For example, if the average rate of duty were 25 per cent, and a 50 per cent rate on an article were increased to 75 per cent, it is possible that this rate would prove to be absolutely prohibitive.
This raise of rate, therefore, would tend to reduce the average rates collected on all dutiable articles. Changes in general conditions of industry from causes quite apart from the tariff may result in shifting the proportions of imports that are dutiable so that the average rates go either up or down while the tariff law has remained unchanged on the statute book. A failure to consider these and related facts leads to much confusion in popular and political discussion of the tariff.]
[Footnote 2: Usually given as 20 per cent. However a good many rates under the full operation of the act worked out as 21-1/2 or 23 per cent, and a few at 26 and at 29 per cent. Besides there were numerous specific rates, the _ad valorem_ force of which cannot be determined.]
[Footnote 3: The political argument that the small tariff reduction of 1857 caused the crisis of 1857 will not bear serious examination. See below, sec. 13.]
[Footnote 4: See ch. 14, sec. 2.]
[Footnote 5: See above, sec. 2, note 1.]
[Footnote 6: Internal revenue receipts in 1866 had been $309,000,000; in 1872 they had fallen to $131,000,000, yet the government's surplus for the three years 1870-1872 was little less than $100,000,000 a year. This was almost half of the total receipts from customs, which were $216,000,000.]
[Footnote 7: Other issues absorbed public attention in this period--the Spanish war, colonial policy, "imperialism," railway rate regulation, corporation control, etc.]
[Footnote 8: See above, sec. 2.]
[Footnote 9: Compare with ch. 13, sec. 5.]
[Footnote 10: Probably resulting from the rising prices, as explained above, sec. 2. For example, in one year, from 1899 to 1900, the average _ad valorem_ rate collected on dutiable goods fell 3 per cent, and that on all goods fell 2 per cent; in the two years from 1904 to 1906 the average rates on dutiable fell 4 per cent, and on all goods fell 2 per cent.]
[Footnote 11: This "competitive principle" is essentially the same as the so-called "true principle" of equalizing the cost of production (see above, sec. 11). It is essentially a prohibitive, not a free trade, principle. Strictly applied it would cause complete exclusion of imports. But as applied to selected articles which it is desired to exclude in order to "protect" the domestic producer, this principle would simply prevent the rate being placed appreciably higher than was needed to exclude them. Anything beyond that point but offers temptation and opportunity for the formation of a monopoly by domestic producers. Then, too, the rate may intentionally be fixed so as to make just possible the survival of the most favorably located or most efficiently operated establishments, while compelling the abandonment of other establishments. See ch. 14, sec. 3.]
[Footnote 12: Such changes are logically related to the subject of financial crises rather than to that of the tariff. See note at end of the next section.]
[Footnote 13: See Vol. I, e.g., pp. 228, 431, 445ff, 466, 490, 506ff.]
[Footnote 14: #Tariff legislation and business depressions.# The relation between new tariff legislation and the business conditions following it has been the subject of much debate in political campaigns. In the few cases where a relationship has been most often asserted to exist, it is more probable that the tariff change was the _result_ of business conditions preceding it, than that it was the cause of the conditions following it. For usually a tariff has been revised downward because a few years of prosperity with large imports had so increased customs duties that the government has had surplus revenues. Just when the tariff was reduced, the conditions were ripe for a crisis. This happened in 1857 (already in 1856 there had been a preliminary halt of business), again in 1872, and on a small scale in 1883. But the main reduction resulting from the compromise act of 1833 did not occur until after the crisis of 1837-39; the Walker act of 1846 was passed just as business was starting upward on a long wave of prosperity; and the act of 1894 was passed a full year after the severe crisis of 1893, when business had already entered upon a period of depression. In none of these cases does it seem reasonable to attribute business depression to the reduction of the tariff, as is commonly done in protectionist arguments even to the point of attributing the panic of 1893 to the reduction of the tariff a year later!
At several times the tariff has been raised soon after a crisis when a good occasion was presented by the need of larger revenues as in 1842, 1860, 1875, and 1897. Business at such times is just at the point of the cycle when prosperity is due. The higher tariff of 1842 was succeeded by the low tariff of 1846 without any check to business. The war obscured the ordinary industrial effects of the tariff acts of the sixties. The increase in the year 1875 was followed by four years of hard times and slow recovery. The increase of the tariff in 1890 occurred as business was nearing the top of the cycle and was followed by two years of prosperity culminating in the very severe crisis of 1893. The authors of the tariff of 1897 were peculiarly fortunate in the time of their action, for the country was just fairly recovering from the very severe crisis of 1893 and prosperity was to continue (with brief hesitation in 1900 and 1903) until the severe crisis and panic of 1907.
The advocates of higher rates are, of course, correct in declaring that the great business prosperity of the years 1915 and 1916 resulted from the unexpected demands in foreign trade growing out of the war, and is not to be credited in large measure to the act of 1913. But reason requires that the same restraint be exercised in crediting to higher protective acts the prosperity which has in some--not all--cases, followed their enactment; and requires further that the present act be not held accountable for the next reaction in trade, whenever it may occur, inasmuch as a reaction would be sure to occur no matter what kind of tariff act we might chance to have at the time.]
CHAPTER 16
OBJECTS AND PRINCIPLES OF TAXATION
-- 1. Public finance as a division of economics. -- 2. The police function.
-- 3. Social and industrial functions. -- 4. The enlarging sphere of the state. -- 5. Industrial revenues of governments. -- 6. Governmental receipts from loans. -- 7. Nonrevenue character of receipts from loans. -- 8. Revenues from taxation. -- 9. Forms of taxation. --10.
Defective tax "systems." --11. Various standards of justice suggested.
-- 12. Social welfare as the aim. -- 13. Principles of administration.
-- 14. Shifting and incidence. -- 15. Taxes as costs.
-- 1. #Public finance as a division of economics.# Men live together in politically organized societies which employ public officials as agents to carry on the functions of government. Every governmental unit, large or small, may be viewed not only as a political body, but as an economic enterprise. Each has its economic aspects, such as receipts and expenditures, employer and employee, borrowing and lending, etc. Each political unit is in this sense "an economy." The study of the public economy, of the economic aspects of government as distinguished from its political aspects, constitutes the science of public finance, an important division, tho not the whole, of political economy.
The primary fact determining the public finances is the extent of the sphere of "the state," meaning by the state the totality of political powers and functions in a community. There are two typical ideals of a state, each with corresponding functions: the ideal of the police state, and that of the social-industrial state. In fact every system of government provides for the exercise of both functions in some measure. The police function is primary. All governments alike exercise it, but they differ most in respect to the degree in which they exercise the social-industrial functions.
-- 2. #The police function.# The police function is that of public defense and the maintenance of domestic order. In family or patriarchal communities all share a common income and combine in the common defense, but self-preservation often has compelled such small communities to form a larger, stronger state for the common defense.
Public defense requires sacrifice of some independence on the part of the family and of the individual. Personal service in the field gives place later in some measure to the payment of taxes, so that a regular income may permit the government to attain a more regular, continuing, and perfect organization of military forces.
As political unity and power grow, the citizens need less often protection against foreign foes, and they need more often, relatively, defense against the aggressions of some of their own countrymen. The preservation of domestic order requires police, courts of justice, and other agencies. The ideal of the anarchist to do without government is nowhere realized. Everywhere there must be government to preserve peace and to protect property. Unfortunately, this need grows with the growing density of population. Crime increases when men swarm in great cities. The courts which settle disputes between men, and which interpret their contracts, are agencies of peace, displacing physical contests. To maintain and operate the various parts of the social machinery requires ever increasing governmental revenues. From many causes government has, in modern times, grown increasingly costly.
-- 3. #Social and industrial functions.# The social and industrial functions of government seem naturally to grow out of the primary ones just mentioned. In a democratic society, popular education is a necessity, as it appears that domestic order is not possible in a democratic state without intelligent citizens. The system of public education has, in many states, expanded to include a publicly supported university as the dominant educational and scientific organ of the community. Some industrial functions are performed by the government in connection with the primary needs. Lighthouses are necessary to guide the navy, but they also serve to guide the merchant marine and to aid industry. The post was established as an agent of political and military government to connect the ruler with the outposts (a fact the name post indicates), but the postal service has grown in every country to be a great industrial and social agency.
The consular service, originating in the political need of keeping official representatives in foreign lands, has become a valuable economic agency; consuls are commercial agents, advancing the business interests of their countries in all quarters of the globe.
-- 4. #The enlarging sphere of the state.# A mere police state would leave to private initiative the provision of every kind of economic agencies not needed for political government. The state might, for example, even leave the provision of roads and bridges to private individuals or to companies, permitting them to charge tolls to obtain a return on their investment. Whenever a toll-road is made public and a toll-bridge becomes free, and the state maintains the roads, it is becoming less strictly a mere police state. Reacting from the ideal of the police state which was most highly praised in the first half of the nineteenth century, the functions of government have been extending in many directions in the last half century. More and more economic functions are performed through the agency of government. If we think of an act as done by the government _for_ private citizens, we call it paternalism; but if we think of an act as done _by_ citizens collectively _for_ themselves as the best way to get these things done, we may call it, in a broad sense, socialism.[1]
Government is in one aspect a direct good to its citizens. In return for its collective cost men collectively get the enjoyment of social organization, markedly in contrast with the uncertain ties and hazards of primitive communities. But government becomes also a mode of social investment, an indirect agent, a productive enterprise. Wealth applied through it secures in some cases a greater product than is possible by individual action.
But when the government undertakes these various tasks the expense falls unequally on individuals and affects differently their incomes.
When free schools take the place of private schools, the law compels every one to contribute to education. To many individuals it is a matter of indifference whether they pay tuition or taxes, but the wealthy bachelor sometimes grumbles when forced to help in educating the day-laborer's family. The average result of a certain social policy may be right, but individuals diverge from the average and thus have constantly a motive to attempt to change the limits of governmental action. Happily the subject is not always viewed with selfish eyes. The ethical and patriotic thought is not, "How will this affect my interests?" but. "How will it affect the general interests?"
But as the question of value is always involved men are usually found favoring or opposing the industrial and social activity of the state according as it affects their own incomes. Thus the determination of the sphere of the state is in large part an economic question.
-- 5. #Industrial revenues of governments#. The costs of government at any stage are met in varying degrees in one of three ways: (1) from industrial sources, (2) by borrowing and thus creating a public debt, (3) from taxation.
(1) Receipts from industrial sources in the broad sense include all rents from wealth owned, interest on loans made, and proceeds of sales from enterprises conducted, by the government. In feudal times, these were mostly obtained in the form of rents from the private domains of kings and nobles. In many early and medieval states these sources of receipts were adequate to the need of government; then they decreased in many countries, both relatively and absolutely, because of the sale of publicly owned wealth (lands and mines) and with the recent extension of the functions of government have again increased very rapidly. Now industrial revenues come not only from the rents of forests, mines, docks, lands, and buildings, but from profits in the operation of industrial enterprises such as waterworks, railways, mines, and factories, and from interest on funds deposited in banks or otherwise invested. At present the industrial revenues of the aggregate governments of the United States (national, state, and municipal) amount to about a fifth of all revenue receipts. Since the middle of the nineteenth century the number and variety of the industrial enterprises undertaken by governments has been steadily increasing, and this increase has been most marked in the cities. The change in this respect in the United States, great as it has been, has been proceeding more slowly than in the European countries.
In 1913 the receipts of this nature (earnings of departments and of public service enterprises) were nearly $500,000,000. The larger part of this sum comes to the national government ($288,000,000), mostly from the post-office department. Most of the remainder comes to the minor divisions ($176,000,000), and but little to the states. The total "earnings" (this means here receipts, not profits) of public service enterprises in incorporated places were $120,000,000.
-- 6. #Governmental receipts from loans.# The funds to invest in these commercial undertakings are originally obtained in nearly all cases from public loans. Almost every unit or division of government may become a borrower to provide for its citizens at once certain needed advantages and improvements when the funds are not at hand and immediate taxation is deemed too heavy a burden.[2]
The indebtedness (less funds available for payment of debt) of the aggregate governments of the United States in 1913 was:
Nation ................................. $1,028,000,000 States ................................. 346,000,000 Minor divisions ......................... 3,476,000,000 ------------- Total .................................. $4,850,000,000
The larger part of nearly every national debt has been incurred for purposes of war and preparation for war, while nearly all public debt other than national has been created for the purpose of peaceful social and industrial development. The debts of the American states have partly been made necessary to meet deficits in current expenses, but largely of late to erect public buildings, purchase forest lands, improve roads, and construct canals. The minor divisions are counties, cities, villages, boroughs, towns, townships, school districts, drainage, irrigation, and levee districts, fire districts, poor-relief districts, road districts, and various other subdivisions of states and of counties. Every one of them has more or less legal power to incur debts and to levy taxes for the purpose of paying the interest and of repaying the principal. The purposes for which the debts are incurred by specially organized districts are sometimes indicated in the names (e.g., drainage, irrigation), while the regular political divisions of counties, cities, villages, towns, townships, incur debts for a large variety of objects, such as streets, sewage disposal, water supply, electric light or gas plants, school houses, libraries, and other public buildings. Large expenditures for these purposes are necessary because the local governments are undertaking new functions, and either existing equipment (such as waterworks systems, and street railways) must be bought from private companies or new ones must be built. They are necessary further because the rapid growth of population calls for an immediate "capital investment," the payment of which may be, through borrowing, more easily spread over a series of years (e.g., in the extension of streets and paving, and in the provision of school houses for the children).
-- 7. #Nonrevenue character of receipts from loans.# The proceeds from loans (and certain other items of sales) are called nonrevenue receipts, because they are but in anticipation of receipts from other sources. The economic theory of such loans is essentially the same as that of private loans, but it is the people of the political district collectively that are the borrowers. To get the present uses of goods they sell their promise to make future payments totaling a larger amount. The loan is the present worth of those promises. In the case of loans made for local purposes, provision is now usually made for their complete repayment within a definite number of years, usually 10, or 20, or 30. Meantime interest is payable annually or semi-annually, and from some source an additional sum is collected to repay a part of the loan, sometimes by redeeming a certain part annually, sometimes by accumulating a sinking fund until that amounts to the whole debt.
The minor divisions in the United States are thus constantly creating debts at the rate of about $2,000,000,000 each year and at the same time paying former debts in instalments, in a total amount somewhat less than this. In the case of some municipal investments which are commercial enterprises (such as those supplying gas, electricity, and water), these annual payments can be made out of the profits; in the case of others, the payments come from special assessments upon the owners; and in most other cases they are collected by the usual methods of taxation. In America, a large part of these costs are, by the law of special assessments, placed upon the owners of adjacent lands, whose outlays are usually more than offset by the increased value of their lands as a result of the improvements. In this case also, the present investment is in anticipation of the future incomes which the owners of the improved lands will get.[3]
-- 8. #Revenues from taxation.# Much the largest part of the receipts of most governments, apart from loans, and in many cases nearly all such revenue receipts, come from taxation. Tax (as a verb) meant originally to touch or handle, then to estimate or appraise, and then to charge a burden upon some one, especially to impose a payment of services, goods, or money upon persons or property for the support of government.[4] _Taxation_ is the legal process of taking income, services, or wealth from private persons for public uses.
Taxes are of various kinds, but they always are incomes, or wealth representing future incomes, transferred from private ownership of the taxpayers to the government. In rare cases, more than the net current income of a certain kind may be taken for public uses. As economic income has many sources, it may be intercepted at many different points, and taxation may take various forms. The differences are so manifold that it is difficult to classify particular taxes satisfactorily.
-- 9. #Forms of taxation.# The following are the forms of taxation most frequently referred to.
(a) The simplest form of tax is a _poll tax_, a uniform amount payable by every person of the taxable class. This form of tax is being less and less used in America and now amounts to little more than $17,000,000,[5] this being only .6 of 1 per cent of the aggregate taxes in the United States. The national government gets about one-fourth of this amount from a tax on immigrants and the rest is collected by (some of) the states, counties, and minor divisions.
Usually, if not always, the poll tax is imposed only upon voters, as a condition to the right to vote.
(b) Taxes may be laid upon _incomes_, as they come into the possession of the owner. Usually, only monetary incomes that arise in commercial transactions are taxable, and no attempt is made to estimate the value of psychic incomes. Commercial incomes are more easily measured, but the omission of the other elements must cause many inequalities in the burden of the tax as between two individuals controlling equal incomes of real things.
(c) Taxes may be on _property_, either general upon all property in the taxing district, or special, upon certain forms of property. A property tax may be specific or _ad valorem_, in proportion to value, as to the method of its determination. Since the value of material wealth is the capitalization of the rentals at the prevailing rate of interest, a general, _ad valorem_, property tax, so far as it applies to material wealth, and if it were accurately assessed, would take an approximately equal proportion of wealth-incomes. It does not, of course, touch directly incomes derived from wages and salaries, but it reduces their purchasing power in many cases. It is in some respects more searching than a tax on actual rents, for it reaches the prospective, or speculative, rental.
(d) Taxes may be on _expenditure_ (sometimes called taxes on consumption). This is but another mode of attacking income, for in the long run most income is spent, not always by the individual who earned it, but by some one, and thus it is reached by a tax on expenditure.
Usually in the United States the tariff duties are accounted to be taxes on expenditure, as also the internal revenues (also called excises) of the national government. In time of war, internal revenues are extended in the United States to a multitude of articles, but usually they have been limited (with minor exceptions) to liquor and tobacco. Most of these taxes are in fact levied not at the time of purchase by the ultimate consumer, but upon the specific goods in the hands of some merchant or business agency, and some of them are essentially special property taxes and others are business taxes of the kind next to be mentioned.