Much difficulty has arisen in handling indebtedness. Where indebtedness exists it is obviously unjust to tax both the debtor on his indebtedness and the creditor on the evidence of this indebtedness. On the face of the proposition it is what an individual has, and not what he owes, that gives ability to meet tax burdens. When evidences of indebtedness are taxed the same property may be made the basis of many taxes. Suppose, for example, a man buys a house and gives a five-year promissory note in payment; in a few days he sells the house and likewise accepts a note; this purchaser in turn sells and accepts a note. There now exist three notes and a house which the assessor is expected to assess separately to four different individuals. It is the general consensus of opinion that indebtedness does not create ability to bear tax burdens, but in fact lessens such ability. Many authorities, consequently, have declared themselves in favor of allowing the deduction of debts from property assessments.

When debt deduction is permitted, however, the way is at once open to so much fraud and deception as practically to defeat the tax. Fictitious debts are frequently created to such an extent that, when offset against the property, there is nothing left to tax. It is comparatively easy for two neighbors, just before assessment day, to lend to each other, without giving notes, a sum sufficient to offset any property valuations which might exist. It opens a particularly easy way for corporations to escape assessment on capital stock. Bonds, of course, are items of indebtedness, and under the plan of debt deduction should be subtracted from the value of the capital stock. Corporations, therefore, simply need to issue bonds to the amount of the capital stock, and when indebtedness is deducted there is nothing left to tax. Evils of comparative magnitude exist, therefore, whether or not debt exemption is permitted, and there seems to be no way to escape the difficulties. Some states have attempted to solve the problem by allowing debt deductions from personal property, but not from real estate, with results that have been entirely unsatisfactory. Such a practice frequently causes a very arbitrary classification of property. In the state of New York, for example, where debt deductions are permitted from personal property but not from real estate, special franchise values are classed as real estate to prevent the deduction of indebtedness which might exist.

Taxation of Mortgages. - Mortgages on real estate form one class of indebtedness that has caused much concern to fiscal officials and authorities. Obviously, to assess a piece of land at full value, and then assess the mortgage that is against it, is a case of unwarranted double taxation. If every piece of property were mortgaged in the same proportion, and all property and all mortgages taxed, then no injustice would be perpetrated because the same burden would be placed upon all property. Where only a part of the property is mortgaged, however, and both the mortgage and the property are taxed, it is an unjust burden upon the mortgaged property. The mere issue of a claim to one half the value of a $50,000 farm does not increase the taxpaying ability of the farm. If the farm is taxed to its full value, and in addition the mortgage is taxed, it means that the tax burden is 50 per cent greater than that upon unencumbered land. It is generally believed, moreover, that a tax on mortgages is shifted to the borrower through an increase in the interest rate, so that in reality the mortgagor is paying the tax both upon the property and upon the mortgage he has given.

The situation with corporate property and the shares of stock which represent that property, is much the same as that of property and mortgages. The capital stock does not represent taxpaying ability apart from the property of the corporation. If the property of individuals is taxed but once, it is apparently unjust to levy two taxes, both of which must be borne by the property of the corporation.

Credit Instruments. - Examples of difficulties and inequalities which have arisen from attempts to tax credit instruments might be multiplied indefinitely, and in the end the conclusion that something is fundamentally wrong with such a system would only be more strongly verified. The taxing of credit instruments emphasizes the personal rather than the property element of assessment. At the base, however, property is the fundamental criterion, the factor that creates the ability to pay, and under no system of logic can credit instruments be justly put into this class. Notes and bonds are simply evidences of contracts under which the holder has transferred property for which he expects to receive a future remuneration.

The issuing of $25,000,000,000 in United States bonds did not automatically increase the taxpaying ability of the purchasers of the bonds by that amount. Neither will the payment of the bonds and their subsequent destruction destroy any wealth or taxpaying ability. Credit instruments merely represent rights to a share in property, and their creation or destruction does not change the amount of the property. While there is much to be said against the assessment of credit instruments because of the administrative difficulties that arise, the nature of the instruments, moreover, indicates that there is no logical basis for attempting to assess them.