children have about thirty lessons on minerals; the sixth-year, the
same number on plants; and the seventh-year, on animals; and it would
be difficult to decide which of these subjects rouses their greatest
enthusiasm.
PRINCIPLES OF TAXATION.[6]
BY THE LATE HON. DAVID A. WELLS.
XX.--THE LAW OF THE DIFFUSION OF TAXES.
PART I.
No attempt ought to be made to construct or formulate an economically
correct, equitable, and efficient system of taxation which does not
give full consideration to the method or extent to which taxes diffuse
themselves after their first incidence. On this subject there is a
great difference of opinion, which has occasioned, for more than a
century, a vast and never-ending discussion on the part of economic
writers. All of this, however, has resulted in no generally accepted
practical conclusions; has been truthfully characterized by a leading
French economist (M. Parieu) as marked in no small part by the
"simplicity of ignorance," and from a somewhat complete review
(recently published[7]) of the conflicting theories advanced by
participants one rises with a feeling of weariness and disgust.
The majority of economists, legislators, and the public generally
incline to the opinion that taxes mainly rest where they are laid, and
are not shifted or diffused to an extent that requires any
recognition in the enactment of statutes for their assessment. Thus,
a tax commission of Massachusetts, as the result of their
investigations, arrived at the conclusion that "the tendency of taxes
is that they must be paid by the actual persons on whom they are
levied." But a little thought must, however, make clear that unless
the advancement of taxes and their final and actual payment are one
and the same thing, the Massachusetts statement is simply an evasion
of the main question at issue, and that its authors had no intelligent
conception of it. A better proposition, and one that may even be
regarded as an economic axiom, is that, regarding taxation as a
synonym for a force, as it really is, it follows the natural and
invariable law of all forces, and distributes itself in the line of
least resistance. It is also valuable as indicating the line of
inquiry most likely to lead to exact and practical conclusions. But
beyond this it lacks value, inasmuch as it fails to embody any
suggestions as to the best method of making the involved principle a
basis for any general system for correct taxation; inasmuch as "the
line of least resistance" is not a positive factor, and may be and
often is so arranged as to make levies on the part of the State under
the name of taxation subservient to private rather than public
interests. Under such circumstances the question naturally arises,
What is the best method for determining, at least, the approximative
truth in respect to this vexed subject? A manifestly correct answer
would be: _first_, to avoid at the outset all theoretic assumptions as
a basis for reasoning; _second_, to obtain and marshal all the facts
and conditions incident to the inquiry or deducible from experience;
_third_, recognize the interdependence of all such facts and
conclusions; _fourth_, be practical in the highest degree in accepting
things as they are, and dealing with them as they are found; and on
such a basis attention is next asked to the following line of
investigations.
It is essential at the outset to correct reasoning that the
distinction between _taxation_ and _spoliation_ be kept clearly in
view. That only is entitled to be called a tax law which levies
uniformly upon all the subjects of taxation; which does not of itself
exempt any part of the property of _the same_ class which is selected
to bear the primary burden of taxation, or by its imperfections to any
extent permits such exemptions. All levies or assessments made by the
State on the persons, property, or business of its citizens that do
not conform to such conditions are spoliations, concerning which
nothing but irregularity can be predicated; nothing positive
concerning their diffusion can be asserted; and the most complete
collection of experiences in respect to them can not be properly
dignified as "a science." And it may be properly claimed that from a
nonrecognition or lack of appreciation of the broad distinction
between taxation and spoliation, the disagreement among economists
respecting the diffusion of taxes has mainly originated.
With this premise, let us next consider what facts and experiences are
pertinent to this subject, and available to assist in reaching sound
conclusions; proceeding very carefully and cautiously in so doing,
inasmuch as territory is to be entered upon that has not been
generally or thoroughly explored.
The facts and experiences of first importance in such inquiry are that
the examination of the tax rolls in any State, city, or municipality
of the United States will show that surprisingly small numbers of
persons primarily pay or advance any kind of taxes. It is not probable
that more than one tenth of the adult population or about one
twentieth of the entire population of the United States ever come in
contact officially with a tax assessor or tax collector. It is also
estimated that less than two per cent of the total population of the
United States advance the entire customs and internal revenue of the
Federal Government.
In the investigations made in 1871, by a commission created by the
Legislature of the State of New York to revise its laws relative to
the assessment and collection of taxes, it was found that in the city
of New York, out of a population of over one million in the above
year, only 8,920 names, or less than one per cent of this great
multitude of people, had "any household furniture, money, goods,
chattels, debts due from solvent debtors, whether on account of
contract, note, bond, or mortgage, or any public stocks, or stocks in
moneyed corporations, or in general any personal property of which the
assessors could take cognizance for taxation"; and further, that not
over _four_ per cent, or, say, forty thousand persons out of the
million, were subject to any primary tax in respect to the ownership
of any property whatever, real or personal; while only a few years
subsequent, or in 1875, the regular tax commissioners of New York
estimated that of the property defined and described by the laws of
the State as personal property, an amount approximating two thousand
million dollars in value was held in New York city alone. Later
investigations show that this state of things has continued. Thus, in
1895, out of a population of about two million, it was estimated that
only seventy-nine thousand, or not over four per cent of the
inhabitants of the city, were subject to primary taxation, and that
one half the whole amount collected in that year was paid by less than
a thousand persons. In the city of Boston, where the tax laws are
executed in the most arbitrary manner, the ratio of population
directly assessed is somewhat greater, but aside from the poll tax,
which is a per capita and not a property tax, only 7.27 per cent of
residents paid a property tax in 1895 out of a population of 494,205.
In one of the smaller cities of Massachusetts, where persons and
property are capable of more thorough supervision than larger numbers
and areas--namely, the city of Springfield, with a population of about
fifty thousand--the report of its tax officials shows that for the
year 1894-'95 the number of persons and corporations assessed on
property (mainly real estate) was 7,745, or one for every 6.4 of its
citizens, while 10,560 other citizens were assessed for a poll tax of
two dollars only. Of the total amount of taxes assessed--namely,
$735,948--the above number, 10,560, paid only $21,120; and this is the
experience generally throughout the United States, as it will be in
every country under a free popular government, where arbitrary
inquisitions and arrests of persons and seizures of property are not
allowed, and where a soldier does not practically stand behind every
tax assessor and collector.
The time (1871) when the personal investigations above referred to
were made was when the masses of the city of New York were moved with
indignation at the misuse and private appropriation by a few officials
(Tweed and his associates) of the municipal revenues raised by
taxation, under cover of instituting public improvements, and which
finally led to their prosecution, imprisonment, or self-imposed exile;
and the questions which naturally suggested themselves were: If only
some forty thousand of the million in New York city paid the taxes,
what interest had the other nine hundred and sixty thousand who never
saw the face of a tax assessor or collector in opposing corruption?
What, in an honest administration of the city government and in a
reduction of taxes? Must it not be for the interest of the many that
the expenditures of the State shall always be as large as possible?
Must they not be benefited by exorbitant taxes on the owners of
property, and a distribution of the money collected, even if stolen by
corruptionists, but spent by them lavishly on enterprises that will
furnish new opportunities for employment or amusement for the masses?
Clearly, so far as any personal experience growing out of any _direct_
assessment and levy was concerned, ninety-six per cent of the
population of the city had no more cause of personal grievance by
reason of the unlawful taking of money from the city treasury than
they would have had at the taking of an equivalent amount from the
municipal treasuries of London, Paris, or any other city.
The answer to these questions is to be found in the fact, as John
Adams once remarked, that "if the Creator had given man a reason that
is fallible, he has also impressed upon him an instinct that is sure."
And this instinct teaches the masses everywhere, though they have
never read a book on political economy, or heard any one discourse
learnedly on the principles of taxation, that if taxes are increased,
either by a lawful or unlawful expenditure of public money, they can
not in any possible way avoid paying some portion of its increase; or,
in other words, that increased taxes meant increased cost of living,
through increased rents, increased price of fuel, clothing, and
provisions, and possibly diminished opportunity to labor through such
increased cost of the products of labor as would limit and restrict
markets or consumption. In short, that taxes inevitably fall upon them
through the increased price of all they consume, even if they pay
nothing to the tax collector directly. A large proportion of the
masses of the city of New York in 1871-'72, who paid no taxes
directly, accordingly and spontaneously joined hands with the
comparatively few of their fellow-citizens who did pay in resisting
extravagance and corruption.[8]
We are thus led up and forced to the recognition of two propositions,
or rather principles, in respect to taxation that can not be
invalidated. The _first_ is, that it is not necessary that a tax
assessor or collector should personally assess and levy upon every
citizen of a State or community in order that all should be compelled
to contribute of his property for the support of such State or
community; _second_, that there is an inexorable law by which every
man must bear a portion of the burden of public expenditures, even
though the official assessors take no direct cognizance of him
whatever.
The following incident may here be cited as instructive: In one of the
recent official hearings before a legislative committee of one of the
States, a strenuous advocate of the popular doctrine that there was
and could be no such thing as equality in taxation except by rigidly
taxing everybody directly for all his property, of every description,
both real and personal, and that to not tax immediately and directly
was, in at least a great degree, to exempt from taxation, expressed
himself as entirely opposed to any system of restricting assessments
to a comparatively few things, on the ground that it would be a
recognition in the United States of a system which in Great Britain
had ground down the masses into poverty. He, however, obtained some
new light on the subject of nondiffusion by being reminded that if the
masses of England had been grievously oppressed by taxation, it had
been under a system of many years' standing, which never in any way
brings the tax collector in direct contact with nineteen twentieths of
the entire population; the customs taxes of Great Britain being
practically levied on only four articles--spirits, tea, coffee, and
tobacco; and the inland revenue also on practically four--spirits,
beer, legacies and successions, and stamps (on deeds, insurance
policies, bills of exchange, receipts, drafts, etc.). Generalizing,
then, on the basis of so broad a fact, how illogical and unscientific
was the assumption that whatever persons, property, or business are
not taxed directly are exempt from taxation!--and yet the practical
exemplification of such a system, in the case of England, was a most
efficient instrumentality for grinding the masses of her people down
to poverty.
On the other hand, to generalize from the experience of an individual
or a class in place of that of a nation or community, let us take the
case of a person who passes all the year _in transitu_--moving
backward and forward, for example, in a boat on the line of the Erie
Canal, or between the head waters of the Mississippi and its mouth; a
citizen of no one State, a resident in no one town, and buying all
that he eats, drinks, and wears wherever he can buy cheapest. Does
this man escape taxation because he has no permanent _situs_
(residence as a citizen), and is unknown by any assessor? If he does,
then his occupation is more profitable to the extent of the taxes he
avoids than is that of the individual who, following analogous
occupations, resides permanently in one location, and pays taxes
regularly; or else some notable, easily discernible cause, as undue
competition to obtain situations, will account for his exemption.
Let us next consider how practical experience definitely indicates the
line of least resistance, in conformity with which those contributions
of property or service which the State requires its citizens to make
for its support, and are worthy of designation as taxes, diffuse
themselves. Let us take first that form of indirect taxation which is
known as customs, or taxes on imports, one from which the Federal
Government of the United States has derived in recent years more than
half of its revenue, and Great Britain more than one fourth of its
total receipts from all forms of imperial taxes. That all such taxes
as a rule diffuse themselves, and ultimately fall upon and are paid by
final consumers, is capable of demonstration by a great variety of
evidence. Every remission of customs duties on the imports into any
country of its staple articles of consumption is followed by a
reduction of cost approximately equal to such reduction, and a
consequent increase in consumption. On the other hand, nothing is
better settled than that an increase in customs taxes on imported
articles as a rule increases prices and tends to reduce consumption.
When Great Britain, in 1863, reduced her taxes (duties) on her imports
of tea from 1_s._ 5_d._ to 1_s._ per pound, her importation of tea
increased from 114,000,000 pounds in 1862 to 139,000,000 in 1866, and
her per capita consumption during the same period from 2.70 pounds to
3.42 pounds; and again, when the duty was further reduced in 1865 from
1_s._ to 6_d._ per pound, the annual importations increased from
139,000,000 in 1866 to 209,000,000 in 1881, and the per capita
consumption from 3.42 pounds to 4.58.
When by the act of October, 1890, the tax was removed from the imports
of crude sugars into the United States, the price of the same went
down almost immediately to an equal extent in all American markets;
while the consumption of sugar in the country increased from an
average of about fifty-four pounds per capita in 1890 to more than
sixty-seven pounds in 1892. A like result has attended a similar
experience in respect to this in other countries, and especially in
Great Britain. Thus, the aggregate consumption of sugar by the British
people in 1844 was returned at 237,143 tons. A reduction of taxes on
its importation in 1864 increased its domestic use to 528,919 tons; a
reduction of fifty per cent on existing rates in 1870 made it 695,029
tons; another reduction of fifty per cent in 1873 carried up
consumption to 779,000 tons; and when, in 1874, all taxes on the
imports of sugar were abolished, the annual domestic consumption
increased in little more than a year's period to 930,000 tons. On the
other hand, when by the tariff act of 1890 an additional tax of half a
cent per pound was imposed on the import of tin plate into the United
States, tin plate went up to an equal extent in price all over the
country; and so also on pearl buttons, linen goods, and other articles
of foreign production on the importations of which the tariff taxes
were largely increased. By the tariff act of 1890, also, eggs, which
could formerly be imported into the United States free of duty, were
made subject to a tax of five cents per dozen. Since then the price of
eggs imported from Canada into districts of the United States within
the same sphere of territorial competition has been increased to the
American consumers to almost exactly the extent of the import tax to
which they are subjected. Thus, when the price of eggs was ten and a
half cents per dozen in Toronto, they were sixteen cents in Buffalo
and sixteen and a half to seventeen cents in New York. Such a result
would be unaccountable if the Canadian farmers paid the duty on eggs
sent by them to the United States.
It is interesting to here ask attention to the opinions entertained
and expressed by those whose situation and experience have qualified
them to speak with authority: "The duty constitutes the price of the
whole mass of the article in the market. It is substantially paid on
the article of domestic manufacture, as well as that of foreign
production" (John Quincy Adams). "I said it, and I stand by it, that
as a general rule the duties paid on imports operate as a tax upon the
consumer" (John Sherman). Mr. Blaine, in his Twenty Years in
Congress, says, speaking of the increase of duties on imports by the
tariff act of July 14, 1862, that it "shut out still more conclusively
all competition from foreign fabrics. The increased cost was charged
to the consumer." Mr. McKinley, in 1890, in a report introducing a
bill for revision of the tariff of the United States, in the direction
of increased rates of duties on imports, said it was not the intent of
the bill "to further cut down prices," that the people were "already
suffering from low prices," and would not be satisfied "with
legislation which will result in lower prices." In an elaborate
opinion given by the New York Court of Appeals in 1851 (see vol. iv,
New York Reports), in which there was no suspicion of any issue of
free trade or protection, the courts, in carefully considering the
relative powers of the legislature and the judiciary in respect to
taxation, assumed the proposition that "_all duties on imported goods
are taxes on the class of consumers_" to be in the nature of a
self-evident truth or economic axiom.
Henry Clay, in a celebrated speech in the United States House of
Representatives in 1833, in advocacy of a protective tariff policy,
candidly admitted that "in general it may be taken as a rule that the
duty upon an article forms a portion of its price." But he
subsequently qualified such admission by claiming that it does not
follow that any consequent enhancement of its price is a tax on
consumers, inasmuch as "directly or indirectly, in one form or
another, all consumers of protected articles, enhanced in price," will
get an equivalent. But this may be equally affirmed of all necessary
and equitable taxation, and does not in any way antagonize the theory
that the final incidence of the class of taxes under consideration
falls on consumption.
But, notwithstanding these conclusions and the incontrovertible
evidence by which they are supported, not a few persons occupying
places of great legislative influence, and no small part of the
general public, hold to the view that taxes on imports are really in
the nature of premiums paid by foreigners for the privilege of selling
their goods in the markets of the importing country, and do not fall
on its people who consume them. That means that if the foreigner has a
yard of cloth, or other commodity, which he sells at home for one
dollar, and the United States imposes a tariff of fifty cents on it,
he will then sell it for export to America at fifty cents. There is no
instance mentioned in history where this has ever been done, but
history unfortunately is rarely taken into account by the public in
the discussion of these questions. In this connection the following
historical incident is interesting and instructive: In 1782 an attempt
by the Congress of the Confederation of the several American States to
provide a system of revenue to defray the general expenses of the
Confederation by duties on imports, which then was not permissible,
was blocked by the refusal of the State of Rhode Island to concur in
it, the Legislature of that State unanimously rejecting the measure
for three reasons--one of which was that it would bear hardest on the
few commercial States, particularly Rhode Island, which in virtue of
their relations with foreign commerce monopolize imports, and lightest
on the agricultural States, that directly imported little or nothing.
Congress appointed Alexander Hamilton to draft a reply to Rhode
Island, and in his answer he relied mainly on what he regarded as an
incontrovertible fact, that duties on imports would not prove a charge
on an importing State, but on the final consumers of imports, wherever
they may be located.