HJ NRLF SB 77h GIFT OF TAXATIONA PROBLEM BY ROGER F. STURQIS BOSTON BOSTON NEWS BUREAU COMPANY 1911 TAXATION===A PROBLEM BY ROGER F. STURGIS BOSTON BOSTON NEWS BUREAU COMPANY 1911 Copyright, 191 1, by BOSTON NEWS BUREAU COMPANY Publications on Taxation OF THE BOSTON NEWS BUREAU Inheritance Taxes for Investors By HUGH BANCROFT $1.00 A handbook showing the extent to which the resident of any state is affected by the inheritance tax laws of every other state. Includes a synopsis of the laws of every state and Canada. Taxation A Problem By ROGER F. STURGIS 25 Cents A discussion of the evils of the present situation from a Massachusetts standpoint, with a plan for their correction. BOSTON NEWS BUREAU 25 Exchange Place, Boston 235478 TAXATION==A PROBLEM. Questions of state and local taxation; questions of how revenue shall be raised to pay state and municipal expenses, are of great importance. There is a country- wide cry for tax reform but no two persons agree upon what the reforms shall be. If I were to undertake to review the different forms of taxa- tion now in force in the United States I should perforce go far beyond the limits of this paper and the same would be true of an attempt to state at length a system of state and local taxation. If within the limits of this paper I succeed in setting forth a few of the glaring faults of some of the present systems and in stating some remedies that may appeal to the business world I shall be satisfied. PARTIES IN TAXATION. We have first the economists and in this class are the col- lege professors who regard taxation as a science to be governed by fixed rules and if a working system permits any inequality they condemn it as vicious. Stamp taxes are as a rule declared to be bad economically and are condemned. It is now the fash- ion to cry down the general property tax. The economists are no more in agreement as to remedies than the rest of the world. Some are single taxers; some believe in the taxation of incomes; some advocate a habitation tax, recommended by the Massachu- setts Commission on Taxation of 1897; one believes in a United States graded inheritance tax, while another thinks that the states alone should impose this tax. Business and professional taxation; taxation of intangible securities, like stocks and bonds, at a lower rate than other property and many other plans have enthusiastic supporters. We have next a class who would probably designate them- selves as practical tax men. These are the state tax commission- ers, the local assessors and those members of legislatures who are looked upon by their colleagues as experts on taxation. In this class we find the ablest, most liberal minded men on the one hand and the most prejudiced, shortsighted men on the other. I know of no better examples of the good element than the mem- bers of the Department of Taxes and Assessments of New York City. The good element realize that the tax laws should not be administered so as to wring the last cent out of the taxpayer but equitably and that the taxpayer should be fully informed of 6 his rights. If a law seems inequitable they use their influence to have it changed. The 'individual may have his hobby, like every other tax man, but he realizes that what is wanted is a stable, workable system that will produce the necessary revenue and seeks to administer the law as he finds it. The majority of the local assessors of the Massachusetts type are to be classed with the good element; men who dealing with impossible laws have endeavored to distribute the tax burdens equally among the community. I shall have more to say of these men when I come to the working of the general property tax. But there are a large number whose first thought is to enforce existing laws to the letter, not always commendable in taxation; to take every possible advantage of the taxpayer and if the latter overlooks or is ignorant of his rights, greatly rejoice and urge before legislative committees additional tax laws, seeking to get more and more revenue without the least regard for the wel- fare of the community. We then come to the taxpayers who very naturally look upon the assessors and collectors as enemies. The typical individual thinks that any taxation that happens to come home to him is a species of robbery, resents bitterly any relief given to another and chuckles over a law that gives him the advantage. It is astonish- ing to find how ignorant the average man is of the statutes under which he is taxed. A new statute is proposed and the man on the street is told that under it he will have to pay less taxes. It may be bad on principle; it may carry in its train great future dangers; never mind, it if lessens his taxes it must be good and those who oppose its passage are denounced. Circulate a peti- tion among the manufacturers of a state to amend the constitu- tion with an alleged intent to relieve machinery from taxation and they will sign almost to a man and with only one thought; it must be good because it may benefit me. Lastly we have the great class who do not pay any direct taxes, other than a poll tax (and seldom even that), who must have schools, parks and playgrounds, and expect their more fortunate friends to pay for them. They know nothing and care nothing about taxation but are important as a class in that their votes elect many members of our legislatures and city councils who do not as a rule pay taxes to any material amount. THE GENERAL PROPERTY TAX. For years in the United States the common practice has been for the municipality or county to tax its residents upon their real and personal property, paying the state a proportion of the amount collected. Real estate presents very little difficulty. It cannot escape taxation and as taxation should be based upon protection and other services rendered by the government, it is of course most fitting that real estate should bear its full burden of local taxa- tion. It is interesting, however, to note inequalities in real estate taxation. According to the last United States Census our own Suffolk County has the proud distinction of being the only county in the United States taxing real estate upon a valuation of 100%. New York goes as high as 98%, while the average tax valuation in Pennsylvania is 58%. Illinois and other states in the middle West, presumably to meet undervaluation in certain cases, have enacted laws providing that the tax shall be assessed upon a fixed percentage of the real value. Illinois in 1898 went as low as 20%, the State Board of Equalization preparing two lists headed "Full Value" and "Assessed Value/' The tax rate under this plan may have looked too high to the legislators in 1909, for they then raised the percentage from one-fifth to one-third. It is conceivable that more revenue was wanted and it would be well for advocates of the three-mill tax to keep this legislation in mind. This Illinois plan must cause unsettlement of values and is indefensible. Let honest assessors value land and build- ings fairly and conservatively and there will be no trouble about the real property tax. A word here about the single taxers and the unearned in- crement. The average man on the street with his money in his business or invested in securities calls himself a single taxer by which he means that in his opinion real estate should bear the whole burden of taxation because he doesn't own any and he firmly believes that he is now paying the maximum rsnt for his store, house or apartment. The real single taxers are fol- lowers of Henry George and believe that all land belongs to the people as a whole and that while the individual is entitled to the income from his improvements he should pay to the city or town a fair rent for the land. The result of course would be that no one could afford to hold unimproved lands and, moreover? the improvements would have to keep pace with the increase in the value of the land. Financial panics have been caused by overbuilding of cities as well as railroads. Many ways of deter- mining andtaxing the unearned increment have been suggested and pages have been written on the subject but no writer or speaker has yet kept his feet upon the ground long enough to state a practical workable plan. The old fashioned tax upon the land at a fair valuation still remains the best and simplest form of taxation. Personal property, tangible and intangible, presents great difficulties and it is the consensus of expert opinion that the general property tax as applied to personal property as admin- istered is a failure. The New Jersey Tax Commissioner in his report for 1907 says: "It is now literally true in New Jersey as in other states that the only ones who pay honest taxes on personal 8 property are the estates of decedents, widows and orphans, idiots and lunatics." Let us first deal briefly with tangible personal property, like cattle, furniture and stock in trade. The United States Supreme Court (Union Transit Co. vs. Kentucky, 199 U. S. 194) has put tangible property into the same class with real es- tate and declared that it can only be taxed where it is, without regard to the residence of the owner, taxation being based upon protection and services rendered. In those states where the owner is allowed to set off his indebtedness against his personal property, e.g., New York, a tax on tangible personal property is no hardship and on principle a barrel of sugar ought to be taxed as well as a foot of land but on principle no indebtedness should be allowed to be set off. It is nevertheless hard to tax a man $16 a thousand on the full value of a cargo of sugar he is carrying as in Massachusetts when his New York rival is taxed only on the value of the equity. More of this later. The real difficulties arise over taxing intangible personal property, like bonds, notes and shares in corporations, and it was undoubtedly to this class of securities our New Jersey friend referred. To ask a man to pay 1 6-10% of the market value of a four per cent, bond in taxes as Massachusetts does at present is of course monstrous. It amounts to an income tax of about 40% while the highest rate of income tax in Europe is 20%, the usual rate being 5%. The same thing is true of a first-class railroad stock netting the holder between 4% and 5%. State and municipal bonds are as a rule and shares in home corporations are always exempt from taxation and that fact is a serious obstacle to finding a remedy for the evil, for they have acquired a higher market value than they would have had were they not tax exempt, and there would be a great shrinkage in values if all intangibles were exempted from taxation; only less so if intangibles were taxed at a lower rate than other property. The taxation of shares of foreign corporations is in most instances the most flagrant case of double taxation. In New York they are not taxed, but in most states they are. In Rhode Island a statute was passed (P. S., C. 57, Sec. 9, Cl. 8) that no shareholder in a foreign corporation should be taxed if the cor- poration in its corporate capacity is taxed for an amount equal to the value of its real estate and tangible personal property, and equal to the market value of its shares, but the Supreme Court held that this did not apply to the American Woolen Co. and other New Jersey coporations. The Supreme Court of the United States said recently that if the right to tax foreign shares was a new question they would have grave doubts about the constitutionality of the tax and a case is now pending in that court upon writ of error from the 9 Supreme Court of Massachusetts in which the question will be finally decided. In New York bonds and notes are taxable but the owner-is allowed to set off his indebtedness, which right is availed of by business men who are carrying stock on margin, and real estate is mortgaged with a view to setting off the mortgage debt against bonds. This cannot be done in Massachusetts. The so-called three mills tax plan has been urged as a remedy for the evils of intangible property taxation. This is copied from the state tax in Pennsylvania and Maryland, but the rate is lower than in those states. This plan carries with it the right of the legislature to classify property for taxation which seems to me to be fraught with danger. Believing as I do that sooner or later we must give up taxing intangible property I am strongly opposed to the proposed plan. It cannot be defended on princi- ple and the rate is sure to be changed from time to time and sta- bility, the most important thing in taxation, will be lacking. In Maryland and Pennsylvania where the plan has worked fairly well, there was practically no taxation of intangibles before the new tax was imposed, so the fact of an increase in revenue in those states is no argument in favor of substituting it for the present Massachusetts system. There is one thing that the history of intangible personal property taxation shows conclusively. It will fail if rigidly enforced and is only successful as a revenue producer by the use of doomage by local assessors who do not feel it their duty to enforce the law to the letter, but try honestly and conscientiously to determine what it is fair each individual should pay, the indi- vidual having the right of appeal. Before the Massachusetts Tax Commission of 1908 launched their three mills plan, Massa- chusetts reached for taxation approximately four hundred and fifty millions of intangible personal property, more in proportion to wealth, than any other state ever did under the general prop- erty tax and almost half as much as Pennsylvania did under its four mills tax, so that Massachusetts with its average sixteen mills tax got twice as much revenue as Pennsylvania. Then trustees who had to show their securities in the Probate Courts could easily buy home stocks yielding a fair return and pay a tax on only a portion of their estates. Today the activities of the Tax Commissioner and the supervisors of taxation with all the sources of information given by inheritance tax and corporation returns at hand, are unearthing much new property, but I firmly believe that in a very few years we will have the experience of Ohio and other states and our cities and towns will find that they have killed the goose that laid the golden egg. There never was such a demand for non-taxable securities and I know of a num- ber of instances where men, who under the old system, were doomed and paid the tax on a third or a half of their securities 10 and never thought of buying non-taxables, are now putting their whole property out of the reach of the taxing powers. How many wealthy men who have summer places in Massachusetts have made Massachusetts their legal residence? Ohio knows well that the threat of leaving the state will be carried out if men of property are driven too far. The public may scoff at the rich man but his millions are mighty useful to the community he chooses to make his residence. Ohio allowed the tax gatherers to collect back taxes stretching over a number of years with the result that many of its citizens, men whom they could not afford to lose, left the state. It was said colloquially "rich men no longer die in Ohio." There is no hope, however, of restoring the old Massachusetts system if we wanted to. The result was the only thing worthy of praise. We are living at a time when the public demands that the laws shall be enforced to the letter and we must find some system of taxation that will yield sufficient revenue to the state and city and at the same time attract business and wealth. A PLAN OF TAXATION. The letter paper of the National Tax Association is headed with what has been called the Golden Rule of Taxation: Never tax anything That would be of value to your state That could and would run away or, That could and would come to you. Try to devise a tax system that will appeal to fair minded men so that every one knows that he is paying his fair share of the taxes and there will be no running away. I know of nothing more discouraging than to see on the one hand the tax enthusiast arguing before a legislative committee in favor of some additional form of tax, piling burden on burden, without thought of principle or result, and on the other the capitalist seeking to obtain some special advantage or to defeat some wise law because it happens to affect his special interest, and thirdly to realize from questions put by the committee that not more than one in ten knows anything about the tax laws of his state. In trying to outline a general plan of taxation I lay no claim to originality or infallibility. Any plan must be experimental and it is of the first importance that it should yield sufficient revenue. We must see to it that our revenues are honestly and economically expended, that is, we must get a dollar's worth for each dollar spent. We must and will have public improve- ments and our demands are bound to increase from year to year. INSTANCES OF INEQUALITY. One of the greatest instances of inequality in taxation is found in apportioning the state tax among the cities and towns 11 upon a basis of the valuation of taxable property, the rates in the cities and towns varying, in Massachusetts last year, from $4. 30 a thousand in Dover to $25 in Chester. On the other hand, a general personal property tax, as a source of state revenue or to be collected by the state for the localities at a uniform rate would be unfortunate for collecting the state tax at one rate and the local tax at another would cause endless confusion. It is very important moreover, to the success of any property tax that the taxpayer should be in close touch with the taxing power, such as can and should exist between the taxpayer and the city and town government. The state is more remote and towns in one part of the state may obtain advantages over towns in another. The state should leave the general property tax to the cities and towns and derive its revenue from wholly different sources, a policy generally known as the separation of state and local revenues. This policy is practically followed in New York today and it seems to me with marked success. Let me quote from an address of Solomon Wolff of the Louisiana state tax commission. After discussing the difficulties arising under the property tax he said: "A remedy for this does exist, a remedy simply and effective, and that is the separation of sources from which the state and local taxes are drawn. Let the state obtain all the revenue it needs from the sources it may select, and say to the counties and municipalities, all the rest of the property you may tax for your pur- poses as you see proper." Again he said: "Human fallibility and various pernicious influences will perhaps always prevent those ideal conditions, but the more intimate relation between the tax payer and the taxing authorities which will result from home rule in these matters, is certain to make far better conditions than we now have." SOURCES OF STATE REVENUE. The state should leave the property tax to the localities and should get its revenue from excises which may be defined as taxes on the privilege of transmitting and receiving property in trade or by will or descent or on the privilege of doing something gen- erally or in a particular manner. Under the Massachusetts constitution an excise need only be reasonable and need not be proportional. Customs duties are of course barred from the states as a source of revenue but there is left a tremendous field to choose from and legislators have only to refrain from imposing burdensome taxes upon some particular class of business, the doing and maintaining of which contributes to the welfare of the community. 12 THE INHERITANCE TAX. First in order is the inheritance tax or the tax on the privi- lege of transmitting and receiving by will or deed or by descent property on the death of the owner. The constitutionality of this form of taxation, and particularly the graded feature of the tax, that is, exemptions and an increased rate for different amounts, has been bitterly fought but is now finally settled. Some of the state courts have held on the principle of the control of the sovereign over the passing of property after death that an act taking the entire property would be constitutional but the great majority have in dicta drawn the line at confiscation but what would be regarded as confiscation has not yet been decided in this class of cases. At no time in a man's life will he pay a tax more willingly than when he is about to inherit money, provided the tax is reasonable in amount and the machinery for the collection of the tax is not used to assist the local tax gatherer to drag him down by unreasonable and confiscatory taxation. As to rates imposed in the taxation of inheritances, we still have much to learn from the English, French and Germans. In England there are three forms known as the estate duty (tax on the estate in general both real and personal) ; the legacy duty (tax on so much of the personal property as goes, whether by will or intestacy, to the legatees or next of kin), and the succession duty which applies to real and leasehold estates and to all personal estate not subject to legacy duty, such as legacies charged on land . There are many exemptions in each class and it may be of interest to call attention to a few to show how insignificant they are when compared to our state laws. Sums under 100 are exempted from the estate duty, also annuities not exceeding 25, also pensions payable by the Indian government to widow or child. Some of the exemptions from the legacy duty are legacies to husband or wife, estates under 100, property passing to lineal ancestors or descendants which is chargeable with estate duty and estates when the net value of the property, real and per- sonal, does not exceed 1000 and estate duty has been paid thereon. The exemptions from the succession duty are sub- stantially the same as in case of the legacy duty. The rates for the estate duty are graded from 1% on estates between 100 and 500 to 10% on the first 1,000,000 of estates over 3,000,000 and 15% on the remainder. The legacy duty and succession duty are based on degree of relationship; lineal ancestor or descendant 1%, brother or sister or descendant of either 3%, uncle or aunt or descendant of either 5%, great uncle or great aunt or descendant of either 6%, and more remote degree or strangers 10%. In 1906 these duties yielded 17,- 344,925, or roughly $85,000,000. In Massachusetts the yield 13 in 1909 was under $1,500,000. In New York the yield under the old law of 1% direct and 5% collateral was $6,500,000. In France there is a tax on transfers at death and orr gifts between the living and there are no exemptions. The rate is graded according to amount and relationship from 1% on amount under 2000 francs passing in direct line to 20j% on amounts over fifty million francs to strangers. The yield in 1906 was roughly forty eight million dollars. Under the United States national inheritance and succession tax of 1862 the greatest yield in any one year (1870) was $3,- 091,825. Underthelawof 1898 the yield in 1903 was $5,356,774.90. In 1907 at the first national conference of the National T^ax Association it was unanimously resolved that it was the sense of the conference that inheritance taxes should be reserved wholly for the use of the several states and that the federal government should raise its revenue from different sources and this resolve has been approved every year since. The great majority of states have now adopted inheritance tax laws and are deriving a very large state revenue therefrom. The imposition of such a tax by the federal government would be an additional burden and the harshest kind of double taxation. The writer regards the inheritance tax as a corner stone of any successful plan of state and local taxation. Bonds the foreign state cannot tax unless actually in the state but they can tax shares in their own corporations owned by non-resident decedents and payment is insured by holding the corporation liable if shares are transferred. This in the great majority of cases results in double taxation and is unfortunate. A few states, among them Massachusetts, where they control the general succession, give a credit for the amount property is taxed elsewhere, that is, the tax rate being 2%, if shares are taxed 2% or more elsewhere Massachusetts does not tax those shares. If they are taxed less than 2% elsewhere the tax is only for the balance up to 2%. This has always seemed to me ex- tremely altruistic and it may affect the revenue from inheritance taxes severely. So long as people are compelled to invest in home shares by our general property tax it may not make much difference, but if this is done away with and Massachusetts in- vestors are free to invest their money elsewhere it will be very serious. Only two states have the right to exact the tax, one the state of the domicil and the other the state in which the corporation is incorporated, but some states, as Illinois, seek to collect a tax on the ground that the corporation owned property in Illinois. Hardly less absurd is the attempt to exact a tax because the cor- poration has a license as a foreign corporation to do business in Illinois. This brings me to what has always seemed to me to be one of the greatest evils in the operation of our tax system 14 the disposition of the tax authorities to avoid or postpone having the legality of a tax determined in the hope that people will pay the tax rather than contest it. It is akin to highway rob- bery. The right to impose inheritance taxes is based upon the use of the Probate Courts in the settlement of estates and there can be no doubt that the state in which the deceased had his resi- dence, the state of the general succession, should have the first right to the tax. Real estate of the deceased passes under the laws of the state of its situs, the inheritance tax is paid there and the state of the domicil makes no claim to tax it. Personal property is different for that must be accounted for by the execu- tor or administrator in the Probate Court of the county of which the deceased was a resident. If the personal property, tangible or intangible, happens to be in another state at the time of the death the state in which it is can compel the executor or adminis- trator to take out special or ancillary administration, although the courts are practically unanimous in upholding a delivery of personal property to a foreign executor without such admin- istration. Mr. Justice Holmes has termed this control of the foreign state over personal property the control over the special succession as distinct from the general succession controlled by the state of the domicil of the deceased. The right of the state having control of the special succession to demand an inheritance tax upon the property within its boundaries has been upheld by the United States Supreme Court in Blackstone vs. Miller and that dec sion opened a very Pandora's Box of trouble. The commission appointed in 1897 to inquire into the ex- pediency of revising and amending the laws of Massachusetts relating to taxation, James R. Dunbar, then a judge of the Superior Court, T. Jefferson Coolidge and Professor F. W. Taussig of Harvard College being members, recommended an inheritance tax at a flat rate of 5% on all estates over $200. This same commission proposed the habitation tax as a substi- tute for taxing intangible personal property. Utah now has a flat 5% rate which through its control of transfers of Union Pacific Railway stock, yields a large revenue. New York for a long time stuck to a flat rate of 1% for direct gifts and 5% for col- laterals, but last year the legislature copied the European graded tax and the great majority of the states have adopted the same plan. The graded tax has been declared constitutional by the Supreme Court of the United States and has proved a great revenue producer. The English system of three kinds of tax seems to me cum- bersome but I do not regard the rates as excessive, if the inheri- tance tax is to be the first source of state revenue. Under the estate tax there are 21 different rates, per cent, based on the amount of the estate, running as I have said from 1% to 15%. An estate of between $50,000 and $125,000 is taxed 4%, an es- 15 tate between $250,000 and $375,000, 5%, and an estate between $1,250,000 and $2,500,000, 8%. This is entirely reasonable. I should not favor adopting the legacy and succession duties in terms but should provide that property passing, whether by will or interstate laws, between husband and wife, to lineal an- cestors and descendants, to the widow of a son or husband of a daughter or to an adopted child, should not be taxed again, the estate tax having been paid. Property passing to collaterals I should tax again upon the plan of the legacy duty, varying the rate according to degree of relationship and I regard the English rates as reasonable. Brother or sister or descendants of either 3% Uncle or aunt or descendants of either 5% Great uncle or great aunt or descendants of either 6% More remote degree or strangers 10% Under this system a legatee for a specific amount would pay one of the above rates and the estate tax would not affect him, but if a brother and sister divided the estate of a deceased brother dying worth $500,000 above his debts, each would bear his or her share of the estate duty, 6%, and pay an additional tax of 007 /0 The state tax of Massachusetts apportioned among the different cities and towns amounted in 1909 to $4,500,000. The commission of 1897, fourteen years ago, stated that their 5% flat rate would yield not less than $2,500,000. The English plan adopted with the modifications pointed out would yield at least three times that amount in view of the great increase in wealth. CORPORATION TAXES. In New York and Pennsylvania the privilege of doing busi- ness in corporate form is taxed, while in Massachusetts persons, whether individuals or partnership, are driven to incorporate by the tax laws. In New York the corporation is taxed locally upon its property like an individual and pays an additional tax to the state. In Massachusetts corporations are taxed locally on real estate and machinery and are taxed by the state upon what is termed the value of the franchise. The Tax Commissioner from the market value of the shares or from any other information obtainable determines the value of the corpor- ate stock, deducts the value of real estate and machinery and taxes the balance at the average local rate in the state, approxi- mately $17 a thousand. If the good will is very valuable and the market value of the shares is to any extent affected by the good will, that element of value is taxed, but with the great majority of business corporations the shares have no market value and the commissioner gets at the value of the franchise by deducting the liabilities from the assets, a thing that the local 16 assessors cannot do in taxing the stock in trade of an individual or a firm. By having a large bonded debt a corporation can keep the value of its shares about on a par with its real estate and machinery. In Pennsylvania tangible personal property is not taxed locally either to the individual or the corporation, but the state corporation taxes are heavy and the small manufacturers or business firms do not incorporate as a rule. A business requiring large amounts of capital must adopt the corporate form and can better afford to pay for the privilege than a business carried on with a moderate capital. The method of distributing the corporation tax in Massachu- setts until 1908 was as absurd as any tax plan ever adopted. The state retained that portion of the tax represented by shares owned by non-residents and distributed the balance among the cities and towns in which, from the returns or other evidence, it appeared that resident owners resided on the preceding tax day, according to the number of shares so held in such cities and towns respectively, the cities and towns giving police and fire protection to the properties getting nothing. This is still true of railroad, telegraph and telephone companies. Street railways were regarded as different from railroads and only the proportion of the tax corresponding to the proportion of the line constructed on private land was distributed under the above rule, the balance going to the several cities and towns in proportion to the length of tracks operated in their streets. In 1909 one half the tax and in 1910 the whole tax from business corporations, representing shares owned by residents, was given to the cities and towns in which the business of the corporation was carried on. The state held fast to its proportion representing shares belonging to non- residents. Foreign corporations doing business in Massachusetts are taxed locally like any individual and the state taxes them one fiftieth of one per cent, on their authorized capital stock but the amount in any one year cannot exceed $2000. This Act does not apply to foreign corporations engaged solely in interstate commerce and the Act is probably unconstitutional if the cor- poration is engaged in interstate commerce to a material amount. I leave out of consideration the fees charged in the different states for organizing corporations for it is only in New Jersey that they are of moment. In Massachusetts they amounted in 1909 to $117,485.75 and in New York to $300,000. These are clearly a proper source of state revenue and under liberal corpora- tion laws and inducements to corporate capital to engage in business in the state the revenue should be an increasing one. The New York state corporation tax may be said to be based upon the ability to pay dividends and it is assessed upon both home and foreign corporations in proportion to the amount 17 of capital employed within the state. There is a small license fee of one eighth of one per cent, upon the amount of the capital stock of foreign corporations employed in the state and this is an original and not an annual payment but if in any year an increased amount of capital is employed then the state license fee is payable upon the increase. In 1910 the Comptroller in his report suggests an amend- ment of Section 182 of the tax law so that it might be free from all uncertainties as to intent and interpretation and the statute recommended by him seems to me worthy of a place in any proposed system of taxation. For the privilege of doing business or exercising its corporate franchises in the state every corporation, joint stock company or association shall pay to the State Treasurer an annual tax to be computed upon the basis of the amount of its capital stock, employed during the preceding year within the state. The measure of the amount of capital stock employed in the state shall be such proportion of the issued capital stock as the gross assets employed in any business within the state bear to the gross assets wherever employed in business. For purposes of taxation the capital of a corporation invested in the stock of any corporation shall be deemed to be assets located where the physical property represented by such stock is located. The capital would be taxed as follows: 1. If no dividend is declared the tax shall be at the rate of three-fourths of a mill on each one dollar of the par value of the capital stock. This is seven and one-half cents on each $100 shares and the tax on one million of capital would be $750. 2. If a dividend or dividends of less than 6% are made or declared the tax shall be at the rate of one and one-half mills on each dollar of capital at a valuation not less than its actual value, nor less than the average price at which the stock sold during the year, but if such an assessment will produce a tax less than would be produced by a tax upon the par value of the amount of issued capital stock employed in the state, the tax being at the rate of three-fourths of a mill on the par value, then the tax shall be assessed at three-fourths of a mill on each dollar of the par value of the stock. 3. If a dividend or dividends of 6% or more are declared or made then the tax is at the rate of one-fourth of a mill for each 1% of dividends on each dollar of the par value of such issued capital stock. This is two and one half cents on each $100 share multiplied by the dividend. If 6% is paid the tax on one million of capital would be $1500. 4. Every corporation subject to taxation shall pay a mini- mum tax of $5. The New York tax law exempts certain corporations taxed under special statutes from this tax, such as banks, savings 18 banks, title, insurance and surety companies, trust companies, elevated and street railways but it would be better to do away with all exemptions and impose an additional tax if the special business done requires more from the state than the ordinary business corporation. The exemptions in New York are very confusing and there is a great deal of special legislation. Manu- facturing corporations are exempt, as they are in Pennsylvania, to the extent of the capital employed in the state in manufac- turing and in the sale of the product of such manufacturing. In view of my plan of local taxation to be described later and the great benefit to be derived by manufacturing corporations I do not regard this exemption as necessary or wise. There is no doubt that the state is entitled to an additional tax from transportation companies and it should be based upon gross earnings and should be light and for constitutional reasons confined to intrastate business. In New York steam rail- road, canal, ferry, express, navigation, pipe line, transfer, baggage express, telegraph, telephone, and sleeping car com- panies pay a tax of 5-10 of 1% upon gross earnings. In New York a distinction is drawn between railroads operated by steam and railroads operated by some other motive power, presumably because the latter are for the most part in the streets of cities and towns. These railways pay an annual tax of 1% upon gross earnings from all sources within the state and 3% upon .the amount of dividends declared or paid in ex- cess of 4%. Corporations formed for supplying water or gas or for electric or steam heating, lighting or power purposes pay, like railroads, a tax of 5-10 of 1% on the gross earnings and at the same rate as street railways upon dividends paid. These corporations and street railways are exempt from the general corporation tax. A uniform tax of 5-10 of 1% on the gross earnings of all these companies, leaving them also subject to the general corporation tax, would be much better. Insurance companies, trust companies and savings banks are all taxed specially and are properly exempt from the general corporation tax. Insurance companies pay 1% on the gross amount of premiums received during the preceding calendar year for business done at any time in the state. Trust companies pay 1% on the amount of capital stock, surplus and undivided profits. Savings banks pay 1% on the par value of the surplus and undivided earnings. They are all allowed a credit for New York state bonds held by them bearing interest at a rate not ex- ceeding 3%, but from the nature of the tax there should be no exemptions. A curious example of double taxation is found in the fact that although trust companies are taxed by the state on capital stock, surplus and undivided profits, they are also taxed locally on real estate. The same is true of savings banks. It 19 would seem fairer for the state, in the case of trust companies at least, to deduct the value of real estate. New York also taxes foreign bankers but this seems wholly wrong on principle and does not even have the merit of yielding a large revenue. It amounted to only $44,749.83 in 1909, The following table from the comptroller's report of 1909 is instructive as showing the amount of state revenue derived from the New York corporation tax: Insurance Premiums $1,237,173.55 Transportation : Earnings 1,339,352.52 Capital stock 903,350.62 Telegraph & Telephone : Earnings 191,492.13 Capital stock 184,732.59 Miscellaneous: Capital stock 1,226,306.76 Gas, water, power, etc. Earnings 487,963.04 Foreign banks 44,749.83 License fees 25,129.84 Trust companies 2,141,508.56 Savings banks 890,160.76 8,671,920.20 The taxation of shares of national banks is restricted by the National Bank Act (R. L., Sec. 5219). Each state may deter- mine and direct the manner and place of taxing these shares but the taxation must not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such state, and shares owned by non-residents must be taxed in the cities or towns where the bank is located. National banks owe nothing to the state and under any system of taxation where banking capital is taxed locally, their shares as representing the value of their capital, surplus and undivided earnings should be taxed for the benefit of the locality. This is recognized in New York, the Tax Law (Sec. 24) providing for the assessment of bank shares at their book value and at a uniform tax rate of 1% throughout the state. ? This is collected by the localities and does not pass through the hands of the state. In 1908 the tax in the five Boroughs of New York City amounted to $3, 09 1,406. The figure of 1% corresponding with the trust company rate perhaps satisfies the restriction in the Bank Act. In Massachusetts the state and locality play pass ball with the national bank tax. The statute (Acts 1909, C. 490, Pt. Ill, Section 11-20) begins by declaring that bank shares shall be assessed to the owner in the city or town in which the bank is located at their fair cash value at the same rate as other moneyed 20 capital in the hands of citizens is assessed. The bank pays the tax to the collector and the cashier gives the assessors a sworn list of the shareholders with their addresses. This list the assess- ors transmit to the tax commissioner. Then some bookkeeping takes place. A charge in favor of the Commonwealth against the city or town collecting the tax is entered for the tax assessed upon shares not owned by residents of the city or town. If it appears from the list that some shares belong to residents of another city or town, its account with the state is credited with the amount of the tax collected on account of those shares. That part of the tax representing shares owned by non-residents of Massachusetts, by a process of elimination, the state credits itself with. This seems to me one of the most grotesque statutes known to tax law. The exemption of intangibles and tangible personal property used in manufactures, trade or business from all taxation being next to revenue the most important element in my plan of taxa- tion, I admit that the taxation of national banks presents a very difficult question. It would be a hardship to tax state banks and trust companies on their capital and let national banks go free. We certainly cannot under the Bank Act allow a city or town to exempt moneyed capital from taxation and at the same time tax bank shares. The national bank like the state bank or trust company will, like the individual, pay local taxes upon its real estate, its fixtures and furniture. It does not owe its right to do business to the state, but, on the other hand.it does not differ in its relations to the state from foreign corporations doing business in the state. The state, to be sure, cannot prevent the national bank from doing business in the state nor make the payment of a license fee a condition precedent to its right to do business in the state, but it may tax it "at the same rate as other moneyed capital in the hands of citizens." If the state taxes the bank at the same rate it taxes its own banks and trust companies it will in my opinion comply with the restriction imposed by the Bank Act. The question is a difficult one and can only be determined by a decision of the Supreme Court. I am in favor of a tax on national banks as a source of state revenue. Stock, grain and cotton exchanges should, I believe, con- tribute their share to the state revenue, based on the amount of business done. The tax should be small so as not to limit transactions, for the greater the business the greater the return. In this class I include the New York stock transfer tax under which $5,355,546.16 was collected in 1909, at a cost of 8-10 of 1%, the rate being two cents upon each share of stock of the par value of $100 sold. I do not believe that the imposition of this tax has had any effect upon the number of shares dealt in upon the New York Stock Exchange. 21 AUTOMOBILE LICENSE FEES. The present Massachusetts plan of applying license fees to the construction and maintenance of state roads seems to me excellent. The municipalities should be satisfied with the prop- erty tax on the automobile itself. The revenue from licenses should be an increasing one and the size of the fees should de- pend upon the amount needed for the state highways. SOURCES OF LOCAL REVENUE. The separation of state and local revenue being based upon home rule and the close relations between the individual and the municipality, it is essential that every member of a community should feel that he is paying something towards the expense of the city or town and that it is for his interest to see that the city or town is run for the benefit of its citizens as members of the corporation and certain departments should be made self sup- porting and if possible contribute something to the common fund. For example, the Boston Water Department revenue in 1909 fell behind expenses by $218,563.49. The expenses of the Boston Building Department in the same year amounted to almost $100,000. In the operation of the East Boston Fer- ries the deficit in 1909 for the year was $132,703.80. Rates and fees should be so adjusted as to make this impossible. The courts should be open to rich and poor alike but there is no reason in my opinion why a litigant should be allowed to enter his case upon the payment of $1 in the Municipal Courts and $3 in the Superior Courts and be charged no fees in the Probate Courts. A scale of fees should be adopted sufficient to pay the expenses of the clerk's offices, of the Registries of Probate and of the Registries of Deeds. The cost of these offices is of course paid by the county but the expenses of the county fall upon the several cities and towns within its borders. TAXES ON REAL ESTATE. Coming to the question of local revenue from taxation, real estate and buildings will always be the chief source of revenue. In New York City in 1910 the real estate of the five boroughs was assessed at the enormous sum of $7,044,192,674 and the per- sonal property at $372,644,825, tangible and intangible, a trifle over 5% of the real estate valuation. In the state of Massa- chusetts in 1907 real estate was assessed at $2,746,005,835 and personal property at $766,551,769, about 28% of the real estate valuation, In the City of Boston last year real estate was assessed at $1,118,989,100 and personal property at $287,- 559,000. We do not in my opinion need to tax the unearned increment and we must remember that the man who does not 22 improve his land is paying taxes and interest charges year after year and that in many cases people get a net return from their buildings of 1% or 2% and their loss in income must be charged against the increased value of their land when sold, if there be an increase to charge it against. Every one not a pauper pays something in the way of rent and thus indirectly pays a part, however small, of the local taxes for rent must in the great majority of cases be affected by taxes, Possibly it would be a good thing if every landlord, following the example of the owners of one State Street building, put in the monthly rent bill an item giving the proportional amount of the tax on the property charged against the room. As I have already said, the old fashioned tax upon the land at a fair valuation still remains the best and simplest form of taxation. In Pennsylvania where there is no local taxation of personal property, machinery is under the decisions treated as a part of the mill or manufactory and is taxed as real estate, and this seems to me right, for the value of the plant equipped can be easily determined. TAXATION OF TANGIBLE PERSONAL PROPERTY. Your horses and carriages, automobiles, furniture, pictures, jewelry and the like all derive benefit from the municipality, and as they are generally to be found where the owner resides they should be taxed there arid I include in this list all personal property not held and used in farming, in manufacturing or in trade, and those I should, following the example of Pennsylvania exempt from taxation. I do this on the ground of the great benefit to the community in promoting business and business enterprises. Has Massachusetts done anything to attract capital? Haven't our industries thriven in spite of legislation rather than by reason of it? Our rivers furnish great water power, we have excellent harbors, our railroads connect with the north, west and south. Let it be said that in Massachusetts a factory can be built and be taxed only upon real estate and ma- chinery, and if a corporation by the state for a small amount based on dividends paid, and I believe that in a few years there would be a period of prosperity and an increase in real estate values in cities and towns hitherto unknown. Say to the leather, the wool, the sugar or the cotton man that his importa- tions will not be taxed, and we will see the old Boston business in those commodities return. Let the farmer feel that his tools, his grain and his cattle are not taxed and there will be a great incentive to cultivate the land. The objector cries out that the city and town must have the money, but one new mill in a town will mean more for the town than the small tax revenue at present derived from the above sources. Let us look into the revenue derived today by the city of 23 Boston from taxation of tangible personal property. The personal property of foreign corporations is taxed locally like that of a firm or of an individual, but as has been seen, the Massachu- setts corporation is taxed on its personal property by the state through the franchise tax, and as in Massachusetts the practice of incorporating is almost universal, Boston derives its revenue from the personal property of these home corporations through the state treasurer, the state retaining so much of the tax as represents shares owned by non-residents of Massachusetts. The tatal personal property assessment of last year was $287,- 559,000, and the city received from the state as its share of the business corporation tax $691,429.71. The late Mr. Hills in a well-thought out paper figured that 3-7ths of the personal property taxed was tangible and 4-7 ths intangible. A part of the corpora- tion tax represents intangibles and good will. Assuming that there is the same proportion as in the case of personal property taxed locally, we have a total assessed valuation for tangible personal property of $123,535,896, which at a tax rate of $16.50 would yield $2,038,342.28. How much of this revenue is derived from tangible personal property not used in manufactur- ing or in trade, still to be taxable under my plan, cannot be figured with any degree of accuracy, but the proportion is large. Figuring on total assessed value of real and personal property for 1910, including the national bank tax at a tax rate of $16.50 a thousand we have a revenue of $24,112,833.21 of which the revenue from tangible personal property is about 8% of the total. The new taxes proposed will not only make up for this but will .give a large increase of revenue. In Lawrence, where the great bulk of tangible personal property would be found in the mills, the city received from the state in 1910 on account of the business corporation tax $192,- 674.59, a sum easily obtained under other methods of taxation without considering the advantage to the city of new manufac- turing plants. TAXATION OF INTANGIBLE PERSONAL PROPERTY. By intangible property is meant money, debts due, bonds and notes, shares of stock in corporations and the like. The attempt to tax these in almost every case results in double taxation and the tax cannot be justified by services rendered in the protection of the property. How can a piece of paper which says that A. B. in Michigan or the corporation in Kansas owes C. D., a resident of Massachusetts, a sum of money be regarded as property deriv- ing a benefit from being in Boston? The same is true of a piece of paper saying that you have an interest in a corporation operating a flour mill in Minnesota. If taxed at the same rate as other property, the result is an income tax amounting to a third of the income. If a special low rate is established for this class of 24 property it is subject to change by the legislature and there is no stability. I have already discussed these questions at some length. I believe in abandoning entirely the attempt to tax intangibles as property, and until we do this we can never have any satis- factory, workable tax system. The attempt to enforce the tax strictly as is now being done in Massachusetts can only result in failure and disaster. The majority of the Tax Commission of 1897 in their report said of this tax : "It is hap-hazard in its practical working and hence demoralizing alike to taxpayers and to tax officials." Taxation, however, is not based solely on protection to property. The individual owes much to the community and he should pay a tax according to his means and his means are best shown by his income. Let us leave this subject therefore until the income tax is reached in its order. TAXATION OF MORTGAGES. Massachusetts long ago abandoned the mortgage tax and New York exacts a tax only when the mortgage is made. The borrower will always have to pay the tax, either directly or in- directly by paying a higher rate of interest than he would if there were no tax. The power to borrow money to improve property or to use in trade and business at the best possible rates is of great importance to the welfare of the community and any tax that checks this power is bad. The real estate already pays one tax and a mortgage tax presents a clear case of double taxa- tion. I believe that a tax on mortgages of real estate forms no part of a good system of taxation. I do believe, however, in a recording fee large enough to make the registry of deeds self- supporting. Massachusetts taxes mortgages on property out of the state but it is difficult to see how a paper affecting title to real estate in another state and recorded in that state can be regarded as property in Massachusetts for purposes of taxation. It can only be supported constitutionally, as a tax on the debt and taxation of intangibles forms no part of my proposed plan of taxation. LIQUOR AND OTHER LICENSES. I have already said that I believed in a moderate tax on deal- ings in stock and other exchanges as a source of state revenue but there are certain special kinds of business that owe nothing to the state and everything to the municipality. I refer particularly to the theatre, the hotel and liquor business, all of which should be and are licensed. These fees belong to the municipality as a matter of right and common sense. This is particularly true of liquor licenses in states where there is local option and the Massa- chusetts statute (R. L.,C. 100, Section 45) requiring the treas- urer of the city or town to pay one-fourth of the license fees to the state seems to me the height of absurdity from an economic standpoint. I have already said that I believed automobile licenses should be applied as they are in Massachusetts to the construction and repair of state highways. Cities and towns should derive a large revenue from the property tax upon auto- mobiles, a tax easily collected and difficult to evade, and in return for this tax they are bound to furnish good local roads. THE FRANCHISE OR LOCAL MONOPOLY TAX. In the plan outlined by me for state revenue the public service corporation is treated like any business corporation and pays a small tax based upon dividends paid and a tax of from J to 1% upon gross earnings. It is, however, to the municipality that the public service corporation owes most and its most valuable asset, the right to use the street, should be taxed locally. Under the modern theory of a regulated monopoly it is most important that these rights, these local franchises or monopolies should be taxed. Professor Loos, speaking before the second national tax conference in 1908, said of this form of tax : "Indeed we may speak of this source of revenue as one of the undeveloped sources of revenue in our cities. Continental cities have gone much further in the exploi- tation of this admirable source of revenue. But a splen- did beginning has been made in a few of our states, not- ably in the State of New York by the passage of the Ford Special Franchise Tax Law in 1899." Referring to the public service corporation, Professor Loos says : "It was found that the permanent franchise pos- sessed by a company put that company into a position of practically defying the city and it was not until the taxing power against the actual value of the franchise was employed that this company became amenable to local control." If a public corporation operates in part through a subway, for the use of which it pays a rent to the city, whether it pays a franchise tax on that portion of its line depends upon the terms of the lease but the rental should in my opinion always include the tax. Moreover, the tax should not be imposed in cases where leases are already in operation. Let us see how this form of taxation works in New York City. The real estate of the corporation is taxed locally like that of any other owner, but the State Board of Tax Commis- sioners fixes the value of the special franchise in each WUW, certifies it to the local assessors and the franchise is taxed at the local rate, in the Borough of Manhattan 1.75790 cents in 1910. 26 The working of the system is well shown in the case of the New York Central Railway. The local assessors assess the tracks from 50th street on the west side, north to the city line, because these tracks run on the private right of way owned by the rail- road company. The tracks from 50th street and the Grand Central Station running north on Park avenue are assessed by the State Board because they are in a street. In 1909 the State Board valued the New York Central franchise at $4,437,500 (City Record 1909), and in 1910, at $4,679,300. In their report for 1909 the Commissioners of Taxes and Assessments (p. 20) say that the law itself is unsatisfactory, and it is doubtful whether anything short of a radical change will work a satis- factory solution, but this seems to be aimed against the wording of the law rather than against it as an element of local taxation. They point out the difficulties of determining whether certain property should be assessed by them or by the State Board . The results in the way of revenue are excellent. These figures are for the five boroughs of the City of New York: Total valuation of special franchises, 1908 $492,490,477 Total valuation of special franchises, 1909 474,001,900 Total valuation of special franchises, 1910 465,409,600 In the report of the Commissioners of Taxes and Assessments for 1909 they attribute the decrease between 1908 and 1909 to the reduction in the price of gas and electricity which has reduced the value of franchises of lighting companies. This presents an interesting question in connection with a reduction of rates by legislative action. What will the people say if the effect is to increase the tax on their homes? There will be an additional argument against confiscatory rates. The corporation must be allowed to live and its franchise must be made valuable. Here are some of the special franchise valuations in the Borough of Manhattan for 1909 taken from the City Record: New York Edison Co $37,301,000 New York Telephone Co 27,360,000 Pennsylvania Tunnel & Terminal Co. ... 15,000,000 Consolidated Gas Co. apart from sub-cos. 20,001,000 Interboro' Rapid Transit Co., independent of subways and sub-companies 20,012,000 This special franchise tax is not limited to public service corporations and is imposed upon individuals even, who exercise a special franchise, e.g., John Smith maintains a scale in 101st street and his right to do this is valued bythe State Board at $500 and he is taxed accordingly. The success of this special franchise or monopoly tax depends ' of course upon having tax boards of ability and of the highest integrity. This can be said of the New York State Board of Tax Commissioners, of the Commissioners of Taxes and Assessments 27 of the City of New York, of the Massachusetts Tax Commissioner and of that most unjustly abused body, the Board of Assessors of the City of Boston, and the chance of having inefficient or corrupt boards in the future is practically nil. I am in favor of a state board to determine the value of these special franchises. We have now provided for direct local taxation for local revenue upon real estate, tangible personal property not used in manufacturing, business, trade or farming and on the value of special franchises or monopolies to be fixed by a state board and for licenses fees from innkeepers, theatres and the like and from liquor dealers but this is not enough nor does it reach every citizen and make him share in the expenses of the government. This can only be accomplished and then not completely by the imposi- tion of an income tax about which much is now being said and written. To treat of the income tax fully would require a separate treatise. Men differ with regard to it as they do about all questions of taxation. However imposed, I believe the revenue should go to the cities and towns and if I succeed in stating a case showing, however imperfectly, a workable income tax plan for local revenue I shall be satisfied. THE INCOME TAX. Many students of taxation are in favor of an income tax but are not agreed upon how it shall be imposed and many in their enthusiasm for a complete and thorough collection of a tax ignore everything else. Today the question of a United States income tax is before the country and it is said by those in favor of it that the national government can alone deal successfully with the problem of collection. It can compel every corporation in the country to pay to the government a percentage of the amounts paid out for interest and in dividends. This is called collecting from the source. Could anything be further removed from the theory of home rule in taxation ! What would become of a community if every man, who did not have the opportunities of his neighbor, allowed his neighbor to monopolize all the oppor- tunities! I believe it will be an unfortunate day for this country when the federal government resorts to the property tax for its revenue in competition with the states, cities and towns, on the plea that it is in a better position to collect the tax, and a tax on individual incomes is a tax on property. Professor Seligman, who contributes the latest work on the income tax, reaches the conclusion that neither the federal government nor the state really need the money and that the cities and towns do and says (page 655) : "The solution is really not complicated. Why is it not possible to secure all the ends of general suitabil- ity by having a tax administered by the national government under direct national supervision, and 28 secure all the ends of adequacy and fiscal necessity by having the proceeds apportioned, to a large extent at least, to the various states, perhaps to be further appor- tioned by the states in part or whole to the localities? This seems to be the real solution: Let the national government assess the tax, and let the state and local governments share in the proceeds of the tax." To make the federal government tax collector for the cities and towns seems to me centralization carried to an extreme and I fear that when the tax reached the locality the result would be a sad disappointment. A federal income tax so far as collected at the source, i.e. from the corporations, would be only another corporation tax. Indeed Mr. Justice Day says in the corporation tax cases that the tax is imposed upon the doing of business and the measure of the tax is to be the income. No one would be required to make any return of his income from dividends and bond interest for the corporation would pay direct to the treasury. It is not to be expected that the payment of this tax by the corporation would affect the dividends or interest paid by the corporation. Suppose the rate were 5% and a corporation was paying dividends of 6%, the corporation would not send checks for $5.70 for each share but would continue to pay 6% and charge the tax to expense account as they do the present corporation tax. In Pennsyl- vania the state tax on bonds is collected at the source, i. e., the corporation nominally deducts the amount of the tax from the amount of the coupon, if the bond is owned by a resident, but most Pennsylvania bonds are issued today tax paid. In England, where the income tax rate is Is 2d,or roughly 5%, it is said that four-fifths of the tax is collected at the source and the result in revenue has been very successful. In England a much larger portion of the people than in the United States live on the income from invested property, but in 1902-3 the profits and salaries of persons and firms amounted to over one billion dollars (211,200,000, Kennan Income Taxation, 70) and it has been said by some one that neither bookmaker, clergyman nor politician escapes. Collection from the indi- vidual has been thorough in England for many years. Baron Martin, in Attorney General vs. Black, 6 Exch. 78, said: "In fact the care displayed in embracing every possible source of profit is, I may say, carried to an almost ludicrous extent; it is practically impossible to escape the operation of the Act." Parliament does not rely upon collection at the source but has entire confidence in its ability to collect from the individual. This is shown in the new super tax which is not deducted at the source but is paid directly by the person liable. If the income of a tax payer exceeds in net amount 5000 a year, a super tax 29 of 6d on the pound is imposed upon so much of the income as exceeds 3000. It is thought in England that this super- tax will yield about 4,000,000 gross. Under the English acts there are so many rebates and allowances that complete indivi- dual returns are essential to the proper working of the tax and severe penalties are imposed which I shall discuss later. Let us return now to the United States and the attempt to collect the tax at the source. The tax so collected, in my opinion, will have little or no effect upon those living upon the income from invested property, but business and professional incomes are also to be taxed and this tax must be collected from the individual, and the federal government is not in as good a position to collect this tax as the state or municipality. The rule that the wider the base the better chance of collection applies to unearned in- come but the converse, in my opinion, is true of an income tax upon earned income. Collection at the source tends to remove that most important element in any plan of taxation that every citizen should be taxed according to his means and should know that he is paying his share towards the expenses of the locality in which he lives. To impose an income tax in addition to a general personal property tax, as is proposed in a bill before the Massachusetts legislature of 1911, is vicious. The income tax has only been successful where it has been substituted for the personal property tax. In England this was brought about in the middle of the last century and of this Professor Seligman says (page 641): "There the local taxes were for a long time assessed on personalty as well as realty, and the attempt to confine the local rate to real estate met with somewhat the same difficulty that is encountered at present in the United States. It was not until shortly before the middle of the nineteenth century that the local taxes or rates as they are called were limited to real estate; and it was only a few years prior to this that the national income tax was imposed." In Wisconsin the experiment of the substitution of an income tax for the personal property tax is now being tried and it is believed by those in authority that it will be successful. The present tax laws of Massachusetts strictly administered must result, as I have said, in a diminishing revenue from the personal property tax. We cannot tell accurately how large the annual income of Massachusetts citizens is, but there are straws which point to over a billion dollars. The dividend payments dispensed each year in the City of Boston by Massachusetts corporations are said to amount to $225,000,000, and it is fair to assume that a very large proportion of the shareholders are citi- zens of Massachusetts. A very large percentage of the stock of the American Sugar Co. is held in Massachusetts. The same is 30 true of many of the great dividend-paying corporations of the country. Think what the yield would be under a 2% income tax in comparison with our present personal property tax at an aver- age rate of 1.6%. No man ought to object to paying 2% of his income towards the public expense though every man must make full disclosure, but there the collection at the source ad- vocate shakes his head. I believe this can be accomplished if the assessment and collection of the tax is placed in the hands of a well-paid state board, penalties made sufficiently severe both for failing to make correct returns and for divulging the returns when made. In England the penalty for neglecting to make a return or for making an untrue or incorrect return is 20 and treble the duty chargeable. A penalty not exceeding 5 may be imposed for neglect to make a return even though the person proceeded against proves that he was not chargeable for duties. A taxpayer in receipt of an annual income of 2,000 makes a return annually for three years of but 1 .200. He will have to pay to the revenue a sum of 420, being three times the penalty and nine times the amount of the tax of 40. Of course the making of a false return should be punishable as perjury and on the other hand the disclosure of individual income tax returns or their publication should be made a mis- demeanor. Business and professional incomes vary from year to year and it would be well to adopt the English plan of computing the tax on the average income for three completed years. If the business has not been in existence for three years the tax is computed upon the average income for its term. I have said that the income tax should be assessed and collected by a state board and I realize that in what I am about to say I am not holding to my plan of home rule in taxation. This part of my plan for an income tax may be wrong on principle but I believe the results will warrant the departure. The boards of assessors in a few of the larger cities or towns might be able to handle the tax, but in the great majority of cases the work would be entirely beyond them, and a state board would also be further removed from local influence. I am also in favor of one rate for the whole state. If in- comes were taxed locally at the local rates there would be the same inducement to change one's residence that there is today. On the other hand, if incomes were taxed locally at the uniform state rate one or two rich men in a town might give far more than the needs of the town demanded and the tax rate on other prop- erty fall so low as to bring about an exodus from other cities and towns of the state. The question then arises of what disposition is to be made of the tax when collected by the state board. First, all the ex- 31 V /'. - : *' :"*: ;. . .' : /. penses of the board should be paid and the salaries of the board should be large enough to induce men of the highest integrity and experience to accept office. Then the balance should be distributed among the cities and towns not necessarily accord- ing to the amount collected from the citizens of each, or accord- ing to the property valuation of each but according to the needs of each city and town in the Commonwealth, to be determined by the state board on the basis of reasonable and proper expendi- tures of the city or town for the year past. This plan of dis- tribution is not new and was suggested, I believe, first by Mr. Purdy of New York for the distribution of the corporation tax. The income tax would have a tendency to make men of affairs and large means live in the cities and if the whole of the income tax collected from them was given to those cities it would be hard upon the smaller cities and towns and the surplus over and above what the cities of residence need for their reasonable expenditures should go to those cities and towns in need of it. If one town, having unusual advantages for residence, has a large number of wealthy residents, a part of its revenue not needed for its own expenditures could very properly be dis- tributed among its less fortunate brothers. The effect would be to make the local tax rate on property more uniform through- out the state, a result greatly to be desired. A small commu- nity would not have to have a $25 tax rate in order to support its schools and build its roads. I do not believe in taxing the same income twice, and if a partnership makes return as it should and pays the income tax the members of the firm should not be taxed again. No income tax should be collected from corporations, the individual residing in the state paying the tax, and Massachusetts has no right to collect an income tax from non-resident stockholders. I can see no reason why income from real estate should be exempt any more than income from any other property and to exempt in- come from all property taxed of itself would defeat the income tax. CONCLUSION. The situation in Massachusetts is now well-nigh intolerable and if we can judge from some of the tax measures before the Legislature and their supporters, things are to go from bad to worse. There must be a complete and radical change in the whole system of taxation and I believe the solution will be found in confining the state to excises, with the inheritance tax and the corporation tax as the chief revenue producers, and leaving prop- erty taxes to the cities and towns with an income tax that will test the honesty and good faith of the citizens and, if my trust in that honesty and good faith is well placed, will yield revenue 32 double and treble that now derived from taxing intangibles and tangible property used in promoting prosperity. My plan of altogether exempting intangible property and personal property used in manufactures, business, trade and farming is not necessarily unconstitutional in Massachusetts. This may perhaps be done to avoid double taxation or for any other justifiable reason (Opinions of the Justices, 195 Mass. 607, 614), and I believe that an income tax imposed at a uniform rate throughout the state is constitutional. The constitution should not be allowed to stand in the way, however, of a new system of taxation which offers relief from the present situation. Let the Legislature agree upon a system and if the Supreme Court declares certain portions of it unconstitutional, pass a resolve for an amendment to meet the objections. It is neither necessary nor desirable to proceed in advance to amend the con- stitution generally and so open the door to reckless legislation. TC 23216 t