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PRINCIPLES OF

TAXATION

HASTIN$ S L$ ON

Caumelor-a t-Law

Dartmout/z College

Autfior of“Capitalization : a Book

BOSTON NEW $ OR$ CH ICA$ O

HOU$ HTON MIFFLI N COMPANYfi bz fi ihetfiibe press ( alumina:

PREFACE

As Counsel to Committees for the InvestmentBankers ’ Association ofAmerica it became myduty to examine and report on many tax measures introduced in the various legislatures , andoccasionally to appear before a legislative com

mittee on account ofsuch measures . Facing theproblem ofthese bills , anticipating that of otherbills in future legislative sess ions , and desiring , i fpossible , to reach , on behalf of the investmentbanking business , some definite conclusions as towhat is fair in the taxation of securities , the TaxCommittee of the Association requested me topresent to it a brief statement of principles oftaxation, to show the position which securitiesoccupy in a fair scheme Of taxation

,and to afford

a basis for working out practicable proposals asto what should be done in the taxation ofsecurities . The Honorable F . W . Rollins , ofBoston , i sChairman Of the Committee

,and the other mem

bers are Messrs . George Baker,Of Boston ; A . B .

Leach , ofNew York ; W . 8 . Hayden , ofCleveland ; W . M . L . Fiske and J . J . O

’

Brien , of Chicago ; and John Nickerson , Jr.

, of St . Louis . Sincesuch a report

,in any event

,involved writing

practically a little treatise on the general subject

iv PREFACE

oftaxation , I decided to make it as nearly suchas its primary purpose permitted , and Messrs .Houghton Miffl in Company undertook its publication . The reader should remember that thereport does not appear as expressing the Opinionof the Association , but simply as my personalopinion .

I have tried to be as simple as possible in stating the principles . I should like to make a statement so plain that every voter could understandthe meaning Of every word , phrase , sentence , andparagraph . Taxation is not , however , an easymatter . As a pamphlet on the subject said

,in

referring to a dinner Of mayors who passed aresolution on some phase Of it ,

“Taxation is notto be mastered between the caviare and the

coffee .

” Besides , an extremely simple statementis not always consistent with brevity , and I waswriting primarily for men of affairs familiar witheconomic concepts and capable of grasping theirimport . Time is of the essence with them , and itwas necessary to be brief . I have been as simpleas I could be under the circumstances , and I b el ieve the constant use ofconcrete illustrations willmake the matter understandable to those whoare not especially trained in economic thinking .

Some people , I am aware , will charge the workwith prej udice on account of its origin . I amcontent to have them look on it as being as parti

PREFACE v

san as possible if they will really consider theargument . So far as the discussion reaches resultsin ideas on the taxation of intangibles

,I believe

it is in substantial accord with all the recognizedauthorities . They cannot be accused of ex-parteargument . I would relieve them , however , fromall responsibility for the course of reasoning bywhich I have reached my Opinions . The work isput out with full notice of the influence , i f any , ofthe “special interest ” involved . As a matter offact , I painstakingly sought reasons for imposingsome taxation on intangibles .I wish to express my appreciation ofthe kind

ness ofMr . John Tatlock , president ofthe Westchester Avenue Bank , New York City , and of

Professor Chester A . Phillips , of Dartmouth College , for reading the manuscript and makinghelpful suggestions .

HASTIN$ S L$ ON .

NEW YOR$ , July 15 , 19 14.

CONTENTS

WHAT Is TAXAT ION?

WHAT SHALL BE TAXED?

SHOULD ALL PROPERT$ BE TAXED ALIXE?

WHERE SHOULD TAXES BE PAID?

How SHOULD TAXES BE ASSESSED?

SHOULD STATE AND LOCAL TAXATION BE

$ EPT APART?

ARE CORPORATIONS TAXED TOO LITTLE?

SIN$ LE TAX , THE INCREMENT TAX, AND

LOCAL OPTION IN TAXATION 120

PRINCIPLES OF

TAXATION

CHAPTER I

WHAT IS TAXATION?

IN answering ourquestion we wil l consider whywe have taxes and what a tax is .

Elastici ty ofthe public income

John Smith must adjust his expenditures to hisincome or else come to grief . He must in the longrun live within h is means . He can lower h is scaleofl iving to meet the income he is receiving muchmore readily than he can increase his income tomeet a desired scale of l iving . Economic andsocial conditions and his Own abilities hedge himin .

Acting in an organized political capacity as thenation , the state , the county ,

city , town , village ,school , or other taxing district , the communityreverses the process which its individual member ,John Smith

,must go through , and first considers

expenditure , then income . Though in practicethe community often does take into account its

2 PRINCIPLES OF TAXAT ION

pas t income when deciding on future expenditure ,i f it wanted anything strongly enough it woulddisregard its ordinary income and determine toprovide more .

The total production ofwealth

Each year the community produces an aggre

gate ofnew wealth which is its annual income . I tmay choose to use this income

,or any part ofit ,

through private or through public channels .There is no distinction

,in the nature ofthe activi

ties themselves , between a private activitythat is , one carried on by people acting in theirindividual capacities and a public activitycarried on by the community acting as a politicalgroup . Whether a particular activity shall bepublic or private depends simply on which thecommunity considers the more advantageous forit . I t can decide whether much or l ittle of itsactivities shall be public , whether much or l ittleOf its total income shall be expended throughpublic channels .

Public income cannot be indefini tely extended

I t is because public activities are only part ofthe total activity Of the community that it is possible in making estimates to plan the expendi

tures first and provide afterwards an income tomatch . I f public activities should approach the

WHAT IS TAXATION? 3

total ofall activities ofthe community , we shouldfind the total communi ty income even morerigidly limited than John Smith ’s private income . The public organization , the State or city ,would then , when estimating , have to set downthe amount of income first and make expendi

tures match , j ust as John Smith must now do .

Present public activiti es

Communities at present generally regard itexpedient that the public organization , the community acting as a whole , should have charge of

certain matters . To protect l ife and limb and topreserve the individual in the enjoyment ofhisprivate property and rights , the community hasgiven the police power to its public organiz ation ,the State , and relieved the individual from fight

ing single-handed for his own against those whomay be disposed to molest him . I t has extendedthis power in many directions to guard againstother than direct attacks , and Offers protectionto health , safety , and against fraud .

The army and the navy represent simply aspecial form of police power . They aremaintainedto protect the particular communal group frommolestation by another group . Fire departmentsafford another special form ofwhat is essentiallya police protection . Judicial systems are organizedfor the protection of legally recognized rights .

4 PRINC IPLES OF TAXATION

The community must appropriate some of i tswealth for the public use to maintain this policeand judicial organization . Our familiarity withthis practice , and the fact that , outside of thesmall group of anarchists , opinion in favor ofit isunanimous , makes us likely to consider it in thenature of things rather than as the matter of

social expediency that it is . We are familiar , too ,

with parks , sewers , streets , and sidewalks as

forms of public activity .

Opinion ofsocial expediency shifts

Social activity also expresses itself in a publicly organized form in the building and maintenance Of highways and bridges . In this familiarpublic undertaking we more readily recognize theidea of expedienc Some bridges used by thecommunity at large are stil l privately owned tol lbridges . Our grandfathers knew privately ownedtoll-roads . Perhaps a few , indeed , stil l exist .Sometimes now the water-supply is a private ,sometimes a public

,undertaking . A newly de

vised form ofhighway,the railroad , developed as

private property . I t universally remains privateproperty in the United States . In some communities it is wholly or partly public property . SO it ispossible for a private activity to exist contemporaneously with a publ ic activity in the same field .

The State may carry on a public activity partly

WHAT IS TAXATION? 5

by private agencies . Privately owned and Operated railroads carry the mail for the public postoffi ce . Community opinion may be that a givenactivity need not necessarily be either exclusivelypublic or exclusively private . Our schools arepartly private , partly public . We recogniz e thatit is expedient that the State conduct someschools , but do not consider it necessary that theState should conduct all schools .

I t is no part of ourpurpose here to go into thequestion of what activities should be public andwhat private . The answer comes , in the end ,simply to a matter of enforcible Opinion . Atpresent unenforcib le Opinions range all the wayfrom those of anarchists , who would have nopublic undertaking whatever , to those of socialists , who would have all undertakings public . Weare , in this discussion , interested only in the factthat certain activities are private and other activities are public .

Public organi zation may charge a price forservices

We are concerning ourselves now only with thequestion that arises after it has been determinedthat certain activities shall be public . How shal lthe public organization meet the cost of carryingthem on?The public may conduct its undertakings on

6 PRINCIPLES OF TAXATION

the same basis as a private enterprise . I t maycharge a price for what ever it furnishes . When acommunity undertakes to supply electric l ight tohouseholders , it regularly meets the cost bymaking a charge to each householder in proportion to his use . When it supplies transportationby street or steam railway , it likewise charges aprice based on the cost Of furnishing the service .

For one reason , the force of example is strong .

These were recently private enterprises . Whenthe public takes them over , it naturally follow sthe private practice . I t is fairly easy to allocatethe cost to the user . I t may be remarked that thepublic organization has an unfortunate tendency ,when determining costs and charges , to overlookthe capital investment . The community furnishes the capital and should make the chargecover interest .

Special assessments may reimburse the publicorgani za tion

The community might follow the same courseof charging a price with such public undertakingsas the highways , streets , and sewers . Thoughmuch more difficult , and therefore less desirable ,i t would not be impossible . To a very considerable extent it does allocate the cost of streets ,sewers , and sidewalks by special assessment tothe abutting property-owner . I t should be

WHAT IS TAXAT ION? 7

noticed that this is an original allocation ofthecapital cost instead of an advancing of the capitaland a subsequent collection Of the capital charge .

This is equally true , whether the charge be metby an immediate cash payment or by borrowingthrough the issuance ofspecial assessmen t bonds .In this form of public undertaking , streets ,

Sidewalks , and sewers , it should be noted that theinitial capital cost is large , in proportion to thecost Ofmaintenance and operation , compared withsuch undertakings as l ighting and transportation .

The special assessment involves , too , less exactj ustice in allocation Of expense than charging aprice based on cost . In undertakings in whichthe capital cost is met by special assessmentagainst the abutters , they , who are the principalusers , may not , and usually do not , defray thecost of maintenance and Operation , such as cleaning sewers and streets . Though the abuttingproperty-owners may be the principal b eneficiaries , they are not the only ones in the case ofstreets and sidewalks . Thoroughfares are usedby people who have no concern with the abuttingproperty . SO we may consider that in a roughway the public use of the thoroughfare Offsets thepublic cost of“operation . We will find a greatdeal ofthis ready approximation of j ustice as we

go on with the consideration ofmeeting the costofpublic undertakings .

8 PRINC IPLES OF TAXAT ION

Fees meet the cost of some public services

The community meets the cost of a considerable variety Ofpublic service by charges called“fees .

” These are distinguishable from the priceCharged , say , for electric lighting , chiefly by thenature Of the service performed . Prices arecharged for what may be called economic serviceswanted by the individual for his private benefit

,

and fees for what may be called primarily socialservices , or those performed for the benefit Of thecommunity . The public organization charges afee for acting in its regulative capacity , chargesfor marriage licenses , and for recording docu ‘

ments . That is , a fee is not charged because theservice benefits the individual against whom it ischarged . The service is for the benefit of the community as a whole . Fee s and prices have beendistinguished on the ground that fees are com

pulsory and prices contractual . But if the publicorganization is the sole source of electric - lightsupply , the price for electric l ight is just as com

pulsory for one who wants it as the fee for alicense to a man who wants to get married . Aspecial assessment , however , is compulsory . Onemay question the strict justice ofcharging to aparticular individual the expense of a service forthe general benefit . Why , for example , shouldthe cost of administering inspection laws for the

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enue , we come to that large part of the publicservice in which it seems inexpedient for one

reason or another to attempt to allocate to individuals the cost ofdoing the service in strict proportion to the amount Of service performed forthe individual .I t may seem inexpedient for several reasons ,

all ofwhich may coexist in a given case .

( 1 ) One reasonmay be the difficulty Ofmakingthe allocation . The salary of a legislator or agovernor or a mayor would illustrate this as wel las other difficulties .

(2) Another reason may be the difficulty Ofcollecting the charge . To endeavor to defray thecost ofmaintaining and Operating a busy thoroughfare by collecting a carefully allocatedcharge would involve a heavy cost of collectionand such a hampering of traffic as to be veryburdensome , in addition to the great difficulty inmaking the allocation .

(3) A third and very important reason lies inthe value to the community in having all itsmembers enjoy the benefit ofa particular service .

In such cases the expense is defrayed in some wayso that no one may be deprived of the servicebecause of inability to pay the cost . I t is important that the public peace bemaintained and thatthe life , l imb , and liberty of every member ofthe

community be protected . Besides the difficulty

WHAT IS TAXATION? I I

of allocating the cost , this protection , in theOpinion of all people but anarchists , must begiven every one , and must be irrespective of

ability to pay .

Public schools afford the best example ofthisthird reason . I t would not be especial ly difficulteither to allocate the cost or to collect it , yet thecommunity considers it so important that everyone have the advantage ofa certain amount ofschool training that it provides this trainingthrough its public organization without payingany attention to the matter of directly appor

t ioning the cost .We shall consider this last part of the publicexpenditure that in which the communitymakes no attempt at any precise allocation of thecost

,but appropriates part of the general priv

ately owned wealth to meet the special publicexpense . The proceeds Of such an appropriationconstitute What is properly a tax . Our purpose isto show in what way such an appropriation actually 18 made , the principles on which it should bemade

,and to see i f ourpresent methods of appro

priation accord with those principles .

CHAPTER I I

WHAT SHALL BE TAXED?

SINCE we have considered why taxes are , andwhat they are , we can now go on to discuss atwhat points that wealth which is acquired byprivate undertakings shall be detached from itsprivate ownership for application to the generalpublic expenditure . Of course some personalways makes the actual payment of a tax .

Either the individuals making up a communityor the community acting in its organized publiccapacity have the entire ownership of the wealth

ofthe community . Though the individuals mayorganize themselves in the form ofa partnership ,association , or corporation , they are the ultimate real owners , and we must consider anymatter oftaxation as affecting them . The community may , however , take the individual

’s privately owned wealth and transfer it to the publicownership according to some aspect or relationship Ofthe individual .I t may tax the individual according to his in

come , or according to the value Of the propertyhe owns , or according to the nature or volume ofthe business he does , or according to whateverelse it might choose . In order to save time , and

WHAT SHALL BE TAXED? 13

to speak In the common language , instead ofusing such an extended phrase as “taxing an individual according to his property or according tohis income ,

” we will ordinarily hereafter speak oftaxing income , or of taxing property , or oftaxingoccupation , or whatever may be taken as themeasure of the tax . We have always to consider

,

however , the effect of the tax on the individualwho pays it and on the public revenue . As amatter of fact taxes are generally and largelylevied according to property . Let us considerwhether this is desirable .

Theories oftaxation

There are two general theories by which thecommunity may impo se taxes . I t may taxaccording to a general consideration of the expense which the individual imposes on theGovernment , or it may tax according to a generalconsideration Of the individual ’s ability to pay .

In each case the theory must be stated as a general consideration ofcost or ability , because , as

We shall see , it is impossible or impracticable toapportion the tax with any degree ofexactnessto cost or ability .

Cost to government theory

I t seems preferable to state the theory firstmentioned as one ofapportioning the tax accord


ing to the cost to the Government rather than tostate it as apportioning the tax according to thebenefit to the individuals . Cost and benefit donot , to be Sure , amount to the same thing .

The people who speak ofbenefit really are think

ing most of cost . To consider benefit leads intothe amazingly difficult philosophical problem of

value . Cost involves a problem Of accountingeasier to solve in the fiscal matter of taxation .

1

Theory ofabili ty to pay

People who write on the theory of taxationto-day are likely to discard , or largely to disregard , the principle of cost or benefit as unsatisfactory , and to place the entire emphasis onability to pay . I am unable to agree that thetheory of cost or benefit is either untenable as

1 Since econoniists wi ll cons iderthis statement oftaxat ion theory ratherca sua l , to say the lea st , and wil l attributeit to ignorance , I wil l expla in that I am aware ofand havecons idered the wide variety of theory discussed by suchAmerican writers as Henry Carter Adams , The Sci ence ofFinance; Edwin R . A . Se l igman , E ssays in Taxati on ;David Ames We l ls , The Theory and Practice of Taxati on ;Carl C . Flehn , Introducti on to Public Finance; FrancisWa lker, Double Taxati on in the Uni ted States ; Stephen F.

We ston , Pri nciples of J ustice in Taxati on; to Say nothingof the fore ign writers on taxa t ion . I have chosen to l imitthe discuss ion to the two theories stated in the text as

those rea l ly s ign ificant and to avo id obscuring the argumentby a ful ler discuss ion of the theory . I want to make myargument as d irect as I can.


explaining present tax phenomena , or undesir

able as a principle on which to base taxationmeasures . I t seems to me that neither the cost orbenefit theory , nor the theory Of ability to pay ,alone adequately explains our present taxes oralone makes a sufficient foundation for constructive work .

Tax practice does not square wi th exclusive

theory ofabili ty to pay

Though what constitutes abil ity to pay presents almos t as difficult a problem as whatmeasures benefit , still it is fairly obvious that aman earning a year from the practice ofaprofession is probably better able to pay a taxthan an invalid who receives a gross income of

$ 1000 a year from the ownership Of real estate ,worth , let us say , and has no other income whatever . Yet the real estate owner , paying taxes at the rate of per $ 100 , wouldhave to pay $ 150 in taxes besides providing forrepairs and depreciation , all ofwhich would probably reduce the $ 1000 of gross , to $500 Of net ,income . Here , then , is a situation existing inmost of the States , a real estate owner payingstate and local taxes of$ 150 against a net incomeof$500 ,

and a professional man with a net incomeof who pays no state and local taxes andno direct taxes at all , except the slight federal .


income tax which is equally levied on incomefrom real estate .

1

An incomefrom la bordoes not indicate the sameabi li ty a s an equivalent income from propertyOn the other hand , compare the man who

receives a net income of $5000 because of hisownership of property or let us say capital , touse the economic term with the man whoreceives a net income of$5000 for services , or,

again to preserve the economic term , let us saylabor . I s the man who receives an income of

$5000 for labor able to pay as much into the publ ic revenue as the man who receives an incomeof$5000 from capital?The $5000 income fromcapital is presumably continuing . I t will go on

irrespective ofthe health or age ofthe capitalist .I t may extend after his death for those whom hemay wish to benefit . Out of the $5000 incomefrom labor the man who receives it must provideagainst sickness disqual ifying for work . To puthim on an equal basis with the capital ist as to

1 Wisconsin ha s an income tax which ranges from one

per cent to approaching six per cent . It should be po intedout tha t even six per cent on income amounts to a tax of

only thirty cents on one hundred do l lars ofcapita l . Thissta tement , ofcourse , assumes capita lizing the income on a

bas is offive per cent . Some other States have income taxlaws . It is genera l ly stated , however, that these are not

enforced . Southern States have occupation taxes .

I8 PR INCIPLES OF TAXAT ION

Assume that one man has invested ina manufacturing establishment in which he ownsa quarter interest and that he could sell his interest for From this ownership he derivesan income of or ten per cent . Anotherman has invested in a street railway insuch a way that he derives an income of$5000from his ownership , or five per cent . The factthat the man having capital in the form of factory property derives an income of ten per cent ,while at the same time the man having capitalinvested in street railway property derives an income Ofonly five per cent , indicates to any stu

dent Of economics that , in the opinion of thecommunity at least , the man who is getting tenper cent is taking more risk than the man who isgetting only five per cent . Considering the tenper cent man ’s liability to loss , he must set asidefive per cent as an insurance fund to place himselfon the same basis as to the probabil ity ofcon

tinned income as the five per cent man . AS

pointed out in the discussion of the differencebetween income derived from capital and incomederived from labor , the probable continuity of

income makes a great deal ofdifference in estimating ability to pay .

1

1 A provis ion in an income tax , such as appears in the

federa l law , permitt ing the deduct ion of loss es in a givenyear from the income of that year for taxa t ion , doe s alitt le toward offsett ing the taxa tion ofrisk . Since the tax


Marketprice ofproperty a fa irer index than incomefrom i t ofabili ty to pay taxes on account of i t

I f income is not altogether a satisfactory meansfor measuring ability to pay , what shall the meas

may be pa id on the risk formany years and the offset is on lyfor one year, it is ent ire ly inadeq uate to meet the s ituat ion .

As the Federa l Income Tax reads , there may b e deductedfrom gross income in comput ing net income ,

“Fourth , losses

actua l ly susta ined during the year, incurred in trade or

aris ing from fires , storms , or shipwreck , and not compensa ted for by insurance or o therwise ; fifth , debts due to thetaxpayer actua l ly a scerta ined to be worthless and chargedoffwith in the year.

”

Assume the ca se of a man who be l ieves in invest ing inseven per cent preferred stocks and purchas ing those ofa

number of corporat ions in order to distribute the risk.Suppose he buys ofsuch stocks in ten compan ies .

His annua l income amounts to $9800 . Al lowing him a de

duct ion of $4000 , he w il l have to pay an income tax on

$5800 . On the assumpt ion that a capita l commitmentpract ica l ly w ithout risk , as in some high-grade , underlyingra ilroad bond , y ie lds four per cent , then three per cent ofthis man ’

s seven per cent dividends represent risk . Of the$9800 ofhis tota l income , $4200 represents risk . To b e on

the same ba s is w ith the man who has invested in the “risk

less ” four per cent security , he should pay a tax on only$600 . Let us suppose he cont inues to pay a tax on $5800 for

ten years , when a corporat ion in which he owns $7000 of

stock becomes inso lvent , and his stock worthless . In thatyear he rece ives seven per cent from ofstock , oran income of$93 10 . I f he were not a llowed to deduct hisloss , he would have to pay taxe s on $53 10 . Since he maydeduct his $7000 loss in this year, he doe s not for this one

year have to pay a tax at all. That is , he has pa id a tax on

$4200 ofincome represent ing risk for ten years , and has remitted to him the tax on $5310 for one year.


ure be?SO far as the abil ity depends on incomederived from the ownership of land or capital , ourpractice may be more nearly just than we sometimes suppose . The greater part of our taxes arederived by levying them on property accordingto its value as measured by its market price . I t i strue that the market price for the great mass ofproperty at any rate of land and of capitalused in production depends on the incomederivable from its use . That is quite as we wouldhave it . Market price , however , which is thecommunity appraisal ofvalue , takes into consid‘

erat ion such elements as risk and makes theproper allowance for the probable continuance ofthe income . So does the income itself , to be sure ,but does it by including the return for the risk .

Take a form ofproperty in which the situation ismost readily apparent . Compare a corporationbond selling to yield per cent with a corporation bond selling to yield 7 per cent . The addit ional per cent indicates risk . Market pricetakes risk into consideration by discounting it .Suppose two corporation bonds each state thatthey pay interest at the rate of5 per cent . Onesells for 100 , the other at 95 . The lower price hasdiscounted risk . This is just what we want toarrive at for the purpose oftaxation .

WHAT SHALL BE TAXED? 2 1

Prices , fees , and special assessments are

applica tions ofthe principle ofcost

Let us apply as a test Of taxation a consideration ofthe expense an individual imposes on theGovernment . We have already considered certain public activities in which the entire cost canbe allocated to all the beneficiaries . This wouldbe the case of the public organization undertaking private electric lighting . We have remarkedthat the expense is not allocated in proportion tothe benefit received , but in proportion to the costofrendering the service .

The community also levies according to cost inthe case of special assessments for streets andsidewalks in which the cost cannot be allocatedto all the beneficiaries ; for those people who usethe street or sidewalkas a thoroughfare , and notat all for access to any premises on the street , arebeneficiaries as well as the abutting owners themselves . In the case of fees for such things aslicenses

,which the community requires for regu

lation,it goes even so far as to charge the cost of

the service to the applicant , though not he butthe community gets the benefit . In the case ofprices and special assessments , and even offees ,people do not generally Object to , in fact theygenerally approve of as fair

,this method of ex

acting payment according to cost . May not the

22 PRINCIPLES OF TAXATION '

application of the principle be extended to taxaation proper?

Extending to taxation the principle ofpaymentfor cost

That one Should in general pay for benefitsreceived seems a sound proposition . Individualsconduct their business relations with each otheron that basis . Requiring payment has the socialadvantage of helping to prevent waste . I t leadsto a real ization that the service or other benefit has cost something , has required sacrifice .

Nothing else quite so effectively brings this hometo the individual receiving the result ofthe sacrifice as requiring him to pay , to make some sacrifice in return . Certainly it is not fair to imposea sacrifice on those who receive none ofthe benefits for the purpose primarily of freeing thosewho do receive the benefits from giving a quid

pro quo . So it would seem fair to extend so far aspossible the principle ofpayment for the publicservice in those cases in which that principle isnot overridden by considerations which the community counts more important .I f the community had not based its taxation on

this principle as well as on the principle ofabilityto pay , i t would have been obliged to adopt theprinciple Of progression in taxation to an extentno one has dreamed ofapplying in practice . To


hold that this is not so , it seems to me that theterm ability

” as applied to taxation must beinterpreted to mean something different from theconnotation generally understood . The force Ofthis principle of taxation according to cost Ofservice has , indeed , weighed much heavier , Ibelieve , than the force of the principle oftaxation according to abil ity to pay .

What i s ability to pay?

The question ofwhat constitutes ability to paypresents an ever-recurring difficulty ofdefinition .

The phrase has elements almost as hard to separate and define as the elements of“value ,

”orof

“benefit . So such words as value and benefit

,

” and phrases like ability to pay , have avagueness which makes them puzzling in use .

Still,it is possible to come to some conclusions

about them .

Though we have already discussed some ofthedifficulties ofgauging ability by net income , andthe superiority ofproperty values in forming anestimate , we have not before raised the broadquestion Of whether ability to pay is in any waypropo rtionate either to amount Of income re

ce ived or to the market value ofproperty owned .

I f it is proportional , can we state the proportionin mathematical terms?Does the ability varydirectly as the income ordoes it vary , say , as the


square ofthe income?On the test of a concretecase it appears certain that ability increasesmuch more rapidly than income . Assume thatone dollar a day will mee t the absolute requirements Of an adult for subsistence . Then the manwho receives $365 a year has absolutely no abilityto pay taxes . I f he should part with one per cent ,

to the State , on our assumption he wouldstarve . Assume his income increases one dollarto $366 . Then he could part with that dollar tothe State without starving . Compared with him

,

however , a man receiving an income of$ 1365 isable to part with $ 1000 to the State . I t wouldappear from this that a complete application of

the theory of ability to pay would involve establishing a certain minimum of income as exemptfrom levy and taking everything in excess of that .Let us in our assumed case try exempting $365

from taxation and taxn each 10 per cent on hisincome in excess ofthat . One man would pay 10cents and have 90 cents left ; the other would pay

$ 100 ,and have$900 left . Each has paid in a direct

proportion . Has each paid according to his ability?The principle of paying according to abilityis sometimes stated as one of equality Ofsacrifice .

These men have not made an equal sacrifice inany sense . I f the second man had paid only 10

cents into the public fund instead of $ 100 ,there

would in one sense have been an equality of sacri

26 PR INC IPLES OF TAXATION

ernment confers on him . Does one person normally cost the Government more than another?To state the question in fuller form , does oneperson put the Government to greater expensefor the benefits that person receives from theGovernment than another?I believe the answeris “yes ” ; and that the cost of certain activitiesof the Government for each person may beapportioned in a very rough way in proportionto the value ofthe person ’s property .

Specia l costs imposed by propertyThere is the cost ofconstructing and maintain

ing the highways . We are not considering nowthose streets which are built by special assessment , but such thoroughfares as state , county ,and town roads , which the public organizationpays for from the proceeds oftaxes . Such roadsare built as well as maintained out ofthe generaltax fund because no special persons are so pre

ponderantly the beneficiaries as in the case ofstreets built by general assessment . They dobenefit the owners of real and other tangibleproperty within their general area , however ,more than they benefit one who does not ownany property of that kind . Though the publicservice diffuses itsel f throughout the communityin such a way that it is impossible to follow itwith a definite apportionment Of the cost in


curred on account of each beneficiary , i t is ,nevertheless , possible to select the general classespecially benefited . In this case it i s the realand other tangible property owners . —TO appor

tion the cost among the members of this classaccording to the market value of their propertydoes not closely apply alone either the principle Of apportionment according to the cost Ofthe service rendered to each member of the classor the principle of levying the tax according toability to pay . Neither theory alone explainsthe situation ; both together cover it . I t comesas close as the community can get , under thecircumstances , to apportioning the cost of theservice rendered each beneficiary , and it seemsto me desirable that the community should dothat with its public undertakings so far as possible . When that becomes no longer possible ,or other considerations become more important ,then the public expense not so apportioned goesinto the common burden to be borne accordingto abilityIn the same way the community incurs the

cost ofpolice and fire protection largely on ac

count ofproperty , and the owners of propertyshould bear the burden so far as it is possible toascertain what part of it is on their account .SO far as the community furnishes the police andfire protection for the preservation of life , l imb ,


and liberty , the property owners benefit as muchas any other members Of the community . Sincethey benefit especially as property owners , it isfitting that as such they should bear that partofthe expense of which they are the beneficiaries .The cost ofthis protection does in general bear adirect proportion to the market value of theproperty . This may be to an astonishing degreenot SO in particular instances , especially in thematter Of fire protection . Fire protection costsnothing for vacant lots or , indeed , for any landwhatever, whether built on or not . I t does notcost as much for an office building of fireproofconstruction worth several hundred thousands ofdollars as for a row of old shacks worth almostnothing . Police protection costs relatively littlefor vacant lots , or land as such , in general . I tdoes bear some direct , though by no means exact ,proportion to the value of buildings and otherproperty . Still , considering the whole situation ,we find that a tax in proportion to the value ofproperty relates itself to the cost ofrendering theservice on account ofthe property .

One further reason for taxing according to thevalue of property involves something besides allthe reasons given ofthe various costs to the community on account ofprope rty . I t is the veryfact that the community maintains the institution of private property . Though it does so as a


matter of social utility , because it believes theprivate ownership ofmost property more advantageous to the community than public ownership ,nevertheless

,in maintaining private property as

an institution,i t doe s especially benefit the

owners of the property . So for this general reasonit seems fitting that taxes should be levied largelyaccording to the value of property owned and ,incidentally

,that the theory of ability meet with

some further limitation on this account .

Some public expendi tures are not on account

ofpropertyOne of the largest of our public expenditures ,that for schools

,does no direct service at all to

the property owner as such . Expenses formaintaining the poor

,for hospitals , for safeguarding

the public health have no direct relation to theproperty owner . These public activities benefita man as a property owner only in indirect ,remote ways

,negligible for our purpose . More

over,the sole consideration of the State in under

taking the expense Of education , for example ,is to free the direct beneficiary from bearing thecost . I f the direct beneficiary does not bear theexpense

, who wil l?The community answers thateach member of the community shal l bear itaccording to his ability .

Why do we get this answer?I t rests on a moral


doctrine of altruism which says that each manowes service to the community according to hisability . This in turn rests on the ba sis that theultimate progress and happiness of the individualis so intimately related to the progress and hap

piness of the group , that each depends on theother . In levying taxes according to ability thecommunity says it will , through its organization ,the State , exact this much from the individual .Outside of this exaction it leaves the matter asone ofprivate morals . .

CHAPTER I I I

SHOULD ALL PROPERTY BE TAXED ALIKE?

WE have come , then , to the general conclusionthat the value Of property affords a sound basis forlevy ing a large part ofour taxes . So far in discussing our subj ect we have indicated as little aspossible that there are various classes ofproperty .

Property and wealth not synonymous

Before going further we must recognize thefact that the term “property is a legal ratherthan an economic term . Yet we are discussingtaxation primarily as an economic rather than asa legal matter . Much of our practice in taxationhas confused the legal word property ” with theeconomic word “wealth ,

” and has gone aheadas if they were synonymous . Much of the common misconception of taxation matters rises outofan unconscious assumption that wealth in itstechnical economic sense is the same thing aswealth in popular meaning .

In order to facilitate ourdiscussion we will notattempt to stick to the economic distinction O fland and capital , except when considering somesuch matter as the proposal to tax land exclu


sively or at a different rate from capital,which

requires us to recognize the distinction . Otherwise we are discussing the taxation ofwealth ,and from both the popular and accounting standpoint

,all wealth used in production

,whether

capital in the economic sense or land,is capital

,

and we shall speak of it as such .

The legal term property ” covers a great dealthat has nothing to do with the economic term“wealth .

” In any precise sense , useful foreconomic thinking , wealth means always somematerial thing . Houses , lands , ca ttle , tools ,machinery , factories , j ewels , paintings constitutewealth . Ownership of all these things comeswithin the term “property , but property covers

many things that are not wealth at all . I f Smithowes Jones $ 1000 , Jones has a right againstSmith and Smith owes an Obligation to Jonesthat constitutes property . Jones owns this property . The fact that Smith Owes Jones does notconstitute wealth at all . Otherwise a group of

people , sitting in a room together , say , couldbecome wealthy far “beyond the dreams of

avarice by solemnly making mutual promises toeach other . In this way a nation could increaseits wealth to any extent . Yet most Of our taxpractice has gone on the assumption that suchpromises create wealth , and has purported totreat them j ust as if they were actual wealth .


taxing according to the cost of the public serviceperformed , we find that something should betaxed to the owners ofrights of this kind . MostOf the great public expenses incurred in connection with property we have seen have nothingto do with this kind ofproperty .

Do allforms ofproperty equally give abi lity

to pay?

When we come to the test ofability to pay weraise an issue impossible to discuss in so brief away . Certainly a man who receives an income of

$5000 from debts owing him is able to pay justas much as the man who receives an income of

$5000 in rent from real estate which he owns .Both receive an income , not dependent like earnings , on a continuance ofl ife and health . I t seemsin all respects in which generally men shouldbear the public burden according to their abilitythat these men should pay taxes alike . On hastythought that seems the logical conclusion .

New considerations in taxation

Other considerations come in at this point tomake a change in the direction of our line of

thought . In fact , our discussion has already gonefar enough to show that the line of thought intaxation is likely to be the result of more forcesthan the most complex astronomical orbit . We

EQUALITY OF TAXATION 35

said early in our argument that taxation consistsof taking a certain part of the privately ownedwealth and transferring it to public ownership inorder that it may be used in the public undertakings . Since this is a continuous process

,taxes

must come out of the economic income of thecommunity . There can be a continuous transference ofwealth only as there is a continuouscreation of wealth . But a debt is not wealth anddoes not create wealth .

A credi t i s neither land , labor, nor economiccapi tal

Land , labor , and capital economists state asthe elements entering into the production of

wealth . In the economic use of the word,

“capital consists of wealth , tangible things , buildings ,machinery , tools , food , clothing , used or consumed in the process ofthe production or creation of wealth . These things , land , labor , andcapital together , produce all the ability to paythere is . Though from an individual standpoint ,i f Smith has an income of $5000 from interest ondebts due him , and Jones an income of $5000 fromthe rent of land he owns , both are equally able topay ; nevertheless , from the community standpoint

,to tax them both alike taxes the com

munity as a whole on an absolutely fictitiousability to pay . Suppose the value of the land


and other tangib le property of a community isand the citizens of that community

owe each other debts to the amount ofConceivably this entire debt might be liquidatedand the productive power of the community

,its

ability to pay , not be diminished in the least .The same amount of land , labor , and capitalwould be there as before . All that would happenwould be that the legal titles to the land andcapital would be somewhat rearranged .

Taxing credi ts taxes a method ofdoing business

When a community taxes credits it does nottax wealth at all , but a method ofdoing business .

I t is taxing the method ofconducting business oncredits . The community approves this form of

doing business by giving it the full benefit andprotection of its legal machinery . Apparently ,the community does not levy a tax on it in orderto discourage it by a penalty .

A formofbusiness may add to productiveness

Though we have mentioned the possibility of

l iquidating the indebtedness of a particular community without decreasing its productive powerin the least , presumably this is not true of allindebtedness . Doing business by means of credits is advocated as increasing somewhat theproductiveness of a community . I t is stated that

EQUALIT$ OF TAXATION 37

credits tend to place the capital ofthe communityin the control of those able to make the mostproductive use of it . Certainly they do not average to increase productiveness 100 per cent . Adefense of the taxation of credits at the same rateas tangible property must make that assumptionin so far as the rate is based on any real abilityto pay .

Capi tal commands a uniformra te ofreturn

A concrete example will Show that the taxationofcredits taxes a form of doing business . Abilityto lend implies control over the use of capital .Enough capital can be diverted from one use toanother , and the possible uses are so various atany time that , leaving out ofconsideration thematter of risk , the control ofcapital commandsa uniform rate of return . I f Brown hasand can buy a house which he can rent to givehim a real net return Of 4 per cent after makinga proper allowance for risk , depreciation , management , and everything else , he will not lendthat to Robinson for a net return of lessthan 4 per cent . I f the community will taxBrown 2 per cent on the debt Robinson will owehim

,Brown will charge Robinson 6 per cent for

the loan ; but if the community will not levy anytax at all , Brown will let Robinson have the loanfor 4 per cent .


Illustra tion oftaxing a business method

Suppose Robinson has himself,and

wants'

to borrow the other and buy afarm neighboring to a farm owned by

Jones,free and clear of all debt and worth

$20 ,000 . Assume that Jones and Robinson are of

equal ability as farmers , and that each shouldget a return of$ 1 200 for his work as a farmer .Since the farmers are of equal ability and thefarms of equal value , suppose each farm producesa return of $2000 . Jones then gets a capital returnof4 per cent on his capital investment and $ 1200for his ability as a farmer . Robinson must pay$600 in interest . I f we allow him 4 per cent on hiscapital investment of or $400 , we leavehim only $ 1000 for his work as a farmer , or$200less than Jones , a man ofno greater ability . By

taxing credits we have taxed Jones ’s form ofdoing business and heavily penalized him forbeing a poor man . By seeming to tax the creditoraccording to his apparent individual ability , thecommunity really taxes the debtor all out ofproportion to the debtor ’s ability .

SO i t appears that the community cannot fairlytax according to property in the legal sense , butmust in any taxation of property tax substantiallyaccording to wealth in the economic sense . Somewriters speak ofthis as a taxation of production .


I t does tax one element of production , capital .Since taxes must be paid out of wealth , to bearany relation to ability to pay they must in some

way relate to production . We should notice , however

,that taxation of wealth extends to a some

what broader area than taxation of capital,

which is wealth used in production . I t coverswealth not used in production , ornamentalj ewels

,pleasure vehicles , costly habitations ,

everything not essential to our annual production . In the taxation of unproductive wealth ofthis kind

,the nature ofthe tax really shifts from

a tax on production to a tax on consumption .

Incidence of taxation of credi ts falls on the

debtor and stays on him

Through the shifting of the incidence oftaxation

,any tax which is evenly levied on the cap

ital employed in a given line of production comes

out ofthe ultimate consumer ofthe product . I fal l producers of a given product have to pay thesame amount of tax on the capital employed intheir business , they wil l simply add the tax tothe price charged for the product . The producercan charge the tax to the consumer only when al lother producers of the same commodity pay atax at as high a rate as his . To test this , let us goback to Jones

,who owns a farm clear

and free of debt , and Robinson , who owns a‘


farm with a mortgage on it .Because the community levies a tax of $200 on

the man who loans to Robinson , thelender must charge $200 more than he would ifhe did not have to pay any tax . Robinson paysdirectly the tax on his farm of the value of

and indirectly the tax of2 per cent onthe debt of Suppose both Jones andRobinson are taxed 2 per cent on a valuation of

on their farms . Jones then pays a tax of

$400 ,but Robinson pays a tax , directly and in

directly , of$600 . Let us assume that both produce only milk , and that they supply all themilk used in a near-by manufacturing town .

Obviously Robinson cannot charge more for hismilk than Jones , and cannot add his extra $200

of taxes to the price he charges the consumer .

Thirty thousand dollars property, but only

twenty thousand dollars ofwealth

Such a situation as Robinson ’s borrowingfrom Smith in order to buy a

farm comes down to the fact that Smith andRobinson each have ofcapital investedin the same farming enterprise . This comprisesthe total value of of wealth to be taxed .

The business arrangement between the partiesas to who is to conduct the enterprise , in whatway the risk is to be borne , and the whole legal


to assume the risk of the enterprise , in order togain any income from the use ofhis wealth . Thecorporate form of doing business is simplyanother device of society to give the individuala greater freedom Of action . People use theirwealth in an economic way through the machinery ofthis device . Obviously , i f Jones , who ownshis farm free and clear , decides to takeadvantage of the opportunity the law affordshim of turning his business , now under his directpersonal ownership

,into a corporation , and

organizes the Meadowbrook Dairy Company , towhich he turns over his farm and takes stock of

the par value of he has not increased thewealth of the community at all . Wealth to thevalue of is stil l there , and nothing morewhatever . I f he decides to retire and disposes ofhis corporate stock

, $5000 each to Brown , Johnson ,

Davis,and Roe , he does not change in the

least the amount of wealth in the community .

There is j ust worth ofwealth investedin dairyi ng .

Ownership under the corpora te form cannot shiftthe incidence of taxation grea ter than taxation

of individual ownership

Now assume that the community taxes thecorporation for the value of its farm on

at the rate of 2 per cent and taxes each of the

EQUALIT$ OF TAXATION 43

shareholders at the rate Of 2 per cent on the valueof their corporate stock . The corporation pays

$400 in taxes and the shareholders pay $400 intaxes , or a total payment of taxes which mustbe made out of the earnings of the farm of

$800 .

Following through the same argument as inthe case of the debtor and creditor , considerRobinson , who , we will now assume , to simpli fythe illustration , owns his farm free fromdebt . Let us have the corporation hire Jones as amanager at a salary of $ 1200 . Jones and Robinson , we remember , are men ofthe same ability asfarmers . Without taking out taxes or payingJones a salary , or allowing Robinson anythingfor his labor , the product of each farm brings

$2500 net . Since Robinson has produced exactlythe same results as Jones , his labor is worth thesame as Jones ’s , or $ 1200 . This reduces thereturn from the farm to $ 1300 . Robinson pays

$400 in taxes , and has left a return of$900 on hiscapital investment , or per cent . How

‘

do theMeadowbrook Farm people come out?Afterpaying Jones ’s salary they have left $ 1300 . Thecorporation pays $400 in taxes and has $900 todistribute in dividends to the shareholders .They have to pay a total of$400 more in taxes ,leaving an actual return on capital of$500 ,

or

per cent .


Bank deposits and capi tal

So , in the sameway , taxingbankdeposits ineffecttaxes bank loans and those people who take advantage of such loans in financing their enterprises .Since banks invest their capital in the same wayas they invest their loans , the same reasoningapplies . Of course , in so far as they invest inland , building , or other forms of tangible property , such property should be taxed the same asany other property of like kind .

Our argument does not lead to the conclusion that

representa tive forms of property should not be

taxed at all

Our argument does not lead to the conclusionthat the community should not tax at all thoseforms of property which represent wealth , butare not themselves wealth in the ordinary use

ofthe word in economic discussion . Though thecommunity does not incur anything like the coston account ofthe representative that it incurs onaccount of the property represented , it doe s ,nevertheless , undergo some extra expense onaccount of enterprises which make use of thosebusiness methods producing representative formsof property as compared with those forms of

enterprise which do not make use ofrepresentative forms ofproperty . I t has all the expense im


posed by directly owned orother unrepresentedproperty , and such relatively slight expenses asthe addition of the representative form implies .TO tax these representative forms ofpropertyinevitably taxes those enterprises which makeuse ofsuch representative forms . Capital alwayshas a choice between going into a loan and goinginto the direct ownership of tangible property .

I t always has the choice between going intoenterprises in the corporate form and those notin the corporate form . These forms ofenterprisecompete with each other for capital . After making allowance for the estimate ofrisk , capital assuch has absolutely one price . Though this pricemay vary from hour to hour , at any givenmoment it is exactly uniform . To tax capitalbecause it goes into any particular machinery of

business , credits , the corporation , taxes thatparticular form ofconducting enterprise . Somesmall expense for police protection ofwhatevertangible form in the piece of paper that theproperty takes , note , bond , share ofstock , or

whatever , and a relatively larger part of theexpense ofmaintaining the courts in which therights are enforced , make the entire expense thisform ofproperty imposes on the community .

We might not come to the conclusion , either ,that these small costs to the Government comprise absolutely the only amount wh ich the com


munity may properly tax to the owner ofintangibles

,and so , back to the enterprise which gives

rise to their issuance . Though a method ofdoingbusiness

,as by the credit system or the corporate

form,is not capital in any sense

,economic or

other,it may , nevertheless , enable a given indi

vidual, or group ofindividuals

,to produce more

than would be possible without it . We should notj ump to a hasty conclusion , however , from anapplication to taxation of part of the theory of

trading on the equity ,that is , ofdoing business

on borrowed money .

Most of the apparent ga ins from borrowingrepresent ri sk

Suppose Brown has a farm worth fromwhich he is able to make $800 , after allowingh imself $ 1200 for his labor , or he makes , say ,

8 per cent on his capital . Assume further that heborrows at 6 per cent , and is able toincrease the net earnings from his farming operations by $900 ,

so that they now total $ 1700 on acapital invested in the enterprise of or

per cent . Since he must pay interest of$600 ,

the net returns to him are $ 1 100 . Borrowing at

6 per cent and making a return of per cent ,he is , we must presume , assuming a risk equiva

lent to per cent on the new capital , or $250 .

and that he has thrust an additional risk of.5 per

EQUALITY OF TAXAT ION 47

cent, or $50 , on his old capital , a total of $300 ,

or all his seeming gains , he must count as premium for risk he has assumed . Though all thisreasoning is , ofcourse , pure theory , it probablycomes very near the truth of the facts , whichin themselves are not absolutely establishable .

Apparently the credit form ofdoing business doesl ittle for a man from an economic standpointbut put him in a position to make some “extraadvantage out ofhis business skill by being aninsurer ofbusiness ri sks , and so , in some measure ,increases his ability .

The corporate formmay to some extent enable a

more profitable employment ofcapi tal because ofconducting business on a large scale

Doubtless some kinds of enterprise can becarried on more profitably on a large than on asmall scale , and some kinds ofenterprise can beundertaken only on a large scale . From thisstandpoint the corporate form , which especial lyenables the aggregation ofcapital necessary forthe conduct ofbusiness on a large scale , may besaid also in some degree to increase ability to pay .

Obviously , this increase does not lend itsel f tomeasurement as an actual fact or to theoreticalcalculation . Certainly it seems an unsound basisfor any but sl ight taxation .

This consideration of possible greater profit


ableness ofenterprise because ofthe use ofsomerepresentative form of property in carrying iton i s too conjectural a matter to afford a soundbasis for taxation of any consequence . I t hasbeen mentioned simply to show that it has beengiven consideration . Except for the case of themagnitude ofcorporate enterprise

,it is based on

special personal productive capacity , or businessskill , and is not fair unless other special personalproductive capacity is also tax ed .

In so far as the machinery of indirect ownershi p in its various forms may tend to bring themanagement ofwealth into more skil ful hands

,

we should rely, to reach that special ability topay taxes , on whatever means may be devisedfor reaching the ability to pay , due to moreskilful management ofdirectly owned wealth ascompared with the less skilful managment ofindirectly owned wealth .

In taxation ofintangibles notforced tofall back on

the principle ofwhat the trafiicwill bear

People Often discuss the matter ofthe taxationof intangible property from the “practical ”

viewpoint of experience without going into theeconomic questions involved . They usuallyadvocate taxation at as low a rate as the traffi cwill bear and produce a maximum of revenue .

Our multiplicity of taxing jurisdictions in the


In answering this question , let us consider one ata time various classes of tangible personal properry . Though all kinds ofwealth , excepting barespace of the earth , is in the process ofconsumption , some kinds are being consumed much morerapidly than others . SO it is possible to distinguish tangible personal property on this basis .

As a practical matter , accountants do classify itthis way as permanent assets and quick assets .The difference between permanent assets in

the form of buildings and permanent assets inthe form of personal property for example , aharvesting machine does not afford a groundof distinction in taxation . On the test of costto the Government , both impose about equalCharges . Highways , police and fire protection ,the machinery of the courts contribute to both .

On the test ofability to pay both are on the Samebasis . Each contributes to productive power ,and the market price ofany particular piece ofproperty measures the value of that contribu

tion . I t is true that the harvester will probablybe consumed much sooner than the building .

The market price , however , takes that fact intoconsideration .

The same argument applies to quick assets,

both on the test ofcost to the Government andon the test Of ability to pay , and no differenceappears between goods in the course of manu

EQUALITY OF TAXATION 5 1

facture and goods otherwise on their way to consumption . A merchant ’s stock ofgoods may seemto call for special consideration . Such a stock ,however , is capital invested in the business ofcreating time and place values in merchandise .

Such values are just a s real and constitute aproduction of wealth just as truly as the creationofform values . No reason appears in the natureofthe property for treating stocks oftrade differently from other forms of tangible property wehave been considering .

This consideration of whether tangible property should be classified for taxation at differentrates is not intended to be exhaustive , but simplyto indicate some general principles . Special considerations may arise in certain cases . Growingtimber , for example , cannot stand taxation atthe same rate as other real estate .

1 Automobiles,

1 It seems as if there must be a fa ilure to rea l ize howheavi ly the regular rate of taxa t ion , if enforced , counts

aga inst the long-de layed returns ofthe t imberland , or e lsesuch property would b e cons idered rathera l iability than an

a sset . To show the effect ofan annua l payment ofa tax

without having an annua l return to pay it out of, I haveworked out a problem . This problem s imply shows howmuch pa id for taxes each yearwould amount to if investedin someth ing bringing a current income . The sum is offsetaga inst the annua l increase in the va lue of the property ,which is a ssumed to be the tota l increase in va lue dividedby the numberofyears to get the increase . A glance showsin how few years the increa se in va lue eq ua ls orexceeds thecompounded tax for the year. The problem states cond i

52 PR INC IPLES OF TAXAT ION

which are imposing very heavy costs on accountof highways , might be taxed higher than otherforms of property , on the principle of taxingaccording to cost imposed on the public organization .

The taxation ofwealth not used in production

Our argument so far has neglected wealth notused in production . Ornaments , habitationslarger and more expensive than necessary forhealth and comfort , automobiles and yachtsused for pleasure would come into this class ofproperty . On the test of cost to the State thi sclass of property should be taxed on the samebasis as any other . The test of ability to paydoes not apply . By the very definition ofthe classit is wealth not used productively and not creat

t ions perhaps fa irly typica l for northern New England , except that the tax rate is made , for the sake ofeven figures ,probably a litt le high . The statement is made to show theprinciple rather than to reach an exact conclus ion ofprofitor loss . It should b e noted that the results show on ly theeffect oftaxa t ion , and do not show the loss from compounding the origina l investment .

Problem on timberland tax

Assume that one thousand acres ofspruce seedling landare bought at $3 an acre , and he ld for forty years , at whicht ime the land wi l l cut a l itt le over seven cords ofpulp-woodan acre , at a va lue of$6 a cord stumpage , ora va lue of, say ,

$43 an acre . Assume that 2 per cent taxes are pa id duringthe forty years . Following is the stat ist ica l result :


ing ability to pay . Inasmuch as it is ordinari ly asource ofprivate as well as of public expense

,far

$ ear. Tax rate .

s per cent

0 0 0 0 0 0 0 0 0 0 0 0


from increasing,it usually diminishes ability to

pay . Instead of using wealth unproductively,the

owner might , how ever , have chosen to use itproductively . I t had potential productive power .I t might have created ability to pay . The factthat its owner chose not to turn it into productivechannels does not afford any basis for relievinghim at all from taxation on account of it . I f thecommunity were to attempt to regulate socialconditions through taxation , it might seem desirable to tax especially that wealth not usedproductively . For all wealth used unproduc

tively diminishes the productive power of thecommunity , and beyond a fair average of thatwhich it is desirable that membe rs of the community should use unproductively , such use constitutes a special private advantage on which thecommunity might well see fit to lay an especialburden . Obvious diffi culties arise on contemplation ofsuch a program . How much of its currentproduction of wealth should the communityturn into unproductive forms for its pleasure

,

and how much should it turn back as capital intoproductive channels?I f the community lives upto its income , it cannot increase its capital fund ,

but its economic progress largely depends on anincrease of its capital fund . On the other hand

,

should the community in any generation deferen tirely al l enjoyment of surplus income?To


draw the line between productive and unproductive expenditure would be a matter Of great d ifficulty . Nevertheless , the community might , i f itchose , undertake to regulate expenditure , andmight use taxation for that purpose .

The communi ty should not generally seek through

taxation to ga in indirectly special social ends

unconnected wi th the direct purpose oftaxation

Whenever at any point the community goesoutside ofthe principle Of making a charge for apublic service that covers the cost of the service ,it must consider other than fiscal effects oftaxation . That alone is a purely fisca l policy whichconsiders the cost of the public service as the onlycorrelative ofthe tax . As we have seen , we have areal tax rather than a price or special assessmentlargely because such an exact correlation isimpossible or inexpedient . Some people evi

dently consider that a tax based on the idea ofplucking the most feathers with the leastsquawking is based entirely on fiscal considerations . To cause the least squawking as a correlative to the public income is j ust as remote from apurely fiscal consideration as any matter ofsocialreform would be .

I rrespective ofthe difficulties Of apportioningto the beneficiary and collecting from him thecost ofpublic service , whenever the community


decides to render a public service on the expressbasis of not charging the cost to the beneficiary ,

as in the case ofthe public schools , — other thanpurelyfiscal considerationsmust enter. Apportioning this burden on the basis ofability to bear itrests on a moral and not really on a fiscal reason .

I t seems undesirable to b ring non-fiscal considerations by way of social results , other thanability to pay , much into taxation questions . Tobring them in confuses both issues , the raisingofrevenue by taxation and the social end desired

,

other than that for which the revenue is expresslyraised . Raising revenue by taxation according toability to pay for expenditure on schools does notproduce any confusion between the raising of

revenue and the social end sought in the publicschools . Permitting lotteries , for example , butplacing a heavy tax on them , partly for the revenue and partly to discourage gambling , confusesboth the fiscal ideas connected with taxation andthe social or moral ideas connected with gambling . I t i s hard enough to think clearly in eco

nomic , moral , and social matters under the bestconditions for clear thinking . Creating and maintaining conditions for clear thinking are in themselves highly important considerations in anyproblem . They may be likened somewhat to thekeeping ofcorrect books ofaccount in a privatebusiness enterprise .


consumption ofluxuries gives an index ofabilityto pay . As already seen , unproductive consumption decreases ability to pay . Assuming thatlabor will in the long run shift the incidence ofatax on necessities from a tax on consumption toa tax on production in the form ofhigher wages ,the consumption of necessities comes nearerbeing an index ofability to pay than a tax on

luxuries .

CHAPTER IV

WHERE SHOULD TAXES BE PA ID?

The problemofthe resident ofone communi ty who

owns wealth located in anothercommuni ty

So far our discussion has gone on the simpleassumption of a single community Whose members owned all the wealth in the community andnone outside of it . Though untrue in fact , theassumption , I believe , has not so affected theargument as to render any of our conclusionsunsound . We cannot go on further with the dis

cussion without meeting existing facts squarely .

In any such purely ideal community probablymany ofour taxation perplexities would not havearisen . I f one had existed and it had made themarket value ofproperty the basis of its taxation

,the distinction betw een tangible and intan

gib le prope rty would not have led into any suchdifficulties as have arisen . Such a communitywould not have misled itself into an attempt totax all tangible property at its full market valueat a given rate and also to tax any intangibleproperty representing it at its full market valueat the same rate . The community would eitherhave taxed all tangible property at the same rate ,


and taxed any intangible representa tive at amuch lower rate , i f at all , or it would have dividedthe tax on a given property between the directand the representative ownership , or among thevarious representative ownerships .

The confusion between property and wealth probably would have cleared away exceptfor the nonresident owner

To be sure that the situation is clear , let usstate it more concretely . In the ideal single community that we have assumed , suppose Smithowns a farm on which Brown owns a

mortgage . Such a community wouldnot long have attempted to collect the sametaxes on these two property items as it collectedon an unencumbered farm worth I tmight have taxed Smith , the mortgagor , on

and not taxed Brown , the mortgagee ,on anything at all , or have taxed him lightly , onprinciples already explained . In that situationBrown would have made his loan on a “freefrom- tax ” interest rate and , with regard to

taxation , Smith would have been no worse off

than Robinson who owns his farmfree and clear .Or the community might have chosen to taxBrown , the mortgagee , on his mortgage

,

and to tax Smith , the mortgagor , on his equity

of the value of Brown would have

WHERE SHOULD TAXES BE PAID? 61

charged an interest rate based on the fact thathe must pay taxes on his mortgage

,and Smith

would be no better and no worse off than b efore .

Suppose a corporation ownn land,factory

,

machinery , and goods to the market value of

Each offive men owns $5000 ofbondsof the corporation , secured by a mortgage on

all the property of the corporation , a total ofin bonds . Ten shareholders own all theof stock ofthe corporation , $5000 each .

The situation between the bondholders and thecorporation is j ust the same as the Situationbetween any individual property owner and hismortgagee , and may be handled in the same way .

That still leaves us to consider the question of

taxation as between the corporation and theshareholders . The community would either taxthe shareholders on the value oftheir shares , oron $5000 each , or it would tax the corporation .

I f the bondholders were taxed , the tax to thecorporation would be on or, i f they werenot taxed , it would be on Observe thatthe division of ownership between the stockholders and the bondholders does not , in itsel f ,give rise to any problem . The market valueof the stock takes into account the existence ofthe bonds . I f the community should tax theshares , it would tax the bonds or else tax the


corporation on the value represented by thebonds .Under the actual conditions we do not alwayshave the mortgagor and the mortgagee living inthe community in which the tangible property islocated . We do not always find all the tangibleproperty ofa corporation and all its bondholdersand stockholders in the same community . Asthe machinery by which business is done becomesmore intricate , and socia l conditions generallymore complex , the residence of people who own

or have an interest in tangible property becomesmore and more likely to be in some place otherthan that in which the property is located .

Where shall such non - resident owners pay theirtaxes?

Difi'

erent treatment of the direct and the indirectowners ofwealth

Let us take the simplest case . Suppose Brown,

who lives in Blackacre , has invested inbuying a house in Whiteacre , in another State ,and rents it for $ 1000 a year . In actual practiceno difficulty has arisen over this situation .

Brown pays taxes in Blackacre on his real estatethere . The community ofBlackacre feels satisfied that he should not pay any taxes there onaccount of his investment in the Whiteacrehouse . Jones , who lives in Blackacre , invests


in a mortgage on a lot and building inWhiteacre . In this situation the

_community of

Blackacre does not feel satisfied unless Jonespays a tax in Blackacre on account ofhis investment in the Whiteacre property . Both Brownand Jones have invested in Whiteacrereal estate . DO the legal arrangements surrounding the two transactions , the agreements be tweenparties , the amount of risk that each accepts withhis investment , have anything to do with thequestion oftaxation?Our earlier argument wentto show that each should be treated al ike in thematter of taxation and also what constitutedequal treatment . No economic reason presentsitself for treating them differently when theyreside in one community and the real estate inwhich they have invested lies in another .To make the situation stil l more concrete

,

suppose Brown and Jones live in Boston and thereal estate in each case is a farm in Oregon . Thejurisdiction making the tax laws for Boston , theCommonwealth ofMassachusetts , realizes that i fBoston taxes Brown say 1 5 per cent on his inves tment in addition to a similar amount the Oregoncommunity taxes him , he will be paying the totalvery heavy tax of say 3 per cent . I t considersthat unfair to its citizen Brown . But why shouldMassachusetts discriminate between this kind of

an investor beyond its borders , who accepts the


risks of complete ownership for the sake of ananticipated greater return , and an investor who ,refusing to accept so great a risk , insists on theprotection ofan equity?I s there any difference in the possibility of

shifting the incidence of taxation in these casesthat should make a difference in treatment?Brown cannot charge any more for the produceOf his farm , to make up for the extra tax ofper cent he pays in Boston , than is charged by aman who lives on his own farm in Oregon . Wehave said , however , that if a community taxesa creditor on his credits , he will shift the tax tohis debtor in the form ofa higher interest rate .

That is true ; and the fact that most taxingjurisdictions tax mortgages , at least

“foreignmortgages of this kind , means that the Oregonborrower pays an interest rate higher by theaverage of this taxation than he would if thesejurisdictions did not tax such mortgages . Asalready seen

,the Oregon borrower cannot shift

the burden of the tax by charging higher pricesthan the Oregon farmer who owns his farm clearand free . So the taxation of foreign ” mortgagesin Massachusetts and other taxing jurisdictionsworks to the disadvantage of the Oregon b orrower . But why , the legislator asks , shouldMassachusetts be concerned about that?


plunder from other States on letters ofmarqueand reprisal . But does a State really profit somuch?

Lending and borrowing communi ti es

What would happen if one State now taxingforeign mortgages should give up taxing them ,

but all other States now taxing them , shouldcontinue th is taxation?I t would have an effecton the interest rate of the Oregon borrower because , under financial , as Well as under physical ,law , no force Operates without a result ; but theeffect may be as diffi cult to measure as the pull abase-ball in the air has on the earth . For a Stateto do away with the taxation of foreign mortgageswould remove the burden of that State ’s taxation not only from the Oregon borrower , but fromall other foreign mortgage borrowers , all of whomare bidders for capital . The capital supply of

these foreign borrowers comes not from one

State alone,but from all lending States . The

surplus funds of one State available for foreignmortgages is not sufficient for the foreign borrowers , so they must bid enough to overcome thetaxation handicap on their borrowing in the otherStates .For the purpose ofclari fying the argument by

being concrete,let us assume that if Massa

chusetts should give up taxing foreign mortgages


at a tax rate which averages (i f paid) say percent , the interest rate to foreign borrowers woulddrop . 10 per cent . That is

,i f foreign mortgagees

now average to pay 6 per cent , they would thenaverage to be paying per cent . Of course

,it

is impossible to say what the result would be inadvance ofthe fact , and very likely it would beimpossible to say what the result was after thefact . Many variables of the financial marketchange so rapidly that at any given time theresult of a change of this kind might not be traceable . These figures do not represent even mereconjectures

,but simply serve as symbols in the

argument . Assume that this change has takenplace . What has happened?When the lenderpaid a tax , he received $60 in interest on each

$ 1000 invested , paid the State $ 15 in taxes , andhad a net return of$45 . Now that the State doesnot exact any tax , the lender receives and keepsas net $59 in interest on each $ 1000 invested .

The citizen has gained most of what the Statehas lost . His gain reduces the real net loss to thecommunity to $1 out of$60 .

Massachusetts giving up its tax would imposea like net loss on all other lending communitiesand give a corresponding benefit to all other borrowing communities . Ifall lending communitiesshould give up their tax , which , let us assume ,averages per cent , if would not follow that the


interest rate to the borrowing community woulddrop from 6 per cent to per cent . Since thetaxing communities have no method of assessingthese foreign mortgages , other than the declaration of the owner , presumably many such mortgages escape taxation . Every credit that does notpay a tax tends to l imit the effect of taxation onthe interest rate . AS the interest rate fell off, thedemand for money would increase and preventthe full decline in the interest rate . Therefore , i fthe taxation averages per cent and shouldall be taken off, the decline in the interest ratemight be from 6 per cent to per cent .Our earlier discussion ofthe taxation Of creditsand other intangibles assumed uniform tax lawsoperating over the whole nation and the nationas one community in interest . I t assumed evensomething more of an ideal and less of a realitythan this in assuming the nation as the only community . The nation as a community , however ,is so large that it has debtor and creditor sections ,and the division ofthe nation into States , each ajuri sdiction establishing tax laws , leads to one

section endeavoring to gain an advantage overthe other . To some extent the endeavor can besuccessful . What would be the effect of thedebtor community taxing the mortgage?Thatwould very simply and directly , in the mannershown in the earl ier discussion oftaxing credits ,


result in an increase of the interest rate to theborrower to cover the tax on the lender .

Where taxes should be pa id as tested by those taxes

due on account ofservice received

This leads directly to the question ofwheretaxes Should be paid . We have taken as the basisoftaxation two principles , THE COST OF PERF ORMIN$ THE PUBL IC SERV ICE TO PA$ FOR WH ICH THE

TAX IS LEV IED,AND ABIL IT$ TO BEAR THE PUBL IC

BU RDEN . Do they help in considering where

taxes should be paid as they have in consideringon wha t taxes should be paid?I f a man owns real estate and lives in the com

munity in which the real estate lies , no questionarises . Since his property and residence are inthe same place , he receives all his public benefitsthere and owes all his public obligations there .

Our question does not arise till We have property

(we are speaking now oftangible property) in onecommunity and the owner residing in another .Suppose the property is real estate : that Jonesowns a house in Hartford and lives inWorcester .As a matter of fact he pays in Hartford all histaxes on account of that property . The community in Worcester rests perfectly content atthis situation . Brown , who l ives in Worcester ,has an investment in a mortgage in Hartford .

The people ofWorcester are not satisfied to let


Brown go without paying any taxes in the city ofhis residence . I s there a substantial differencebetween the situations of Brown and Jones tojustify this difference in feeling?Let us firstconsider the case ofJones .He lives in Worcester and owns a house in

Hartford . The community ofHartford bears allthe expense ofthe public activity for the benefitof that house highways , fire and police protection . Excepting for the practically negligiblefact that some action on account ofit , say sometort action , might be brought in the Massachu

setts courts as having jurisdiction over the personofthe owner , the Worcester community bears noexpense of public activity because of Jones ’sownership ofth is Hartford property .

Where taxes should be pa id as tested by those taxes

due on account ofabili ty to pay

How about those public activities which do notbear any relation to the private ownership of

wealth?Schools have been ourtypical example ofthese . Let us assume that Jones is childless , andtherefore imposes no expense on the publicactivity ofWorcester in the matter ofeducation .

Largely because ofpublic activities of th is kind ,as we have seen , the counterbalancing taxationprinciple ofpayment according to ability arose .

As we have stated in ourdiscussion ofthat prin

WHERE SHOULD TAXES BE PAID? 7 1

ciple , it represents part of a moral ideal , of analtruistic obligation of the individual , which thecommunity impresses to the extent ofoffsettingexpenditures which it sees fit to make withoutrepayment from the beneficiary . Where doesJones owe his Obligation to pay taxes accordingto his ability in the community in which hel ives or in the community from which he deriveshis income?The community in which a man owning wealthl ives

,though all the wealth lies in some other

community , generally feels that he should bearsome share of the public burden of his place ofresidence and pay some taxes there . The feelingseems reasonable . I f a man chooses to live in acommunity , his fellows in that community naturally fee l that he should identify himself with it ,that its interests should become his interests

,and

his ability become available for its undertakings .A man with wealth in one community

, who

chooses to l ive in another , would himself preferto contribute to the community of his residence .

I f he must make a certain total contribution forcommunity purposes out of his wealth , he wouldprefer to make a considerable part ofit , at least ,to the community in which he dwells .On the other hand , h is ability to pay arises inthe community in which his wealth is located .

Nou-resident owners ofwealth in that commun


ity feel conscious of this . Especially if they areemployers of labor there they feel a sense of

obligation . Members of the community feel thatthe nonresident owner owes a duty there . I t isimpossible to say that the claims ofone community so outbalance those of the other that theclaims of the other should not be recognized . Ifeel that the community in which the wealth lieshas a much larger claim on the owner ’s abilitythan the community of his residence . But inwhatever proportion , it seems evident that thepart of the tax he pays on account of h is ability ,as opposed to that part he pays as his share ofthecost of public activities for the benefit of hiswealth , might properly be divided between the

two communities .Jones , who l ives inWorcester and has investedin a house in Hartford , which he rents , does not ,as we have seen , pay any taxes in Worcester .The community of his residence acquiesces

,

under’r

these circumstances , in the payment Of al lh is taxes in the community in which his wealthlies . Now , let us take up the case of Brown , wholives in Worcester and has invested in a mortgage in Hartford . In this case Worcester takesthe position that Brown owes all h is tax obligation to the community of Worcester , treats himas if his investment represented so much wealth

in Worcester . We have seen , however , that the


economic Situation on which taxation should bebased is concerned they are in the position of

j oint owners . I t is immaterial that in the legalsituation Robinson may , by the machinerythrough which the law works , orby private stipulation with Brown , actually appear as if payingthe whole tax . Aswe have seen , that is immaterialso far as Hartford is concerned . I f Robinson paysit , he deducts so much from the gross income ofBrown on account ofthe property .

1

1 Jurisdict ions not taxing mortgages at all — whetherthe rea l estate mortgage is in orout ofthe Sta te :Ca l ifornia ,

De laware , Idaho , Utah , Wa shington .

Alabama has a mortgage recording tax formortgages onrea lty in the State , but taxes mortgages on rea l ty outside ofthe State .

Connect icut does not tax mortgages on rea lty in the

Sta te . Mortgages on rea lty outs ide the State may be re

corded with the State Trea surer and a tax pa id at the rateof4 mills per annum . Otherw ise they are taxable at the

ful l genera l property rate .

Iowa taxes at 5 mills per annum , Whether the propertymortgaged is in or out ofthe State .

Minneso ta ha s a mortgage recording tax formortgageson rea lty in the Sta te amount ing to three tenths ofa mil lperannum and taxes mortgages on rea lty outside the Stateat 3 mills per annum .

Maryland taxes a t the rate of something over 3 millsper annum whether the mortgage is on rea lty in or out of

the Sta te .

Michigan has a mortgage recording tax of 5 mills on

mortgages on rea lty in the State . The ownerofa mortgageon rea lty out side ofthe Sta te may register it as free fromfurthertaxa t ion on the payment ofa 5 -mill tax .

New York ha s a mortgage recording tax of .5 per cent


Our discussion has Shown that a taxation of

such representatives of property as mortgages ,

for the l ife of the mortgage on rea lty in the State ; mortgages on rea lty outs ide the State may be stamped underthesecured debts tax law free from further taxes on the payment of .5 per cent for the l ife ofthe mortgage .

Pennsylvania and Rhode I s land tax mortgages 4 mil ls perannum whether the property is in or out ofthe State .

Wiscons in ha s an income tax rea ching income from mortgages whether ou rea lty in or out ofthe State .

Assuming that per cent represents an average rate of

taxat ion , it appea rs tha t these specia l rates tax mortgagesfrom one fifth to one third ofthe ra te on tangible property .

Since taxable property is se ldom a sse ssed at its ful l va lue ,and these mortgages are , in the nature ofthe ca se , a ssesse dat 100 cents on the do llar inve sted , the proport iona l taxat ion ofthe mortgages is even higher. Cons idering the factthat this form ofproperty imposes only a s l ight cost on the$ overnment , and a tax on it in excess ofthat cost is essent ially not a tax on ability , but a s it works out is rathera taxon a form of do ing bus iness , even these reduced ra tes of

taxat ion seem ra therhigh . On a mortgage running forthreeyears the New York rate amounts to mills and on a

mortgage running five years to 1 mill per annum . Thisactua l ly works out to some thing lower from the pract ice ofextending ”

the mortgage , i .e ., renewing the debt without

changing the mortgage securing it , so tha t the mortgagemay run for severa l terms w ithout a new recording.

The rate under th is New York tax seems approximate lya fa ir rate under present circumstance s .

Jurisdict ions not taxing mortgages on rea lty in the State ,but taxing mortgages on rea lty out s ide the Sta te are

Co lorado , Louis iana , Ma ine , Ma ssa chusetts , Nebraska ,

New Hampshire (provided the ra te of interest on a mortgage in the State does not exceed 5 per cent ) , New Jersey ,Wyoming .

Jurisdict ions taxing all mortgages , whether the rea ltymortgaged is with in oroutside the State are :


bonds , and stocks in itself amounts to a taxationofa form ofdoing business . The growth of thisclass ofproperty , and the amount of non- residen townership increasing coincidently with it

,and

partly because ofit , especially in its newer formsofthe corporation security , developed a feeling inthe community that a resident , ofObvious abilityto pay on account ofhis ownership ofnon- localwealth , ought to pay taxes in the community of

his residence . Non- resident direct owners constitute a small class compared with these non

resident investors through the forms of indirectownership furnished by such instruments as themortgage and the corporation security . I t seemsfair as a premise that a resident in a community

,

able to pay taxes , should pay them . I t is not soeasy to see that the real wealth which actuallyconstitutes h is ability pays taxes somewhere else .

Even when it is seen , the foreign payment of

taxes seems so entirely unsatisfactory from thelocal viewpoint that the community of residence

Arizona , Arkansa s , Florida , $ e orgia , I ll ino is , Indiana ,

Kansa s , Kentucky , Miss iss ippi , Missouri (if the mortgageis on rea lty outs ide the Sta te , taxa t ion depends on whetherthe tangible thing , the note , evidencing the mortgage everwas in the Sta te ) , Montana , Nevada , New M exico , NorthCaro l ina , North Dakota , Ohio , Oklahoma (except tha tmortgage s he ld by a building and loan associa tion in the

Sta te , when given by a re sident on rea lty in that State ,a re exempt ) , Oregon , South Caro l ina , South Dakota ,

Tennessee , Texas , Vermont , Virginia , West Virginia .


insists that the resident pay taxes anyway , i rrespective ofwhat happens anywhere else . Thecommunity ofresidence sees the unfairness mostclearly in the ca se ofthe direct ownership ofnonlocal property , the situation of the man inWorcester owning a house in Hartford . Exceptin the rare instance of an income tax which isenforced , the community makes no attempt totax a resident because ofhis ability on account ofhis direct ownership ofnon-local property . So far

as the feel ing that a resident who is rich on ac

count ofhis ownership of non- local wealth shouldnot escape from a share ofthe community burdenresults in a demand for taxing him , that demandshould extend to a resident who directly ownswealth located outside ofhis place ofresidence aswell as to the resident who owns it through theintervention ofan intangible .

The inability ofmost citizens untrained in economics to understand that a credit , though property , is not wealth , creates a great difficulty in theway of fair taxation in itsel f and largely adds tothe perplexing situation created by the nonresident owner . The positions of the variousjurisdictions in taxation matters indicate clearlythe obstacles to correct thinking as well as otherdifficulties in the way offair results . Those jurisdictions which tax all mortgages

,both those on

realty within the State as well as those on realty


outside the State , Show a failure to appreciate thedistinction between the legal property of a creditand the actual existence of economic wealth .

Jurisdictions which tax mortgages on propertyoutside the State , but do not tax mortgages onproperty within the State , do appreciate the distinction between legal property and economicwealth , but want to reach the ability ofthe resident who has invested outside the jurisdiction .

There i s as real a conflict of interest among thecommuni ties wi thin a State as among the state

communities

As a matter of fact , those jurisdictions whichtax all mortgages , those on realty within theState as well as those on realty outside the State ,have a practice nearly as easy to defend on principle , except the principle of piracy on otherStates , as the practice of those jurisdictionswhich tax mortgages on realty outside the State

,

but not those on realty within the State . Thecommunity of Worcester fails j ust as much toget at the ability

”ofa resident who invests in

mortgages in Springfield , Massachusetts , as itwould if it could not tax the resident who investsIn mortgages in Hartford , Connecticut .In Worcester , wealth in Springfield in the

same State is just as much non- local as wealth inHartford in another State . So taxing residents on

WHERE SHOULD TAXES BE PA ID? 79

their mortgages on p roperty in other Statesreaches only part ofthe problem .

Sometimes a j urisdiction appreciates the distinction between a legal property right and realeconomic wealth in its application to the stock ofa corporation when it does not show an appreciation ofthe distinction in its application to a creditin the form ofa mortgage or a corporation bond .

Since the shifting ofthe incidence of the tax tothe borrower helps obscure the situation in thecase of a credit , the distinction is clearer in thecase ofa stock . I t is fairly easy to follow throughthe process whereby the payment of a tax by acorporation comes out ofthe pocket of the shareholder . 1

1 To il lustra te the variat ions ofmethod in taxing stock ,the taxa t ion ofthe stock ofmanufacturing corpora tions isgiven in this note . Since financia l corporat ions , as banksand insurance compan ies , and to some extent public servicecorporat ions are trea ted different ly by the States in taxa t ionfrom the stock of manufacturing corporat ions , it is not

poss ible to make a genera l statement about the taxat ion of

stock that would apply to the stock ofall kinds ofcorporat ions .

Al l stock is taxable , whether the corporat ion is incorporated in the jurisdict ion or not , in Oregon and Wyoming .Stock is taxable , if the corpora tion is incorporated out

s ide the jurisdict ion ,in Co lorado , Florida , $ e org ia , I l l ino is ,

Indiana , Louis iana , Massachusetts , Michigan , Miss iss ippi ,North Caro l ina , North Dakota , Texa s , and Virgin ia .

In Iowa , stock in a manufacturing corporat ion incorporated outs ide the jurisdict ion is exempt if tangible propertyof the corporation is loca ted in the State ; otherwise the


Some jurisdictions tax the stock of corporations incorporated outside the j urisdiction

,but

stock is taxed at the specia l rate of5 m il ls on the dollar ofassessed va luat ion .

InMaryland , it is taxed at the rate of3mills forthe loca ltax and mills forthe State tax , ora tota l tax of mills .

Stock ofcorporat ions incorporated in Maryland is taxed ,but the corporat ion pays the tax.

Stock ofmanufacturing corporat ions incorporated in thejurisdiction is not taxed in :Arkansa s , Co lorado , Connecti

cut , De laware , District o i Columbia , Florida , $ eorgia ,

I l l ino is , Kansa s , Kentucky , Louis iana , Massachusetts ,Michigan , Miss iss ippi , M issouri , New Hampshire , New

Jersey , New York , North Caro l ina , North Dakota , Ohio ,

Oklahoma , Tennessee , Texa s , Virginia , Washington , and

Wisconsin .

Stock ofmanufacturing corporat ions incorporated in thejurisd ict ion is not taxed if the corporat ion has i ts tangibleproperty in the States l isted be low. Whetheror not all theproperty must be in the Sta te has not in every case been decided :Arizona , Ca l ifornia , Idaho , Indiana , Ma ine , M innesota , Montana , Nebraska , Nevada , New Mexico , RhodeI s land , South Caro l ina , South Dakota , Utah , and West

Virginia .

Pennsylvania taxes the stock ofmanufacturing corporat ions incorporated in or out ofthe jurisd ict ion , in proportion to the amount ofproperty ofthe corpora tion loca tedin the Sta te , a t the rate of5 mills . The corporat ion pays thetax . Stock ofa corporat ion incorpora ted in another Sta te ,and not having any property in Pennsylvan ia ,

is taxed tothe ho lder at the rate of4 mills .

Stock ofcorporat ions incorporated outs ide the jurisdict ion is not taxed if its tangible property is loca ted in the

State (whether all its property mus t be in the Sta te hasnot in every ca se been decided ) in : Arizona , Arkansa s ,Ca l iforn ia , Idaho , Kansa s , Kentucky , Ma ine , Minnesota ,

Montana , Nebraska , Nevada , New Mexico , Oklahoma ,

82 PR INC IPLES OF TAXAT ION

corporation may have its property in more thanone jurisdiction . An individual is taxed on eachpiece of property . The stock of a corporationrepresents al l its property . I f only part of thecorporation ’s property lies in the taxing jurisdiction , shall its stock be freed from taxation?Jurisdictions answer this question differently .

One would assume that the taxation Of bonds ,certainly ofmortgage bonds

,would follow the

rule of taxation ofthe ordinary mortgage givenby an individual . The corporation mortgages itsproperty just as an individual does . Joint ownership by bondholders ofthe corporation mortgagedoes not affect the large principles involved .

The corporate form , however , has confused theissue , and some jurisdictions treat a bond and anindividual mortgage differently .

1

1 Ca l ifornia , Co lorado , Ma ssachusetts , New Jersey , andWyoming exempt from taxat ion bonds secured on rea l estate in the jurisdiction .

The fol lowing jurisdict ions tax them , a lthough they donot tax individua l mortgage s on rea l ty located in the jurisdict ion : Idaho , Louis iana , Ma ine , Utah .

The fo l lowing jurisdict ions tax bonds secured by a mortgage on rea l ty outs ide the State , but do not tax individua lmortgages on rea lty outs ide the State : Ca l ifornia , Idaho ,

Utah .

Rhode Island , oddly enough , appears to tax ind ividua lmortgages on rea lty in the State at its cla ssified rate , but to

exempt the bonds ofcorpora tions having tangible propertyin the Sta te .

Iowa , Maryland , M inneso ta , and Pennsylvania pursue a

WHERE SHOULD TAXES BE PA ID? 83

I t is no part ofour purpose at this point to discuss the taxation of the intangible values represented in the stock ofa corpo ration . We will takethat up later in an express discussion Of thetaxation of corporations . So far we are considering corpo rate securities as being , l ike mortgages ,representative of economic wealth . This seemsthe proper place , however , to mention again thetaxation of credits other than those secured bymortgage . The fact of a mortgage seems imma

terial to the matter of taxation . The essentialthing is that most business credits represent capital invested in some tangible form ofproperty .

pol icy ofclassifica t ion ofall bonds , and Connect icut , NewYork , and Michigan permit them to take advantage ofa

registra tion law . In Connect icut this amounts to a 4-mill

annua l tax . In New York and Michigan it is .5 per cent ,and exempts the security from further taxat ion during itslife . Missouri fo l lows its practice in the ca se ofa mortgageand makes its taxat ion ofthe bonds ofcorpora tions , whoseproperty is outs ide the State , depend on the phys ica l presence ofthe evidence of the security in the State . Sincethis was written Massachusetts has enacted a statue (approved July 7 , 19 14) providing that a bond secured bymortgage on tangible property s ituated within orwi thoutthe Commonwea l th , which is subject to taxat ion wherevers ituated , and which is there actua l ly taxed , sha l l be ex

empt from taxat ionforone yearwithin the Commonwea lth ,if the fact ofthe taxa t ion of such property is determinedby the tax commiss ioner and the bond is regist ered by thecommissioner on rece iving a fee of30 cents on the $ 100

par va lue . This would amount to a 3-mill annual tax .

The constitut ional ity ofthis statue is yet to be tested .


Since both realty and economic capital in theform ofchattels enter alike into the productionofwealth , and may be taken to have a value inproduction represented by their market price ,there does not seem to be any sufficient reasonto distinguish in taxation between the represemtat ives ofrealty and of chattels . The question ofthe taxation by the community of residence seemsthe same whether the investment was made directly or indirectly and whether it was made inrealty or in chattels . I f there is no tangibleproperty back of the credit , available , that is ,through the various legal processes to satisfy thedebt , then the mere legal ” property imposesvery sl ight charges on the community and nowhere produces ability to pay .

A given tax , we have seen , may be regarded ashaving two parts , one part levied according tothe cost of government activity for the benefitOf whatever the tax is levied on , the other leviedaccording to considerations ofability to pay . I fwe could strike the line between these parts , andwith the help ofthe result again divide that taxwhich should be paid on account ofability into

tw o parts , one that which should be paid in acommunity on account of the physical presenceofwealth there , and the other that tax whichshould be paid in a community on account of theresidence ofthe owner ofwealth , we should reach


a fair solution ofthe problem . Assuming that itwere possible to make these divisions

,levy ing

taxes in accordance with them would still meetwith two great diffi culties , the unwillingness ofthe community ofresidence to let a resident offfrom taxation at anything less than his fullability

,and the unwi ll ingness ofthe community

in which the tangible property , the wealth , i slocated to let the non-resident owner Offwithanything less than his full ability on account ofthat wealth . The community ofresidence oftheowner ofwealth located in another community isunwilling to make any allowance in the taxationfor the cost ofthe property to the community ofits location , and insists on taxing its residentjust as i f his wealth were located at his place ofresidence instead ofelsewhere .

Though it would probably be impo ssible toreach an agreement as to exactly what part ofthetotal tax levied on wealth should be paid on

account of the residence of the Owner and whaton account ofthe location Of the wealth , stil l itwould not seem impracticable to take these asguiding principles in any plan of taxation . Ourargument would indicate that they are the rightprinciples and we can test the fairness oftaxation by them . For example , we can see that totax representatives of wealth any considerableamount taxes wealth held in a representative

86 PR INCIPLES OF TAXAT ION

way disproportionately to wealth held directly .

This is true even after granting that to tax itsomewhat higher , on account of the Sl ight expense the representative form imposes on theGovernment , does not tax it dispropo rtionately .

Unless we find some way to separate the taxon directly Owned property into that part whichshould be paid on account ofthe residence oftheowner and that part which should be paid on

account of the location of the wealth , and of

levyn it accordingly,and making it equal to

that levied on both accounts on wealth ownedrepresentatively , we should not endeavor to givethe community of residence a large tax on

account of representatively owned wealth . For

the present , to attempt to tax a resident on

account of his direct ownership of wealth inanother community probably presents too novelan idea to meet with any acceptance . Directlyowned wealth presents no peg to hang the taxon . A mortgage , a bond , a share of stock havebecome concepts in themselves apart from thewealth they represent . A direct title to wealthhas not become formulated into any such concept . Consider the case of a resident own ingwealth located in the community of h is residence . For the community of his residence tosay that a part of his tax is paid there on accountofhis residence , equivalent to a part which non


resident owners pay in the community of theirresidence

,would make the total tax that a

resident owner of local wealth pays in his community greater than the tax which a non -residentowner pays there . I t is almost impossible toimagine a community at present enduring such asituation .

Courts ofthe community of residence are openfor the enforcement of the property rights .Since the owner ofthe property rights generallykeeps the evidence ofthem where he resides , thecommunity of residence bears whatever burdenofpolice protection there is . So it seems properthat whatever taxation i s levied on these representatives of wealth should be levied by thecommunity of residence . SO far as the tax exceeds the cost to the public on account of theform ofdoing business , ofowning the property ,wemay consider it that part ofthe tax on wealthto be paid in the community of residence ratherthan in the community where the wealth islocated . Unless some equivalent of this excessis levied on directly owned wealth

,whether the

owner resides in the community where the wealthis located or not , we shall have to consider thetax as unequally levied , j udged by any fairprinciples oftaxation .

No reason in principle appears forplacing anyofthese representatives ofproperty in different


classes in any classification ofproperty for taxation . The same principles apply to all , notes ,mortgages , stocks , and bonds . The most reasonable solution of the tax problems they presentseems to be for the community of the residenceof the owner to tax them all alike at some lowrate .

1

A tax on wealth to cover that part ofthe totaltax which should be paid at the place ofthe location of the wealth irrespective of the residenceofthe owner , and a tax on income to cover thatpart of the total tax which should be paid atthe place of residence of the owner , irrespectiveof the location of the property , would be oneanswer to the question ofhow to tax the residentowning wealth in another community withoutunduly favoring the direct owner ofwealth as

against the man who owns it representativelythrough mortgages , securities , etc . We havealready discussed the fact that a tax on incomes ispartly a tax on risk rather than on ability andhave seen some objections to it as compared

1 The jurisd ict ions adopting this form , tax as we haveseen a t from 3 to 5 mills per annum . Even the lower ofthese is too high . Bringing all stock into the catagory of

taxables would in some jurisdict ions he lp offset loweringthe tax on bonds . On principle , stock should be taxed on thesame bas is a s bonds . Not to tax stock and to tax bondstends to force investment funds into the channe l ofthe morespeculat ive investments . Th is is not fa ir to the conservat ively inclined investors .

CHAPTER V

HOW SHOULD TAXE S BE ASSESSED?

COMMUNITIE S are coming to an understandingofthe weaknesse s ofthe system of locally electedassessors usual throughout the United States .I t is simply human for a man to desire to pleasethose who have elected him and those on whomhis continuance in Office depends , and the desireto please may often work counter to that strictjustice with which assessments should be made .

This fact makes a special obj ection to electiveassessors in addition to the many general ob

jections to elective administrative officers . Thevalue ofexperience is not greater in any occupation than in that ofthe assessor .

Boards ofequali zation

First efforts made to correct'

the evils ofa system of local ly elected assessors take the form of

central boards of control , often called boards ofequalization . These state boards vary in powerfrom merely nominal authority to a large measure

ofcontrol . I t takes the form ofa right to correctthe findings ofthe local assessors and sometimes

ASSESSMENT OF TAXES 9 1

to instruct them and to supervise their work. Agood board with real , authority can accomplisha great deal .Though giving such boards a right of reviewover the findings of the local assessor , and somemeasure ofauthority over him , lessens the evi lofthe elective nature ofthe Office , it does not doaway with it . I t would seem desirable to abolishthe system ofelective assessors and establ ish anentirely central administration ofall assessmentsin the State and central appointment ofall assessors . In order to secure the benefit ofa knowledgeoflocal values it would undoubtedly be desirableto appoint local men . Such a man appointed bya central authority and having a permanenttenure of office would be in a vastly differentposition from the same man elected for shortterms by his neighbors whom he is going toassess . He might not be altogether removed fromthe tendency ,

for example , to assess the propertyof non- residents more heavily than that of hisresident neighbors , but that and other undesir

able tendencies would be checked . (By way of

an aside it may not be inappropriate to remarkon the tendency of communities to be eager intheir invitation to foreign capital and inhospitableto it after its coming .)


Centraladmini stration more readily suppliesdesirable special expert knowledge

In a centralized system ofassessment it wouldbe easier to supply that expert knowledge necessary for the proper appraisal ofspecial classes ofproperty . No one man , or even several men , canpossibly have the knowledge necessary formaking a correct valuation of all the varieties of

wealth in modern economic communities . Tovalue land alone calls for a high degree of expertskill . I t is hardly possible that a man capable ofvaluing land and making an approximate ap

pra isal of the value of the common structuresshould have the skill necessary to value any of

the other common forms ofproperty . A centraladministration could supply the expert knowledge necessary to assess factories , mines , timberlands , stocks of goods , securities , or whateverproperty there might be in a community forassessment .We shall later discuss briefly the separation ofthe sources of state and local revenue . I t may bestated here , however , that the system , even moregeneral formerly than it now is , ofraising all ormost ofa State ’s revenue by simply imposing inone way or another the state tax on the localassessment , leads to special endeavor on thepart oflocally elected assessors to give their com


value . I f the assessments are at full value , inequalities become at once more apparent .There is not the obscuring necessity of goingthrough a mathematical computation to see j ustwhat the real situation is . Actual things are moreor less known things and current topics ofremark .

They are not sta ted or thought of in terms ofhalf the value . I f Smith ’s house and lot areworth and are assessed at that , whileBrown ’s house and lot , also worth areassessed at only $9000 ,

Smith is more likely tonotice and object to the discrepancy than hewould be if his house was assessed at $5000 andBrown ’s at $4500 . As appears from this example ,the unfairness does not seem as important on thefifty per cent assessment basis as i t does on theone hundred per cent basis .

Why securities should be a ssessed at market value

Securities should be assessed at their actualmarket value j ust the same as any other property . Ordinary real estate mortgages may fairlybe taken at par . They are regularly placed atpar

,that is the mortgage is given to cover the

actual amount advanced and the interest rate isadjusted to take care ofthe varying elements ofrisk and the changing values of capital . Sincethey run for relatively short terms they arekept constantly adjusted to changing conditions .

ASSESSMENT OF TAXES 95

Par always represents practically the marketprice . The situation is very different with securities . Corporations Often issue bonds below par ,and sometimes above par . During their l ifeconditions both within and without the corporation may change so much that th e issue pricemay have l ittle to do with present value . This iseven more noticeable with stocks than withbonds . On ly an appraisal ofvalue affords a fairbasis for taxation . Appraising the value ofsecurities i s no more difficult than appraising thevalue ofreal estate .The market should be the basis ofestimatingvalue for assessment . Market value expressesthe consensus of opinion as to actual value .

Probably market value approximates real valuenearer than the Opinion ofany individual couldfor a whole class ofproperty . In many ca ses it is afact much easier to arrive at than an appraisalbased on an individual Opinion , which mustascertain many facts on which to base theOpinion .

Since our discussion is concerned mainly withwhat constitutes fair taxation , we will not gointo these questions of administration further .

Difficulties of administration may sometimesmake what would be a fair tax inexped ient inpractice .

CHAPTER VI

SHOULD STATE AND LOCAL TAXATION BE

KEPT APART?

CURRENT theory and practice in taxation tendto separate the sources ofstate and local revenue .

Two forces have worked to produce this tendency .

We have already referred to one . It is the unfortunate effect on loca l assessments ofsuperimposing the state tax on the same property and underthe same assessment as the local tax . Thismethod of raising the state revenues producesa constant effort on the part ofone communityto gain an advantage over another by means of

underassessments . Some States have sought toreach this by limiting the tax rate a communitymight impose . Even boards ofequalization havenot in general been able wholly to remedy theevil . SO one way out ofthe diffi culty , or, at least,of lessening it , has been sought through havingthe State reserve to itsel f certain subjects oftaxation . Centralizing tax administration wouldseem the nearest means ofmeeting this situation .

The natural development ofcertain special taxesand the growth ofcertain forms ofwealth , whichdo not lend themselves readily to local assessment and taxation , has been the other force


Some subj ects oftaxa tion do not lend themselves tolocal assessment

Some subjects certainly do not lend themselvesto local assessment . The absurdity ofthe assess

express companies ; Sta te a sse sse s ra ilroads and street ra ilways , telegraph and te lephone companies , on basis ofgrossrece ipts , reta ins part ofthe tax, and distributes the rest to

the loca l communit ies .

NEW HAMPSHIRE State assesses property of street

and steam ra i lways , col lects the tax ,reserves part ofit for

state purpose s and distributes the rest loca l ly. The Sta tetaxes exclus ive ly for state purpose s the property of te legraph , te lephone , express , and car companies , except thatthe irrea l estate not used in the irord inary bus iness is taxedloca lly .

VERMONT Transportat ion and transmiss ion companies , other than pa lace car and express companies , have theopt ion ofbe ing taxed on property oron gross earnings . The

ta xat ion is forsta te purposes . Express companies are taxedby the State for state purposes on the mileage ofthe irrouteand pa lace carcompanies on the ircapita l used in the State .

OH10 :— Al l property of steam , street , suburban , and

interurban ra ilroad compan ies , a s assessed by the State TaxCommiss ion , is taxed loca lly for state and loca l purposesunder the genera l property tax. Rea l estate necessary forthe da i ly operat ion ofthe ra ilroad is trea ted as persona lty ;other rea l estate is taxed like that of individua ls . In addit ion to the genera l property tax , ra ilroads pay to the Statefor state purpose s a tax on gross earnings . The ent ire property of expre ss , te legraph , and te lephone companies is a ssessed by the State Tax Commission on the ba sis of the

market va lue of the capita l stock . Then the proport iona lva lue ofthe property within the State is determined on a

mileage bas is and is taxed under the genera l property taxfor sta te and loca l purposes afterdeduct ing the va lue oftherea l esta te owned and taxed in Oh io . Besides this general

STATE AND LOCAL TAXATION 99

ors in each local community making an assessment ofthe property located in that communityofa railroad running through it is apparent . Thelocal assessors have no technical knowledge tohelp them in estimating the value ofa property .

However skilled they might be , they could notvalue a piecemeal part Of a whole system . Suchdelicate questions arise as the taxation of carsand locomotives constantly passing from onecommunity to another . Obviously the same diffi

culties come up in the assessment ofexpress com

panies , telegraph and telephone companies , pipelines

, orany other property that is not local in itsessential character . A fair assessment can bemade only by considering the property as a whole .

So it seems logical that here , if nowhere else , thecentral authority should make the assessmentand

,perhaps , collect the tax . How much ofthe

tax the State should keep might depend on the

property tax all these corporat ions pay a tax on gross earnings to the State for state purposes .

MINNESOTAz — Steam ra ilroads are taxed 4 per cent ,

te lephone compan ies at 3 per cent , express and fre ight l inecompan ies at 6 percent on gross earn ings . These taxes areregarded a s taxes on property and are pa id to the Statefor state purpose s . They are in l ieu ofall other taxes

, ex

cept the genera l property tax pa id loca l ly for state and

loca l purpose s on property not used in the business .

Tota l state taxes and amounts contributed by certa inspec ified sources oftaxa t ion in New England ,M iddleAt lantic and Eastern Centra l groups are

PRINCIPLES OF TAXATION

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It should be remarked in this connection thatcare should be taken in the segregation ofsuch

road , and ofthe waterway ofeach cana l , and the length ofsuch in each taxing district .

2 . The va lue ofthe other rea l estate used for ra ilroad orcana l purposes in each taxing district , including the roadb ed (other than ma in stem) , waterways , reservo irs , tracks ,buildings , wa terworks , riparian rights , docks , wharves ,piers , and all other rea l estate ,

except lands not used forra ilroad and cana l purposes .

3 . The va lue ofallthe tangible persona l property ofeachra ilroad and ca na l company .

4. The va lue of the rema in ing property , including thefranchise .

In 1906 the ma in stem was declared herea fter to in

clude the roadbed , not exceeding 100 feet in width , withits ra i ls and sleepers , and all structures erect ed thereon and

used in connect ion therewith , not including , however, anypassenger or fre ight building erected thereon .

”

The taxes on the property included in 2 , and known as

second-class $

ra ilroad property , are asse ssed and col

lect ed by the State , but the ent ire amount is pa id over tothe loca l taxing districts , giving each the tax derived fromsuch property s ituated there in .

ILL INOIS Al l st eam and e lectric ra ilroads , except theI ll ino is Centra l Ra i lroad , are subject to the genera l property tax forboth State and loca l purposes . To the a sse ssedva luat ion ofdomest ic roads is added the a ssessment oftheexcess va lue ofthe ir capita l stock , including franchise .

With respect to assessments , steam and e lectric ra ilroadproperty may be class ified as

1 . Property (including“ca pita l stock and franchise

a ssessed by the State Board ofEqua l izat ion ; and2 . Property assessed loca l ly .

Class I consists of(a ) Ra ilroad track , wh ich is taxed as real estate , and

embraces right of way, including all tracks , superstruc

STATE AND LOCAL TAXAT ION 103

properties as the railroads , telegraphs , etc . , forassessment and taxation by the State that thisproperty is treated on a level with propertylocally assessed . Some jurisdictions endeavor ina measure to take care ofthis by providing thatthe rate of taxation shall be an average of thelocal rates throughout the State .

1 This presents

tures , bui ldings , and improvements located thereon . The

va lue ofbui ldings and the va lue per mile ofma in , secondma in , and s ide tracks are separate ly a ssessed by the Board .

Distribut ion to count ies through which the road pa ssesis made upon the ba s is of the length ofvarious kinds of

track in each county , mult iplied by the irrespect ive asse ssedva lues permile , plus the assessed va lue ofbui ldings there in.

(b)“Ro ll ing stock ;

”and

(6) Capita l stock , including franch ise .

Both (6) and (c) are taxed as persona l property and distributed in such proportion as the length of ma in track ineach county bears to the tota l length ofma in track in theState .

D istribut ions by county officia ls to municipa l it ies and

loca l districts are made on a bas is s im ilar to distribut ionsby the State Board to count ies .

Class 2 consists of all property not included in Class I ,and is assessed loca l ly . The informa t ion in this and otherfootnotes in th is chapter ha s been taken principa l ly fromthe reports of the Commiss ioner of Corporat ions on the

Taxa t ion ofCorporat ions .

1 InWiscons in , for example , the Tax Commission determines the average rate oftaxat ion by d ividing the aggre

gate taxes levied on the genera l property in the State forall purposes (except a ssessments for loca l improvements )by the true ca sh va lue ofsuch property a s a scerta ined bythe Commission . The q uot ient thus obta ined const itutesthe average rate of taxa t ion . It should b e noted that assessment is especia l ly central ized in Wisconsin.


another reason for insisting that all assessmentsbe at the full value of the property

,and shows

further advantages of a centralized administration of all assessments .There hardly seems to be an adequate reasonfor taxing railroad , telegraph and telephone , andother properties that are not loca l more or lessthan manufacturing and other properties thatare local . Even assuming that a railroad

, say ,

can shift the incidence of the tax and collect itfrom passengers and shippers in the rates itmakes , there is no reason formaking such a public service corporation 3 medium for the collection oftaxes , orfor the users oftransportation tobe especially taxed . Besides , the assumption thatthe public service corporation can shift the incidence ofthe tax is not necessarily true in view ofthe fact ofsupervision of rates by the InterstateCommerce Commission and other public servicecommissions . The interests ofclarity are servedby keeping the taxation ofthese properties on thesame level as the taxation oflocal prOperty .

1

1 The fo l lowing indicates the method of assessment of

ra ilroad property in a number ofthe StatesMAINE : The State taxes gross rece ipts for state and

loca l purpose s .

NEW HAMPSHIRE The State a sse sses on the va lue of

the property , co l lects the tax , and distributes proceeds toloca l commun it ies .

VERMONT: The State taxes property or gross earnings(at the opt ion ofthe ra ilroad) for state purpose s .


wide properties as wel l as of local properties .Certainly railways , telephone lines , and likewidely extended properties are not generallybought and sold like houses and lots , at one com

plete purchase price . But fractions oftheir valueare sold with great frequency in the form ofsalesofshares ofstocks and bonds . Those prices indicate the consensus ofopinion on the value oftheproperty . They are the market price ofthe property . The fact that the property is so large andits legal ownership in the corporate form suchthat it does not have a market price in its entiretyshould not obscure the essential situation . Anassessment based on the market value ofstocksand bonds probably comesmuch nearer to findingthe value in production ofthe property than anyother form ofassessment can come . The relativeease ofmaking the assessment should recommend

NORTH DA$ OTA : Ra ilroads are asse ssed by the Stateon the va lue ofthe ir property , including intangible va lues .

The tax is col lected loca l ly .

SOUTH DA$ OTA:— The State a ssesses ra i lroads on the

va lue ofthe ir property , including intangible va lues . The

tax is col lected loca l ly .

IOWA: Ra i lroads are assessed by the State and the taxis col lected loca l ly .

NEBRAsxA z — Ra ilroads are a ssessed by the State .

The tax is col lected loca l ly .

$ ANSAS Ra ilroads are assessed by the State . The

tax is co llected loca l ly .

MISSOUR1 : Ra i lroads are assessed by the State . The

tax is collected loca l ly.

STATE AND LOCAL TAXATION 107

it . Whatever reasons there may be for makingelaborate physica l valuations of public serviceproperties , for consideration in determining ratesby public service commissions , they have noapplication to the matter of taxation . Value inproduction to the individuals owning the prop

erty depends very largely on the rates permitted .

To take such a value in production as a basis formaking the very rates which determine it wouldbe traveling in a circle and arriving nowhere .

Under an existing set ofcircumstances , however ,value in production is a definite thing , and theestimate ofit by the market price the best avail .

able for purposes oftaxation .

Assessing on value of stock and bonds includes

intangi ble values on which an individualpropertyowner i s not subj ect to taxation

Such an estimate does have a large element ofunfairness . I t includes other things than thevalue of the economic wealth , the tangible prop

erty ,used in production . I t includes the so

called intangible values , the special skil l of aparticular management , the good -will of a business . The securities of a corporation representmore than their proportionate ownership of thetangible property of the corporation ; they carryalso these intangible values . Market prices of

privately owned wealth represent only the value


in production of the tangible property . Theyoften do represent location values j ust as truly aspublic service corporation franchise s . There canbe only four corners to the intersection of Fortyse cond Street and Fifth Avenue in New York .

They do not carry skill ofmanagement and goodwill . To this extent to value corporate propertyon the market price of the corporate securitiesmay be to place too high a value on it as compared with individually owned property . I t maybe that the skill of management is not above theaverage , and that there is no special good -will .In that case the corporate property would notbe taxed more than private property . Management might be below the average and the goodwill amount to nothing or be postively bad-will .Then the market price of the securities wouldgive a value below the actual value ofthe tangibleproperty in the process of production .

1

In our later consideration of the taxation of

corporations we shall discuss the special taxationof intangible values in the so -called corporateexcess taxes .

State taxation ofinheri tances

We shall discuss only one ofthe many specialstate taxes , the taxation of inheritances . This

1 As indicated in an earl ier footnote Connecticut followsthis method ofassessing ra ilroad corporat ions .

1 10 PR INC IPLES OF TAXATION

transfers intervivos would be the only changes ofownership . Interesting as this may be as a matter of speculation , its bearing is on the amountrather than on the nature of the tax . I n anyevent , the wealth is owned with the knowledgethat this tax will have to be paid . The tax is discounted in the consideration ofthe value oftheproperty for private purposes . Of that totalvalue of the property in production a certainpart of the product will , in the long run , go topublic rather than to private purposes .Looking at the tax in this way , it is immaterial

also from the viewpo int ofthe nature ofthe taxwhether it is considered a tax on the abil ity ofthepreceding or of the succeeding owner . Thoughthe Wealth may be inherited in the form of itsrepresentative intangible property , which ordinarily is taxed at the domicile ofthe taxpayer , aninheritance ofsuch property is not taxed at thedomicile of the person inheriting . One amplysufficient practical reason is that the jurisdiction of the person inheriting has no such available means as the probating of the estate of thetestator or intestate to learn of the inheritanceand

,to enforce the tax . Though this may be

the practical reason , the result might be pointedto as supporting an argument that the tax is adeferred one .

By taking this longer view we can bring the

STATE AND LOCAL TAXATION 1 1 1

tax within the ordinary tax theories . The tax ismore popular than most . Perhaps both the person leaving the inheritance and the person receiving it feel the same doubt we have mentioned asto which is really paying the tax . At any rate

,

the person leaving the inheritance is in no position to obj ect and the person receiving it is in nomood to object . The tax is even more popular ,possibly , with those who have no connectionwith it . The adventitious Opportunity affordedby inherited wealth is one ofthe very importantcauses of the Socialist ’s obj ection to the socialuti lity ofprivate property . The usual progressiveform ofthis taxation affords an instance ofplacing more stress on ability to pay than most formsoftaxation . This again extends the number ofthose who approve the taxation .

In practice the tax has been given defects thatshould be done away with . I t is especially adaptable to piracy among the States in taxation . Wehave already noticed the tendency . The piracytakes the form oflevying the tax on such intan

gible property ofnon- resident decedents as theState can get any jurisdiction over to enforce thetax . As we have seen , so far as intangibles aretaxed they should be taxed at the domicile oftheowner . Suppose the case of a testator whoseresidence is in the State ofA levy ing stock in acorporation ofthe State ofB . The esta te prop$


erly pays a tax in the State of the testator'sdomicile . But the State of incorporation oftensteps in and claims a tax also on the ground thati f the tax i s not paid the State can prevent thetransfer ofthe stock . In like manner States getj urisdiction over the transfer ofregistered bonds ,or of the physical presence within the State of

the evidence of the intangible property as thecertificate for the stock .

l

1 Among the States taxing the intangibles ofnon-res idents are :Co lorado , I l lino is , Iowa , Ma ine , Michigan , New

Hampshire , New Jersey , North Carol ina , Oklahoma , and

Vermont . Among the States avo iding th is double taxat ionof inheritances are : Arkansas , Connect icut , Idaho , $ en

tucky , Louis iana , Mary land , Massachusetts , M innesota ,

Missouri , Montana , Nebraska , New York , North Dakota ,

Oregon , Pennsylvania , South Dakota , Tennessee , Texas ,Utah , Virginia ,}Washington, West

_Virginia , and Wyoming.

1 14 PR INC IPLES or TAXATION

We have already seen how the taxation ofcorporate securities thrusts back an extra burdenoftaxation on the corporate form ofenterprise .

I t is due to several things that the corporateform ofdoing business has not suffered more onaccount ofthis extra burden . So far as the taxation ofborrowing is concerned , it is no t peculiarto corporations . Individual as well as corporateborrowers suffer on account of it . But we haveseen that a considerable number ofj urisdictionstax the stock ofcorporations and add to corporatebusiness the burden ofthis taxation which individual business does not have to bear . The factthat this tax , i f equal to the tax on tangibleproperty , is commonly evaded , of course , relievesthe corporate burden so much . In just the sameway the fact that mortgagees and bondholderscommonly evade any high rate of taxation tendsby so much to keep down the rate of interestcharged , and to that extent to relieve the individual and the corporate borrower . This evasionof taxes has enabled the corporate borrower toprocure loans at rates that would be impossiblei f the tax against the loans were collected . I f thecorpo ration has had sufficient security to offer ,and has been able to give its bonds general currency , it has been able in times of low moneyrates to borrow at less than four per cent . I flenders paid taxes at the average rate , approach

TAXATION OF CORPORATIONS 1 15

ing two per cent , they would not have loaned ata rate to net them two per cent or less . In thesame way funds have more readily gone into cor

porate enterprises by the purchase of stockbecause the purchasers in those jurisdictionswhich impose a tax on stock had no intention of

having their expected net return from the investment reduced by the amount ofthe tax .

Another reason why the corporate form hasnot suffered more lies in the fact that a givenkind ofbusiness has largely either remained inindividual hands or has assumed the corporateform . This development has largely come fromthe advantage of conducting certain businesseson a larger scale than individual ownership generally permits . So a corporation has not beencompeting with individuals , but with other cor

porations subj ect to the same tax burden . Thenthere is always the fact that taxation is only oneamong many economic forces at work in privateenterprise , and it may not be possible to traceits effect in the resultant ofthem all .The corporation meets extra tax burdens fromits very beginning . At its organization it must inmost jurisdictions pay a tax on its stock inaddition to the charge (generally in itself a tax)for incorpo ration . Many jurisdictions levy anannual capital stock tax . Though this is usuallynot large in itself , considering the fact that it is


supe rimposed on a full taxation on account ofproperty owned , it amounts to a considerableexaction .

l

Besides those States having a capital stocktax of the kind just mentioned , several jurisd ictions have a tax on the so -called “corporateexcess by which they aim to reach intangiblevalues expressed in the market value ofthe stock .

In general the “corporate excess ” is taken to bethe assessed value of all the corporate securitiesless the assessed value of the tangible propertyof the corporation . To show the situation concretely , suppose a corporation withofbonds selling at par and of capita lstock selling at 125 . Assume that the tangibleproperty ofthe corporation is assessed where it is

1 In Ohio , for example , the state capita l stock tax leviedon all corporat ions except public service corporat ions , isthree twent ieths ofone percent , that is , . 15 percent , on the

parva lue ofthe stock . I f the genera l property tax amountsto per cent , this would make the tax on corporat ionsamount to percent a s compared with a tax of per

cent on individua ls , assuming that the par ofthe stock justrepresented the va lue ofthe corporate property . New Yorkhas a tax on capita l stock which it ca lls a franchise tax.

Domest ic and fore ign corporat ions pay to this State a tax

computed on the amount ofcapita l stock employed in thejurisdict ion . It depends on the amount ofdividends . Cor

porations paying dividends of6 percent ormore pay a tax

ofone fourth mill foreach one per cent ofdividends . Spe

cial provis ions are made for those pay ing dividends oflessthan 6 percent .


po ssibilities may be present in the excess ofacorporation . I t may represent partly the difference between assessed value and actual value oftangible property

,and partly intangible values

ofskill in management and good -will . ‘

I s there sufficient reason for this extra taxationof corporations?Taxes levied go way beyondthe cost ofthe corporate form to the States . I tincreases ability to pay ,

if at all , only in indirectways

,as in enabling capital to be massed for the

undertaking ofenterprises so large as not generally to be possible for individuals . Let us applythe benefit theory oftaxation to see if we can onany theory find a justification for this specialtaxation ofcorporations . Does the State bestow

1 States employ ing the method of corporate excess intaxing corporat ions are Massachusetts , Connecticut , Indiana , I llino is . In Massachusetts the assessed va lue ofthe

tangible property is deducted from the market va lue ofthestock only . Bonds are not included in the securit ies valuat ion . In the otherStates bonds are included with the stockin arriving at the corporate excess . Massachusetts and

Connect icut take the market va lue ofthe securit ie s in ar

riving at corporate excess . Indiana and I ll ino is leave theva luation ofthe securit ies to the judgment ofthe Tax Commissioner. Connect icut applies this tax only to ra ilroadsIndiana to pract ica l ly all corpora t ions except ra ilroadsI l l ino is applies it to domest ic corpora t ions ; Ma ssachusettsto domest ic and fore ign corporat ions . OtherStates , Minnesota , North Dakota , South Dakota , and Kansa s , have thistax on the ir sta tute books , but apparent ly do not enforce it .New York and Massachusetts also have a stock transfer

tax.

TAXATION OF CORPORATIONS 1 19

any such special benefit on those who seek thecorporate form that it is justified in taxing themon account of it?Limited liability is the mostimportant gift ofthe State to a corporation . Thisespecially helps in that massing of capital we havejust spoken of. I t is important to the State thatenterprises requiring large amounts of capitalshould be undertaken . That might sufficientlyofIset whatever special privilege is given to theindividuals forming the corporation . Limitedliabili ty really imposes no disadvantage on peoplein general . I f they deal w ith a corporation , theyrealize the limited liability and make termsaccordingly . Perpetuity and other characteristicsof a corporation are merely characteristics of abusiness device , and do not afford any betterreason for taxation than the characteristics of

any other business device , such as a bill ofladingwhich has proved greatly useful in business practice and therefore may be said to confer a benefiton the user . Doubtless if the State should taxthe use of a bill of lading , shippers would cont inue to use it and endure the burden because ofthe convenience of the device . Such taxation

,

however , depends on the idea ofwhat the traffi cwill bear and has no relation to any fair principles of taxation .

CHAPTER VIII

SIN$ LE TAX , THE INCREMENT TAX , AND

LOCAL OPTION IN TAXATION

IT i s no part ofour general purpose to discussspecial tax proposals , particularly those with aprimary purpose other than raising revenue .

Advocates ofthe Single Tax ”so actively agitate

for it , however , that it seems desirable to give ita brief consideration . They present a plan of

taxation which provides for a tax on land only .

I t would exclude from taxation that realty whichconsists of improvements on land and all personalty . The proposal is founded on the assumption that the existence ofthe community createsland values , and that , therefore , the communityhas a special right to appropriate those values toits general use . I ts advocates further base on thisassumption a program of social reform . Theydeclare that placing the entire burden oftaxationon land would “force it into use .

$ That is , onaccount ofthe heavy tax charges

,presumably a

landowner would not be able to hold his land asa speculation only . In order to meet the heaviertax charges he would be obliged to improve it ,as the word is ; that is , to build on it or otherwise


the individual owner toward it is the same as hisattitude toward any other wealth . Just like anywealth capable ofuse in production

,it has become

capital . As such , the relationship it l ies in , asbetween the individual and the community , isthe same as that of any other form ofwealth .

So long as there is any unoccupied land, or any

land capable ofgreater use in production than i tnow has , it is not true that land is the limitedand labor and capital are the unl imited elementsof production . Though there is , for example ,abundant fertile land in the West , capable ofgreat productivity under irrigation , we lackcapital to irrigate and labor to work it . The appli

cation ofnitrogen would make fertile many acresofland that are now barren . The use ofcapitalin the process would extract nitrogen from theair . We have not the available capital to do it .Whatever effect of forcing land into use thesingle tax might have

,it would not go very far in

affording that equality ofOpportunity its advocates claim for it . Land is ofonly the slightestuse without capital . I f the land were forced intouse and made somewhat more available , no capital would be immediately available to make useof the land . Applying labor to land withoutcapital would produce only a slow growth of

additional capital .Advocates ofthe single tax assume that hold

THE S IN$ LE TAX 1 23

ing land out ofuse brings only evil to the community , or at least more evi l than good . Thismay well be questioned . May the community notgain very distinctly from having some ofits landheld out of use?In a given community may itnot be desirable that some ofits land remain foratime entirely unimproved rather than having onebuilding put up which will shortly have to bedestroyed and replaced with a larger building tokeep pace with the growth of the community?Holding some ofthe land out ofusemay wel l leadto a conservation ofcapital . I t would seem thatspeculation in land has the same advantages tothe community in conserving and giving a properdistribution to the land supply as speculation incommodities in conserving and giving a properdistribution to the supply of food and clothing .

Speculative opportunity , a rapid advance in landvalues , would overcome the tendency ofa tax toforce land into use . I f an owner anticipated anadvance of50 or 100 per cent , a tax of5 or 10

per cent might not be a suffi cient influence toovercome speculation and compel improvement .

In an urban community the matter of landsupply is one of mere space , earth surface . Outside ofan urban community land supply meansrather the content ofthe land what is in it oron it than the matter ofspace . One acre thathas the chemical constituents in its soil to pro


duce thirty bushels of wheat is worth more thantwo acres that will produce fifteen bushels of

wheat each . Timberland is valuable on accountofthe timber on it , not because ofbeing a certainarea on the surface ofthe earth . Speculating inthese lands is speculation in potential commodities and is conserving them against the needs ofan increasing population . To force such landsinto use , in so far as the capital supply permitstheir use , would be to encourage the increase ofpopulation by an immediate cheapening ofproduce and make the famine that is to come moreacute because there will be less available landand a greater population .

Since land has in fact become capital ized,it

seems unfair for the community to single out theowners ofthat particular form ofwealth for contribution to supply community needs . This isespecial ly the case in view of the Operation of

economic principles which tend immediately todeduct from the market value ofthe property onwhich it i s levied so much ofthe capital ized valueofa tax expected to be permanent as cannot beshifted . This has been a fact ofexperience toooften to be doubted . To levy the entire community burden on this form ofwealth would beeither to take immediately large values from oneclass in the community , that now owning land ,and bestow equivalent values on another class ,


This idea of the unearned increment leadsdirectly to a consideration of another tax proposal already being tried in Europe

,the

increment tax . Like the single tax , this apparently rests on the thought that an increase in landvalues is a gift ofthe community

,and therefore

especially subj ect to appropriation for the uses ofthe community . This proposal would levy a taxon increases in land values . Should not such a

prOposal carry as a corol lary some reimbursement by the community for a decline in landvalues? Suppose a piece of land increases invalue from to and is taxed on the

$5000 increase , then decl ines to a value ofThe owner is no better off than he would havebeen if the property had never increased in value .

He is “out ” the “increment ” tax he paid .

Why confine the taxing ofincrements to increments in the value ofland?I f a man buys cottonin the fall at one price and in the spring it isworth a higher price , why not tax him especiallyon the increment?An income tax which taxes asincome all such profits when taken is fairer taxation than to confine the taxation ofprofit to theincrement ofland .

In the case ofa city about to make some localimprovement requiring the acquisition of land ,as the cutting through of a new street , or the razing ofa block of buildings to create a park , there

LOCAL OPTION IN TAXATION 127

does not arise in my mind any objection to givingthe city the right to acquire , by eminent domain ,if necessary , property adjacent to that actuallyrequired for the street , or park , or whatever , inorder that the community may get the benefit ofthe increase in values resulting from its specialexpenditure .

1 Indeed , it seems to me that thisshould be done . I t rests on a different principlefrom the single tax , for here is a definite ex

penditure of communitymoney creating a specificbenefit to particular property . Since the prop

erty i s taken at a definite existing value , theappropriation differs from an increment tax

on property from which the increment maydisappear .We will mention one more tax proposal whichperhaps is not out of place when connected with amentioning of the single tax and the incrementtax , because it seems especially , though not exclus ively , to be pressed by advocates of the singletax

, on one applica tion of the principle ofdivideet impera . This is the proposal for local option intaxation . Since so many ofour tax ills come fromthe amount of local option already existing on

account ofthe multiplicity of j urisdictions havingauthority in taxation , it seems rathermalaproposto propose an overwhelming extension of the

1 Th is is already the European pract ice , and is authorizedin New York State at lea st .


number ofcommunities with power to say whatshall be taxed . Even though the power should bestrictly limited , it would bring great further confusion into taxation matters . So far as the singletax people are back ofthis movement , their ideaseems to be that by concentrating their efforts ona single community they are likely to get a trialof their plan sooner than they can if they haveto persuade a whole State . With our constantlyincreasing economic unity there is less need forlocal diversity in taxation and it would creategreater confusion . Rather than grant more localoption leading to a greater diversity in taxation

,

we need to work for such un i formity in taxationas will make for j ustice .

BO

ments . 2 1 ; extending to taxat ion .

2 2 ; where taxes should be pa idfor, 69 .

Cost to government . spec ia l . imposed by property , 26 .

Cred its , taxing them taxes a

method of do ing business , 36 ;

incidence of taxation of. fa llson the debtor. 39 ; efi ect of lending commun ity not taxing. 67 .

Debt . does not produce ability topay . 35 ; taxing it taxes a methodofdo ing business . 36 .

De laware , does not tax mortgages .

74 ; method of assess ing ra ilroads . 105 .

D irect and indirect owners of

wea lth . difi erent treatment of.62 ; direct ownercannot shift incidence oftax . 64 .

Distribution of ra i lroad taxes invarious juri sdict ions . 1 01 .

Double purpm in taxat ion con

fusing . 56 .

Economic act ivity of commun itymay be public or private . 2 .

Eq ua lity of sacrifice . what is . 24 .

Eq ua lizat ion . boards of, 90 .

Expert knowledge in assessment9 2 .

Fee . and price .d istinct ion between ,

8 ; meets the cost ofsome publicservices , 8 ; ofcourts in the na

ture ofa penalty. 9 ; In excess ofcost . a tax. 9 .

Fire protect ion . cost of. not according to va lue ofproperty. 28 .

Fi scal po licy. what const itutes . 5 5 .

Florida . mortgage taxat ion . 76 ;

stock taxation. 79 ; bond taxat ion . 82 .

Full va lue in assessmen t . 93 .

$ eorgia . mortgage taxat ion. 76 ;

stock taxat ion . 79 ; bond taxation. 82 .

INDEX

Holding land out of use . possiblega in from. 1 23 .

$ ansas . mortgage taxat ion . 76 ;

Idaho . does not tax mortgages , 74 .

I llino is , mortgage taxat ion. 76 ;stock taxa t ion , 79 ; bond taxat ion . 82 ; distribut ion ofra ilroadtaxes . 1 02 ; method of assess ingra ilroads , 1 05 ; corporate excesstax. 1 18.

Incidence of taxation . of creditsfal ls on debtor. 39 ; on corporate form cant be shifted .42 ; direct and indirect owner.64 .

Income . from labor. not eq uiva

lent to income from property .16 ; even from property. not a

true test of ability. 1 8 ; fromproperty.includes return forrisk.18.

Income tax . problem of. 1 5 ; in

Wisconsin. 16 ; offsetting lossesmay not compensate for taxespa id on return forrisk . 1 8 .

Increment tax . 1 26 .

Indiana . mort gage taxat ion , 76 ;stock taxat ion . 79 ; bond taxat ion . 82 ; method of assessingra i lroads , 105 ; corporate excess

tax. 1 18 .

Indirect and direct owners of

wea lth , difi'

erent treatment of,

62 .

Indirect owner shifts incidence of

tax. 64 .

Inheritance tax , 108 ; aga inst whomlevied . 1 09 ; taxing intangiblesof non-re s idents . 1 1 1 ; juri sd ict ions levying on intangibles of

non-res idents 1 1 2 .

Intangible values taxat ion of. 107 .

Interest rate . W i thout a llowancefor risk , is uniform , 37 .

Iowa . taxa tion ofmort gages in . 74 ;

method of assess ing ra ilroads .

106 .

INDEX

stock taxation . 79 ; bond taxation , 82 ; method of assess ingra ilroads . 106 .

$ entucky. mortgage taxation. 76 ;stock taxation . 79 ; bond taxat ion . 82 .

Labor. income from , not eq uiva

lent to income from property.16.

Land . has become capita liz ed . 3 1 ;he ld out of use . poss ible ga infrom . 1 23 ; may be more thanearth surface . 1 23 ; risk in own

ing . 1 25 .

Lending and borrowing communities . 66 .

Lending commun ity. efiect ofnot

taxing credits . 67 .

Levying tax. according to income ,

1 2 ; according to va lue of property . 1 2 ; with re lat ion to abilityto pa y . 1 3 ; with re lat ion to cost

ofservice , 1 3 .

Loca l and state taxa tion . separat ion of, 96 .

Loca l option in taxat ion , 1 27 .

Loca lly e lected assessors . weakness of. 90 .

Louis iana . mortga ge taxat ion . 75 ;

stock taxation. 79 ; bond taxation . 82 .

Ma ine . mortgage taxat ion , 74 ;

stock taxat ion . 79 ; bond taxat ion. 82 ; corporate sources of

state revenue . 97 ; method ofassess ing ra ilroads , 1 04 .

Mana gement , more skillful . dueto borrowing . ability on account

of, should be reached only in thesame way as any other moreskillful management . 48 .

Market price , a llows for risk . 1 9 ;fairest index of ability to pay .

1 9 ; as basis of tax combinestheories ofcost and ability. 27 ;in assess ing securities . 94 .

Mary land . taxat ion of mortgages

131

in. 74:method ofassessing ra ilroads . 1 05 .

Massachusetts .mortgage taxat ion.

75 ; stock taxat ion. 79 ; bond taxat ion . 82 ; method of assess ingrai lroads . 1 05 ; corporate excess

tax. 1 18 ; stock transfer tax.

1 18 .

Method of doing business . mayadd to product iveness . 36 ; illustra tion oftaxing . 38 .

Michigan . taxat ion of mortgagesin . 74:method ofassessing ra ilroads , 1 05 .

Minnesota . taxa t ion ofmortgagesin . 74 ; corporate sources ofsta terevenue . 99 ; method ofassess ingra ilroads , 1 05 .

Miss iss ippi , mortgage taxat ion.

76 ; stock taxat ion . 79 ; bond taxat ion . 82 .

Missouri , mortgage taxation. 76 ;stock taxation. 79 :bond taxat ion . 82 ; method of assessingrai lroads , 1 06 .

Montana , mortgage taxat ion . 76 ;stock taxa tion. 79 ; bond taxa a

t ion . 82 .

Mortgages . taxat ion of, in various juri sdictions , 74 ; fair rate oftaxat ion . 75 ; Why they can be

assessed at par, 94 .

Nebraska . mortgage taxa tion . 74stock taxat ion . 79 ; bond taxat ion . 82 ; method of assessingra i lroads . 1 06 .

Nevada . mortga ge taxat ion. 76

stock taxa t ion . 79 ; bond taxat ion . 82 .

New Hampshi re . mortgage taxat ion. 7 5 ; stock taxat ion . 79

bond taxat ion. 82 ; corporatesources ofstate revenue . 98 ; dis

tribut ion ofrai lroad taxes . 101 ;

method of assess ing ra ilroads.1 04 .

New J ersey. mortgage taxa t ion ,

7s ; stock taxation . 79 ; bond tax

132

ation. 82 ; distribution of ra ilroad taxes . 1 0 1 .

New Mexico . mort gage taxat ion ,

76 ; stock taxation . 79 ; bond taxation . 82 .

New $ ork . taxat ion ofmortgages .

74 ; sources ofsta te revenue . 9 7 ;

method of assess ing ra ilroads .ca pita l stock tax. 1 16 ; stocktransfer tax. 1 18.

North Caro lina . mortgage taxat ion . 76 ; stock taxat ion. 79 ;

bond taxat ion , 82 .

North Dakota , mortgage taxat ion.

76 ; stock taxat ion . 79 ; bond taxat ion. 82 ; method of assessingra i lroads , 106 .

Ohio . mortgage taxation . 76 ; stock

taxation . 79 ; bond taxat ion . 82 ;corporate sources of state rev

enue . 98 ; method of assess ingrailroads , 1 05 ; capital stock tax.

1 16 .

Oklahoma . mortgage taxat ion . 76 ;

stock taxa t ion. 79 ; bond taxat ion , 82 .

Oregon . mortgage taxat ion . 76 ;

stock taxat ion. 79 ; bond taxat ion. 82 .

Pennsylvan ia . taxat ion of mortgages in , 75 ; method ofassess ingra ilroads , 1 05 .

Piracy in taxat ion . 65 .

Pol ice power. a public act ivity. 3 .

Price and fee . dist inct ion between .

8 .

Price for service may be chargedby public act iv ity , 5 .

Private property , fact of commun ity maintenance of. a basis fortaxat ion . 28 ; some pub lic expend itures not on account of, 29 .

Product ion . taxing . 38 .

Property. income from , not eq uiva lent to income from labor. 16 ;a lega l term . 3 1 ; and wealth . notsynonymous . 3 1 ; different forms

INDEX

of. impose difi erent costs . 33 ; allforms of. do not give the sameabili ty to Day . 34

Public activities . what are . 3 ; and

private . no clear line between . 4 ;

and private . a matter of en

forcible Opin ion . 5 ; ma y chargeprice for service . 5 ; specia l assessment to cover cost of. 6 ;fees meet the cost ofsome . 8 .

Public expenditures . not on s e

count oi private property. to

b e borne according to ability.29 .

Public income . not unlimi ted . 2 .

Ra ilroad taxes . distribution of. in

various jurisd ict ions . 1 0 1 .

Rate oftaxation .forra ilroads , 103 ;for sta te -wide and interstatepropert ies . 1 04.

Rea l and tangible persona l propetty on same basis in taxa t ion .

49

Representa t ives ofwealth createdby corpora te form . 4 1 .

Rhode Island . taxa tion of mortgages in . 75 ; method ofassess ingra i lroads . 1 05 .

Risk. returns for. represents mostga ins from borrowing . 46 ; inland ownersh ip . 1 25 .

Securit ies . value of, in ra ilroad assessment . 1 06 ; taxat ion of,thrusts burden on corporat ions .1 14 .

Sewers . streets . sidewalks . paid forby specia l assessments . 6 .

Sidewa lks . streets . sewers . pai d

for by special assessments . 6 .

Single tax . 1 20 .

Situs for taxa t ion . where taxesshould be paid . 59Socia l ends , indirect , should not besought by taxat ion . 5 5 .

Social expediency. shifting Opinionof. 4 .

Sources of state revenue in New

principles of taxation - forgotten books · principles of taxation chapter i what is taxation? in...

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