 . . 36,548,455,489 ^ According to the best available authorities the national indebtedness of the world increased four- 1 Bastable, in his edition of 1903, says that tlie total of national debts can hardly have been less than £7,<)00,(M)(),()00 at the close of the nineleenlh century (p. 026). 366 CHAi'. I PUBLIC INDEBTEDNESS 367 fold between 1848 and 1890, and by 1908 it was fivefold. Tears Aggregate debt Increase Per cent of increase 1848 . . % 7,0-27.60lV_>15 18G0 . . 10,;i9!J,:34 1,088 $2,771,649,473 36.34 1870 . . 17,117,040,428 6,718,298,740 64.60 1880 . . 27,421,0:37,043 10,303,397,215 60.19 1890 . . 27,524,970,915 103,939,272 .38 1908 . . 30,548,455,489 9,023,478,574 32.80 [From best available sources.] The increase of national indebtedness between ]880 and 1890 was comparatively slight. But this Wiis partly due to the payment of a large part of the national debt of the United States. The increase since 1890 is largely attributable to the Boer War in England and to the Spanish-American War. Other countries have continued the process of debt- making — although less rapidly, owing to the continu- ance of peace. The above figures do not include pensions, which are really debts in the form of annuities.^ The following table compiled from the Statesman's Year Book for 190G gives the details of the population, indebtedness, and ^er capita debt on the account of the national governments only, of twenty-four of the most important nations. 1 If these were included and capitalised at ten years' purchase, which would, perhaps, be a fair averajje, they would add to the debt of the United States at least '§1,500,000,000. 368 INTRODUCTION TO PUBLIC FINANCE part in Rkported National Debt ov Specified Nations for the Fiscal Year, 1904-1905 Austria . . . Hungary . . . A u str i a- II u ngary Belgium . Bulgaria . . . Denmark . . France . . . Germany . . . Greece . . . Italy .... Netherlands Norway . . . Portugal . . . Roumania . . Russia . . . Servia . . . Spain .... Sweden . . . Switzerland . Turkey . . United Kingdom United States . China .... Japan .... POI'ILATIOX 26,150,710 10,254,560 45,405.270 7,074,910 3,744,280 2,464,770 3.S.96 1.950 60,605.180 2,433,800 33,476,120 5,509,660 2,240.100 5,423,130 6,400,000 129,309.300 2,676,990 18,618,100 5,260,810 3,425,380 21,028,900 43,218,000 81,511,815 407,253,000 46,732,200 Total Debt \ 785,243,792 ],069.0()7,851 1,095,606,825 606,762,617 66,162,890 65,269,644 5,929,395,672 823,290,138 164,001,050 2,424,448,935 464,246,824 71,657,217 855,114,614 264,723,487 3,738,304,688 89,736,313 1,858,191,268 103,803,418 19,798,382 537,767,716 3,877,318,133 080,866,772 587,654,208 483,042,912 Per Cai'ita Debt $30 56 24 86 18 26 152 14 67 72 84 32 158 41 29 34 100 20 6 22 90 12 1 10 The totals for the British Empire are: population 325,540,000, total indebtedness $7,190,748,560 (£1,440,000,000), ;)er mmVa #22 (X4 10.y). While tli(! ahsoliitc aiuoiinl of tlic (lcl)t lias in CHAP. I PUBLIC INDEBTEDNESS 369 creased, the burden has materially decreased since 1880, owincr to the increase in popula- ' '^ ^ ^ The burden tion and wealth. In 1880, the national has decreased indebtedness of countries other than the »^"<^^ ^"^^O- United States amounted to itf35.64 ^;er capita^ while in 1890 it was i!32.90 per capita. During the same period the national debt of the United States was reduced absolutely by over a billion dollars, and relatively from -^38.33 joer capita to ^W.'H-i: per capita. The per capita debt for the world at large on the national accounts only was in 1909 about 826, that of the United States in the same year about $10. Of course statistics of this sort are neither perfectly accurate nor easy to interpret. The only proper comparison between different countries would be that of the ratio of the interest charge to the annual in- come of the people. But the anfiual income is very difficult to ascertain, and the errors would, probably, be so great as to destroy the significance of the result. But the foregoing figures, while not absolutely correct, are sufficiently so to indicate that the policy of borrowing has become a most vital part of the system of public finance. Tiie cause of the national debts is almost exclusively war and the preparation for war. If the expenses of war and its preparation had been excluded from their finances and the treasury relieved of the subsecjuent burden of interest, civil- ised nations would have been easily able to meet their current expenses. In England the annual public-debt chai'ges {ov interest and debt payments 2b 370 I.VTRODUCTIO.V TO PUBLIC FIXAXCE part hi consume nearl}'^ one-fourth of the annual revenues from every source. The policy pursued by England is to tix a permanent debt charge against the annual revenues and to use all that can be saved therefrom over and above the interest charges for the payment of the principal. This so-called sinking fund system is suspended in time of war. The funded debt of France, the largest ever contracted by any country, imposes an interest charge of about 1,250,000,000 francs upon a total revenue of about 3,500,000,000 francs. If we include certain annuities and pensions, over one-third of the revenues of France are con- sumed in this way. Germany is the only country of importance that does not rely entirely upon the possibility of borrow- ing money in case of war. That country maintains a special cash reserve of $30,000,000, which is avail- able for immediate application to war purposes, should Germany's it be needed. Although the German Em- cash reserve. ^\yQ began in 1871 without debt, it had in 1908 a debt of 1,588,000,000 marks. This is largely due to armament. So that, although Germany holds a cash reserve for military purposes, it is practically a borrowed one, and she is making her preparation for war on borrowed money. This policy does not differ essentially from that of other countries. In the middle ages, however, as in classical times, it was the practice of nations to accumulate a treasure for war purposes in advance, by collecting more revenue each year than was needed. This prac- CHAi'. I PUBLIC INDEBTEDNESS 37 J tice is now obsolete and is also indefensible as too costly. 1 Modern nations, then, practise a method of deficit financiering. They make provision in their annual revenues for the current, regular, or Deficit finan- " ordinary " expenditures only, and rely c^enng. for funds at other times upon their ability to borrow. What then constitutes this ability to borrow upon which so much reliance is placed that even the very existence of the nation is allowed to depend upon it ? Since when, and how is it, that nations have been able to rely so absolutely upon public credit ? The answer to both these questions is contained in the analysis of public credit.''^ Sec. 2. Public credit is only one form of general credit, and it is comparatively easy to point out wherein the former differs from the lat- p^^^i^^ ^^^^^ ter. But credit in itself is by no means a form of gen- easy to define. Scarcely any two of the able writers who have treated the subject are agreed as to its most important features. It has, moreover, as a term in common use, suffered so Difficult to many subtle changes in meaning in the define credit. course of its history as to leave its modern signifi- i bee Bastable, p. 5fi7. " The first edition of this work was severely criticised for coii- Udning the analysis of public credit that is reembodied in this edition. It may well be that a study of credit is more appropriate u> a work on economics than to one on public finance. But the nnauce minister of every nation is necessarily vitally concerned UiDOUt the credit he can coniniand, and, appropriate or not, the sub- ^Owi 13 oi vital public importance in a fiscal relation. 372 J.VTKODUCTION TO PUBLIC FINANCE part iiv cance full of dangerous variations. The ordinary business man uses the woid daily to convey half a dozen or more different ideas without recognising the differences. Scientitic writers liave waged long and bitter controversies concerning its proper defini- tion. ^ Without going too (k'e[)Iy into the controversy, we may say that there are practically three opposing views as to the real nature of credit. First, there are those writers, who, like Nebenius and Ran, start Three oppos- from the etymological meaning of the tnq views as ^gj.j^^ j^j^(^ maintain that the confidence. to the nature 0/ credit. or trust, reposcd by the creditor in the ability of the debtor to fulfil an agreement in the future is the chief element in credit. ^ Second, there is a class of writers who, like Knies, regard this element of confidence, a mere psychical condition, as too intangible, too immaterial, to be of any value for a scientific definition. They proceed entirely from observation of those transactions which are said to involve the use of credit, and find in all such trans- actions one feature which is never present in trans- actions not designated as credit transactions. That feature is that the completion of the transaction is regarded as being postponed to a future time. This element of time, this postponement, must then, they argue, be the essence of credit. Credit is, in their 1 A good idea of the extent of the controversy and of the con- flieting views can be gained from Knies, D/r KreiUt, Berlin, 1876. 2 Nebenius, Der offentliche Credit, Carlsruhe and Baden, 2d ed., 1829 , Rail, Finanzwissenschaft, 3d ed., Heidelberg, 1851 ; II. Abt., p. 248. CHAP. I PUBLIC INDEBTEDNESS 373 eyes, merely a means of transfi'rring ownership tem- porarily, a means of })ayint;' f<»r [)resent goods with a greater quantity of future ones. Third, there is still another school, who, like McLeod, regard credit as analogous to money, money being regarded as repre- senting claims on the wealth of tlie whole community, while a credit is a similar claim on tlie wealth of some particular individual. McLeod even goes so far as to identify the claim, the order, the promise to pay, or the right to demand with " the credit," " A credit," says McI>eod, "in Law, Commerce, and Economics, is the Right which one Person, the Cred- itor, has to compel another Person, the Debtor, to Pay or Do something." ^ Sec. 3. These definitions, apparently so contra- dictory, are not altogether irreconcilable. They represent different points of view ratlier Reconciliation than real differences in meaning. Cer- '^f '''^*'' '^'^f"'*- tainly nothing but credit is described by any one of the three delinitions, and certaiidy tliere are shades 1 Theoi'y of Credit, Vol. I., p. 315. In a very scholarly article published in the Qnartcrly Journal of Economics, January, 1894, Professor Sherwood di.scusses the nature and nechanisni of credit in a way to throw a great deal of new liglit upon the subject. I do not believe that his analysis can be improved upon. He dis- tinguishes particularly the credit basis of money, as generic or universal credit (which he calls "customary credits"'), from that of the commonly so-called credit transactions, which he calls "for- mal credits." It is with the latter only that we are concerned here. They are legally enfortible. They rest in the economic sense "on a p.sychological trait of faith in the uniformity and rea.sonableness of other men's vohuilary acts." 374 INTRODUCTION TO PUBLIC FINANCE pakt m of the meaning of the term that are a[)t]y (h'serihed by each of them. As is so often the case when a word in common use is defined for scientific pur- poses in several ways, we find that one definition fits certain classes of things covered by the term better than others. There are certain debts, for examj)U% in which the element of trust is paramount, others in which that of time is more important, and again some in which the element of claim or demand is the distinguishing thing. But it is also true that there are no cases of the existence of credit where all three of these features do not appear, the one or tlie other varying in importance as the case may be. To fully understand a thing so many-sided as credit, it is necessary to examine it from several points of view. If we start from the etymological meaning of the term, we cannot avoid the conclusion that one of tlie chief elements of credit is trust. Certainly without that intangible, unmeasurable feeling or frame of mind known as confidence, trust, or faith, on ^ ., which Knies pours so nuu-h scorn, no Confidence a ^ necessary debts would liave come into existence. P""'- As Professor Colin well says, "Credit rests on the development of opinions and institutions which arise with the general advance of civilisa- tion." ^ Modern usage has not yet eliminated this original meanin"' from tlic (ciin. It cannot be altogether incorrect to make this a part of the defi- 1 Orundlegung, p. 553. CHAP. I PUBLIC INDEBTEDXESS 375 nition. It is customary enough to conceive that credit or faith is reposed by the creditor in the debtor, and that it varies in amount, although never exactly measurable. But there are many credit transactions in which the element of trust shrinks into insignificance. An advance on a warehouse receipt, a Lombard loan, a pawnbroker's advance, all of these and many like them are credit transac- tions, but the element of personal confidence plays little part in these. The creditor in these cases never has to consider the character of the debtor nor his ability or willingness to pay. After he has satisfied himself as to the value of the security, all that he has to consider is the time the Ti^^e also debt has to run. It must be admitted, essential. then, that there are a number of cases of credit transactions in which the paramount element is that of time. The first two of the above-stated views of the nature of credit are, therefore, reconcilable in this way. They may be regarded as essentially the same with a difference in the emphasis, and it is correct to change the emphasis when different kinds of debts are considered. Both of them may be covered by one definition, whicli may for two reasons be called the subjective definition : (1) because it takes into consideration feelings, opinions, i.e. trust, confidence, belief; (2) because it looks at credit from the natural point of view of the creditor wlio entertains that trust. Subjective Definition. — From the subjective stand 376 INTRODUCTIOX TO PUBLIC FIXAXCE part m point credit is the confidence or trust reposed by one person in the ability of some other person to fulfil a promise at some future time. The emphasis will fall upon the feature of trust or upon that of time according to the nature of the particular debt in point. But that is not all : we have yet to dispose of that view which identifies credit with the claim which the creditor has on the debtor. In one aspect this view seems absolutely contradictory to that which we have adopted. So much so that Ivnies ridicules it, considering it quite as absurd as the reasoning of John Law. He says it makes the debtor give credit: i.e. he gives the claim, and the claim is credit. But McLeod's reasoning is not so easily The objective disposed of . He has taken what may be point of view, yy^w called the objective view. He has sought out embodied credit. His, too, is the natu- ral point of view of the debtor. The opi)osition, therefore, between the two views is more apparent than real, and arises from the fact that each is from a different point of view. There are two sides to the shield. The debtor sells a claim (a chose in action) which is a more or less tangible thing having a present value, just as many another light lias; as, for exuin[)le, a patent right or a copy- right. The debtor is concerned only with tiie value of that claim. The creditor, however, looks beyond the claim and desires to know whether he can trust in the ability of the debtor to make the claim good. CHAP. I PUBLIC liXDEBTI-.DNESS 377 By a very natural analogy, too, the language of business says that the debtor enjoys good or bad credit, as thongli the trust reposed in him by others, in whose minds it exists, really became an attribute of him. There is still more ground for McLeod's view, for, as has already been remarked, it is often the nature of the claim created that adds to, or de- tracts from, the credit. Any man, in ordinary times, can obtain credit, if he comes prepared with collat- eral security and is ready to create a claim that is good on tliat in case his other resources fail him. It is clear, then, that the view of McLeod is im- portant, and also that it is supplementary to that already adopted. It reveals many phases of credit that cannot be seen at all from the subjective point of view. The two views taken together make a complete explanation. Objective Definition. — From the objective stand- point, credit is embodied in claims which are ac- cepted by the creditor in pa3ment. These objective claims have a value like every other exchangeable commodity, and are recorded in the various " instru- ments of credit." If these two definitions are accepted, we can pro- ceed to point out wherein public credit differs from ordinary or private credit. The pecul- Public credit iar conditions wliieh distinguish public '^'ffj^'f'^"' ^ '^ ordinary credit fioni oidiiiarv credit arise from credit. the fact that the debtor is the State. The State, being above the law, cannot be compelled, as the 378 IXTRODUCTION TO PUBLIC FINANCE part iii private iiidi vicinal can, to pay its debts. Public credit is therefore subjectively defined" as the confi- dence or trust reposed in the ability and willingness of the debtor (the State) to fulfil its [)rc)inises at some future tiniCo Objectively the claim (in this case the bond) shrinks to the character of an unsupported although generally accepted promise. There are, to be sure, some important cases in which the claim is apparently supported by something more definite than the mere promise of the debtor; as, for example, when the revenues from certain productive enter- prises are pledged for the support of the debt charges. But even in these cases, the creditor has no real resource against intentional bad faith. In general the subjective standpoint gives a better view of public credit than the objective, because the claims cannot be enforced. The fact that the debtor is the State has other important consequences. (1) The State has sover- eign power and can compel its subjects to lend to it ; or, on the other hand, the creditor may make Other differ- advauccs on rather poorer terms than he encrs between i i ii • ^ £ !.• would otherwise accept, irom motives public credit ^ and private, of patriotism. (2) The debtor State lives forever, and hence can make perpetual debts. (•3) Its affairs are all open to inspection, and the would-be creditor has full op[)ortunity to know its ability to pay. (4) Public credit may be divided into various parts, according as it is the credit of the central govenimeiit or of . some subordinate depart- CHAP. 1 PUBLIC INDEBTEDNESS 379 ment that is being considered. The consideration of the rehitions of the different parts of the govern- ment in this respect belongs to the fiekl of public law rather than to that of public finance. Sec 4. Public credit was necessarily later in development than private credit. General habits of lending on a large scale had to be „, , , ^ t' o The late de- established before nations could borrow, veiopment of The bankers and brokers of the world vuhUc credU. had to develop the machinery for handling evi- dences of debt before large public loans could be placed. Then, too, inasmuch as the objective evi- dences of debt in the case of the government were nothing but the unsupported promises of the gov- ernment, confidence that these promises would be kept had to grow. At first the assurance rested on the honour of the monarch, or upon some pledge or security given by him, such as the crown jewels, crown lands, a lease of the revenues, and the like. But later, as Bastable so ably shows, ^ the development of public credit goes hand in hand with the develop- ment of constitutional government. It would seem that the control of the purse by the very persons who were to pay the taxes gave a steadiness and security to the financial administration that aroused the confidence of money owners. Sec. 5. Much attention has been given by differ- ent authors to the economic effects of public bor- rowing. It is now pretty well agreed that public 1 V. 679. 380 IXTRODUCriOX to public finance part hi borrowing' iloes not, as was once taught,^ create new wealth except indirectly, tlirougli the use made of the capital taken when it is used productively. „ . Nor, on the other hand, does public bor- Economic ' '■ effects of pub- rowing in itself directl}^ destroy wealth. ic orrowing. rp|^^ nioucy borrowcd may be devoted to some form of rapid consumption, as in war. In this case the destruction of wealth is determined by the line of expenditure decided upon, not by the bor- rowing merely. But the feasibility of obtaining large sums in this way is said to lead to more ex- travagant expenditure than would otherwise be in- dulged in, since taxation for such purposes would be difficult. The consumed wealth is replaced by claims upon future wealth whicli are not of such a character as to be available as productive capital. But the loss incurred is distributed over many years instead of being concentrated in a few. As in the case of a spendthrift who mortgages his patrimony for wasteful extravagance, so in the case of a nation which borrows for war, the evil that arises is from the waste of war, not from the borrowing. For a State to borrow for a productive purpose has no other economic effect than for a private corporation to do the same. Sec. 6. There has also been some discussion of the relative merits of domestic and foreign loans, and their differing economic effects. Sometimes it has been chiimcd that foreign loans involve less 1 "The public funds a mine of gold." CHAP. I PUBLIC INDEBTEDNESS 381 disturbance of domestic industry. The intimate re- lation existing between modern nations j^o serious dif- in their commercial and industrial en- ference in the terprises destroys to-day almost all the 'JgnVdoZ'es- significance that might formerly have tic loans. attached to such a discussion. The payment of the French indemnity of 5,000,000,000 francs to Germany after the war of 1870 was carried out in twenty- seven months, and not one single serious difificulty or disorder in the financial centres was produced by it.^ So great is the mobility of modern capi- tal and so vast are the current transactions, that all of this money could be easily turned into the same stream without disturbing its placid surface. Public credit is a plant of slow growth ; more than that, it is a delicate plant. It may be The frailty of injured beyond recovery by a single case pw^'^^'c credit. of failure to fulfil the promise in which it found expression. ^lany of the commonwealths of the United States have repudiated their debts, and have since then recovered their power to borrow but slowly, and in some instances scarcely at all.^ Weak nations which may be or have been coerced by stronger and wealthier nations in the interest of 1 BJarkwiHxVs Edinhnrijh Muffazine, February, 1875, pp. 172-187. 2 Uiick-r the Kleventli Aniendinent to the federal Constitution, a state cannot be sued in a federal court. Tliis is contrary to the original intention of the Constitution. See my monograph, Das Kreilitwi'sen di-r Staaten uiul Stiidte der Xordamerd-auischeH Union in seiner historischen Entwickeliing, Jena, 18U1. Egypt is a good example of foreign coercion to enforce debt payment. 382 IXTRODUCriON to public FLXAXCE part hi citizens of the latter who were creditors of the former, generally borrow more easily than stronger independent nations, or parts of strong confedera- tions, which have failed to meet their obligations and cannot be coerced. The credit of local governing bodies depends in great measure upon their powers and duties in public law. Generally speaking, a " municipal cor- poration," when acting legally within the sphere prescribed to it, is like a private company, — its obligations can be enforced by legal or judicial pro- cedure. Unlike the sovereign State, a municipality can be sued without its consent. Only with the positive sanction of the sovereign State can a mu- nicipality default and escape punishment therefor. CHAPTER II FORMS OP PUBLIC DEBTS Section 1. Governments may borrow money in almost any of the ways which an individual may use. These different forms can be best classification made clear in connection with their clas- ^^o^<^ ^f^^w rm • • 1 1-1 ^^^ credit up- smcation. The principles upon which a on which each useful classification can be built are those ^^'^^ '"''*'*■ developed in the preceding chapters. Public debts are forms of public credit, and the kind of credit upon which each debt is based can be shown in the classification. Some light can be thrown on the different forms of debt by a review of the older classifications. One of the commonest distinctions is that between funded and floating debts. Orig- inally, tiiis distinction was very simple, and corre- spondingly useful. In the words of Adam Smith : " Nations, like private men, have gen- p^^,^^^.^ q„^ erally begun to borrow upon what may unfunded be called personal credit, without assign- ^ *' ing or mortgaging any particular fund for the pay- ment of the debt ; and when this resource has failed them, they have gone on to borrow u[)on assignments or mortgages of particular funds." The first of these is the unfunded debt, the other is the fundeJ 883 384 IXTRODUCTIOX TO PUBLIC F/XANCE part hi ilt'bt.^ Hut allliougli these terms are still in com- mon nse, the meaning attributed to them has so entirely changed, that to-day the so-called floating or unfunded debt consists, in large part, of out- standing claims upon very definite revenues, while it is often the case that no particular fund or source of revenue is directly pledged for the payment of the so-called funded debt. Hence it is that Pro- fessor Cohn treats Smith's grounds of distinction as antiquated, and says that the real distinction is found in the fact that the funded debts are those of longer duration, and the floating debts those of shorter duration, " although," he adds, " different causes and pur[)oses of credit lie behind the differ- ence in duration. "2 The most elaborate attempt Wagner's ^^ explain the modern use of these distinctions, tcmis is that of Wagner. As it is so complete, it is well worth summarising here. Funded and floating debts can be distinguished by the fol- lowing characteristics, which are more or less clearly recognisable in the different cases: (1) the purpose of the loan — floating debts are generally for rapidly passing needs, especially for the payment of the (uirrent dues of the treasury : funded debts are to supply the capital for permanent needs of the civic liousehold ; ('2) continuance of the debt — together with the former characteristic, relatively shorter continuance of floating debts, at least in intention; 1 Wealth of Nations, Rk. V., Chap. III. 2 Fi)iunzioiissenscha/t, p. 707. CHAP. 11 FORMS OF PUBLIC DEBTS 385 longer continuance of funded ; (3) the legal con- ditions of repayment — in the case of floating debts the different items are re})ayable at sight or within a comparatively short period ; in that of the funded, the creditor lias a more limited control over the principal, the debtor (the State) being bound to re- payment according to a fixed plan for amortisation, or making no agreement as to the repayment of the principal. This last is regarded as the essential test.i The difficulty found in drawing a sharp line be- tween these two classes arises from the fact that the distinction is at best purely an arbitrary one. It may differ from state to state, or from time to time in the same state, according to the temporary whim of the public official or statistician. The terms are relative ones. By a floating debt is generally meant one that is regarded by the person using the term as a temporaiy one. One official will call any debt temporary, or a floating debt, which has three, five, or even ten years to run ; while another will refuse the term to any debt that is to run longer than six months or a year. Strictly speaking, the term "floating debt" ought never to be applied to any debt that is, on the face of it, to run beyond ^ Most writers make use of these terms ; few have defined them so accurately as Wagner. For example, Adams, Public Debts, p. 147, concedes the terra " floating debt " only to those in which the governniont retains the right to investigate each particular claim. 'J'iiis necessitates a new class of " temporary debts,"' consisting of treasurer's notes, bills of exchepareiitly such. Unless he waive all claim to repayment, in which case there is no debt, his loan differs from those of the third class only in that it is even more " voluntary." 2 See Roscher, § 132. CHAP II FORMS OF PUBLIC DEBTS 387 paying their current expenses in bonds, and compel- ling persons having claims to accept them. There is a form of quasi-forced loan, that is of some interest. That is tlie use of irredeemable paper irredeemable ' money. This is very commonly spolj en of pop*^ money. as a forced loan. It must be oljserved, however, that it is a loan only when the government making such issues, directly or indirectly, promises to redeem the notes at some future time. Otherwise no debt has been created. When such money is issued with the purpose of retaining it in circulation permanently, it is not, in intention at least, a debt ; but it is a form of forced payment more akin to a tax. Even when there is a promise to redeem the money at some future time, this forced loan shows few of the funda- mental features of a debt. Every debt involves the use of credit.^ Now from the subjective side there is little or no credit involved in tliis case. The trust or confidence amounts to nothing more than a belief in the stability of the government and a readi- ness to obey its authority. From the objective side the creditor, if we may call him such, receives a claim that is satisfiable not from the goods of the debtor as in other cases, but from the goods of the communit}^ and that by law. Unlike money of "final redemption," these notes cannot properly be said to be based even upon customary credit. From both points of view, tlu'ii, these so-calhnl ' Formal credit, to use Professor Slierwood's term ; see note, p. 373. 388 INTRODrCTIOX TO PUBLIC FINANCE part hi foivecl U»ans are scarcely more than (|iiasi-debts. They are also quasi-taxes. Dietzel maintained tliat these loans were merely taxes. Sec. 3. Among the contractual debts the first thing that strikes us is tliat certain of the contracts contain features especially intended to add to or insure the confidence of the creditor, while in others there is little or nothing looking to that end. This at once suggests two natural subdivisions of con- „. . . ^ tractual debts. On the obiective side Divisions of •* contracttwZ the first class consists of claims good ^ '*■ (1) upon particular funds, or (2) upon particular revenues or the revenues of a particular period, or (3) upon certain definite portions of the general revenue permanently set aside to meet them. These three bases for the claims suggest three natural subdivisions of the first class. Of these three again, the second, consisting of those claims which bear upon certain definite revenues, may be most conven- iently analysed according to the classification that was adopted for public revenues. The most important element of those debts, the contracts for which contain no provisions directly intended to insure the confidence of would-be cred- itors, is the length of time that the debt has to run, or, what is much the same thing, the relative size of the demands made thereby on the general revenue. Here we find that certain contracts call (1) for the repayment of the principal only, some (2) for the payment of principal and interest, while others CHAi'. 11 FORMS OF PUBLIC DEBTS 389 (3) call for the payment of interest only. To shorten the mutter, the whole classification will now be presented in the form of a table. The names of the classes are generally self-explanatory, but in some cases, for clearness' sake, a concrete oi' a gen- eral example is appended. I. Forced Debts : (Now mostly obsolete. Akin thereto are the quasi-debts in the form of irre- deemable paper money.) II. Contractual Debts : A. The contracts for which contain provisions directly intended or calculated to insure additional confidence. Such confidence rest- ing : 1. On the fact that the sums received from the creditor are not expended but are retained to meet the debt charges. These are of two kinds : a. Voluntary deposits : 1) Without interest. Ex. Post- office orders. 2) With interest. Ex. Deposits in public banks, etc. 3) Insurance (not compulsory). 6. Statutory deposits : 1) Guarantee funds of various kinds, with and without interest. Ex. Deposits by insurance companies to protect policy-holders, etc. 2) Insurance (compulsory). 390 INTRODUCTION TO PUBLIC FINANCE part m 3) Deposits of coin or bullion to secure circulating notes. Ex- United States silver and gold certificates. 4) Estates in hands of the courts pending litigation. 2. On the fact that definitely specified revenues are set aside for the payment of the debt (subdivided according to the classification of revenues). a. Based generally on the revenues of a definite period. Debts contracted in anticipation of the revenues. Ex- chequer bills and redeemable notes. h. Based on prices or rates. Ex. Money borrowed for the establishment of some productive enterprises carried on in a manner similar to private enterprises of the same character. .l:i Treasury nijtes .... 18,452,800.00 Temporary loans .... 550.900. 00 Total burden on the sinking fund $108,689,205.79 1 Ross, !>. U7. 412 LXTRODUCTION TO PUBLIC FINANCE mkt hi The sinking fund was at that time composed of Interest on stock held by com. . . 11,969,577.64 Receipts from public lands . . 800,00().()() From duties ..... 5,230, 12-J..;0 Sinking fund . . . !$8,000,000.00 » Tlie policy of protection, inaugurated after the War of 1812, separated income from expenditure. The ultimate purpose of most of the taxation, namely protection, was considered so paramount that a high rate of taxation was continued for that reason. The available surpluses were, therefore, large, and were from time to time applied to the debt. Down to 1824, when all the debt contracted up to that time was practically paid, the sinking fund was managed by a special commission, but since then the Secretary of the Treasury has had charge of it. The Civil War debt was by the act of February 25, 1862, sup- Sinkin fund po^^dly placed ou a secure basis. " The of the Civil coiu paid for duties on imports was to be applied first to the payment of interest on the bonds and notes of the United States. It was then to be applied ' to the purchase or payment of 1 per cent of the entire debt ... to be made within each fiscal year, which is to be set apart as a sinking fund, and the interest of which shall in like manner be applied.' . . . The residue of cus- toms receipts was to be paid into tlie treasury." ^ While no such regularity as was contemplated by ' Ross, p. 0!), from Finance, Vol. II., p. 910. 2 RO.S.S, p. 79. CHAP. Ill REDEMPTION OF DEBT 413 this act was realised, yet the cleljt has been paid from surpluses more rapidly tlian was anticipated, until the reduction of the revenues in 1895, due to a change in the policy in regard to the protective duties, togethei" with a redundancy in the monetary circulation, which resulted in a foreign drain upon the gold reserves held for the redemption of notes outstanding, made new borrowing necessary. The war with Spain involved a new increase of indebted- ness, which, however, was contracted on terms re- markably favourable to the government. The same general policy of debt reduction has continued, and the debt, which amounted to i|l,108,000,000 in 1900, was by 1908 reduced to ^938,000,000. The commonwealth constitutions of the United States very generally impose upon the legislatures the duty of providing a sinking fund. Many of them, besides limitinsr the amount of „ f' Common- debt that may be created, either by wealth sink- naming a fixed sum or a fixed propor- ^"^•'" ^• tion of the revenues that may be used for interest payment, also provide that whenever a debt shall be contracted, a tax shall at the same time be levied sufficiently large to pay the interest charge and provide a sinking fund. The general distrust of the legislatures is emphasised in the constitutions by making such laws irrepealable until the debt is paid. The common wcalt lis arc thus permanently committed to the jjolicy of debt j)ayment, not so much on account of any deep-seated belief in the 414 JNTRODUCriON TO PUBLIC FIN.^NCE part hi efficacy of the particular methods hiid (h)\vn, wliich may necessitate the continuance of debt payment even at a time of borrowing, but on account of the widespread distrust of the prudence of the legisLa- tures. The same distrust has destroyed the danger of the system, by almost entirely forbidding debt- making by the commonwealths.^ Sec. 6. In conclusion, it would seem that the experience of great nations shows : that debts must be paid ; that they can be paid only by increased taxation ; and that the possible weight of taxation for this purpose is determined by a consideration (1) of the length of time it is thought desirable that the debt shall run, (2) of the existing burden of taxation, (3) of the general conditions of the people. When the debt has been contracted for some productive purpose, it seems fitting that the surplus earnings of such an enterprise should go to debt payment, as this eventually enables a perma- nent lowering of the cost of such services to the people. ^ For a full account of the debt policy of the American common- wealths see my monograph, Das Krcditwesen der Staalen und Stddte der Nordamcrkanischen Union in seiner historischen Ent- wickelung, Jena, 1891. PART IV FINANCIAL ADMINISTRATION CHAPTER I THE BUDGET; ADMINISTRATION OF EXPENDITURE; CONTROL AND AUDIT Section 1. To the fourth and last part of our subject belong the formal arrangements of the public finances, — the preparation and ratification of the budget, the care and preservation of the public funds, the administration and control of expendi- tures, and the collection of the revenues. It was this side of the subject that first attracted attention and which occupied a large part of the writings of the cameralists. Lorenz von Stein gives a very considerable portion of his monumental work to these subjects, and the able French writer, Stourm, has devoted to financial legislation a volume entitled Le Builget. English and American economists have generally left this field to the jurists and publicists, but Bastable devotes the last three chapters of his book to some of these topics. In every well-regulated household and every 415 416 INTRODUCTION TO PUBLIC FINANCE part iv business concern the keeping of accurate accounts, The impor- the distribution of the funds among tanceo/cor- different persons, and the control of red methods of fiscal ad- cxpenscs have an importance second ministration. Q^^jy ^q (^jjg broadcr qucstious of policy. Equally important in tlie greater housekeeping of the State are the formal arrangements for the enact- ment of fiscal laws, for the keeping of accounts, and for insuring compliance with the laws. The general frame of the fiscal administration, the relation between the various departments, the assignment of particular powers and duties to the different officials or bodies, depends entirely upon the general political organisation. How these fea- tures differ from country to country it is the prov- ince of political science to describe. But the frame of administration has an effect on the finances ; and there are certain principles demanded by sound finance which are followed by every country, no matter what its frame of government. Sec. 2. Of necessity the methods of accounting and control do not assume a publie character until „ . ^ . . there is a pretty clearly recognised popu- cai admiins- hir interest in the affairs of the State. Ira ion. ^j. ^^^ time the Roman treasury under the control of the Censors and in charge of the QucEstors exhil)ited the features of public economy. But under the Empire the public treasury and the private treasury of the Caesars gradually merged into a single one, and the methods of accounting CHAP. I THE BUDGET 417 became that of private rather than of civic house- keeping. The middle ages were essentially unpolitical, and in that period no system of public tj-easuries proper was developed, except in the free cities. As we have already seen, there were no revenues collected in the monarchies for a distinctly public purpose until the fifteenth and sixteenth centuries, and con- sequently there could be no public accounts or ^jub- lic control over the funds. The constant struggle between the representatives of the people and the officers of the older abso- lute governments for the control of the ^ n- . ^ , ° Conflict devel- purse led to the development of distinct ops legislative methodsof accounting and control. The most striking feature of the modern systems in European countries is the establishment of the bud- get, and of the right of the popular representatives to vote taxes and appropriations. In America the right of the legislatures to control the* finances was clearly established at a very early date, and little or no advance has been made beyond the crude methods first developed. Most European countries have advanced more rapidly and perfected far better systems. This liigher ilevelopment of the budget in European constitutional goveriiinents is ex[)hiiiu'd by the constant conflict between the branches of the government having interests which are theoretically opposed. The modern budget is an outgrowth of the gradual assumption of power by tlie legislatures, 2b 418 INTRODUCTIOX TO PUBLIC FINANCE part iv and the corres[)OiiLling loss of power l)y the execu- • . tives. The latter have had to ask for Europe in advance of fuiids, and the former in granting them merica. have insisted upon knowing what they are to be used for, and upon having assurance that they will not be applied in any other way. In th3 United States, however, both the federal and the commonwealth legislatures suggest, or initiate, finan- cial legislation as well as grant funds. Both of these functions of initiation and of grant being in the same hands, there is no conflict of intei'ests sucli as has developed the systems of financial statements and legislative control in Europe. The only care in this country is to see that the funds are not appro- priated to private purposes, while in Europe there is the desire to prevent the application of the funds to other public purposes than the ones specified. • Sec. 3. It has been claimed that the English sys- tem served as a model for the other Eur()[)t'aii c<>un- ,, , . tl'ies. However that may be, and it is Making up ^ ' the English truc ouly in part, tlie English system " ^^ ' will serve as a good illustration of the European methods. The fiscal year begins Apiil 1 and ends March 31. Each department of the ad- ministration prepares a careful statement, known as the "estimates," for the coming year. These "estimates," each of which comprises a good-sized quarto volume, are tediously exact and minute in the statement of what it is expected will be needed for the forthcoming year. They are called the CHAP. I THE BUDGET 410 "army estimates," the "navy estimates," the "civil service estimates," etc. Tiie Chancellor ^h,^ « ^^n, of the Exchequer, in turn, bases his ^nates." estimate of all that will be needed upon these statements, and calculates the receipts from each source on the basis of the revenues of the previous year. He then presents all the documents to Parlia- ment with a brief, clear statement of what the expenditure will be, what it is expected the reve- nues will be, what new taxes, if any, are needed, or what taxes may be remitted or changed, in order to make the revenues equal the expenditure. This statement is called the budget. " Usually, but by no means always, the proposals of the Chancellor of the Exchequer are accepted by the Commons, and even when they are not in detail, it is seldom that the items of expenditure are objected to. The House is supposed to go through the 'estimates' in detail; it forms itself into a 'committee of The " votes." supply,' and sanctions every item in the three bulky volumes, but its members have not, as a rule, knowledge enough of the details to offer effec- tive criticism, and the utmost the committee can be said to do, on the average, is to render flagrant abuses impossible. On the average, perhaps that is enough." 1 Parliament cannot directly or indirectly increase the appropriations asked by the ministry in the name of tlie Crown, nor add new appropriations. The estimates both of rovenuos and exi)en(liture are 1 Wilson, The \alii>nal Diuhjet, p. 147. 420 IK'TRODVCTION TO PUBLIC FINANCE part iv nuide with such grcMt care tliat there is sehloin either ji surplus or a deficit of any hirge amount at the end of the year. According to Bastable the estimates of expenditure in Enghind for the three years A{)ril 1, 1889, to March 31, 1802, as compared with the re- sults, show an error of only <£ 137,000 in a total of £261,000,000, or a little over Is. per XlOO, or 81 in Smaiinessof '^2000. All Credits of disbursing offi- errors. Qg^.g expire, aud their accounts close, March 31. All appropriations lapse at that time, except those appropriated for the consolidated fund. It requires a special act of Parliament to spend any more money on last year's account, even though the original appropriation may not have been ex- hausted. In the United States there is no connection be- tween the executive and legislative departments of the government that would allow of any such ar- rangement as that of the l)udget in England. The reports of the administrative officers, the President, and the Secretary of the Treasury, are made to Con- gress and are often accompanied by suggestions of vai'ious sorts. But the executive officers have no real access to the ear of the House. Therefore, no Congressional fomial budget is presoitcd to Congress. financiering. Two Separate Committees in the House (wliere finance bills originate, altliougli they may be amended by the Senate) deal regularly with finances ; one witli taxation, the other with ap})ropriations. These committees are the "Committee on Ways and CHAP. 1 THE BUDGET 421 Means" and the "Committee on Appropriations." IJills involving expenditure or taxation are regu- larly referred to these committees. The control of these committees rests solel}' on convention, tliere being no constitutional provision for such reference. Even after the committee has presented an appro- priation or revenue bill, there is the greatest freedom of amendment, and theoretically any member of the House could, if so inclined, present an entire new set of such bills forming a budget. Appropriations may be increased or decreased, or new ones intro- duced, without reference to the committees. Prac- tically the control of these committees is very great, especially in the matter of suppressing appropria- tion bills that may be referred to them for considera- tion. Certain lines of expenditure may be suggested by other committees, and theoretically may be voted on without reference to these controlling committees. For example, the navy and war departments may receive appropriations suggested by the committees in charge of them. Many other committees, as, for example, the ones on claims, on invalid pensions, pensions, etc., regularly bring in bills involving expenditure. Ever since the protective policy was fully estab- lished the United States government has been in the possession of large revenues, which are Revenue laws .,,.,. , , sundered not determined in any way by the ex- y^y,,^ appro- penditurcs. Sothattlie consideration of priations. revenue bills has always been compliiMted by other 422 IXTRODVCTION TO PUBLIC FINANCE part \^ than fiscal consitU'ratioiis, except (luring- the Civi\ War. This sundering of the functions of spending and of ol)taining revenues, and the general scatter- ing of appr()[)riations, would ap[)arently cause the utmost confusion. But the result is not so bad as might be expected, (1) because of the influence of the committees, (2) because, of course, some attempt is made by the House itself to ascertain whetlier funds are or will be available for the purposes sug- gested, (3) because the tax system has not been a variable one, and lias yielded a fairly regular and gradually increasing revenue, to spend which has sometimes taxed to the utmost the ingenuity of Congress. But the system absolutely prevents any systematic oversight of the finances as a whole, and allows of no measurement of the relative weight of each appropriation. Credits to spending ollicers do not expire at the end of the fiscal year, July 1, as in England, but generally continue in force until the entire sum is consumed or the object is accom- [)lished. Congress thus loses one advantage for the i'lmtrol of expenditure that Parliament enjoys. The American system, liowever, has one great advantage over the English in that it allows of a more critical investigation by the legislature of the specific items of each appropriation. The date at which the fiscal year expires is gen- Thefiscal crally set with reference to the conven- •'/'"'■• ience of officials in rendering their reports and to the meetings of the legislatures. The ac- CHAP, t CONTROL AXn AUDIT 42(i counts i)resenterl are generally for gross income and expenditure, so that the details of tlie cost of cul- lecting revenues and chance savings of expenditures can be controlled. There is theoretically no sanction for expenditure of any kind beyond the amount appropriated by the legislature. If any ex[)enditure not so Deficiency sanctioned is of pressing necessity, the ^'^^*- administrative officers may sometimes assume the responsibility and make the appropriation, subject to the ratification of the legislature when it next meets. This discretionar}'- power is exercised to a very limited extent in most countries. In the United States, however, the disorder attendant upon the appropriations involves the annual presentation of a "deficiency bill." When any action involving expenditure has been sanctioned by the legislature, and insufficient funds have been appropriated, there is a moral obligation resting on the legislature to make the requisite appropriation afterward. Sec. 4. When the budget has been prepared and voted, the next step is to see that the expenditure is carried out as authorised and to prevent English con- any misappropriation of the funds. In troi and audit. England the funds are deposited with tht' Bank cf England, subject to the order of the t'()ui[)tr(»lU'r an i auditor-general only. This ollicer's duties are a combination of those of the old board of audit created by Pitt in 1785 with those of the Exchequer, and date from IHOG. No payment is made without (1) 424 INTRODUCTION TO PUBLIC IIXAXCE part iv an act of Parliament, (:2) a icqiiisition by the treasurv ^ issued to the cm )nipl roller-general, (3) a grant ot" credit for the amount authorised by the act good for one year, (4) a treasury order directing the transfer of the money to the paymaster-general of the service.^ As the estimates have been closely scrutinised, there is little opportunity for the mis- application of funds. There is none whatever for overdraft. Again, after the expenditure has been made, the accounts with vouchers are passed through the comptroller's office for his approval, or audit. The report of that officer is subjected to the final re- vision of the parliamentar}' committee of public accounts. Thus the whole process begins and ends with Parliament. It will be seen that there are really two parts to the process. First, the control over the ''issues" to the disbursing officers, that is, over the placing of the public moneys in their hands. Secondly, the audit of the accounts after the ex- penditures have been made. Sec. 5. In the United States ^ the direct control of the money is in the hands of the executive oflScers, subject to the statutes of Congress. The safeguards consist in making the processes of ex- penditure complicated and subjecting each item to the scrutiny of several sets of executive officers. 1 See Wilson, The State, pp. 000-698. 2 C.{. Bastable, p. 705. 8 See Renick and Thompson, Political Science Quarterly, Vol VI., pp. 248-281, and Vol. VII., pp. 468-182. CHAP. I COXTROL AXD AUDIT 425 The idea of the original plan in the Uiiited States was not to allow of issues to the regular Original plan ,. , . ,^ , . ^ , of control and disbursing oflicers, but to control ex- audit in the penditure by a careful scrutiny of the United states. accounts or claims rendered. The treasury was to be reached only after the claims had been cut down to the lowest possible figure. Claims against the government were first passed upon by an au- ditor, then by a comptroller, either of whom might reject them. Then the secretary drew a warrant upon the treasurer, and that warrant was recorded by the register and countersigned by the comp- troller. Hamilton found it necessar}^ for the sake of economy, to pay cash for many things needed by the government, and hence this original plan broke down. Issues were made to disbursing offi- cers, and the necessary warrants were drawn for each particular item of expenditure, afterward, in order to legalise the transaction. For many years the United States had a very complicated system of audit, control, and record. There were six auditors, so called, and „, y /((■ rrccntlif the "commissioner of the general land abandoned office," who was auditor for the lands ac- ^ ''"■ count. Then there were three comptrollers, known as the first and second comptrollers, and tlie com- missioner of the customs. Lastly there was the register. All of these were assisted by a large body of clerks. These offices were organised into four co- ordinate branches, with separate jurisdiction. Ac- 426 INTRODUCTION TO PUBLIC FINANCE part iv counts were first examined and passed upon by an auditor, then reexamined by a comptrollei-. Claims disallowed by these ollficers could be pushed in the Court of Claims and appealed from there to the Su- preme Court. The assignment of accounts to the different auditors and comptrollers was almost arbitrary and with little system. The first auditor looked over the general income and expense accounts of the treasury, the special accounts of the customs receipts, the expenditures for tlie legislative and executive departments, special accounts of the treas- ury department, — as of the interstate commerce commission, of the public debt, of engraving and printing, of the coast and geodetic survey, of the life-saving service, of the lighthouse establishment, of the public buildings, of the government of ter- ritories, of the District of Columbia, of the central administrative departments of war, navy, tlie in- terior, etc., of the departments of labour and of agriculture, and all the expenditure for the judi- ciar}'. The second auditor had the accounts from the Indian service and the army. The third auditor had the pension account. The fourth had the accounts of the navy. The fifth looked over the accounts of the collector of the internal reve nues. The sixth was for the [)()stal accounts. The first comptroller then revised the accounts that were assigned to the first and fifth auditors, except the customs account, for which the commissioner of the customs was coniptrollcf, and those of the commis- CHAP. I CONTROL AND AUDIT 427 sioner of the general land office. The second comp- ti-oUer had tlie accounts of the second, third, and fourth auditors. All of this was changed by "the act of July 31. 1894, making appropriations for the legislative, exec- utive, and judicial expenses of the ?,^^- The -present ernment for the fiscal year ending iwwo, j)ian of muiu 30, 1805. This act altered the account- '^'^ ing offices of the treasury and changed materi;dly the system of accounting. The detail revision of accounts heretofore made by the first comptroller, as well as by the second comptroller and the com- missioner of customs, was abolished, as were the offices of the second comptroller and the commis- sioner of customs, the first comptroller being made the sole comptroller of the treasury. A revision of accounts under the new sj^stem is only made when either the head of a department or the claimant is dissatisfied with the settlement of an account by an auditor, or when the comptroller himself has reason to believe that any particular account ought to be subjected to a second revision. Much labour has been saved by this system, and the adjustment of accounts has been greatly expedited. It was one of the duties of the first comptroller to 'countersign all warrants drawn l)y the Secretary of the Treasury which sliall be warranted by law.' This duty was continued with the comptroller of the treasury under the new system. As the Secretary of the Treasury has the duty devolved u[)()n him of (jriginating warrants. 428 rXTRODUCTION TO PUBLIC FIXANCE i-akt iv und as all sia-li warrants imist be counlersigiuMl by the e()m[)tr(»llL'r, no warrant finally becomes effec tive without their concurrent action.'* ^ There are now six auditors : (1) for the treasury department, (2) for the war, (3) for the interior, (4) for the navy, (5) for the State and other depart- ments, (6) for the post-office. The accounts are still distributed in tlie old arbitrary unsystematic fashion among the different auditors according to the illogical scheme by winch the different duties are divided among the departments.^ It is hard to see how this can be bettered until the work of the departments is rearranged. The recent change is a great gain in tlie direction of simplicity and speed. The auditor's work stands unless appealed to the comptroller, and is no longer necessarily gone over again by a comptroller. The register keeps ledger accounts with all ap- propriations made by Congress, and also keeps all The Register's the personal disbursement and receipt offi''^^- accounts pertaining to the customs, in- ternal revenue, diplomatic, treasury, judiciary, inte- rior, civil services, and the public debt. General receipt and expenditure ledgers have been kept running from the foundation of the government. The register furnishes to the proper accounting officers copies of all warrants covering proceeds of government propi^rty, where the same may be nec- ' Finanre Report, 1804, pp. 83(i, 837. •■2 See Wilson, The State, pp. 567-570. CHAP. I CONTROL AND AUDIT 429 essary in the settlement of accounts in their re- spective oilices. He also furnishes certificates of balances, advances, and repayments to the offices of the first and fifth auditors, for settlements of accounts, and certifies to the first comptroller, on requisitions for adv^ances, the net indebtedness of disbursing agents as shown by the ledgers.^ The treasury department itself exercises a pretty ex- tensive supervision over expenditures. The system of disbursing officers, one connected with each bureau, commission, department, or other branch of the government to which appropriations are granted, still continues in the federal government. Each of these officers, under bond, receives such ad- vances from the treasury as may be necessary, and pays the various claims that may come up against his appropriation. He is responsible for the pay- ments he makes until released by the approval of the proper auditor and of the comptroller. In general it ma}- be said that public audit is much the same as private audit. It has for its object a certi- fication, by some properly constituted authority, that each collection and each disbursL'uient was made in accoi-dan(;e with law. The fact that in public audit the connection between the collection or the disburse- ment and the law has to be clearly established gives to public audit a degree of formality that is not al- ways observed in i)rivate audit. Another difference is found in the f;ut that the public audit usually ^ Finance Bcpurt, 1894, p. 737. 430 LVTRODUCT/Oy TO PUBLIC FINANCE part iv closes witli a formal certification, which relieves the collectingor disbursing officer of tint her responsibility. Such certificates are either issued to the officers, at stated intervals, or are appended to each voucher, whether for collections or for disburseiueuts. CHAPTER II COLLECTION OF THK REVENUES, CUSTODY OF THE FUNDS, AND THE PUBLIC ACCOUNTS Section 1. Under the early methods of collecting revenues, the tribute due, the economic receipts, and the voluntary contributions were delivered directly to the chief or leader. Many of the early direct taxes were similarly treated. Indirect taxes upon com- modities and transactions could not be managed in this way. The first crude method of dealing with these taxes was that of the tax-farmer, „ , ,, . ' harlij methods the Roman publican. He purchased, for of collecting ,1 ■ •1 c Hi- Ti £ revenues. a price, tiie [)rivilege or collecting all oi certain kinds of taxes that he could obtain. The same method was extended to other taxes where there was no similar necessity for it. This farming of taxes was used through the imperial era of ancient Rome, and copied by France, it was extended into modern times. The various direct contributions of the middle ages which were apportioned among the different cities or "estates," were frequently delivered directly to the prince or his treasurer. All of these crude methods were abandoned as soon as there was a distinct recognition of the authority of the taxing power over all the dift'erent parts of the country and 4;U 432 LVTA'ODL'Cr/O.V TO PUBLIC FINANCE pari- iv over eiu'li conlrihutor iii(li\ idiially. Tlu' ap[)t)i'tit)ii- ment system, as originally used, was a more or less distinct recognition of the autonomy, and possibly of the partial political independence, of the taxpayers, be they provinces, cities, or classes of individuals. Sec. 2. The collection of the taxes is usually the duty of the regular tiscal officers of the general administration, but industrial and commercial receipts are frequently collected by special boards in charge of them, who turn the money over to the treasury. Assessment and collection are so closely connected that they can be studied together. In the collection of customs duties there are two things for the officials Q II r ^ to care for. (1) They must look out for customs the arrival of all the taxable commodities ^^^^^' and prevent smuggling. (2) They must ascertain the value of the goods if tlie taxes are ad valorem, and tlie number and size of the pieces if specific. The invoices, supported by the usual certificates, oaths, etc., are of the nature of a declara- tion by the owner, or importer. They are then sub- jected to the scrutiny of ol'licial appraisers, whose knowledge of the nature and value of the goods is very accurate. The tax is then paid tathe collector at the place of importation or when it reaches the recipi- ent in the interior, but before it is delivered to him. In case the goods are to be admitted into the interior of the country, or of the customs disti-ict, before the tax is paid, as is the case when the person to whom the goods aie sent resides in the interior, the pack- CHAP. II COLLECTION 433 age is sealed up, or " bonded," and the seals can only be broken by an authorised collector after the pay- ment of the tax. In countries where there are no general tax-collectors in the interior, this method is not feasible, and the goods are held in the custom- house on the boundary until the tax is paid. With a few exceptions this is the practice of the United States. But in Germany, where there are regular fiscal officers of the central government in almost every hamlet, goods are regularly shipped to the consignee, and the tax paid in the interior. In the case of excises, the factories, breweries, fields, and other places where the taxed goods are produced are subject to regular inspec- collection of tions, and are more or less under the ^•'^cises. constant supervision of the officials. The tax is collected directly from the producer or by the sale of stamps and licenses. Sec. 3. In the case of direct taxes, it is the assess- ment that is the most dillieult part of the process. The methods of assessing some of the Assessment oj taxes have already been suggested. The direct taxes. work consists of two parts. (1) It is necessary to ascertain the base — the persons, the property, or the revenues subject to taxation. (2) It is tlien neces- sary to fix upon tlie valuation, or the rating of the base in each particular case. The latter part of the process is " making the assessment." In this the contributor may be called upon to assist, or the officers of the government may proceed entirely 2f 434 INTRODUCTION TO PUBLIC FINANCE part iv iilone. Generally a declaration is requested, or may be required, from the taxpayer, and the officials then investigate the truth of that declaration. In Europe it is customary to form assessment commissions con- sisting of representatives of the tax[)ayers in the district, who are acquainted with the local con- ditions and act with the officers of the government. These commissions help the regular officers of the fiscus to make the assessment, or sit as a sort of court to hear appeals from the assessment made, or both. The final assessment, however, is made by the fiscal officers. In the American commonwealths the assessment of the general property tax is usually made by a . , . board of locally elected assessors or an Assessme'ni of J the general asscssor. The assessor calls for declara- vropertytax. ^-^^^^ ^^.^^^^ ^j^^ different Contributors. The law in most States imposes severe penalties for failure to comply with the requirement of dec- laration or for false declaration. But, nevertheless, there is, for tlie most part, the utmost laxity in enforc- ing the law concerning declarations. Only the un- usually conscientious, who voluntarily come forward with complete statements, are reached in this way. So general is the habit of neglecting this duty that it is practically impossible for the assessor, no matter how anxious he may be to have the law complied with, to prosecute all the persons wliom he knows are evading assessment. The general practice is to (U'fault the declaration and allow the assessor to liiid CHAP. II COLLECTION 435 out, if he can, what taxable property the contributor has. If this were done by only a few Difficulty of persons, they could easily be brought uj'^l"^"^ to terms under the existing laws, but tions." when nine-tenths of the population refuse to com- ply, the assessor is helpless, and the only effect that follows from the declaration by the few is to make the existing inequalities of the general prop- erty tax worse than ever. Real estate and other visible property is easily assessed. The officer has at his command the records of titles, of deeds, etc., which he can investigate, and he ascertains the value of each piece from his own personal observa- tion of prevailing prices. As we have seen, per- sonal, intangible property escapes almost entirely. It would seem that this difficulty of administration is insuperable. No merely severe methods of assess- ment will ever cure the evil. Above the assessor in the United States there are generally two boards of equalisation, though some- times only one. The first board is local, ,, ,. . , ,, Equalisation. covering the same district as the assessor. Tliis hears ai)peal from the taxpayers in regard to their assessment. It equalises between individuals. The second board is for the wiiole commonwealth, uiul is known as the state board of equalisation. This board is to adjust the burden of state taxation equally between the different districts. As has al- ready been explained, a local assessor may make the assessment in his district lower than that intheother 436 INTRODUCTION TO PUBLIC FINANCE pakt iv districts. This will not at'feet the burden of loca\ taxation, for all that is needed is to raise the rate. But it lessens, if the assessment stands, the burden which the state taxes impose. These central boards are of three kinds : (1) those with power to add to or subtract from the assessment of each district, but in such a way as not to change the total amount ; (2) those with power to change the assessment of any district, and which may and generally do change the total assessment of the state ; and (8) those with power to change the valuation not only of districts as a whole, hut of classes of property, or even of indi- viduals within any district. As these boards sehlom have sufficient powers, and never sufficient informa- tion as to the local conditions, the effect of their ac- tion is not all that could be desired. The only possible solution of tins difficulty is the separation of local taxation from that of the commonwealths, so that the assessment can be made independently for each. Sec. 4. After the assessment has been completed, it is comparatively easy to make the collection. All that is needed is a collecting agent of the treasury conveniently located, to whom the taxpayers may Convenience gO» Of ^ CoUcctor wllO gOCS tO the taX- of the contrib- payers. The burden of taxation may be vdor to he con- . i • r i suited in seriously increased if the convenience of collection. ^^\^Q taxpayers is not consulted in this matter. The size of the district over which a col- lector has supervision will depend upon the density CHAP. II COLLECTION 437 of the population. If the collector is to be sought out by the contributors, it is best that his office should be located in some business centre frequently visited by the contributors. According to the principle of "certainty and convenience," the taxes assessed upon the same person should all be entered in a single bill and all be payable to the same collector. The tax- payer should be informed as early as possible of the total amount of taxes that he has to pay, of the num- ber of instalments in which they are payable, and of the conditions of delinquency and its penalty. Some of the American commonwealths disregard this rule entirely. They add grievously to the burden of tax- ation, especially in tlie country districts, where they are already entirely out of proportion to the ability of the people, and increase the irritation felt by the contributors, by inconvenient location of the collec- tor's office, and by requiring the payment of state and county taxes to one set of coUectoi's, while the town and other municipal taxes are paid to a differ- ent set and upon separate bills. The most econom- ical and least irritating process is to have all the taxes collected by the same person.^ Sec. 5. The transfer of the public funds from one part of the country to another is, in modern times, attended with little risk. It is most conveniently 1 The writer knows of an instaiicf where a farmer has to travel fifty miles to pay his state ami county taxes, while the local taxes are collected within two miles of his home. This is not an ex- treme case. 438 INTRODUCTION TO PUBIIC FINANCE part iv done by means of the banks or the post-office. If the Means of country is sparsely popuhited and inse- transferring cure, the Collector's office should be at public money from place to o^ near the bank or vault in which the place. money is to be stored. In large coun- tries, as, for example, the United States, it is convenient to have a number of branch treasuries scattered about the country, at which collections can be made, and through which money for expenditure can be distributed to the disbursing officers. ^ The storage or safe-keeping of the funds is accom- plished in one of three ways. (1) As in England storage of the ^ great State bank is made custodian of public funds, the funds which are sent to it from the various collectors who deposit with its branches. (2) As in France and the United States the treas- ury and the subtreasuries are the chief custodians of the funds. 2 (3) As in the commonwealths of the United States, where, except in a few states, private or other banks are made the depositories of the public moneys. When protected by proper safeguards, such as the giving of personal bonds and collateral, the bank depository system has proved itself far safer and more economical than tlie independent treasury, which is only to be defended on political 1 Subtreasuries are at Baltimore, Boston, Chicago, Cinoinnati, New Orleans, New York, I'liilaiU'lphia, St. Louis, and San Fran- cisco, ■^ According to law, tlie treasurer and disbursing officers of the United States may make deposits in the national banks. About §14,000,000 are regularly so dcpositiil. CHAi'. II PUBLIC ACCOUNTS 439 grounds, if at all. The experience of the United States federal government in the early days with "pet banks " points to the political difficulties of the bank depository system. The bank deposit system prevents the periodic disturbance of the circulation by the withdrawal or storage of money. If the independent treasury system were used by all the departments of the government, this dis- turbance would possibly be serious enough to affect prices.^ Sec. 6. The mere mechanical details of the methods of bookkeeping and public accounts can- not be described here. About all that can be done is to make such explanation as will enable the stu- dent to easily comprehend the published accounts and statistics in their main features. The revenue account is generally ver}- simple. It contains items named according to the sources from which they come. Care must be taken ..j ..,• '' Public in studying the reports of the fiscal olli- accounts, cers on the revenues to distinguish the "^ '* ' receipts that represent income from tlie receipts that are merely formal transfers and bookkeeping expedi- ents. For example, the English finance account of the United Kingdom for the year ending March 31, 1895, contains the following: Receipts — I. Balance in Exchequer, April 1, 1894, £5,977,118 18s. 9iL ; 1 Cf. Kinley's "Independent Treasury," and Buckley's "Cus- tody of Slate Funds,'' Annals »f the American Academy, Vol. VI., 3, November, liJU5. 440 INTRODUCTION TO PUBLIC FINANCE part iv II. Revenues received into the Exchequer, viz. customs, excises, etc., .£94,683,762 10.s\ 'ld.\ total, X100,660,881 8s. 11(7. This was what Enghind had to draw on. But following that appear a number of other " Exchequer receipts," among which are re- payments of advances ; as, (1) by the mint for the purchase of bullion for coinage, X 700,000, represent- ing merely a return to the Exchec^uer of money temporarily passed to the mint. The same 3"ear the Exchequer advanced to the mint £615,000, which will appear in 1896 as a receipt increased by the seigniorage. (2) The Exchetjuer borrows money temporarily in anticipation of the revenues. This appears, of course, as a receipt of £13,700,000, but is not revenue. (3) It renewed a number of outstand- ing bills and bonds amounting to £14,123,400. These appear as receipts, offset, of course, by an equal expenditure. But (4) it created an ad- ditional debt of £760,000, for barracks and tele- graph. This sum may fairl}^ be called revenue. So that the total amount of money that came as actual income to the treasury was £101,420,881 8«. \\d. But the total receipts foot up £130,217,647 138. M. On the expenditure side the issues or credits to disbursing officials, are first, the consolidated fund "services"; that is, the payments for (1) the " national debt services," (2) the " other consoli- dated fund services," which consist of the civil list, annuities and pensions, salaries and allowances, courts CHAi'. II PUBLIC ACCOUNTS 441 of justice, miscellaneous " services," the Exchequer contributions to Irehuid, and the annuity under the Indian army pension deficiency act of 1885. After the consolidated fund " services," which foot up to £26,500,000, come the supply "services" for the army, ordnance factories, navy, and miscellane- ous civil " services," for the collection of customs and inland revenue, post-office, telegraph, and postal packet " services." These two items, the consoli- dated fund and supply " services," contain all that is strictly chargeable to the revenue. They amounted in 1895 to £93,918,420 188. \d. In ad- dition there were special expenditures of £810,000, making a total of £94,728,420 18s. \d. But there were a large number of additional issues: (1) bills and bonds paid off by receipts from new bills, (2) temporary advances repaid, a part of which were for deficiencies in the consolidated fund. These and one or two other minor items, Avith a balance of £6,300,826 15*. 4t?., brought the "issues" up to the receipts. In studying the accounts published by the treas- ury department of the United States, we have dif- ferent difficulties to meet. There is „ .,■ Public generally a clear statement, free from accounts, repetitions, or transfiTs, of tlir revenues ^'"''^'^ 'S^«'''«. according to tlie sources, and of expenditures according to departments, or objects. The only difficulties arise from the peculiar and arbitrary grouping of the expenditures. This comes from the 442 INTRODUCTION TO PUBLIC FINANCE I'Akt iv illogical distribution of duties among the different departments already referred to. Some of the peculiarities are that the expenditure for the "civil establishment " includes foreign intercourse, public buildings, collecting the revenues, deficiency in postal revenues, rebate of tax on tobacco, refunding of direct taxes, French spoliation claims. District of Columbia, and similarly incongruous items. Those for the military establishment included rivers and harbours, forts, arsenals, and sea-coast defences ; for the naval establishment included construction of new vessels, machinery, armament, equipment, and im- provement of navy yards. Expenses not otherwise classified are generally listed as expenses of the treasury department. Sec. 7. An interesting phase of public bookkeep- ing is the separation of accounts into funds. ^ When Parliament voted a tax, it was formerly The "funds. " for a definite purpose, and the plan was to reserve the whole of it for the proposed purpose. But the receipts and expenditures of these funds never exactly balanced, and simplicity finally re- quired that all should be turned into the consoli- dated fund. This method of bookkeeping is best ex- hibited to-day by the accounts of the commonwealths in the United States, although also used in national and municipal accounts to some extent. All the re- ceipts are distributed among various so-called " funds," ^ A "fund" in this sense is practically an appropriation for a specified purpose or group of purposes. CHAP. II PUBLIC ACCOUNTS 443 or accounts, according to some prearranged plan. A separate account is kept of all receipts and expendi- tures belonging to each fund. With the exception of a few trust funds arranged to keep certain sums inviolate, these funds are, in effect, mere book- keeping contrivances. With the exception of the general fund, which receives all the money not otherwise appropriated to special funds, each of these accounts generally bears the name of the ex- penditure met thereby, sometimes of the revenues supplying them. In some commonwealths the num- ber of these funds is very large. ^ The accounts are sometimes complicated by transfers from one fund to another, in wliich case they appear twice in the account, and frequently swell the apparent receipts enormously. Local budgets are necessarily determined by the frame of local government and the number of fuiR-- tions performed by each. Thus in Eug- j^cai land the public function to be performed accown^s. constitutes the basis of local organisation, and until the recent reforms each local governing bod}- had only one or two duties ; hence only one or two gen- eral accounts of expenditures, and one or two sources of income. But in America each local governing body generally has charge of all the local functions affecting a certain area, and. may have as many expenditures and revenues as a com- 1 See SelifTinaii, ''Finance Statistics of the American Coniuion- wealths," Pub. Amer. Statistical Assoc, December, 188J). 444 LXIRODUCTIOX TO PURI.IC FIXANCE i-Aur iv nioiiwealtli, or even more. Here luetliotlsof account- ing defy classification and frequently defy sensible interpretation, even by the officials in charge. There is a crying need for reform here in the direc- tion of uniformity.^ iSee in this connection a form suggested for published reports of numicipalities by Professor II. B. Gardner, in tiie Pub. of the Aiiwr. Statistical Assoc, June, 1889, and adopted, in part, by the Eleventh Census of the United States, as tiie basis of schedules and inquiries sent to the municipalities. The .studies of local and commonwealth accounting made by the United States Census Bureau and pub- lished in the volume on Wealth, Debt, and Taxation, 19U7, are especially valuable. CHAPTER III FINANCIAL ADMINISTRATION OF WAR ; ILLUS- TRATED BY THE EXPERIENCE OF THE UNITED STATES IN THE WAR WITH SPAIN Section 1. A serious war usually imposes a sudden, new burden upon the treasury, the exact, or even the approximate, size of which it is not pos- sible to estimate at the outset. Many of ,< ^^f^^ the expenses of war belong to tliat class ordinary" which financiers call "extra-ordinary" to ^^P*""*^®- distinguish tlicm from the usual or current expenses of the government. The amount by which the ordi- nary expenses are increased in time of war depends upon many circumstances. Obviously, the chief fac- tor is the size of the fqi-ces engaged and the duration of the struggle. Naturally, the chastisement of a few dozen hostile Indian braves in the immediate vicinity of the regular army posts involves practi- cally no "extra-ordinary " expenses. Allowance is usually made in the ordinary budget for the ex- penses a war of that kind would occasion. But many circumstances less obvit)Us than tlie size of the forces engaged enter into the determination of the amount of the "extra-ordinary " expenditures. Thus, for example, a naval war, unless it happens to become the occasion for the purchase of new ships, 445 446 INTRODUCTION TO PUBLIC FIXAXCE iakt iv involves comparatively little addition to the ordi- nary expenses of maintaining the navy. A country which has a large standing army incurs relatively less "extra-ordinary'' ex})ense when engaging in war than a country wliicli, like the United States, has only a small regular army. The ordinary expenses being provided for by the regular budget, the financier's chief concern in time of war is the provision of the " extra-ordinary " funds. If the operations of the war are likely to interfere with tiie ordinary revenues, he must furthermore be pre- pared to treat a part of the ordinary expenses as " extra-ordinary," at least to the extent of furnishing new means to meet them. It is not often possible, and still less often expedient, to curtail the ordinary expenditures in any way for the purpose of saving „, ' ., money to meet the new expenses. How The ■problem '' '■ presented to increasB the receipts of the treasury by y war. ^^ amount sufficient to insure the efficient conduct of the war, without too serious disturbance of the industries and commerce of the people, upon / which all the revenues depend, is the problem for the finance minister to solve. The " extra-ordinar}' " demands come thick and fast, especially at the be- ginning of the war, and they must be met, and met at once. The amount which may be needed at an}^ given time is not ascertainable. Hut in spite of that, sufficient funds must always be on hand. Upon this more than upon any other one thing depends the fate of war. The war financier can CHAP. Ill FINANCIAL ADMINISTRATION OF WAR 447 never plead tluit he has no funds, nor can he ask for time in whicli to collect. He must have the money when it is wanted and in the amounts re- quired. No degree (jf skill on tlie part of olhcers or bravery on the part of the men, no degree of self- sacrifice at the front, can compensate for failure on the part of the financier to provide the ways and means. His powers are, therefore, of the greatest and most unusual. Sec. 2. Possibly the most natural source to turn to in time of war for the increased revenues needed is the existing system of taxes. At first , . ^ '' Increased thought it might seem proper to attempt rates /or to obtain new income by raising tlie rates of the old taxes. To some extent this is possible. In every well-arranged tax system there should be some taxes which can be made to yield an increased revenue by simply raising the rates. One of the chief reasons for tlie establishment and the retention of the British "■ property and income tax," for ex- ample, is found in the elasticity of the returns. But not all taxes can be treated in this way. Some- times an increase in the rate of taxation will disturb industry and commerce and do a greater injury to tlie welfare of the people than is received from the damages of war. Again, an increase in the rates of certain taxes will diminish the revenue or even destroy it entirely. In not a few taxes the only way to increase the revenue is to lower the rates. This is the case with most protective duties. Any change 448 IXTRODUCTION TO PUBLIC FINANCE part iv in the rate of such taxes is bound to affect industry and commerce, and to affect them unfavourahl}- in the first instance, wliatever the subsequent effect may be. A war brings perplexities enough to business without the creation of artificial ones, and the iinan- cier should not interfere with these taxes. It added not a little to the perplexities and dangers of the Civil War in the United States that the industry and commerce of the people were repeatedly disturbed during the war by changes in the tariff as well as by the military and naval operations themselves. There are, therefore, but a limited number of old taxes from which any aid can be sought. In the United States, owing to the one-sided system of federal taxation, the number of them is very small indeed. The American linancier must look elsewhere for his new revenues. Sec. 3. The next resource, naturally, is new taxes. But the establishment of new taxes, or even the restoration of old taxes not in use at New taxes. i • p i tlie tnne of the wai', is a matter requiring considerable time. Even if it were an easy matter to decide ujjon tlie best form of taxation and to get tlie necessary authority from the legislative branch of the government, the organisation of the new ad- ministrative forces for the collection of the taxes is a matter requiring time. No new system of taxa- tion reaches its normal revenue-yielding powers within many months of its enactment. If tlie taxes are entirely new, the time recpiired is longer. CHA1-. HI FINANCIAL ADMIN ISl RATION OF WAR 449 But even if they are mure or less fuiniliar to the people from use on some previous occasion, a con- siderable lapse of time must intervene between the beginning of war and the receipt of sufficient new revenues to meet any considerable part of its ex- penses. Furthermore, the expenses of war are now so enormous that any system of taxation which raised, or attempted to raise, the entire amount needed during the probable duration of the war would be so burdensome as to crush the people. It is therefore extremely unwise, and practically im- possible, to attempt to raise the entire cost of the war by immediate taxation. The only other re- source is borrowing. Sec. 4. The use of the public credit in time of war is attended by many special dilliculties. The outcome of war is always more or less ^, , ■^ The use of uncertain. Even if defeat would not en- credit in tirely cripple the nation's resources and ""<'''/^'^'"- render the repayment of the loan uncertain, or affect the payment of interest, yet there are many con- siderations which make the lender hesitate. The fact that the duration of the war, the extent to which other nations may become involved, and many similar considerations affecting the size of the total demand upon the public credit are unknown, vastly increases the difficulty of placing a loan on favour- able terms. But on tliat very account it is par- ticularly necessary for the successful administration of the war that everything should be done to 2u 450 IXTKODUCTIOX TO PUBLIC FINANCE i-akt iv strengthen and preserve the nation's credit. There may come a time in the progress of the war when the only source from which any funds can be had is the money market. If, therefore, the financier has done anything to weaken the nation's credit at the beginning of the war, lie is apt to be helpless at the close. Credit tends to weaken as debt increases. It is for this reason that resort is frequently had in early war-borrowings to the simplest and most primi- Provision of ^ivc method of debt-making ; namely revenues to ^[la^t; whicli providcs revenucs for the pay- preserve r 1 • 11 public ment ot the interest and the repayment credit. of the principal at the very time the debt is contracted. The creditor sees in the new funds flowing into the treasury the security for his ad- vances and the guarantee of good faith on the part of the government. So long as every new loan is accompanied by new taxes from which its cost can be met, the public credit is practically secure. But if, on the otlier hand, the government neglect this precaution during the first stages of the war, any attempt to resort to it at a later stage is apt to be regarded as the desperate device of unsound financial management and the presage of coming bankruptcy. Public credit is a plant of slow growth and ex- tremely tender. It withers in a day before a breath of doubt. Inasmuch as a successful outcome cannot be hoped for in modern warfare without the funds obtainable solely by public borrowin*^, and the necessity for CHAP. Ill FINANCIAL ADMINISTRATION OF WAR 451 loans increases the longer the war continues, it be- hooves the modern war financier to guard the nation's credit as liis most precious treasure. No sacrifice is too great which will strengthen it and preserve it intact for tlie later stages of the war. Sec. 5. Such, stated in condensed form, are the general principles which should guide the fiscus in time of war. No better illustration of the applica- tion of these principles can be found in history than is afforded by the operation of the United States treasury during the war with Spain; and by follow- ing in some details the story of that war, we can obtain a clearer view of the principles themselves. The situation, as it confronted Secretary Gage when the news of the destruction of the Maine reached Washington, may be summarised rhesUua- somewhat as follows. The treasury had Hon of the United a balance on hand of about $225,000,000. states But, as we shall see below, only about treasury $525,000,000 of this was really available break of the for immediate use in the prosecution of ^<^'"- the war. The ordinary expenditures of the govern- ment, outside of those for the postal system, which was nearly self-supporting, amounted in round num- bers to 1350,000,000 per annum. For the first time in many months these expenses were being nearly met by the revenues. Indeed, it was estimated that at the ordinary rate of expenditures there might be a slight surplus at the end of the year. The tariff was expected to yield about !5«200,000,000, the inter- 452 INTRODUCTION TO PUBLIC FINANCE part id nal revenue taxes about -f 165,000,000, and there were about ■i<25,000,000 to be expected from miscellaneous sources. Sec. 6. The larger part of the income, however, came from taxes which could not well be tampered with. The tariff had been so long a subject of con- „, , .- troversy that there was little desire to The tariff J could not alter its recent settlement. For reasons e c ange . already made clear, there were many parts of the tariff which could not well be changed. Except in a very few instances, the income to be obtained from it would not be increased by raising the rates. In the great majority of instances, to raise the rates would have been to lessen the re- ceipts, while to lower those rates for the purpose of increasing the income by allowing larger imi)orta- tions would have been to remove the protection afforded by them. This was contrary to the avowed policy of the administration. It would, moreover, have served to disturb industry and to perplex its leaders at a time already sulHciently disquieting, and might have proved but an aggravation of the disturbance caused by the war. Tlie great body of the customs rates, of which there are thousands on the tariff" schedules, are not productive of much revenue and are not intended to be. They are there to restrict importations. These certainly could not well be changed. Of the bare dozen or so of articles of importation which do yield a revenue, sugar, one of the most important, was likely to CHAl'. Ill FINANCIAL ADMINISTRATION OF ^VAR 453 be interfered with hy the war. At the existing rates, sugar inqxnlcd should yield a revenue of about 180,000,000 a year, but at least half of the importation was jeopardised by the war itself, and it would have been highly impolitic to have changed the rate of this time. Iron, which was once a source of considerable revenue, was, in consequence of the changes which have taken place in that industry and of the protective features of the customs law, not available to provide new revenues, as the im- portations are at best small. Cotton goods, the tax upon which yields considerable revenue, were pro- tected ; so were manufactures of hemp, flax, and jute, of leather and of wool. Drugs, medicines, and chemicals were already taxed up to the limit of productiveness, from a revenue point of view. In short, there were but four important articles im- ported which might be used to yield additional revenue. These were hides and skins, raw silk, tea, and coffee. To tax hides and skins or raw silk would, probably, under the prevailing theory of *' compensatory " duties, have involved an increase in the rates on the products manufactured from them, to maintain the same degree of protection that those products now enjoy. That would have reopened the whole tariff controversy, and have ren- dered the outcome of the war revenue measure extremely doubtful. Clearly it were wisest, con- sidering how recently the tariff issue had been tem- porarily settled, to leave them alone. As a matter 454 JXTKODUCTIO.V TO PUBLIC FIiVANCE part iv of fact, then, there are only two artit;les in the whole list of importations wliieh might be considered by the Secretary of the Treasury in iiis search for new income. These were tea and colTee, which miglit, perhaps, liave been made to yield together nearly $80,000,000 additional revenue. That was approxi- mately all tiiat could be expected from the tariff. In the war revenue bill, as presented to the House of Representatives by the committee on ways and The tax means, of which Mr. Dingley was chair- on. rr c'(?y*//(?. show how utti'ily inailequate 456 hXTRODUCTIOX TO PUBLIC FIXAXCR i-akt it the coustitutioiuil inetliod of raising direct taxes has become. Then, again, the method of taxation by which most of the states raise their revenues, and which they would probably follow in raising their share of any apportioned taxes, is the worst in use in any civilised country, and the injustice of the apportionment would have been enormously in- creased by the injustice in collection. The second objection to this method of raising direct taxes prescribed by the Constitution is that it takes an inordinate length of time, and war taxes should begin to yield a revenue as early as possible. The only available plan was, therefore, to seek additional revenue from the existing, indirect, inter- nal taxes, the excises or, as they are called Description ^ j of the new in the United States, the "internal reve- '^^^^' nue " taxes, and to supplement these still further by new taxes of the same sort. Briefly sum- marised, the revenue bill nearly doubled the existing rate of taxation upon beer and other similar fer- mented liquors ; it imposed special taxes on bankers, brokers, pawnbrokers, theatres, circuses and other shows, bowling-alleys and billiard rooms ; it raised the rates on tobacco of all kinds ; and it placed stamp taxes on stocks and bonds, commercial papers, legal documents, checks and drafts, proprietary medicines, toilet articles, bills of lading, insurance i)olicies, and a number of other things. S[)ecial direct taxes were imposed on the oil trust and the sugar trust, and on legacies and distributive shares of personal property. CHAi'. Ill FINANCIAL ADMINISTRATION OF WAR 457 Sec. 8. As tlie war revenue bill passed the House, its probable yield was variously estimated at from $90,000,000 to .^105,000,000 per annum, yield of the former beinjr the better estimate. As "^"^ '«^^«- amended in tlie Senate and finally adopted, it prom- ised to yield at least $150,000,000 per annum. The actual yield in addition to the regular revenue dur- ing tlie first month was about $13,000,000.1 But the expenses of war during the first few months, if not for a long time after that, would be, it was estimated, at least double that sum and possibly more. Therefore, unless the treasur}^ had a con- siderable balance on hand, there would have been no possibility of conducting the war at all without immediate loans. The balance in the treasury at the outbreak of the war was $225,000,000. Upon this were a number of claims, some of The funds which, however, were not immediate. avaUabie. $100,000,000, known as the gold reserve, had to be held for the preservation of the parity of all parts of the circulation and the avoidance of general financial ruin. Then there were $13,000,000 of fractional silver and minor coins, a large part of which was 1 It is not possible, and probably never will be possible, to state exactly how nuich the new taxes increased the revenues. In the first place the reports do not segregate the income obtained from tlie new taxes from that obtained from the old ; and in the second i)lace the changes in the rates and the existence of new taxes have changed the yield of the older parts of the system by an amount which cannot even be estimated. The total inon-ase in tlie revenues for the fiscal year 1899 over 1898 was about $115,UUU,UU0. 458 INTRODUCTION TO PUBLIC FINANCE part iv worn and unavailable, while tlie rest was needed for currency purposes throughout the country, ^14,000,000 had been received from the sale of the Pacific railroads ; but although this sum was temporarily available, it would, if it were spent, be necessary to raise an equivalent amount before January 1 to meet the Pacific Railroad bonds which came due at that time. $33,000,000 were held in trust for the redemption of the notes of national banks which had failed or which were redeeming tlieir circulation. A part of this was temporarily available, but it would be necessary to replenish that fund at an early date if much were drawn from it. There were, then, out of the -1225,000,000, #160,000,000, of which a small part only was available, and that but for a short time. Anything drawn upon that would have to be re- placed by January 1 at latest. Of the #65,000,000 remaining, #40,000,000 were necessary as the cash on hand for the ordinary operations of the govern- ment. That amount corresponds to the cash on hand which a merchant keeps in the till to make change or to meet small bills. This left but #25,000,000 for the initial expenses of the war, which in the state of unpreparedness would natu- rally be above the average. This #25,000,000 was all the unincumbered money in the treasury to meet the appropriation of #50,000,000 made by Congress be- fore war was declared. It was clear that the Sec- retary of the Treasury could not provide the sinews CHAP. Ill FINANCIAL ADMINISTRATION OF WAR 459 of war without the power to borrow, both for a short time, to anticipate the revenues expected from the new taxes, and for a long time, to enable him to support any naval and military operations which niiglit become necessary, however extensive. Sec. 9. After much discussion and more or less unnecessary and dangerous delay, especially in tlie Senate, Congress authorised the borrow- , ,, ., ing, at the discretion of the administra- to borrow tion, of not more than $100,000,000 at ^'■''"'''^• one time on treasury certificates and of an amount not to exceed $400,000,000, on 10-20 bonds at 3 per cent. Nominally, therefore, the Secretary of the Treasury had in his hands for the necessities of war during the first six mouths of its duration : Surplus on hand War revenues . Temporary loans Bonds Total . . a 25,000,000 75.000,000 . 100.000.000 . 400,000,000 . #600,000,000 Practically, he was limited by the fact that all of this money had not been appropriated, and it would have been folly to raise more than he had authority to spend. Including the $50,000,000 appropriated before the war broke out, the total war appropriations made by Congress before it adjourned amounted in all to $361,788,005.11. This sum covered the most generous estimates ot" the probabk- cost of the war. 460 INTRODUCTION TO PUBLIC FINANCE part iv But the secretary did not deem it necessary to raise Determina- at oncc a suui cqual to the total appro- tiono_^ t e priations. It was estimated that the ex- a mount to be '^ borrowed. penses for the first six months would not exceed $175,000,000, or about one-half of the appro- priations. The new taxes would probably yield about !$75,000,000 toward these necessities, and a loan of #100,000,000 would possibly have sufficed to meet all the demands. But the treasury raised $200,000,000 by the sale of 3 per cent 10-20 bonds, obtaining a total of $275,000,000, or nearly $100,000,000 in excess of the probable actual expendi- ture. The accumulation of this surplus was not in any sense an extravagant or useless piece of financiering. As has already been explained, the treasury must be prepared to meet any demand that may arise, instantl}^ and amply. That is the imperative ne- cessity. As the early close of the war could not have been foreseen, the fiscal preparations were necessarily liberal. Indeed, the amplitude of the funds available was one of the most potent causes of the success of the war. The excess raised was not larger than was necessary to insure the instant readiness of the treasury to meet all possible de- mands. Had the war continued and the demands equalled the appropriations, the treasury would again have been obliged to use its power of borrow- ing which the fortunate termination of the war rendered unnecessary. Sec. 10. It now remains to see how the credit of CHAP. Ill FINANCIAL ADMINISTRATION OF WAR 461 the nation was protected and how it stood the strain. At the end of April, 1898, the interest-bearing debt of the United States amounted in round numbers to -1847,000,000. -!ilOO,000,000 of this bore f;,^^^^;,^ interest nominally at 5 per cent, the power to balance at 4 per cent. The 4 per cent °^^°^' °J^ ^ '- preservation bonds, payable in 1925, were quoted when of the public the plans were being made for placing the '^^ ^ ' new loan at 11 7|. At that rate they would yield tlie investor 3| per cent interest. There was, there- fore, some surprise when it was proposed to place the new loan at 3 per cent. It was urged that nobody would buy the new bond at 3 per cent when he could buy one of the old ones and get 3^ per cent. Yet the outcome showed the wis- dom of the move. The bonds were subscribed to seven times over, and in a short time rose to a pre- mium of 103 and 105. In fact, the entire loan was easily placed on far better terms than any nation has ever before been able to obtain in time of war. This remarkable result was attained partly by reason of the fact that the loan was offered for popular subscriptions and the bonds were for small amounts, thus creating and reaching a new market among investors of small means. In part, too, it was due to the fact that tlie new bonds at par really formed a better basis for the national bank-note circulation than the old bonds at 117|, and very much better than the old bonds at 128|, the price which was reached beforo the new issue was completed. An 462 IXTRODUCTIOX TO PUBLIC FINANCE part i\ investment by a national bank of -f 100,000 in the old bonds at 117{ would yield a profit of '|!73().70 on the circulation, if interest is at 6 per cent ; while an investment of the same amount in the new bonds at par would yield a profit on the circulation of $1302.02. The difference in favour of the new bonds was $565.32, or over half of 1 per cent. The advantage was still greater when the old 4's reached 127.], as they did before the close of the war. None of these influences, however, would have had any weight had it not been that new revenues sufficient to meet all debt charges and part of the war expenses had been provided. Sec. 11. Much interest centres around tlie suc- cessful attempt to make this a popular loan, and A •' popii- ^^ this was one of tlie features which iar"ioan. contributed to strengthen the credit of the country at this time, we may examine it some- what in detail. Congress, after much discussion, finally provided that these 3 per cent bonds, " re- deemable in coin at the pleasure of the United States after ten years from the date of their issue, and payable twenty years from that date," should "be first offered at par as. a popular loan under such regulations, prescribed b}'^ the Secretary of the Treasury, as will give ()])jM)rtuiiity to the citizens of the United States to participate in the subscriptions to such loan, and in allotting such bonds the several subscriptions of individuals shall be first accepted, and the subscriptions for the h)wcst amounts shall CHAi'. Ill FINANCIAL ADMINISTRATION OF WAR 463 be first allotted." Before the bill was finally passed^ offers had been made by various banking houses to take the whole issue at a slight premium. Both Congress and the administration, however, favoured the experiment of interesting a large number of small property-owners in the loan, even at a loss to the government. It was thought that such a measure would strengthen the national credit by giving expression to the faith of our own people in the integrity of the government. Other con- siderations of a political character also entered in, but witli them we are not concerned. As a financial measure for the strengthening and support of the public credit it proved a phenomenal success. The bonds were issued in denominations as low as $20. Subscriptions were received through the post-office, and every hona fide subscription under $500 was immediately accepted. More than half of the entire issue was taken by 230,000 of these small subscriptions, and no subscription of more than $4500 was accepted. In all 320,000 persons offered or made subscriptions-, and the total amount tendered the government was $1,400,000,000. This rush for the new bonds was not merely „, , •^ 1 he rush a matter of [)atriotism or sentiment, for the new During the progress of the subscriptions '^" *' the price of the bonds advanced first to 102 and finally to 105 J. They now stand at about 110. The lucky iiidisiduals whose subscriptions were accepted made from 3 per cent to 5 per cent in a 464 INTRODUCTION TO PUBLIC FINANCE part iv few days. The popularity of these bonds was greatly enhanced by the standing offers obtained by Secretary Gage from two syndicates to take the entire loan or any part of it that was not covered by the popular subscriptions. This method of floating the loan will cost the government a considerable sum of money. In the first place a possible premium is lost. How much ^, ^ , that premium would have been cannot The cost of ^ the popular be estimated because the bonds were sold """■ in a broader market than would have otherwise existed. But it would have been at least 2 per cent, for even at a higher rate the bonds offer a favourable basis for national bank-note circulation. That is, at least 84,000,000 was lost at the beginning. Then the cost of handling the loan, paying the interest, etc., is increased consid- erably by the small size of the bonds and the large number of holders. It is just as much trouble to pay the 15-cent coupon of a $20 bond as it is to pay the $75 coupon of a 110,000 bond. Yet in spite of all this, the placing of the 1200,000,000 loan of 1898 was one of the most successful pieces of financiering ever accomplished by the government. It demon- strated the perfect solvency of the government; it gave the country a financial prestige which went a long way toward hastening the end of the war ; and it so strengthened credit of the government that, had the war unfortunately continued, it would have been able to obtain funds to almost any amount CHAK III FINANCIAL ADMINISTRATION OF WAR 465 on the most favourable terms imaginable. With a 3 per cent bond selling at 105 during the actual con- tinuance of military o[)erations, a nation may safely regard its credit as unimpaired. The final test of the success of the financial administration of a war is the preservation of the public credit. 2h BRIEF BIBLIOGRAPHY FOR SUPPLE- MENTARY READING Adams, H. C. Public Debts. N.Y., 1887. Adams, H. C. . The Science of Finance. N.Y., 1898. I^ASTABLE, C. F. Public Fiiiauce 3d ed., eiil. The Macniillan Co., 1903, Bullock, C. J., Editor. Selected Readings in Public Finance, Boston, 1906. CoBDEN Club Essays. Local Government and Taxation. London and N.Y., 1875. CoHN, G. System der Nationaloekonomie, iter Band, Finanz- wissenschaft. Stuttgart, 1889. Partial Translation by Vebleii, T. B. Chicago, 1895. [Economic Studies of the University of Chicago.] CooLKY, T. M. Law of Taxation, '2d ed., eiil. Chicago, 1886. CossA, L. Primi elemente di scienza delle fiiiaiize, 3d ed. Milan, 1882. Translation by Horace White, with notes. N.Y. and London, 1891. Danikls, W. M. The Elements of Public Finance. N.Y., 1899. DowELL, S. History of Taxation and Taxes in England. 4 Vols. 2d ed. London and N.Y., 1885. Ehkberg, Finanzwissenschaft, 8th ed. Leipzig, 1900. Ely, R. T., and Finlky, J. IL Taxation in American States and Cities. N.Y., 1888. GoscHEN, G. J. Reports and Speeches on Local Taxes. Mac- niillan and Co., 1872. Hock, C. F. von. Finanzcn nml die Finanzgi'sciliichte det Vereinigten Staaten von Aun'iika. Stuttgart, 18G7. 460 BIBLIOGRAPHY 467 Lf.roy-Beaulieu, p. Traite de la Science des Finances. 6th ed. Paris, 1899. Marzaxo, F. Coinpendio di scieiiza delle fiuanze. 2d ed. Turin, 1887. McCuLLOCH, J. K. Taxation and the Funding System. 3d ed. London, 1863. De Pariku, F. E. Traite des inipots. 5 tomes. Paris, 1862. [First edition in five volumes better than the second in four, 1866-7.] Rau, K. II. Grundsatze der Finanzwissenschaft. 3d ed. Heidelberg, 1850. RoscHER, W. System der Finanzwissenschaft. 3d ed., enl. Stuttgart, 1886. 5th ed. revised by Gerlach, 1901. Say, L., F2ditor. Dictionnaire des finances. Paris, 1S89-94. ScHtiNBERG, G., Editor. Ilandbuch der National Oekonomie, 3ter Band. Tubingen, 4th ed., 1897-98. ScHANZ, G. Finanz Archiv, A periodical. Stuttgart, since 1884. Schwab, J. C. History of the New York Property Tax. American Economic Assoc, 1890. Seligman, E. R. a. Essays in Taxation. The INIacmillan Co., 1895. Seligman, E. R. A. Finance Statistics of the American Com- monwealths. Boston, American Statistical Assoc, 1889. Seligman, E. R. A. Progressive Taxation in Theory and Practice. American Economic Assoc, 1894. Revised 1908. Seligman, E. R. A. Shifting and Incidence of Taxation. 2d ed., enl. The Macmillan Company, 1899. State and Local Taxation. Addresses and Proceedings of two Conferences 1907 and 1008, held under the Auspices of the National Tax Association. The Macmillan Co., New York, 1908 and 1909. Stein, L. von. Lehrbuch der Finanzwissenschaft. 5te Auf- lage. Leipzig, 1885. ViONES, E. Traite des impots en France. 2 tomes. Paris, 1880. 468 BIBLIOGRAPHY Wagner, A. FinanzAvissenschaft. Loipzicj, Vol. T. 3d ed., 1883; Vol. II. 2d ed., ISOO; Vol. III., ISSO. Erganzungs- heft, 1896; Vol. IV., 1899. Wells. Theory and Practice of Taxation, N.Y., 1900. Wilson', A. J. The National Budget, the National Debt, Taxes and Rates. English Citizen Series. Macmillau and Co., 1882. OTHER BIBLIOGRAPHIES [Most of the larger treatises mentioned above contain nu- merous references and many bibliographies. The following lists of books are easily available for English and American stu- dents.] White's translation of Cossa's Taxation. Pp. 181-193. Bowker and lies. Readers' Guide in Economic, Social and Political Science. Putnam, 1891. Pp. 00-73. Seligman's Essays in Taxation. Pp. 02, 03, and 203, 264 Stammhammer, Bibliographie der Finanzwissenschaft, Jena 1903. INDEX Abatements, British income tax, 324 ; Prussia, 320. Ability defined, 145 ff. See Faculty. Accise, 159 n. Accounts, England, 439; local, 443 ; public, interpretation of, 439 ff. ; United States, 441. Acquisition, taxes on, 113. Adams, II. ('., 2 n., 8, 385 n., 380 n., 393 n. Adcisw, 159 n. Administration, fiscal, 11, 415 ff. Administrative expenditures, 31, 39; concept of direct and in- direct taxes, 108; local, 41. Administrativ'e fees, 115, 351. Ad valorem, defined, 121 ; duties, 227. Aide, 81, 162. America, see United States, and General property tax. American colonies, taxes in, 170. Amortisation of real estate taxes, 202. Andrews, E. B., 118. Annuities, 366 ff. See Debts, pulilic. Anti-Corn Law League, 232. Apportioned rate defined, 122. Appropriations, conimittee of United States Congress on, 421 . See liudget. Aristotle, 18. Arnioriid bearings, tax on, 20G. Arin\', 53. Sic Military. Art of public (InaMco, 4. As.se.ssnu'nt, ars hiirdcii of, 225; yield of, 220; I'nitcd States, 237 IT.; \irginia, 1 7.S : union, Gi'rmany, 233. Sec Protection. Dnneqdd, 1()2. Daniels. S, 277. Death duties, 302. See Inherit- ance taxes. Debts, public, 366 ff. ; classifies, 393. Floating debt, 385. Folwell, 223 n. Forced loans, 386. Forests, 116, 361. Forfeits, 97. France, abolition of export duties, 220; customs duties, 109, 235 ff.; debt, 368, 370; development of tax sj'stem, 188 ff.; direct taxes, 189; exci.se taxes, 207, 210; gabelle, 209; indemnity, 381 ; indirect taxes in, 188; reforms in, 180; revo- lution in, 168, 189; royal feudal dues, 158; sub-treasury system, 438; tobacco-monop- oly, 116, 120, 215; writers on public finance, 6; yield of excise in, 208 ; jield of salt tax, 215. Franchises, 280 ff. ; defined, 281 ; special, 282 ff. Freeman exempt, 154. Free trade, 73, 223, 239; in land, 146. See Protection. Full cash value, 272. Fumnqc, 163. Funded debt defined, 384; in- come, 276. Funds of account, 442. Gabelle, 162, 209. (iallatin, 411 ff. (lardner, II. B., 44 n. Geffcken, 56. General property tax, 246 ff. ; a.sse.ssment of, 434 ; assessment of personalty, 274 ; as.se.s.snient in United States, 286 ff. ; de- fined, 96; exemptions under, 268, 269; incidence of, 341 ff . ; New England type, 252; objec- tions to, 284 ; originally a local tax, 249; ibid., a personal tax, 249; Pacific Coast type, 259; preeminence in Unitetl States, 248; Prus.sia, 186; Southern type, 257; under-valuation, 272 ff. ; in I'liitcnl States be- comes objecti\e, 250; ibid., property subject to, 2(>2 ff. ; ibid., relation to other taxes, 247; ibid., types of, 251. General revenues, Ignited States Census Bureau definition, 94. 474 INDEX George, H., 134 ff. See Single tax. Germany, abolition of exjjort duties, 220; cash reserve, 370; customs liuties, 234; customs union, 233; debt, 3G8; ex- cises, 208, 210; forest:, 361; indirect taxes, 177; military system, 51 ff. ; jiublic lands, 360; writers on public finance, 6; yield of customs, 220. See Prussia and other States of. Gifts, 93, 98. Gobelin, 363. Good-will, 284. Graduatefl rates, 126. Grain duty, Germany, 234. Grants, defined, 98. Great Britain, cost of adminis- tering justice, 75; ibid., foreign intercourse, 43; ibid., pen.sions, 70; ibid., public building.s, 49; income tax, 195, 321 ff. ; old- age pensions, 65; poor relief, 64. See England. Greece, debt, 368; expenditures, 23; taxation, 153. Growth of interest in public finance, 7. Guns, tax on, 206. Hadley, 118. Hair powder, tax on, 206. Hall, H., 229 n. Hamilton, A., 410 ff. Hamilton, R., 408. Harbours, 56. Hardenberg, reforms of, 181. Hearth taxes. 111, 163. Health, protection of, 61. Higgs, 107 n. Hill, .1. .\., 317. Hinsdale, 252 n. Hoffman, 3 n. Holland, general property tax in, 24(;. Home-market argument, 72. Hospitals, 67. House of Representatives, 45. House tax, 196, 206. Hungary, debt, 368. Illinois, valuation of property in, 273. Import duties, 219. See Customs. Impost defined, 128. Inipot foiieicr, 189, 190; des patentes, 189; sur les chevaux ct les voitures, 190; sur les partes et fenfires, 189. See France. Imj)rovements, separately valued, 273. Incidence, 128, 336 ff. Inei.'. Land, free trade in, 146; tax, 295; tax in Kngland, 167; tax, incidence, 344; tax, justifi- catiini, 297; tax, Prussia, ISl ; values, tax in investment, 138; ibid., single tax on, 135 fT. See Real estate. Single tax. Lands, public, 359. See Do- main. " Leave-them-as-you-find-them " theory, 149. Legacy and succession duties, 302 ff. See Inheritance taxes, Death duties. Legal fees, 349. Legal persons, 292 ; theory of ta.xation in United States, 143. Legislative control, 417. Legislature, expenditures for, 31, 44. Legoyt, 178 n. Leroy-Beaulieu, 7 n., 189 n., 386 n. Levasseur, 236 n. Levy, 231 n. Levy, defined, 129; a legislative act, 130. Lexis, 227 n. Libraries, 59. Licenses, 96; in England, 211 n., 212 n. Life annuities, 394; saving sta- tions, 56. Lightiiouses, 56. Limit of State activities, 20. Licjuors, tax on, 206. See Excise, Lic<>iises. List, F., 71. Loans, 386; popular, 462. See Debt. Local councils, 47; taxes in England, 169; taxes in Prussia, 187. Lottery loans, 395. Luxuries, excise on, 207, 209. Magna Charta, 103 n., 165. .Maine, 80. Mninmorte, taxes des biens de la, 190. Malchus, 12 n. Malthus, 63. Manufactures, State, 77, 101 Sec Imlustries. 476 INDEX Markets, 60. Marquardt, 25 n. Marriage licenses, 350. Marshall. 118. Maryland, 270 n. Masons, 268. Massachusetts, General Court on faoultv, 171 ; mortgage tax in, 270. Matches, monopoly in France, 217. Maximum - minimum tariff France, 237 ; in general, 244, 245. Mc("ulloch, 231 n. McKinlcv tariff, 242. McLeod, 373 ff. Measure of ta.xation, 85, 103. Menservants, tax on, 206. Method, 8, 9. ■Mexico, 139. Michigan, 255, 261. Military, 50 ff., 53, 163. Mill, J. S., 222 n. Mines, 116, 362. Minimum of subsistence, 142, 143. Ministry in England, 46. Minnesota, 261. Miquel, 185. Missouri, 260. Moffett, S. E., 45. Money, taxation . of, 277 ; econ- omy, 176. See Currency. Monopolies, control of, 61 ; prices, 99 ; of State, 89. Montana, 266. More, Sir Thomas, 167. Morier, 181 n. Morrill tariff, 240. Mortgages, taxation of, 199, 200, 275 ff., 300. Municipal activities, 21. Museums, 59. National banks, 203 fT. ; debts, 306 ff., 368 ; Municipal League, 35. Na\'igation, 56. Navy, 52. Nebenius, 372. Necessaries, 209. Necker, 215. Negotiating loans, 401 ff. Netherlands, debt, 368. Nevada, 274. New England, property tax in, 171, 252. New Jersey, 270 n. New York, 274; excises in, 173; special franchises, 267. Nicholson, 12 n., 107 n. Non-intercourse act, 239. Norway, debt, 368. Objective taxes, 112. Octrois, 162, 188. 192, 218. Odd Fellows, 268. Ohio, 261. Oklalioma, inheritance tax, 308. Orders in Council, 239. Orient, defence against, 51. Paper money, 387. Parieu, 101." Parliament, cost of, 45, 46; ap- propriations for education, 59. Patent rights, 32. Patentes, 189 n. ; impdt des. 192 ff. Patriotic loans, 386 n. Pauper labour argument, 72. Payne bill, 244. Peace, .54. Peasant revolt in England, 166. Penalties, 93, 97. Pennsylvania, 270 n. ; inherit- ance tax, 305. Pen.sions, 31, 68 ff., 69; old age, 65. Perjury, 275. Permits, 96. Perpetual bonds, 392. See Debts. Personal property taxes, 110, 111, 260, 292, 343. See Gen- eral property tax. Personnellc et niobiUdre, 189, 191. Pet banks. United States, 439. Petitiones, 81. INDEX 477 Pharmacists, 100. Philippines, export duties, 220. Pliysiocrats, 6, 107, 134, 140, Picture galleries, 59. Pitt, 168, 407, 423. Plate glass, 2()fi. Playing cards, 207. PoUce, 55. PoHtical c<|uality, 177. Pohtical science, related to public finance, 3. Poll tax, 96, 247, 312 ff. ; in- cidence, 345 ; Virginia, 173. See Capitation. Poor, 15, 31; law, England, 169; rates, 86; relief, 62, 64. Popular loan, 462, 464; sub- scription, 401 . Partes ct fen etrcK, 192. Portugal, debt, 368. Po.s.se.ssion, taxes on, 113. Post, L. F., 135. Post office, 32, 357, 358; fees, 357; orders, 389. Powers, L. G., 33. Price, B., 407. Prices, 88, 99. Primary schools, 59. Printing, public, 46. Private enterprise, control, 60. Privileges, 97, 100. Probyn, 181. Productive agents, tax on, 176. Productive loans, 398. Produit net, 107. Profits, taxes on, 113. Progressive rates, defined, 123 ; theory of, 149, 151. Property and income tax, Eng- land, 195, 321 ; taxes, 95, 96, 110, 111, 198, 295 flf. Proportional rates, defined, 122. Propriitf bAtic. 190. Protection, 70 ff., 73, 220 IT. See Customs, Free trade. Prussia, general property tax, 246; income tax, 127, 317, 318, 320; property tax, 186; public lands, .361 ; reform of local taxation, 187; tax reform, 180, 181, 184 ff. Public accounts, 439, 441 ; audit, 429; borrowing, 380; build- ings, 31, 48, 49, 60; credit, 378, 379, 381 ; debts, forms of, 383; finance, relations of, 5; industries, 359; lands, 359; service enterprises, 116. Publican, Roman, 431. Pure food, 61. C^uarantine, 67. Quit rents, 171. Railways, taxes on, 257 ; State ownership, 364. Hatos, meaning government mo- nopolv charges, 88, 89 n., 101, 116, 122, 131 ; tax, 120 ff. ; the, in England, 131. Rau, 108, 372. Real estate, taxes, 202, 266. See General pro pert j' tax, Land tax. Real taxes. 111. Recording fees, 350. Redeemable notes, 391. Redevances des mines, 189. Reform of taxation in United States, 200. Register, United States, 428. Registry tax on mortgages, 276. Regressive taxation, 127. Relief, from income tax, England, 324. Religious expenditures, 23, 31. Renick and Thompson, 424 n. Rented farms, 271. Rents, 1(K); taxes on, 113. Re|)ressive effect of taxation. 139. Roproiluctive revenues, 91. Repudiation of debt, 381. Revenues, 79 ff. ; ta.\es on, 114. lieversion, 93. lievolutionary debt. United States, 411. i5ce French Revo- lution. 478 INDEX Rhode Island, 252 ff. Ricardo, 142. Ripley, 171 n., 172. Rivers and harbours, 56. Roads, 31, 55. Rome, 23, 25, 153. Roscher, 0, 386 n. Rosewater, 353, 355. Ross, 339 n., 406 ff. Roumania, debt, 368. Rowe, L. S., 35. Russia, 51; debt, 368, 404; ex- port duties, 220; public lands, 361 ; yield of excises, 208. Sacrifice theory, 149. Saladin tithe, 164. Salable values vs. annual values, 145. Sales, receipts from, 100. Salt conscription, 162; tax, 215. •See Gabelle. Schonbcrg, 108 n., 156, 158. Schools, exempt, 268. See Edu- cation. Schwab, 171 n., 173 n. Seeley, 181 n. Seigniorage, 3.5.3. Seligman, 8, 11 n., 86, 87 n., 102, 105 n., 109 n., 112, 115, 118, 141, 151, 171, 185 n., 207, 2.38, 293 ff., 302 n., 335 n., 340 n., 341, .354, 443 n. Selling value vs. rental, 271. Senior, 118. Servia, debt of, 368. Sevres, 363. Sewers, 32, 56, 76. Sha\-ing warrants, 397. Shaw, A., .58 n. Sherwood, .373 n. Shifting, 128, .336 ff . ; 338. Src Iiifidence. Sliip-gcid, 162. Sidgwick, 118. Signal stations, 56. Silks, 210. Single taxes, 134 ff . ; Henry George, 134 ff. Sinking funds, 406 ff. ; American 409 ff., 413; Engli.sh, 407 IT. Situs, 262 ff. Shiughter-hnuses, 60. Smith, Adam, 6, 113, 141.338,384. Smith, ]{'. M., 238.' Smuggling, 228. Socialism, 19, 1.34, 1.50. Spain, debt, 368; war with United States, 451 ff. Special assessments, 87, 88, 98, 115, 353 IT., 355. See Bet- terments. Special benefit, 14, 16. Special service income, 94. Specific taxes, 121, 227. Spottiswood Letters, 171 n. Springer r'.s. United States, lOdn., .333. Stammhammer, 8 n. Stamps for fees, 350. Standing army, 54. State, nature of, 18. Statements, sworn, 274. Steadiness of revenues, 21. Stein, L., von, 415. Stein, reforms of, in Prussia, 181. S truer, 81. Stocks, public, 300. Stoppage at source, 301. Storage of public fimds, 438. •Stourm, 415. Streets, .32, 76. Sul)jective taxes, 112. Sub-treasury, 438. Subventions, 98. Succession tax, 302. See In- heritance tax. Sugar tax, 210. Sumner, 118, 2.37 n. Sumptuary, 206. Sweden, debt, .368. Switzeriiind, flebt, 368; export duties, 220; indirect taxes in, 177. System of taxation, 133. Taillr. I .v.). 160. Tallage, 1,59 n., 1 64 ; of groats, 166 INDEX 479 TarifT, 221, 237 fT., 452. Sec Customs, Protection, Free trade. Taus.sig, 237 n. Tax, defined, 87, 95; list, 130; system, 133; new, 448. See more specifie terms. Tea, war tax on, 454. Ten-forties, 393. Terminable annuities, 394. 'i'exas, 259. 'i'hirteenths, 164. Time element in credit, 375. Tithe, 164 n. Tobacco-inonopolv, 116, 120, 215, 217; tax, 162, 206. "To be, " franchise, 282. "To do," franchise, 282. Toll, defined, 101, 128; transit, 218. Tontine annuities, 394. Transfer of public monies, 437, 438. Transit duties, 218. Treasury debts, 396 ; notes, 397. Turkey, debt, 368 ; export duties, 220. I'liearned increment, 135 ff. Undervaluation, 272. Unfunded debt, 384. United Kiiifjdom, debt, 368. See (Jreat liritain, Kngland. I'nited States, apportioned taxes, 123; boards of etiualisation, 435 ff. ; Census Bureau, 90, 94, 252 n., 444 n. ; cost of adminis- tering justice, 75; ibid., collect- ing revenues, 44; ibid., de- fence, 51 ; ibid., foreign inter- course, 43; ibid., public build- ings, 49; comptroller and auditors, 424 ff. : control and audit, 424; corporation taxes, 199; customs, 237 ff . ; debt, 368, 369, 393 ; excises, 212 ff. ; expenditure for education, 57; ibid., roads, .5."> ; farmers over- taxed, 343 ; federal licenses. 213; general property tax in, 246 ff. ; income tax, 109, 331 ff., 334 n. ; indirect taxes, 177; in- heritance tax, 305 ; internal im- provements, 56; internal re\e- nue, 128, 213 ff. ; legal theory of ta.xation, 143; military .sys- tem, 51 ff. ; pensions, 68 ff. ; poll ta.x, 312; power to tax in, 130; property taxes in, 198; public accounts, 441 ; public charities, 64 ; sinking funds, 409 ff. ; sub-treasury system, 438; tax reforms in, 180; tax system of, 197; taxation of mortgages in, 199; yield of customs, 220. University education, 58 ff. ; fees, 351 ff. Vagrancy, 64. \'alue, criterions, 270, 271 ; de- fined, 272 ; salable vs. annual 145. Verbrauch, 113. Verein fiir Socialpolitik, 238. Verijicatian, 189. Vermont, lands in, 146; taxation of faculty, 147 ; general prop- erty tax, 263; grand list, 121. V^ignes, 159 n. Vingtiemes, 159, 160. Virginia, 172; income tax in, 335. Voluntary contributions, 81, 86, 90. Votes in Parliament, 419. Wages taxes, 113, 345. Wagner, .\., 35, 108, 108 n., 109 n., 113, 156, 317, 384. Walker, 172 n. War-chest, 370; co.-^t of, 50 ff., 54; of 1812, 238, 393, 411 ; financial administration of, 445; Spanish, 451 ff. ; tariffs, 240; taxes in United States, 1898, 451 ff. 480 INDEX Warrants, 397. Washington, State, 277. Watches, tax on, 206. Water supply, .32, 76, 117. Waterways, 56. Ways and Means Committee of Congress, 420. Wealth, Debt, and Taxation, United States Census Bureau, 34. 252, 455. Wealth, estimate of, in United States, 290 ff. Weather bureaus, 56. Weights and measures, 60. West, 302 n. Williams, 196, .322, 327, 329. Wilson, .\. J., 54, 231 n., 322, 419 Wilson bill, 242. Wilson, W., 3 n., 424 n., 428. Wisconsin, 261, 306. Woo