§ 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. Non-revenue character of receipts from loans. § 8. Revenues from taxation. § 9. Kinds of taxes. §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. § 16. Taxation and socialism.

§ 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, though 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 large, 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.

Fig. 1, Chapter 17.—Expenditures of the Federal government by groups of objects, fiscal year ending June 30, 1920.

Expenditures  of  the  Federal  government   by groups of objects, fiscal year ending June 30, 1920.

§ 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 agency 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, (meaning not a political party, but a principle of social action).

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.