The most instructive country to study is Prussia. The line between the old and the new may be drawn at the reforms of Stein and Hardenburg in the forms of land tenure. These reforms may be regarded as having been accompished in 1811. Briefly stated, their result was to abolish personal serfdom, dissolve the feudal partnership between tenants and proprietors, and establish free trade in land.1 Although these reforms had to do mainly with land, and although the accompanying edict of 1810 promised speedy reform of the land tax on the basis of a new survey, or cadastre, nothing material was accomplished in the reorganisation of this tax until 1861. In that year the land tax was rearranged for the entire kingdom on the basis of a new and rapidly executed survey. Some twenty different provincial land taxes, with upwards of one hundred minor variations, which had existed before that time, were merged into an apportioned tax upon the net product of each piece of land as given in the cadastre. This tax recently yielded about 40,000,000 M. annually.

1 Seeley's Life and Times of Stein, Vol. I., pp. 187-297. Morier, " The Agrarian Legislation of Prussia during the Present Century," in Probyn [Editor], Systems of Land Tenure in Various Countries, pp. 306-316. See Selections in Rand.

The reforms which preceded this were those of the indirect consumption taxes, out of which finally emerged the personal class tax. The edict of 1810, which was referred to above as promising a reform of the land tax, seriously attempted to remove inequalities by destroying many feudal exemptions and privileges, and removing local differences. A general scheme of consumption taxes on necessaries, of which the excise on meal is a type, was planned for city and country alike. It was, however, immediately found that the meal tax was hard to collect in rural parts. As early as 1811, therefore, a poll tax of one-half thaler from every person over twelve years of age was substituted for the meal tax in all places except the larger towns. In 1820 this tax, still applying to the same places, developed into a classified poll tax ; i.e. all persons were grouped according to rank, profession, and general prosperity, into a few classes, which were then taxed per capita at different rates for each class. Somewhat modified the next year, so as to make twelve classes, in groups of three each, and with rates which ranged from one-half thaler to 144 thalers, and covering all persons over fourteen years old, this tax endured thirty years. As before, this tax did not extend to the large cities, where the excise on meal and meat was regarded as placing the same burden on the people. Such a remarkably clear perception of the fact that indirect taxes are practically the equivalent of direct taxes in the individual burden they impose is not often met with in fiscal history.

In 1851, this tax was changed in order to make room for the introduction of an income tax on all persons having an income of over 1000 thalers. Those persons whose incomes were below this amount were taxed in the large cities by the meal and meat tax ; in the country and in small towns, by a class tax, like the old one, with rates ranging from one-half thaler to 24 thalers, according to the supposed income. Persons living in large cities who paid the income tax were allowed to deduct 20 thalers from their income as compensation for the meal and meat tax they were supposed to have paid. Later reforms removed these gate excises except for local purposes. As the income tax forms a special topic in a later chapter, we will not at present follow the details of its development and reform. It is sufficient to say that it was a progressive tax on the income of every person.1

When the land tax was reformed in 1861, the building tax was separated from it, having been until that time a part of it; and all old taxes of a similar sort were merged in the new one.

1 See Chapter IX.

This tax is assessed in the cities according to the rental of the buildings, and in the country according to the size of the lands connected with the houses, and other characteristics. One of the reforms that was made after the peace of Tilsit to strengthen the weakened economic resources of the country was the establishment of general industrial freedom. Naturally, such a change would have been regarded as a failure from the standpoint of the statesmen of the times, if it could not be made to yield a revenue to the treasury; so the new industries were burdened with a new tax. This tax, which was very weak, and which, wisely, perhaps, failed to meet all the new forms of industry which came into existence, was subjected to a thoroughgoing reform in 1891. But it was at that time transferred to the local governments. Capital invested and some of the permanent features of each business form the basis of this tax.

The Prussian system, as it existed before the great reforms of 1893, may now be seen as a whole. It consisted of two parts : (1) There was a group of three complementary taxes upon theproduce of property and capital, — the land tax, the building tax, and the industry tax ; (2) there was a system of personal taxes culminating in an income tax. The former group, true to the economic tenets of the first three-quarters of the century, taxed the productive agencies. The latter, although it originated as a consumption tax, aimed at taxing the shares in distribution. Thus the older consumption taxes, which were originally assessed without any very clear idea of what the justification was, but were used because productive of large revenues, yielded to new taxes supposed to be more fairly in accord with the modern system of distribution.

We are now in position to see the significance of the great reforms of 1893 (all of which went into effect in 1895), made under the leadership of Finanzminister Dr. Miquel. These reforms place Prussia far in advance of all other countries in the theoretical perfection of her tax system.1 The income tax, which has long been correctly regarded as the foundation of the Prussian tax system, was subjected to a thorough reform in 1891.2 It was strongly urged at that time that income from property represented a far higher faculty, per unit, than income from labour and personal exertion, and, therefore, that a perfect system should contain two kinds of progression: one that taxed larger incomes more heavily than smaller ones ; another that taxed incomes from property more heavily in proportion than incomes from labour. It was felt that the existing produce taxes (Ertragsteuerri), the land, building, and industry taxes, failed to accomplish this end.

1 See Seligman, Essays, pp. 330-339. References to larger and more detailed statements are given there.

2 See Chap. IX.

Hence one of the reforms of 1893 was the surrenderof these taxes as royal taxes, and the initiation of a general property tax as supplementary to the income tax. This tax, which can only be properly understood when its supplementary character is held in mind, is arranged as follows :

The tax is one-half per mill on the lower limit of the class within which the property falls. The classes go by stages of 2000 M. from 6000 M. to 40,000 M., of 4000 M. up to 60,000 M., of 10,000 M. up to 200,000 M., and above that of 20,000 M. each.

Thus:

Property.

Tax.

Up to 6,000 M. .

exempt.

6,000 " 8,000 " .

. 3M.

8,000 " 10,000 " .

. 4 "

10,000 " 12,000 " .

. 5 "

20,000 " 22,000 " .

. 10 "

40,000 " 44,000 « .

. 20 "

60,000 " 70,000 " .

. 30 " etc.

Above 200,000 M. the stages are 20,000 M. each, and the tax increases 10 M. in each stage.

This tax being supplementary to the income tax accomplishes the result of imposing a differential rate on funded income as against unfunded income.

The abandonment by the State of the three old taxes on land, buildings, and industry rendered the reform of local taxation possible. As has already been said, the proper co-ordination of all tax burdens is one ofthe chief problems of modern taxreform. With the exception of the beer taxes, and the meat and meal taxes still used by some of the cities, local taxation in Prussia is mainly direct. Most of it, until 1895, took the form of additional percentages to the rates of the royal taxes. In some cities there were important special local taxes, like the house rent tax in Berlin. Prussia, also, grants subsidies from the royal treasury to the local bodies for special purposes. But the symmetry of the national system was somewhat destroyed by these additional rates. Such additions to the income tax were especially intolerable. Real estate is, moreover, a particularly good basis for local assessment. It cannot evade the tax, and it is the recipient of particular benefits from good local government. The same is true of businesses of a local character, although it is not safe to let the rate vary from place to place. Hence these three taxes were handed over to the local bodies. At the same time the attempt was made to regulate all other sources of local revenues.

The Prussian system as it now stands comes nearest to the realisation of the taxation of faculty of any in the world. The chief difficulties that have arisen are those of assessment. The progressive rate gives rise to a special incentive to the concealment of larger incomes, and not even the general excellence of Prussia's administration has been preventive of under-assessment.1