Essays in Taxation

Essays in Taxation
by Edwin R. A. Seligman (1895/1913)
pdf Chapters I – V
pdf Chapters VI – VIII
pdf Chapters IX and X
pdf Chapter XVIII
pdf Chapter XIV
pdf Chapter XV


Preface to the Eighth Edition
Chapter I—The Development of Taxation
I. Voluntary and Compulsory Payments9
II. Direct versus Indirect Taxation
III. The Forms of Direct Taxation
IV. Changes in the Basis of Taxation
Chapter II—The General Property Tax
I. Practical Defects
II. History of the General Property Tax in Antiquity
III. Early Mediæval History of the Property Tax
IV. Later Mediæval and Modern History of the Property Tax
V. Theory of the General Property Tax
VI. Conclusion
American Bibliography of the General Property Tax.
Chapter III—The Single Tax
I. What is the Single Tax?
II. The General Theory
III. Practical Defects
IV. Conclusions
Chapter IV—Double Taxation
I. Double Taxation by the Same Authority
II. Double Taxation by Competing Authorities
Chapter V—The Inheritance Tax
Chapter VI—The Taxation of Corporations. I. History
I. Early Taxation of Corporations
II. Development of the Corporation Tax
III. Bases of the Tax
Chapter VII—The Taxation of Corporations. II–The Principles
I. The Franchise Tax
II. Economic Theory
III. Practical Reforms
IV. The Legal Situation
Chapter VIII—The Taxation of Corporations III—Complications and Conclusions
I. Taxation of Property and of Debts
II. Taxation of Income and of Property
III. Taxation of Property and of Stock
IV. Double Taxation due to Conflicts of Jurisdiction
V. Taxation of the Corporation and of the Security Holder
Chapter IX—Modern Problems in Taxation
I. Justice and the new Economic Basis of Society
II. Economic Analysis and Fiscal Facts
III. The Practical Problems
Chapter X— A Quarter Century’s Progress in Taxation
I. General Progress
II. Local Considerations and the Benefit Theory
III. Social Considerations and the Faculty Theory
IV. Conflicts Between Tax Jurisdictions

Chapters XI and XII not reproduced

Chapter XIII—The Importance of Precision in Assessments
I. Democracy and Administration
II. American Conditions
Chapter XIV—The Classification of Public Revenues
I. The Primary Classification
II. The Police Power versus the Taxing Power
III. Fees
IV. Special Assessments
V. Prices
VI. Conclusions
Chapter XV—The Betterment Tax
I. The Origin
II. Betterment and Taxation
III. The Principle


Chapter I—The Development of Taxation

To the citizen of the modern state, taxation, however disagreeable it maybe, seems natural. It is difficult to realize that it is essentially a recent growth and that it marks a comparatively late stage in the development of public revenue; it is more difficult to realize that each age has its own system of public revenue, and that the taxes of to-day are different from those of former times; it is still more difficult to perceive that our ideals of justice in taxation change with the alteration in social conditions. Not only the actual forms of taxation, but the theories of taxation as well, vary with the economic basis of society. Fiscal conditions are always an outcome of economic relations. This is true even where the direct influence of political causes is traceable, for political changes are in the last resort dependent on economic changes. Finance and economics are inextricably intertwined. Like all the facts of social life, taxation itself is only an historical category.

1. Voluntary and Compulsory Payments

At the beginning of history there is no such thing as a state. Whether we accept Hobbes’ theory of the helium omnium contra omnes, or the more modern clan theory of the origin of society, there is no public household, because there are no recognized public needs. But even in the original man there are possibilities of social development, Man, as Aristotle tells us, is a social and political animal. Centuries of hard experience strengthen the social instinct and contribute to form primitive society, until finally a real political life emerges.

Gradually from either physical, ethical or religious causes a leader evolves. The oldest or the wisest or the bravest—at all events, the one possessed of some peculiar characteristic—becomes the leader of the horde, the clan or the tribe. He acts as the great priest, great judge or great warrior, often combining all three qualities. There are no financial needs, because the only consideration is that of defence; and every man contributes to the defence in his own person. The leader himself subsists on the booty of war.

But with the growth of society and the expansion of the clan into the larger community, the public needs develop. Administration begins. Roads, bridges and fortifications are constructed, and the prince or king must now not only maintain order, but must be assured of a revenue to support his household and to distribute favors to his retinue. All his followers, being roughly equal, now support him by gifts, whether of labor or of property. In all primitive societies voluntary offerings constitute the first form of common contributions, and every man feels the necessity of upholding the political and military organization by his own personal efforts.

The king’s needs now increase. They are chiefly personal needs, except in so far as expenditures are made for the purposes of internal peace and external defence. But in order to ensure his position, the king endeavors to secure his revenues elsewhere. He develops the subsidies and tributes of the allied and conquered nations, and amasses treasure filched from abroad. Part of this he distributes among his followers; part he retains to increase his own possessions. The private property of the king differentiates itself from the public property, which was originally common to all. The monarch now increases his revenues and domains through the acquisition of lucrative prerogatives of all kinds. Certain activities come to be looked upon as within his peculiar province. The king’s peace must be kept—any infraction must be paid for in fines and penalties; not only crimes, but torts, have their public side. Nobody can harm an individual without breaking the king’s peace, and having to pay for it. Commerce begins, and weights and measures and money are needed. The royal rights of coinage arise; and as the kingship becomes stronger, the rights of escheat, of wreck, of confiscation develop, until finally the various royal prerogatives bring in a substantial revenue.

Voluntary payments have in the meantime ceased. As society advances, what was at the outset freely given comes to be paid by the individual from a sense of moral obligation. But with the weakness of human nature, in the face of a diversity of interests, even the feeling of duty soon fails to produce an adequate revenue. The moral obligation slowly becomes a legal obligation, keeping pace with the crystallization of social usage and custom into primitive law; the voluntary offerings become compulsory contributions. But the compulsory contributions are still largely personal services, connected with the common security. Such was the early mediæval trinoda necessitas, the liability to military service, to watch and ward, and to the repair of the bridges and fortifications. The first forced contribution of the individual to the maintenance of the common welfare is always seen in this rude attempt to assess every one according to his ability to bear the common burden—his faculty. This faculty consists in the enforced participation in the administration. But there is not yet any idea of taxation of property. The contribution is personal, and is limited to a few well-defined objects. The individual’s faculty is found in his person, not in his property, because there is practically no private property. And the contributions are, for the most part, not regular, but spasmodic.

As civilization gradually advances, private property develops, and the primitive equality slowly disappears. The interchange of commodities takes place on a larger scale. The old revenues are no longer adequate, and it becomes necessary for the monarch to supplement them by broadening the field of these compulsory contributions of service. In other words, the need of taxation arises. But a direct tax is still out of the question. Public opinion will not yet admit its necessity. The taxation of property is scarcely less impossible than the taxation of the person. It is regarded as a badge of disgrace for the freeman—a nota captivitatis, as the Romans at first called it—because only conquered enemies have to pay this arbitrary impost. The king, therefore, must endeavor to effect his object covertly. He must go to work in a roundabout way, and hide the tax in a variety of disguises. He either gradually extends his lucrative prerogatives, or alleges that the charges are simple returns for governmental services. He grants protection or privileges to individuals, and requires some payment in return. Thus begins the period of fees and charges, which the individuals are willing to pay and which gradually reconcile the public to the idea of governmental charges.

Before long, however, the monarch feels able to throw off all disguises, and limits the amount of his exactions only by the degree of his rapacity. Thus the fees and tolls change into taxes on exchange and transportation; thus the people become accustomed to the “customs”; thus the “evil duties” and the excises grow apace; thus the payments become veritable “impositions.” In other words, the community enters upon the stage of indirect taxation.

This explains why it is so difficult for the idea of direct taxation to force its way into popular favor. The earliest manifestations of the taxing power are generally merciless and brutal. They are apt to react on the public consciousness and to stunt the growth of any feeling of obligation. It is not until public morality has so far developed as to introduce more lenient and more refined processes of indirect taxation that we discover a growing willingness on the part of the individual to pay direct taxes. Another reason for the later appearance of direct taxation is that the indirect taxes are often paid without the contributors being really conscious of it. They are jealous of their own and not public-spirited. They are willing to give only that the loss of which they do not feel. But whatever be the reason, it is clear that when this final stage—possible only after centuries of laborious and continued exertion—has been reached, we enter upon a new phase in the history of finance. The readiness to share in the public burdens out of one’s property presupposes a far higher social ethics and a far more complex society than was possible in the simple conditions when every one was willing to take part in the defence of the village or the repair of the roads. Interests have now become specialized. It needs a far greater sense of civic obligation to submit cheerfully to direct property taxation than was necessary in primitive times for the putting forth of mere personal exertions. Even to-day the full import of this obligation is only inadequately grasped. Until within a few years it was deemed necessary to base the theoretical justification of taxation on fanciful doctrines of contract, of protection and the like. And even at the present time, those who cheerfully seek to contribute their share to the common burden form the exception, not the rule. But even the imperfect recognition of this duty implies a highly developed political consciousness. The method of taxing every one according to his property is the first rough attempt of a property-owning community (as over against a primitive community) to assess each member according to his relative ability. The introduction of the direct property tax is a vast step forward in the development of social ethics.

This historical process is well illustrated by etymology. If we look at the various terms applied to what we to-day call a tax, we shall find every shade of the development reflected not only in the words used in former centuries, but in those still employed to-day. There are no less than seven different stages in this etymological growth.

The original idea was that of gift. The individual made a present to the government. We see this in the mediæval Latin term donum and in the English benevolence, which was used far into the middle ages. The second stage was reached when the government humbly implored or prayed the people for support. This is the meaning of the Latin precarium, used for many centuries on the continent, as well as of the German Bede (from beten, to pray). The Landbede was the term applied to the land tax in the German states until quite recently. With the third stage we come to the idea of assistance to the state. The individual felt that, if not making a gift, he was at least doing the government a favor. This idea is expressed in the Latin adjutorium, the English aid and the French aide, which was at one time used for all kinds of taxes. The same idea is discernible in the English subsidy and contribution. It has survived in the German term for a tax, Steuer (steuern, to help), and in the Scandinavian hjelp. In France contribution is even to-day commonly used as synonymous with tax.

The fourth stage of development brings out the idea of sacrifice by the individual in the interest of the state. He now surrenders something for the public good. This is seen in the old French gabelle, in the modern German Abgabe, and in the familiar Itahan dazio. In each case the citizen gives or sacrifices something. With the fifth stage the feeling of obligation develops in the taxpayer. The English duty was not originally restricted to its present narrow meaning in the United States. Here it is usually applied to import taxes and sometimes to the internal revenue taxes. But even to-day in England the term includes some of the most important so-called direct taxes, like the inheritance tax and the income tax. It is not until the sixth stage is reached that we meet the idea of compulsion on the part of the state. We see this in our impost or imposition, as well as in the French impot and the Italian imposta. Although we limit the term to a certain kind of tax, the French use it as the generic epithet par excellence. The same idea is seen in the German Auflage (something “laid on”) and Aufschlag (something “clapped on”), frequently used at present for certain indirect charges on commodities.

With the seventh and final stage we reach the idea of a rate or assessment, fixed or estimated by the government without any reference to the volition of the taxpayer. We see this in the mediaeval English scot (to be “at scot and lot”), which is nothing but the German Schoss or the Scandinavian skatt. It is seen in the German Schatzung (or estimate), which was used until about a century ago. Above all, it is recognized in our tax (taxare, to fix, to esthnate), the French taxe, the Italian tassa and the English rate. It is worthy of note that in the middle ages “tax” always meant a direct tax, for which a regular assessment list or schedule was made.

2. Direct versus Indirect Taxation

With the introduction of direct taxation, the progressive increase of public revenues becomes far easier. This is fortunate, for with the advance of civilization the public expenditures grow apace. For a long time, as we have seen, almost the only aims of government are security and defence. But as economic conditions develop and various classes of society differentiate, more attention must be paid to matters of general welfare. Expenditures for commerce, industry and transportation arise. The need is felt for better roads, for more canals, for improved methods of communication through the postal service. Then the less material ends of government are recognized. Education must be provided, hospitals and asylums must be erected, and the sanitary conditions must be looked after. Finally comes the immense growth of the modern state, with its new functions due partly to the industrial revolution, partly to the growth of democracy, partly to the recognition in legislation of the preventive as against the repressive principle. These new functions mean fresh expenditures; and these expenditures mean increased taxes. Thus the characteristic mark of the modem age is taxation as against the more or less self-sufficing public economy of former times.

Direct taxation, as we have seen, generally forms the last step in the historical development of public revenues. At first regarded entirely as an extraordinary means of support, it gradually assumes the character of an ordinary form of revenue. In the early days of classic antiquity the direct tax was used only in very exceptional exigencies and was, in fact, regarded as a compulsory loan, to be repaid in the future. It was not until after the establishment of the Roman Empire, for instance, that the regular direct taxation of Roman citizens began. And the same process may be observed throughout the history of many mediaeval states down to the most recent period of European and American history.

In some cases, however, this historical process assumes a slightly different form. It depends entirely on the economic conditions and on the relative importance of the various social classes. For instance, it is incontrovertible that certain kinds of indirect payments always come first, as has been explained above. But when the people understand that indirect charges on commodities increase their price and thus form veritable taxes, it sometimes happens that more opposition is shown to indirect than to direct taxation. In such cases direct taxes furnish the ordinary revenue, and it is only after a severe struggle that indirect taxes are introduced.

This process can be clearly traced in the history of mediaeval and modem revenue. In democratic communities, where the legislation is influenced by the mass of the people, we commonly discern a tendency to oppose indirect taxes on consumption. In the early mediaeval towns the democratic instincts were strong, because of the more equal distribution of property. We accordingly find that the revenue system was based largely on direct payments, and that the populace rebelled against indirect imposts. But on the continent, where aristocratic influences gradually became powerful enough to break down the communal liberty and democracy, the mass of the people were ground down by taxes on the necessaries of life, while the wealthier or governing classes practically escaped. When the democratic upheaval took place, as in the Italian towns, we find an attempt to reintroduce the old order of things and to reach the wealthy by a system of direct taxes. But with the downfall of the mediaeval democracy, the property and income taxes disappeared, while the octroi and municipal indirect taxes again came to the front. Only in England, where the democratic instincts maintained themselves somewhat more strongly, and where the powder of the aristocracy was held in check by a strong monarchy, do we find continued opposition to the general excises and to local taxes on the necessaries of life. It was with the greatest difficulty that the excise system was introduced. And the same feeling was awakened under similar conditions on the other side of the Atlantic, when Hamilton initiated his system of indirect taxation or internal revenue in the federal fiscal system of the United States. ”The time will come,” said one of the members of Congress in 1790, “when the poor man will not be able to wash his shirt without paying a tax.” With the advent of the modern democratic state, we notice the same tendency. Indirect taxes, says Lassalle, are taxes on labor. Hence the efforts of modern democracy in England, in Switzerland and in America to confine indirect taxes on consumption and exchange within the narrowest limits.

On the other hand, there is a counter-tendency which has frequently been overlooked. Curious as it may seem, indirect taxes were advocated in the later middle ages as the means of introducing not inequality, but equality, of taxation. This was owing to the fact that the privileged classes on the continent had succeeded in securing virtual immunity from taxation. The nobles were largely exempted from the land tax, while the clergy and the wealthier citizens in general were able to a large degree to purchase freedom from the tax burdens. What was more natural than that the statesmen and tax reformers should attempt to make them pay something through taxes on their expenditure, which they could not well escape? Their plan, it is true, no longer took the shape simply of taxes on the necessaries of life; it was now expanded into the single tax on all expense which would reach the rich as well as the poor. This was the idea of Colbert; and it has been the idea from the time of Hobbes and Petty of all enthusiasts for indirect taxation in England, and of many writers in Germany, in France and in Italy. To-day we are clamoring for the abolition of indirect taxation; formerly the reformers clamored for a single universal indirect tax. The explanation, as we see, is simple.

But this does not yet answer the question why excise taxes were actually introduced into England, as elsewhere, in the seventeenth century. The fact is that tax reformers cannot do much good if economic conditions are not ripe for their proposals. It must be confessed that according to the experience of history most reforms, in finance at least, are due to selfish reasons; they are the necessary outcome of changes in economic relations and of the efforts of each class, whether it be the small or the large class, to gain some advantage for itself. The classic home of the excise tax or indirect tax on business and trade is Holland. It is well known that Holland, during the sixteenth and seventeenth centuries, had become the leading financial and trading nation of Europe. In the other countries wealth was still centered in the landed interests, and the whole system of taxation was largely dominated by feudal aristocratic ideas. The direct taxes were land taxes, because wealth consisted chiefly of land; but the landed proprietors sought to escape the burden by assessing real property as low as possible and by putting taxes on the necessaries of life of the poorer classes. In Holland, on the other hand, wealth was now largely centered in the moneyed interest. The great traders and merchants did not relish any direct taxation of trading capital, and therefore devised a system of indirect taxation of business which would, as they thought and hoped, be shifted to the community in general, and to the poorer classes in particular. Thus developed the stamp taxes, the excise taxes, and the whole host of indirect taxes for which Holland was noted.

The seventeenth century marks the rise of the trading class in England; ”the glorious revolution” was a revolution not so much of the people as of what the Socialists love to call the “bourgeois.” Puritanism and commercialism went hand in hand,[1] and the downfall of the Stuarts not only put an end to feudalism, but weakened the fiscal ascendency of the landowner—an ascendency to which another serious blow was given by the abolition of the Corn Laws, and whose final overthrow in England, as elsewhere, is fast approaching. The indirect taxes of the seventeenth century were thus the outgrowth of the effort on the part of the commercial classes to escape the burdens which the landowners were desirous of placing on them. The selfish designs of the capitalists and the unselfish ideas of the tax reformers went hand in hand to widen the scope of indirect taxes. And as the trading class developed in the other countries, the system of excise spread with it.[2] It was not until the democratic movement of the nineteenth century, when the system of excises was recognized as a burden on the poorer classes, that the number of commodities subject to excise was gradually reduced.

3. The Forms of Direct Taxation

“We have seen the economic relations which condition the interworking of direct and indirect taxation. Let us now endeavor to learn how these economic conditions affect the growth of direct taxation itself.

In primitive society, there is a certain rough equality in the personal status and the personal abilities of the individual. Hence the idea of the poll or capitation tax, which is the first rude manifestation of the equities of taxation. The members of a club to-day pay equal dues, because their interests are supposed to be equal. Club life does not cover the whole of human activity, but only a very small portion of it. So, in the same way, as long as economic conditions are primitive, the social obligations of the members of the clan or the state are conceived to be equal. But as the social conscience develops, more stress is laid on other elements of ability to pay than on mere number. Not only do men differ in strength, in mental vigor and in opportunities, but inequality of possessions grows greater. And with differences in property, the old feeling of equal obligation weakens. The poll tax becomes unjust and is gradually abolished. A certain phase of this primitive feeling sometimes persists for a long time, especially in democracies where political equality is still based on the fiction, of economic equality. We find poll taxes as adjuncts to other taxes long after the justification of a single poll tax has disappeared. But it has now assumed a political significance, as in Switzerland and in some of the American commonwealths, where its payment is made a condition of the suffrage. Even this tends to become a farce to the extent that the payment of the tax is assumed by the political parties. The economic basis of the poll tax has entirely vanished and it tends to be replaced by the property tax.

The first property taxes are entirely in harmony with the facts of early industrial life. It is a matter of common knowledge that the early period of almost every civilization is marked by two chief facts, the preponderance of agriculture and the existence of slavery. As Rodbertus has pointed out,[3] this leads to a fundamental distinction between ancient and modern economic theories. In modern civilization we have not only a quantitative division in wealth, but also a qualitative difference. That is, not only are there rich and poor, but there are landowners, capitalists, employers and laborers. In early civilization there was a quantitative but no qualitative distinction in wealth. Property consisted chiefly of land and the landowner’s household, including slaves and beasts of burden. There was no important capital—or at all events, no industrial capital—apart from this landed property, and hence there were no distinct shares in distribution. But Rodbertus errs in predicating of Greece in general and designating by the Greek name an economic system which is characteristic of all early civilizations. It was as true of the slave-holding states in the American Union, and of the mediæval manorial system, as it was of the early Hellenic civilization. Wherever we find only agriculture and slavery, there we have this inseparable mass of collective property, not yet split up into its constituent parts.

The importance of this for finance lies here: since we have only this general collective property, and since this property consists practically of land and the means to till the land, the direct property tax must take the shape either of the land tax or of the tax on the cattle or slaves or implements used in agriculture. These are practically tantamount to each other. For the produce of two given portions of land will vary about in proportion to the value of the land, together with the amount of slaves and cattle necessary to till it. Everywhere at first, therefore, the direct property tax is found to be either the land tax or the tax on agricultural capital.[4] It is the only practicable and the only just form of taxation at this early period.

It is, however, important to notice that the property which is now taxed is not so much property in land as property in the produce of land. Whether we have the primitive village community or only the system of common cultivation, the earliest private property consists of the produce of the soil. The first attempt, therefore, to take account of the gradations in the tax-paying ability of the individual is seen in the tax on gross produce—the tithe, or any other portion of the produce, or on mere quantity of the land irrespective of value. Since land itself is not private property, since land is not bought or sold, the faculty of the taxpayer can be measured not by the value of the land, but by the value of its produce, which is in some proportion to the quantity of the land. Moreover, in early agriculture, where tilling is extensive and where expenses of cultivation vary but little, the tax on gross produce is a fairly accurate test of ability to pay.

With the advance in population and the necessity of more intensive agricultural methods, owing to the decay of the primitive communal system and the growth of private property in land, it becomes possible to measure the productivity of land in terms of property. Thus the land taxes of this newer stage of culture are property taxes, even though the value of the property is fixed sometimes according to selling value, sometimes according to arbitrary estimates of quality. But where the survivals of primitive conditions are strong, the value is still measured in terms of yield or produce, either actual or computed. In the early middle ages, for instance, land taxes were not based directly on the selling value, because, although land was private property, it was not bought or sold. The lands had rental value, but no selling value, and the tax was assessed not so much on the market value as on the produce of land. When the American colonies were founded, private property in land was well established and the land taxes there very soon became property taxes, although we not infrequently find examples of the taxation of gross produce rather than of property.[5] With the progress of cultivation and the advance in population, the tax on gross produce is supplanted by the property tax on market value.

But now comes a change in the forms of economic life—a change that inevitably produces an effect on the public conscience and on the accepted ideas of justice. In the first place, with increasing prosperity we find a gradual increase in the simpler kinds of personal property. The landowner’s family gradually accumulates money, clothing, and luxuries. If the general property tax is still to continue a fair evidence of individual ability to pay, personal property must be taken up into the assessment lists. And this, in fact, everywhere occurs. Not only the real estate, but also the growing personal estate, is now regarded. At first this personalty consist of tangible, visible objects not easily concealed, and constituting a fair index of the citizen’s prosperity. The existence of this scanty stock of personalty will, however, still be in harmony with the early economic system. It is still the landowner who owns the personal property, and it is fitting that there should still be only the general property tax. The economic system has not yet materially altered.

The next change, however, inaugurates a widely different stage. The primitive family group or manorial system decays. Slavery is gradually broken down by manumission or abolition. The commercial instinct grows stronger, and trade is no longer limited to the interchange of superfluities between adjacent households. What Aristotle decries as the gainful pursuits become common occupations. Capital develops and free laborers appear. The original undifferentiated mass of property splits up into separate parts. The landlord is no longer the property lord. Personal property, in the shape both of productive capital and of unproductive wealth, increases at a continually accelerating ratio. Finally, as in our modern industrial system, the movables outrank the immovables. Realty is completely overshadowed by personalty, in both extent and influence. *1

Now begins the contest between the landed and the moneyed interest, between rent and profit. The landowners in mediaeval times, like the farmers in our own time, vainly attempt to expand the original property tax so as to include all these new forms of property. The capitalist and moneyed class either seek to shift the burden by devising the indirect tax of which we have spoken above, or they attempt to escape the burden entirely through evasion or through lax administration of the property tax. Where the differences in wealth become striking and the lower classes are politically powerless, the landed proprietors and the traders combine to throw the burden on the agricultural laborers and the urban artisans, although they may still struggle between themselves as to the division of the remainder of the burden. Where aristocratic conditions prevail less strongly, as in America up to the present time, the laborer fares better, but the contest between the farmer and the city resident assumes a more acute form. The history of modern taxation is largely the history of these class antagonisms.

4. Changes in the Basis of Taxation

In the meantime the test or standard of individual ability has itself undergone a change. With the growing differentiation of society, the productive powers of the various classes themselves differ. Moreover, there are now many forms of earnings which are derived not from property, but from industry. And since it is difficult to capitalize industry, it is the product of the industry which now becomes of importance. But there is a decided difference between this new system of taxes on product, and the original system which preceded the first property tax. In the original system the tax was on gross produce or on mere quantity of land. The land tax was either the tithe or some definite part of the estimated produce. Now the tax is on net produce. Allowance is made for expenses of cultivation. Two pieces of land may yield the same amount, and yet the outlay in the one case may have been considerably more than the other. To take net, instead of gross, product marks another step forward in the evolution of the idea of ability to pay. In a state of complete mobility of capital and labor, it perhaps makes no difference whether we take the market value or the net product of a piece of property; for the selling price of property tends to equal the capitalized value of the revenue derived therefrom. But in actual life, where we often find limitations to this absolute mobility, there may be a divergence between the capitalized value of the produce and the actual value of the property. Thus we find almost everywhere a movement to replace the property tax by a system of taxes on net product—on the product of land, of capital, of business, of labor, etc. This was the stage reached in Europe toward the end of the eighteenth and the beginning of the nineteenth century.

Relatively good as this system was, it was soon seen not to be entirely satisfactory. It failed to respond to modern economic conditions. It looked at the produce of the source of industry, rather than at the recipient of the earnings; it was a tax on things, rather than on persons; it abstracted from the personal situation of the taxpayer; it made no allowance for indebtedness. Just as the tax on gross produce was defective because it paid no attention to expenses of cultivation, so the tax on net produce, while in itself an improvement, was nevertheless faulty because it paid no attention to what may be called the personal expenses of cultivation, i.e. the interest on indebtedness.

Thus it is that in recent decades the tendency has arisen to substitute personal taxes for the older real taxes, and to assess the individual rather than the thing; or, stating it in simpler language, to put revenue or income in the place of proceeds or earnings as the test of taxation. Just as a man’s ability to support himself or his family is seen in his income or revenue, so, in the same way, it is recognized that the test of a man’s ability to support the state is to be found in this same income or revenue. From the modern point of view, it is the duty of the citizen to support the government according to his capacity to support himself. Income or revenue may not, indeed, be an ideal test;[6] for there is no absolute test which can exactly gauge all the varying personal circumstances of each individual. But it is the best workable test that governments can secure, and it is in harmony with the test imposed on the individual by the force of social opinion in regard to his duty to his own family. For this reason modern states are everywhere changing their revenue systems, so that the taxes shall correspond, as nearly as possible, to the revenues of the citizens. But precisely because the income tax is a personal rather than an impersonal tax or a tax on things, it involves administrative difficulties and presupposes an advanced stage of social morality and political probity. Where this stage has not yet been reached, it may be better to continue the system of taxes on product which form a very rough approximation to the revenue of the taxpayer, than to attempt a system of income taxes which strive to reach the revenue more closely. Furthermore, as we shall see in a subsequent chapter, there are certain considerations which militate against the exclusive adoption of individual faculty as the all-controlling norm of taxation. But whatever may be the momentary demand of expediency, or the influence of countervailing considerations, the line of development is evident, and the ultimate result must necessarily harmonize with the facts of economic and social relations.

Let us test the theory of development as laid down in the above pages by a reference to the history of taxation in America. It is well known that the primitive revenues of the colonies were composed largely of voluntary payments, of subsidies or allowances from abroad, of quit-rents, and of occasional fees and fines of early justice. But it has usually been overlooked that when the voluntary offerings turned into compulsory contributions, the tax systems in the various colonies were quite different.

The New England colonies were democratic communities where almost every one owned some land, and where the distribution of property was fairly equal. We therefore find as a characteristic mark of New England, in addition to the primitive poll tax, the tax on the gross produce of land either actual or computed according to the quantity or quality of the land. This slowly grew into a real property tax, which soon expanded into what was nominally a general property tax. And this itself was supplemented by a tax on town artisans and others who subsisted on the produce not of their property, but of their exertions. To the property tax was now added the “faculty” tax.[7]

In the Southern colonies, which were aristocratic in their economic substratum, the land tax played an insignificant role, because the large landowners naturally objected to bearing the burdens. After the introduction of slavery it became difficult to retain even the poll tax, which when laid on slaves is practically a property tax on the slave owner. Hence we see a system of indirect taxes, mainly on exports and imports, falling with special weight on the poorer consumers.

Finally, in the middle colonies, above all in New Netherlands, the conditions were neither democratic nor aristocratic. There was no such approach to equal distribution of wealth as in New England, and no such preponderance of the landed interest as in Virginia. We find the dominance of the moneyed interest or of the trading classes, who brought with them Dutch instincts and Dutch methods. Accordingly, there was no system of poll and property taxes as in New England, and no system of indirect taxes on exports and imports as in Virginia. The fundamental characteristic of this system was the introduction of the excise system or indirect taxation of trade, which was borrowed from Holland, just as we find the excise system introduced from Holland into England and the other European countries during the seventeenth century. Each section, therefore, had a fiscal system more or less in harmony with its economic conditions. It was not until these conditions changed during the eighteenth century that the fiscal systems began somewhat to approach each other; and it was not until much later that we find throughout the country a general property tax based not on the produce, but on the market value, of the property.

The same divergence of economic conditions explains what is to-day the most marked distinction in the United States between the fiscal systems of the North, the South and the West. In the Southern states up to the civil war, the interests of the large landed proprietors were still dominant. Under the federal constitution, it was impossible for them to levy import or export duties. For a time, therefore, land, as the only source of wealth, had to defray the public charges. In the absence of industrial centres, there was little opportunity for taxation of personal property. As the need of increased revenues was felt, the landed interests attempted to secure this revenue from the few ordinary occupations carried on outside of the farms and estates. In other words, the license or privilege system was established, which levied a fixed charge on well-nigh every occupation. It was not until after the middle of the century that the general property tax was introduced; but even to-day the license or privilege taxes yield a large share of the public revenue.

In the Northern states, on the other hand, where the business interests were more powerful, the license or privilege system never attained such a firm foothold. But with the breakdown of the general property tax, the attempt of the general public to secure a taxation of the moneyed interests has taken the form of taxation of corporations and of capital. There are plainly visible the beginnings of a system of taxation of net product. Finally, in the Western states, where the economic conditions are as yet more primitive, there have been only sporadic attempts to alter the general property tax, which there is still to a great extent a tax on real estate. But with the gradual unification of economic conditions, which is slowly taking place throughout the entire country, we may expect that the systems of taxation will become more nearly uniform, until the results of modern industrial and democratic development will finally appear here, as they are appearing in other parts of the world. The recent attempt to introduce a federal income tax, however defective the measure may have been, is a significant evidence of the trend. That this attempt will ultimately be followed by others, not necessarily precisely similar, but yet indicative of the same general movement, is by no means improbable.

From the above survey one fact stands out prominently. Amid the clashing of divergent interests, and the endeavor of each social class to roll off the burden of taxation on some other class, we discern the slow and laborious growth of standards of justice in taxation, and the attempt on the part of the community as a whole to realize this justice. The history of finance, in other words, shows from one point of view, at least, the evolution of the principle of faculty or ability in taxation—the principle that each individual should be held to help the state in proportion to his ability to help himself. In the earliest indirect payments there was no idea of equity, but only of force. But with the advance of civilization and social ethics, we reach the first stage of rude equality in the poll tax. Step by step the revenue system advanced to successively higher planes. Expenditure, property, product—each of these in turn was considered the test of individual capacity and obligation toward the state; until finally in modern times revenue or income has come to be regarded as the most equitable and the most practicable measure of individual and social faculty. To arrange a system of taxation a large part of which at least shall, on the whole, correspond as closely as possible to the net revenues of individuals, and which shall take into account the variations in tax-paying ability, has thus become a demand of modern civilization. But unless this system is in harmony with the external structure and the internal conditions of modem economic life, it is foredoomed to failure. If the history of taxation teaches any one lesson, it is that all social and moral advance is the result of a slow process and that while fiscal systems are continually modified by the working out of ethical ideals, these ideals themselves depend for their realization upon the economic forces which are continually transforming the face of human society.

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[1] This aspect of Puritanism has more recently been studied in detail by Professor Max Weber in a series of suggestive articles “Die protestantische Ethik und der ‘Geist’ des Kapitalismus” in the Archiv für Sozialwissenschaft und Sozialpolitik, vols, xx and xxi (1905).

[2] A word may be said, in passing, about our present attitude toward indirect taxes. There is a prodigious amount of cant on this topic. Many thinkers are apt to make common cause with the socialists and the single-taxers in demanding the complete abolition of the so-called indirect taxes. This is a mistake. There is nothing inherently bad about an indirect tax, nor is there anything inherently good about a direct tax. It depends entirely upon what kind of direct or indirect tax it is. A direct tax on the laborer is not necessarily good because it is direct; an indirect tax on the luxury of the rich is not necessarily bad because it is indirect. It happens, indeed, that most of the indirect taxes of the past have been devised by the powerful in order that their burden might fall on the weak; but it is by no means impossible to frame a system of taxes on consumption which will supplement other taxes and do substantial justice to all. The elaboration of this point must be reserved for another place.

[3] “Untersuchungen auf dem Gebiete der Nationalökonomie des klassischen Alterthums,” in Hildebrand’s Jahrbücher für Nationalökonomie und Statistik, iv., p. 343 et seq.

[4] In some of the early mediaeval tax systems, these were specifically termed cattle and land taxes. So the Vieh- und Klauensteuer in Germany.

[5] For details sec the article on “Income Taxes in the American Colonies,” Political Science Quarterly, vol. x. (ISO), pp. 233, 234. This is reprinted in Seligman, The Income Tax, 1911, part ii, chap. i.

[6] For some of the difficulties connected with the theory of the income tax see Seligman, The Income Tax, 1911, Introduction, §4, et seq.

[7] For details as to the American “faculty” taxes, see Seligman, The Income Tax, 1911, pp. 367 et seq.