§ 15. Taxes as costs. Now, if a new tax is levied, or an old tax changed in amount or in its incidence, it becomes a new influence in industry. Some occupations are made more attractive, others less so. Some places are made more, others less, desirable to live in. Property thus fluctuates in value, and investments become more or less remunerative. If the new tax reduces the net income of any productive agent, it reduces likewise its value, which is but the capitalization of its net rental. If taxes are taken off factories and put upon farm rents, factories rise and farms fall in value in the hands of their owners. The immediate change in value is much greater than the annual tax, for if five dollars is to be taken permanently from the annual rental of the farm, nearly one hundred dollars is taken at once from its selling value when the prevailing yield on investment is 5 per cent. The rate of adjustment varies greatly under different conditions, and the inflow and the outflow of labor and capital are more or less rapid in the various industries.

Taxes that enterprisers are unable to shift to others are reckoned by them as a part of their costs of production whenever the conditions of competition and of substitution make it possible to do so. Every new tax that curtails the supply of any necessary agent must raise the price of the products and cause more or less of the tax to fall upon the consumers. In the Civil War an increase in the tax on whisky increased its selling price, and distillers who owned stocks on which a smaller tax had already been paid reaped profits of millions of dollars. When the tax on tea was increased in England, all dealers that had accumulated a stock before the law went into effect were gainers. Every change in taxation inevitably affects, either favorably or unfavorably, many interests. The chance to anticipate a change in tax laws, or to get, from those in power, information of a proposed change, makes speculation possible and political corruption profitable.

The fact that a change in taxation is a disturbing element in price is not to be deemed insignificant merely because "all comes out right in the end." Every change in taxation is an element of uncertainty in business and increases the fortunes of some men at the expense of others. Hence no considerable change should be made without good reasons in its favor. The older taxes have the virtue of stability, but in many cases they have grown out of harmony with the industrial conditions. While, therefore, from time to time there is a real need of a reform in the tax system, it should not be undertaken without recognizing the many and complex interests involved.

§ 16. Taxation and socialism. Because of its effect on costs, the taxing power gives to the government a means of encouraging some and of discouraging other persons and industries. "The power to tax is the power to destroy," is the notable dictum of the Supreme Court. At the same time it is the power to favor and to enrich the favored. So it is but to be expected that, under the guise of taxation, greedy men, mistaken reformers, sentimentalists, and true philanthropists should constantly attempt to upbuild or to destroy the chosen objects of their favor or of their antagonism. Taxation has been used, for example, to make impossible the issue of bank-notes by state banks, to discourage the use of whiskey and tobacco, to prohibit child labor, to decrease the use of oleomargarine, and to upbuild chosen industries. The purpose in such legislation is sometimes subtle, at other times frankly recognized. Rarely is it admitted, however, by those who use taxation as a means of interference with the ordinary course of business, that this is socialism in the correct sense of the term.6 Many active business men who generally oppose any interference with private business, and strongly denounce as socialism the use of legislation intended to favor the weaker industrial classes, nevertheless support a "protective" tariff. But a protective tariff is intended to make selected industries more profitable than they would be if left to the usual rule of supply and demand, and it compels men in other industries to cease exporting goods, and forces many others to pay higher prices than they otherwise would. That such use of the taxing power, either with selfish or unselfish purposes, will cease, is not to be expected; but it is well to recognize the truth nature of the case, and to watch carefully the results. 6 See ch. 35.

References

Bullock, C. J., Selected readings in public finance. Bost. Ginn.

1920. Daniels, W. M., The elements of public finance. N. Y. Holt. Pt. II, chs. IV. 1904.

Library of Congress. List of References on Municipal Finance and taxation. Washington. 1920.

Plehn, C. C., Public finance. 4th ed. N. Y. Macmillan. 1920.

Seligman, E. R. A., Essays in taxation. 8th ed. N. Y. Macmillan 1913.

United States Census, 1910. Volume on wealth, debt, and taxation.

Willoughby, W. F., The movement for budgetary reform in the States. P. 254. New York. Appleton. 1918.

Willoughby, W. F., The problem of a national budget. N. Y. Appleton. 1918.