§ 7. Separation of state and local taxation. For the reason just indicated the failure of the general property tax has been most conspicuous where it is used as a basis for state taxation. This has led some financial students to advocate the plan of separation of state and local taxation. This means the assignment of certain sources of revenue (such as corporations and the liquor business) primarily or exclusively to the state, leaving all real estate and the general property of noncorporate persons to be taxed by the counties and minor divisions under the general property tax. The plan has been increasingly applied in New York, until, in 1906, it became almost complete. In 1910 the plan was adopted in California; and it is largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, and to a small extent in some other states. An efficient state assessment of general wealth would accomplish most of the advantages claimed for this plan, while avoiding some of its dangers.

§ 8. Federal taxation of commerce. Customs and internal revenue (including the income tax) constitute the chief revenues of the federal government. Unlike the general property taxes, these are not levied upon the main body of wealth held in possession, but upon income as it accrues or upon articles of merchandise in course of trade and upon business activities. Stamps on receipts, checks, deeds, bills of sale, and licenses on the sale of liquor and tobacco are taxes on business acts which are necessary to the acquisition, use, or expenditure of wealth. Goods imported are taxed at the time of entering the country; domestic prod-ducts, such as cigars, spirituous or malt liquors, playing cards, and (at times) matches, pig iron, and other products, are taxed usually at the time of exit from the factory.

It has already been shown that when the tariff duty prevents the importation of foreign goods and by raising the price encourages domestic manufacture of the article, there is virtually taxation of the consumer to subsidize the private manufacturer. A system of properly adjusted compensatory duties (tariffs and internal duties combined) which would prevent tariff duties from having any prohibitive effect could, in a great country like ours, be made to produce any revenues desired. Such a system, combined with the federal income tax, seems destined to be the chief dependence for the national government.

The increasing needs of revenue between 1913 and 1920 led to the development of many forms of federal taxation on business. The most important of these, under the names of the taxes on corporate incomes and excess profits, will be more fully discussed with the income tax, with which, though of a different nature, they have been closely connected in legislative development.

§ 9. Proposal of the single tax on land values. Besides the general property tax, there are found in the country as a whole a large number of special property taxes. Some of these have been introduced as substitutes for the general property tax; such is the special taxation (above referred to) of mortgages, and bonds. Other special property taxes have been introduced because they were believed to be good in themselves; such are special franchise taxes on corporations and some kinds of taxes on land. A much more drastic policy of special taxation of land, or of land values, was proposed by Henry George and has been advocated by his followers since the publication of his remarkable book "Progress and Poverty" in 1879. The doctrine there set forth is that the state should "appropriate land rent by taxation," should "tax land values, irrespective of improvements." It is maintained that a "single tax" of this kind would be quite sufficient for all the purposes of government. The main arguments adduced for this plan may be reduced to three propositions: first, private property in land is essentially unjust because land is made by nature, not by man; second, the plan would make assessment simple and certain by limiting it to the unimproved land and making unnecessary the more difficult assessment both of tangible improvements and of intangible personal property; and third, it would work a marvelous reform in social conditions, abolishing poverty and greatly increasing production.

It is impossible within our limits of space to discuss this proposal further than to indicate that: (1) It assumes an untenable theory of property.4 (2) It overlooks the difficulty of distinguishing the value of the land, "irrespective of improvements," from that of the land as it actually is, a difficulty especially great in the case of agricultural land.5 The difficulty is present even in the case of urban land when the improvements of filling, draining, and leveling have become incorporated with the site.6 (3) The plan ignores the stimulus (motivating force) which private ownership has given and still gives to the maintenance and fuller productive use of land. Nowhere has production thriven where the state was the universal landlord.

§ 10. Various reforms in land taxation. While the single tax plan is defective in principle, its wide discussion has served to direct attention toward the need of reform in the taxation of land. Some proposals looking toward this end are widely favored by opponents as well as by advocates of the single tax. Such are the following:

(a)   The abandonment of the taxation of mortgages.7

(b)   A more correct assessment, in accordance with the present laws, of lots and lands held for speculative purposes, which in usual practice are now greatly under-assessed.

(c)   More adequate special franchise taxation upon corporations for special privileges in the public highways.

(d)   Exemption, in value equal to the costs, of improvements

4 See ch. 32.

5 See Vol. I, pp. 116, 117, 145, 445 - 455.

6 See Vol. I, pp. 117, 146, 453.

7 See § 4 and § 5. on land, such as buildings, drains, fences, and fertilizers, for a limited time after they are made, perhaps five years.

(e)   The separate assessment of urban lands used as mere building sites and of the buildings on them.

(f)   Taxation of the increase ("increment") of urban land values, periodically or on the occasion of transfer of ownership.

§ 11. Difficulties in taxing corporations. Until near the second quarter of the nineteenth century, business corporations (of which there were few) were taxed just as was the general property of individuals, excepting that fees were charged, usually payable but once, for the incorporation of new companies, or at times of increasing the capital stock of an old one, variously called taxes on corporate charters, license taxes, incorporation fees, organization fees, and charter fees. This still continues to be the case in the main in most of the states. The methods and machinery of assessment were (and still are) essentially local and simple, and have proved to be inadequate to reach or justly assess the larger and more complex corporate enterprises when their equipment and business extend beyond town, then county and, finally, state lines. Moreover, the corporate forms of organization presented in complex and puzzling ways the dual conception of property.8 Here was the tangible wealth of the corporation, and there were the diffused rights of ownership, the capital of individual stockholders and bondholders. Confused by this ambiguity, the men of that time believed (as many still believe) that there were here two separate and justly taxable funds of value, the tangible wealth and the paper evidences (or the mere intangible rights) of ownership. The popular view was, and still is, that "all kinds of property ought to bear their fair share of the burdens of taxation." The real question is, what is "fair"? To treat the object owned and the right of ownership (or the equity in it) as separate bodies of property is surely double taxation, and results in confiscation in many cases. Between this doubt and the practical difficulty of assessment, it turned out that corporate wealth, far from being doubly taxed, was largely escaping even its due single burden.

8 See above, § 3.