§ 1. Importance of taxation as a public question. § 2. The general property tax; nature and difficulty. § 3. Ambiguity of the term "property." § 4. Various temporizing policies. § 5. A consistent policy of wealth-taxation. § 6. Needed reform of assessment. § 7. Separation of state and local taxation. § 8. Federal taxation of commerce. § 9. Proposal of the single tax on land values. § 10. Various reforms in land taxation. § 11. Difficulties in taxing corporations. § 12. Special taxes on banks. § 13. Special taxes on insurance. § 14. Special taxes on transportation. § 15. Alternative policies in corporate taxation. § 16. General plan for corporate taxation.

§ 1. Importance of taxation as a public question. The discussion of taxation has accompanied the growth of free government in England and America from the time of Magna Charta. The control of the public purse has been found to give the key to political power, and therefore it has frequently become the occasion of conflict between the monarch and the people. But in our own national history, since the adoption of the Constitution, taxation has not had a leading place in politics except in the one aspect of the tariff. The constitutional question of states' rights long absorbed most of the interest of citizens and of legislators. But, with the quickened attention of the public to economic questions, the problem of taxation became of increasing importance.

It has come to be recognized that taxation can be made to play, and is bound to play, a leading part as an agency in the distribution of wealth, and thus it is the center of much of the ardent controversy regarding social reform. Ultimately, almost every proposal of social change and betterment involves some cost. The question then must be answered, Who is to receive the benefits and upon whom and how shall new taxes be levied to pay the cost ? Further, it is often urged that this result of taxation in redistributing incomes is in itself (or can be made) a virtue; and some even see in tax reform the answer to the largest social questions of our time. We are now to take up a few of the more important problems of taxation, to see the difficulties, and to suggest the direction in which their solution is to be sought. The tariff having been already separately considered, the chief kinds of taxes we have here to treat are property taxes, general and special, and inheritance and income taxes.

§ 2. The general property tax; nature and difficulty. The general property tax is a tax of which the rates both of assessment and of levy are uniform and equal in proportion to the value of all (or nearly all) property in the taxing district.1 There are always some exceptions of certain kinds of property, or of the property of certain persons, or of property and things put to certain uses - public, educational, religious, and charitable in their nature.

The federal government levies no general property tax, but the other branches of government2 receive about three fifths of all their revenues from it.

At first view nothing would seem to be simpler and juster in principle than such a plan of taxation; but those who have most carefully studied its practical operation, almost with one accord pronounce it to be a "dismal failure." The chief reason assigned for this failure has been that the assessment of the tax is imperfect and incomplete because of the incompetency or dishonesty of officials. The usual thought is that if all property could be justly assessed the plan would be excellent. Undoubtedly the difficulty of just assessment has its part in the weakness of the tax; but back of and more important that this is an inherent fallacy in the apparently simple principle of the tax.

1 For example, the constitution of Alabama declares: "All taxes levied on property in this state shall be assessed in exact proportion to the value of such property," etc. And the constitution of Indiana declares: "The general assembly shall provide, by law, for a uniform and equal rate of assessment and taxation of all property, both real and personal, excepting," etc. Similar statements occur in most state constitutions. 2 The general property tax in the United States constitutes:

Of the revenue receipts of the states............38 per cent.

Of the revenue receipts of the counties..........76 per cent.

Of the revenue receipts of the incorporated places. .60 per cent. The total amount collected in this way in 1913 was over $1,083,000.000.

§3. Ambiguity of the term "property." Unfortunately, the word property is applied, even by the most competent courts, both to the intangible right of ownership (the fundamental meaning) and to the concrete thing that is owned, the source of the income.3 But apparently the value of the right to the income yielded by a house, for example, is merely the value of the house. The value of the property in the one sense (the abstract ownership, the intangible right) is merely a reflection of the value of the property in the other sense (the concrete wealth). There are not here two independent bodies of economic wealth. Whatever value belongs to the one is subtracted from the other. Nor is it rational to take the paper document called a deed (which is but the evidence of ownership) and call it tangible property having a value in addition to the house itself. Yet, in fact, all these confusions are constantly made in taxation. The term "intangible personal property" is applied to such things as mercantile credits, promissory notes, bonds - in general to the right to collect sums from another person, whether these rights arise out of sales or of loans - and all are treated as parts of taxable property. Sometimes the evidences of indebtedness, the promissory notes or the mortgage papers, are even called tangible property, the same term that is applied to land, houses, and machinery. By universal practice supported by a long line of court decisions, these rights (whether evidenced by paper or not) are made subject to taxation, except as by piecemeal legislation certain grudging exceptions have been made. These views and this practice are supported by the popular desire to tax money-lenders. The result is "double taxation" of many sources of income. This involves a burden that is ruinous in some cases, both to borrowers and to lenders, and that tempts in all cases to the evasion of the tax.

3 See Vol. I, pp. 264-267.

Take, for example, a house assessed at $10,000 which is owned free of debt and which has a rental value of $600. If the rate of taxation is 1.5 per cent, the tax paid would be $150. Now if the owner borrows $8000 he is still taxable $150 on the full value of the house, and the lender nearly everywhere is taxable on the amount of his mortgage, which would be $120 additional. The total tax payable out of the one source of income, the house, is then $270. The same analysis will show that any credit is but a contractual claim upon some other source of income which is, or should have been, already taxed under the general property tax.

If one person owns all the capital-value invested in a specific piece of wealth, no attempt is made to tax both the capital and the wealth; but if it happens that two or more persons share the capital-value invested in the same wealth, the attempt is made to tax as a unit the full value of the wealth and, in addition, some part of the capital also. It is, however, easy in most cases to conceal this "intangible property" from the assessor's eyes, and a comparatively small amount of it is ever taxed. This means inequality and hardship in the operation of the tax and, as a result, unceasing temptation to perjury by the taxpayer and to favoritism and graft by public officials.