<h2>CHAPTER 49</h2>
<h3>TAXATION IN ITS RELATION TO VALUE</h3>
<h4>§ I. PURPOSES OF TAXATION</h4>
<div class="sidenote">Taxation defined</div>
<p>1. <i>Provision for the expense of organized government is the fundamental
purpose of taxation.</i> Taxation may be defined as the taking by the
government of private property for public uses. This implies a certain
degree of compulsion. When the national government accepts ten million
dollars in trust for the Carnegie Institution, it is not taxation,
though wealth is given for public uses. The effects of taxation pervade
all industrial affairs, but they will be discussed here only in relation
to the value of goods and to the distribution of incomes. By taxation
the government interferes with the individual's free choice and with the
impersonal economic forces. It expends income in different ways from
those which would be chosen by the individual.</p>
<div class="sidenote">Taxation for public defense</div>
<p>The primary purpose of taxation is public defense. War often has driven
men into closer social relations. Public defense requires sacrifice on
the part of the family and of the individual. In family or patriarchal
communities all share a common income and combine in the common defense,
but self-preservation compels such small communities to form a larger,
stronger state for the common defense. Personal service in the field
gives place to money taxes permitting a more regular, continuing, and
perfect organization of military forces.</p>
<div class="sidenote">To preserve domestic order</div>
<p>Next comes the need of civil government to insure domestic tranquillity.
As political unity grows, the citizens need less<span class="pagenum"><SPAN name="Page_472" id="Page_472">[Pg 472]</SPAN></span> often protection
against foreign foes, and they need more often, relatively, defense
against the aggressions of some of their own countrymen. The
preservation of domestic order requires police, courts of justice, and
other agencies. The ideal of the anarchist to do without government is
nowhere realized. Everywhere there must be government to preserve peace
and to protect property. Unfortunately, this need grows with the growing
density of population. Crime increases when men swarm in great cities.
To maintain and operate the social machinery requires ever-increasing
resources. The courts which settle disputes between men, and which
interpret their contracts, are agencies of peace, displacing physical
contests. Many other public expenses tend to enlarge, as those for
legislative bodies, public buildings, statistical inquiries, the
printing of public documents. Government on these accounts has become in
modern times an increasingly costly institution.</p>
<div class="sidenote">Developing public wants; social and industrial welfare</div>
<p>2. <i>The promotion of the social and industrial welfare of society has
come to be an important purpose of taxation.</i> Some functions of
government, less essential than the primary ones just mentioned, seem
naturally to grow out of them. In a democratic society, popular
education is one of the necessary conditions of good government, as it
appears that domestic order is not possible in a democratic state
without intelligent citizens. Step by step the functions of government
are widened. Some industrial functions are performed by the government
in connection with the primary needs. Lighthouses are necessary to guide
the navy, but they also serve to guide the merchant marine and to aid
industry. The post was established as an agent of political and military
government to connect the ruler with the outposts (a fact the name post
indicates), but the postal service has grown in every country to be a
great industrial and social agency. The consular service, beginning in
the political need of keeping official representatives in foreign lands,
has grown to be a great economic agency. Consuls are<span class="pagenum"><SPAN name="Page_473" id="Page_473">[Pg 473]</SPAN></span> commercial
travelers, advancing the trade-interests of their countries in all
quarters of the globe. These social and industrial functions have been
increasing of late. As the national and local governments engage more in
industry, they usually make larger demands in the shape of taxation.</p>
<div class="sidenote">The sphere of the state expands</div>
<p>It is along the border-line between the primary and the secondary
purposes of taxation that the contest goes on regarding the proper
functions of government. If they are to stop short of the extreme of
socialism, where shall the line be drawn? The movement has been of late
toward greater government activity; more of the wants of men are thus
supplied through the agency of the state. That year by year a greater
sum is taken by taxation and spent for the citizen is a fact that may be
recognized without debate here. The toll-road becomes a public road, the
toll-bridge becomes free, more is supplied by taxation for schools, for
advanced research, and for technical training. In our country great
wealth was given by the Morrill Act to scientific and technical schools.
The state universities, against much opposition, have become in many
states of the Union the dominant educational force. Moreover, taxation
often is used as a means not merely of raising revenue, but of
discouraging one kind of industry and encouraging another. One industry
wanes or dies under increasing burdens, another waxes strong by
fostering exemptions and bounties. A large share of this "protective
legislation" is done under the guise of taxation.</p>
<div class="sidenote">Government as a consumption good and as a means of
production</div>
<p>3. <i>Shifting of the limits of state action and corresponding changes in
the weight of taxation are constantly affecting value and incomes.</i>
Society as a whole is made up of many groups of industry. Government is
the largest of these, collecting and expending more than any individual
or corporation. Government is in one aspect a consumption good. In
return for its collective cost men collectively get the enjoyment of
social organization, markedly in contrast with the uncertain ties and
hazards of primitive communities. But<span class="pagenum"><SPAN name="Page_474" id="Page_474">[Pg 474]</SPAN></span> government becomes also a mode of
social investment, an indirect agent, a productive enterprise. Wealth
applied through it secures a greater product than is possible by
individual action. Government can maintain lighthouses more economically
than individuals could otherwise secure them.</p>
<div class="sidenote">Apportioning of the cost</div>
<p>But when the government undertakes these various tasks, the expense
falls unequally on individuals and affects differently their incomes.
When free schools take the place of private schools, the law compels
every one to contribute to education. To many individuals it is a matter
of indifference whether they pay tuition or taxes, but the wealthy
bachelor sometimes grumbles when forced to help in educating the
day-laborer's family of twelve. The average result may be right, but
individuals diverge from the average and thus have constantly a motive
to attempt to change the limits of governmental action. Happily the
subject is not always viewed with selfish eyes. The ethical and
patriotic thought is not, "How will this affect my interests?" but, "How
will it affect the general interests?" But as the question of value is
always involved, men are usually found favoring or opposing a measure of
taxation according as it affects their own income. Thus taxation is
inevitably an economic question.</p>
<h4>§ II. FORMS OF TAXATION</h4>
<div class="sidenote">The various forms of taxes</div>
<div class="sidenote">On incomes</div>
<div class="sidenote">On property</div>
<div class="sidenote">On expenditure</div>
<div class="sidenote">On business</div>
<p>1. <i>Taxes usually are a portion taken from the income arising from labor
or from wealth.</i> In rare cases more than the net income of wealth may be
taken, but the aim of taxation in general is to take only a portion of
the income for public uses. As economic income has many sources, it may
be intercepted at many different points, and taxation may take various
forms. First, private income may be appropriated by a tax on income.
This is the simplest in thought, but the administrative difficulties of
the income-tax<span class="pagenum"><SPAN name="Page_475" id="Page_475">[Pg 475]</SPAN></span> are great in practice. It is not easy to determine the
money value of the various sources of enjoyment that come into a man's
possession in the course of a year, including, as the ideal requires,
the immaterial gratifications along with the material. A second form is
a tax on property in proportion to value. Since the value of material
wealth is the capitalization of the rentals at the prevailing rate of
interest, the property tax, so far as it applies to material wealth,
should take an approximately equal proportion of incomes. If it were
accurately assessed, it would be in some respects better than a tax on
actual rents, for it reaches the prospective, or speculative, rental. A
third form of tax is one on consumption, or expenditure. This is but
another mode of attacking income, for in the long run income is spent,
not always by the individual who earned it, but by some one, and thus it
is reached by a tax on expenditure. The principal consumption taxes in
the United States are the tariff duties and the internal revenues of the
national government. In time of war, internal revenues are extended in
the United States to a multitude of articles, but usually they are
limited (with minor exceptions) to liquor and tobacco. A fourth form of
tax is one on selected agencies of industry; such are business taxes,
licenses, taxes on investment in business, corporation taxes, etc. These
burdens are diffused and rest eventually on some income, not always
exactly ascertainable. Actual tax systems combine these forms in great
variety, subtracting many minute fractions from each citizen's income in
ways unsuspected by him.</p>
<div class="sidenote">Changes of taxation and in capitalization</div>
<p>2. <i>The immediate effect of a change in the form of taxation is a change
in the market value of goods.</i> If the new tax reduces the net rent of
any productive agent, it reduces likewise its value, which is but the
capitalization of its net rental. If taxes are taken off of factories
and put upon farm rents, factories rise and farm-land falls in value.
The immediate change in value is much greater than the annual<span class="pagenum"><SPAN name="Page_476" id="Page_476">[Pg 476]</SPAN></span> tax, for
if five dollars is to be taken permanently from the annual rental of the
farm, nearly one hundred dollars is taken at once from its selling
value.</p>
<p>Taxes are reckoned by enterprisers as a part of the cost of production
whenever the conditions of competition and of substitution make it
possible to do so. In such a case the products rise in price and most of
the tax falls upon the consumers. In the Civil War an increase in the
tax on whisky increased its selling price, and distillers who owned
stocks on which a smaller tax had already been paid reaped profits of
millions of dollars. When recently the tax on tea was increased in
England, all dealers who had accumulated a stock before the law went
into effect were gainers. Every change in taxation inevitably affects,
either favorably or unfavorably, many interests. The chance to
anticipate a change in tax laws or to get, from those in power,
information of a proposed change, makes speculation possible and
political corruption profitable.</p>
<div class="sidenote">Shifting and incidence of taxation</div>
<p>3. <i>After every change in taxation, competition among bargainers goes on
and a new equilibrium of prices results.</i> The citizen who pays a tax
into the public treasury is not always the one whose income is reduced
in the long run. In most cases the final and regular burden of the tax
is distributed over a number of incomes. The passing on of the burden is
called the shifting of the tax; the location of the final burden is
called the incidence of the tax. The lawmaker cannot tell exactly where
the weight will fall. The principles of value give some guidance in the
inquiry, but the workings of the principle are difficult to follow.
Certain it is that the new tax, both in its collection and in its
expenditure, becomes a new influence in industry. Some occupations are
made more attractive, others less so. Some places are made more, others
less, desirable to live in. As property thus fluctuates in value, as
investments become more or less remunerative, the market price of
corporation stocks rises and falls. The rate of adjustment varies
greatly<span class="pagenum"><SPAN name="Page_477" id="Page_477">[Pg 477]</SPAN></span> under different conditions. The inflow and the outflow of labor
and capital are more or less rapid in the various industries.</p>
<div class="sidenote">Many personal incomes affected</div>
<p>The fact that a change in taxation is a disturbing element in price is
not to be thought insignificant merely because "all comes out right in
the end." Every change in taxation is an element of uncertainty in
business and increases the fortunes of some men at the expense of
others. Hence no considerable change should be made without good reasons
in its favor. The older taxes have the virtue of stability, but in many
cases they have grown out of harmony with the industrial conditions.
While, therefore, from time to time there is a real need of a reform in
the tax system, it should not be undertaken without recognizing the many
and complex interests involved.</p>
<h4>§ III. PRINCIPLES AND PRACTICE</h4>
<div class="sidenote">Various standards of justice suggested</div>
<p>1. <i>Taxation should be adjusted with reference to the general social
interest.</i> Many standards have been suggested to measure the
distribution of the burden of taxation, such as benefit, equality, and
ability. Each of these terms is capable of various interpretations which
have changed from time to time. The benefit derived by any citizen from
most of the public services evidently cannot be measured with exactness.
The standard of equality cannot be applied in any literal sense to
strong and weak, to rich and poor. It is possible, however, to interpret
equality with reference not to objective goods, but to the psychic
sacrifice occasioned by taxation. Ability thus is of many kinds and may
be differently understood. Some think ability to bear taxation is "in
exact proportion to the money income"; others believe that it increases
at a greater rate than money income, and favor, therefore, progressive
taxation, that is, higher rates on the larger incomes.</p>
<p><span class="pagenum"><SPAN name="Page_478" id="Page_478">[Pg 478]</SPAN></span></p>
<div class="sidenote">Social welfare as the aim</div>
<p>The conflicting interests of the classes in each period are to some
degree softened by the social conscience, and taxes are adjusted
according to a vaguely held ideal of the social welfare. Social
expediency, more or less broadly interpreted, determines who shall be
taxed and what will give the best social results. The exemptions from
taxation in feudal times were great, and viewed from our standpoint were
inequitable, for it was the upper classes who escaped while the peasants
bore all the burdens. The landlords and nobility who were assumed to be
performing important social functions, often had outgrown their
usefulness. Exemptions are granted liberally in most states to-day for
some purposes and to some classes of citizens; to educational,
religious, and charitable institutions; to the homes of priests and
ministers; to homesteads purchased with pension money, etc. California
alone of all the states in the Union continued until 1903 to tax
churches and private schools. The social interest requires that taxes be
both elastic and productive, so that the needs of the government shall
be amply provided for. The harmonizing of these needs in the laws of
taxation requires a high degree of wisdom, of foresight, and of
integrity, in the legislator and in the citizen. No hard-and-fast rule
for the apportioning of taxes can be laid down. The decision must be
made in each generation by social opinion, guided by the social
conscience.</p>
<div class="sidenote">Principles of administration</div>
<p>2. <i>The administration of taxation should be economical, certain, and
uniform.</i> Whatever taxes are adopted, whether on property or income,
whether at a proportional or a progressive rate, their justice and
expediency depend largely on their administration. Principle and
practice in this as in most affairs may go far apart. Some laws are more
easily and economically executed than others. The time of collection
should be as convenient as possible for the citizen, and the mode of
payment should be the most simple. As to the time, method of payment,
and amount, the utmost certainty is desirable. Taxation that is
variable, shifting, dependent on personal whim and favoritism, is
despotism. Above all,<span class="pagenum"><SPAN name="Page_479" id="Page_479">[Pg 479]</SPAN></span> the administration of the law should be uniform
and impartial,—yet this is a principle most frequently departed from in
practice. The assessment of taxes has to be intrusted to men with
fallible judgment, imperfect knowledge, and selfish interests. The
assessor is as near a despot as any agent of popular government to-day.
Not infrequently it is to men incapable of earning two dollars a day in
any private business that the power is given of passing judgment on the
value of millions of dollars' worth of property. Under the
circumstances, evils are to be expected and they occur. The small
property-owner often is crushed under the unequal assessment while the
large owner comes lightly off. Political friends are favored, political
foes are made to suffer. Woman nearly everywhere pays more than her fair
share of taxes, a fact that the advocates of woman suffrage do not fail
to urge as an argument for their cause, although women's disadvantage in
this matter is little greater than that of any man without special
political influence.</p>
<div class="sidenote">Importance of taxation as a public question</div>
<p>3. <i>The relation of taxation to private incomes makes it one of the
largest public questions of the day.</i> The discussion of taxation has
accompanied the growth of free government in England and America from
the time of Magna Charta. The control of the public purse frequently was
the occasion of conflict between the monarch and the people. Taxation
was a leading issue in the American Revolution. While, therefore, it
cannot be said that the subject has been of no great importance in the
past, it is true that in our own national history since the adoption of
the Constitution, taxation has not been much discussed, except in the
one aspect of the tariff. Constitutional and political questions, states
rights, and the question of slavery, long absorbed the interest of
citizens and legislators. But with the aroused interest of the public in
economic problems, taxation is attracting, and is certain to attract in
the next few years, increasing attention in local, commonwealth, and
national politics.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_480" id="Page_480">[Pg 480]</SPAN></span></p>
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