The decision that taxes should be measured by ability to pay by no means gives a solution to all tax problems. One of the most puzzling questions is how ability can best be measured. In early stages of development this was comparatively easy. There was little difference in the ownership of property, and a poll tax was equitable. As soon as differences in property developed, however, the idea of equal obligation vanished and poll taxes now have only a small place in fiscal systems. The first property distinctions were between those who owned some land, cattle, slaves, etc., and those who owned more of these same commodities. As industry developed differences in capital, wages, and incomes had to be considered in arriving at the ability to pay. Personal property, both tangible and intangible, must now be considered, as well as the earlier forms of wealth. In assessing the product of land or industry, choice must be made between gross product and net product. Taxes which can be shifted must be weighed against those which cannot when the determination of a proper base for taxes is under consideration.

1 Mill, Principles of Political Economy, bk. v, chap, ii, sec. 2.

Proportional Taxes. - Land, income, property, imports, or domestically produced goods might be considered as a just base for measuring the ability to pay taxes. With this decided, however, the method of assessment becomes important. Some have contended that more justice is secured when the same proportion is taken from each base, no matter what the size. This is known as proportional taxation - the rate remains the same, no matter how large the base. If 2 per cent is taken from a base of 100 and 1,000, the result is that proportional amounts have been taken - 2, the amount taken from the 100, is to 100 as 20, the amount taken from the 1,000, is to 1,000. The advocates for this method claim that its justice lies in its definiteness. It is sometimes admitted that proportional amounts do not always mean equal sacrifices, but it is contended that greater injustice will result if proportion is abandoned. As an early writer put it, when proportion was abandoned you were at sea without rudder or compass, and there was no amount of injustice or folly you might not commit.

Progressive Taxes. - Many authorities, on the other hand, believe that justice, equality of sacrifice, and ability to pay can be measured more accurately by using progressive rates - that is, to have the rate increase as the base increases, and hence take a greater proportion from a large base than from lesser ones. This system is known as progressive taxation. Two per cent from a base of 1,000, 4 per cent from a base of 10,000, and 6 per cent from a base of 100,000 would represent a progressive scheme.

The first justification for progression is that it more nearly secures equality of sacrifice than does proportional taxation. To take $100 from a base of $1,000 would entail a much greater sacrifice than to take $1,000 from a base of $10,000. In the one case only $900 are left, while in the other $9,000 are left. To give up the $100 may mean an encroachment on necessities - at least very much more of an encroachment than to give up the $1,000. A second important justification for some rate of progression as best measuring ability is that, as wealth increases, the ease of producing more wealth increases faster than at a proportionate rate. That is, the difficulties that must be overcome in producing a second $10,000 are very much less than those for producing the first $10,000; the difficulties in obtaining the second half of the $1,000,000 are much less than those in obtaining the first half. As wealth or incomes increase, therefore, the owners become more than proportionately able to meet tax burdens.

Degressive Taxes. - One important objection to progressive taxation is that with its adoption any definite rule is abandoned, while the only logical stopping place is 100 per cent, or confiscation. When this is reached the source of the tax will be destroyed. This difficulty is usually alleviated by making the rate degressive - that is, to have the rate increase as the base increases, but by an ever decreasing amount. This system is known as degressive taxation. A true progressive increase would be 2,4, 6, 8, 10, etc., until 100 were reached. Degression 8 would make each increase less than the preceding one, so that the rate would always be approaching 100, or some other definite amount as a limit, but would never reach it. A mathematical computation of these rates sometimes might prove difficult, so the desired results can be approximated by allowing a fixed exemption on each base, and levying a proportionate rate on the remainder. Suppose an exemption of $1,000 is allowed from each of the bases of $2,000, $4,000, $6,000, $8,000, and $10,000, and a 10 per cent tax were levied upon the remainder. The actual percentage burden upon each amount would any exemption remains, however, it is impossible to reach 100 per cent, or confiscation. Graph No. II illustrates the actual percentage burden of the first grades under the be as follows: 5 upon $2,000; 7.5 upon $4,000; 8.33 upon $6,000; 8.75 upon $8,000; and 9 upon $10,000. The accompanying graph, No. I (see page 112), will show the trend of a curve for these figures, with the percentages for the intervening thousands also shown.

GRAPH No. I

Showing the Real Tax Burden of a 10 Per Cent Tax with a $1,000 Exemption

Showing the Real Tax Burden of a 10 Per Cent Tax with a $1,000 Exemption

In the tax scheme, where the exemption is changed as the base increases, or where a fixed amount is taken from each grade rather than a certain per cent, or where other than proportionate rates are used, the regularity of the curve may be affected in a number of ways. As long as

GRAPH No. II

Showing the Real Percentage Burden of the United States Income Tax

Real Percentage Burden of the United States Income Tax

The figures are based on the $3,000 exemption for unmarried persons. The total tax paid by each grade is found by adding the additional tax for each grade to the normal tax of 2%. These rates are provided under the 1916 law, and do not include the supplementary war rates. The additional rates to 5150,000 are as follows:

1%

from

$ 20,000

to

$ 40,000

2%

"

40,000

"

60.000

3 %

"

60,000

"

80,000

4%

"

80,000

ii

100,000

5%

"

100,000

"

150,000

1916 income tax in the United States. If, instead of a percentage tax paid in each grade, a lump sum is taken, the lines within each grade will be descending rather than ascending. This is true of the Prussian income tax. Graph No. III illustrates a possible curve of this nature.

Graph No. III

Showing the Real Percentage Burden op a Lump-sum Tax in an Assumed Schedule

Real Percentage Burden op a Lump sum Tax in an Assumed Schedule

Regressive Taxes. - It is possible that taxes may be levied in such a way that the rate may be regressive- that is, that the rate decreases as the base increases. In graph No. III the tax within each of the grades is regressive. Such taxes would, of course, seldom be levied by design for purely fiscal purposes. They may, however, be used as regulatory measures. Certain industries whose products are considered harmful are often subject to a rate of taxation much higher than that of other industries of a similar degree of ability.

Many taxes, however, are regressive in their effects.

Chapter V Taxation 4

In so far as a tax on tobacco is shifted to the consumer, in order not to have a regressive effect, each individual would have to purchase according to his ability. The effect of a general property tax is much the same. Owners of a small amount of property usually have it in a tangible form, which is easily assessed, while the owners of large amounts hold much intangible property, which escapes assessment and taxation. This places a burden upon the small property owner out of proportion to his ability to bear it. Progressive taxes on incomes and wealth, then, may tend only to give proportionality to the tax system as a whole, since they to some extent equalize the disproportionate burdens caused by the regressivity of other taxes.

Either proportional or progressive taxes may be partially regressive if the rate is a flat amount rather than a certain per cent. A ten mill rate in reality means that the classes are to be differentiated by one dollar amounts. The class below one dollar is exempt; from one dollar to two dollars the tax is ten mills; from two dollars to three dollars it is twenty mills, etc. In this case the tax is a greater burden upon the person who is just over the lower boundary of a grade - say $1.05 - than one who is near the upper limit - say $1.95. That is, ten mills, which each will pay, is a larger part of $1.05 than of $1.95. The smaller the grades, of course, the less the effect of this regressivity would be felt. If the ten mill tax be calculated as a 1 per cent tax, and levied upon the actual amount of the base, then the tax is proportional rather than regressive within each grade.

Apportioned Taxes. - Taxes, moreover, are sometimes said to be apportioned. This occurs when some central political unit distributes the amount of tax to be collected among several of the minor political divisions which compose it. The apportionment may be made according to some definite rule, such as population, property, or income, or it may be that each district in the apportionment area will be asked to contribute an equal amount. An apportionment according to some definite rule, however, does not prescribe a definite plan for raising the tax. A tax apportioned on the base of population, for example, does not mean that the levy will be in the form of a poll tax. Each district may use any method it chooses in raising the necessary amount.

Kinds of Incomes. - Another problem which arises concerns the ability of a base to bear taxes under varying conditions. Distinction is often made between earned and unearned incomes and wealth, and between the funded and unfunded incomes and wealth. It seems reasonable that a greater sacrifice would be felt by giving up an amount from funds secured through labor than if they had been secured in some fortuitous manner. Likewise a funded income - one which is dependent upon some other factor than the efforts of the individual receiving it - can better bear burdens than one which depends solely upon the exertions of the recipient. The former will continue when the productive capacity of the individual ceases; the latter will not. No one would hesitate in choosing between the two forms of income.

In seeking to determine the faculty of the taxpayer, then, a number of complex problems must be considered. Not only must a just base be found, but justice must be used in applying the rate of tax. No tax, moreover, can be viewed as a distinct factor, but must be considered in relation to the other taxes in the system. A particular tax might be found to work injustice, but when used with another the two may be found to work together in such a way that justice will result.