TAXATION AND PUBLIC FINANCE
_The purpose of this chapter is to explain what taxes are, how they
are levied, and how they are spent._
[Sidenote: Taxation per capita.]
=The Cost of Government.=—The cost of maintaining the national
government and all its activities is now about four billion dollars per
year, in other words about forty dollars per annum for every man, woman,
and child in the country. The cost of maintaining state and local
government varies in different parts of the country, but it would be
safe enough to put it down as three billion dollars more, or thirty
dollars per head. In round figures, therefore, the average tax payment
every year for each individual in the United States is at least seventy
dollars.[211]
[Sidenote: The extent of the burden upon the income-earner.]
Bear in mind, however, that only a small part of the whole population is
earning the income which enables these taxes to be paid. When we
eliminate all the children, all the women who are not employed in any
income-earning occupation, all the public officials who are paid out of
taxes, all the delinquents, cripples, paupers, unemployed, and so
on—when we subtract all these from the total it will be found that only
one person in five is an actual income-earner. From the earnings of
these twenty million people the entire seven billions in taxes must be
paid; there is no other source from which the taxes can come. A little
mental arithmetic will readily demonstrate, therefore, _that every
income-earner in the United States pays, on the average, at least $350
per year in taxes of one sort or another, in other words about a dollar
a day_.[212]
[Sidenote: Everyone is a taxpayer, directly or indirectly.]
=Who Pays the Taxes?=—“Oh yes”, someone will say, “but most people earn
small incomes and pay no taxes at all, or almost none. The heavy taxes
are paid by wealthy men and women who own property and have large
incomes.” That is misleading. People who own property and earn large
incomes are the ones who actually hand the collector his tax-money, to
be sure; but they merely give him, for the most part, money which they
have collected from others. The owner of an apartment house collects
taxes from his tenants in the form of rent; the storekeeper collects
taxes in the price of his goods; the lawyer and the doctor collect taxes
when they charge fees. Taxes are an element in the cost of everything,
an element just as certain as interest, wages, or profit. Everyone who
rents a house, buys goods, or hires any form of service pays taxes. If
you analyze the various items which make up the price of a suit of
clothes, for example, you will find that they usually come in this order
of importance; wages, cost of materials, taxes, profits, interest.[213]
The chief factors which make up the rent of a house are interest, taxes,
and profits in the order named. Hence it is that while landlords,
merchants, manufacturers, and others make the direct payment of taxes to
the government, they in turn pass the burden to tenants and
consumers.[214]
[Sidenote: The way in which taxes are shifted.]
=The Incidence of Taxation.=—Taxes, therefore, do not usually stay where
they are levied. They are shifted from one shoulder to another until
they finally reach someone, usually the ultimate consumer, who cannot
unload the burden upon anybody else. This ultimate resting-place of a
tax is called its _incidence_, and an important thing about any tax is
to discover just what its incidence is; for the justice or injustice of
taxation depends upon the ability of the actual taxpayer to bear the
burden and not upon the wealth of the ostensible taxpayer. If the
government were to levy a tax of one cent per loaf upon bread, there
would be a storm of protest because everybody would recognize it as a
direct tax upon one of the necessities of life. But a tariff duty on
wheat, or a property tax on flour mills or bakeries, is just as
certainly a tax on bread and is paid ultimately by those who buy it. The
chief difference is that in the latter case the payment is made by the
consumer without his knowing it.
[Sidenote: Relation of taxes to rents and prices.]
Most people pay taxes unknowingly. Their taxes are concealed in rents or
prices, and they complain bitterly that these things are high. It does
not occur to the average American wage-earner that if taxes were lower,
rents and prices would be lower, and that if there were no taxes, it
would be exactly the equivalent to finding every morning, on coming down
to breakfast, a crisp, new dollar-bill on his plate. Demagogues tell us
that trusts, and profiteers, and other forms of organized avarice are
responsible for high prices; but one of the biggest factors in the
high-cost-of-living is the high-cost-of-government.
[Sidenote: If waste were avoided the tax burden would be diminished.]
If this enormous flow from the nation’s earnings into the public coffers
were wholly, or even largely, used to promote and encourage production,
it would not be so bad. Much of it is wasted, or spent without adequate
return. This takes place because the people do not keep close watch on
the officials whom they elect to public office and do not hold them to a
strict accountability when public money is squandered. More than a
hundred years ago the most eminent of American jurists, Chief Justice
John Marshall, pointed out that “the power to tax involves the power to
destroy”. He was right; the power to tax is the most far-reaching power
that any government can possess. By the use of the taxing power a
government can take from the people what they would otherwise save, thus
preventing the increase of the nation’s wealth and ultimately breaking
down its prosperity.
[Sidenote: Taxes are:]
=How Taxes Differ from other Payments.=—Taxes differ from most other
payments in two respects. [Sidenote: (_a_) compulsory.] First, they are
compulsory. No one need pay interest, rent, wages, or prices unless he
bargains to do so; but the payment of taxes is not the result of any
bargain. Taxes are levied without any reference to the initiative or
wishes of the individuals upon whom they may fall, except, of course, in
so far as these individuals by their votes may have an influence in
determining the general taxing policy of the government. [Sidenote:
(_b_) levied without reference to service rendered.] Second, taxes are
not payments made to the government by individuals and corporations in
return for services rendered. The man who rides a hundred miles on a
railroad pays twice as much as one who goes half that distance, because
he gets twice as much for his money. But the man who pays a thousand
dollars in taxes does not get twice as much in benefits from the
government as the one who pays only five hundred dollars.
[Sidenote: The basis of taxation is ability to pay.]
Nearly all payments that we make are in the form of a _quid pro quo_;
they are in proportion to the benefits which we receive. This is the
case in payments for all forms of goods or services—the one great
exception is the payment of taxes. Taxes have no direct relation to
benefit; those who pay very little in taxes, either directly or
indirectly, sometimes receive a large return in the form of public
services. Take for example the taxes that support the public schools.
The fact that a wealthy man has no children, or prefers to send his
children to a private school, does not relieve him of the obligation to
pay his full share of what public education costs the community. On the
other hand, a man whose contribution in taxes is very small may send a
dozen children, one after another, through the public schools without
any extra cost.
[Sidenote: Why taxes cannot be adjusted to service.]
It would not be possible to base taxation upon service, because there is
no way of knowing how much benefit each individual receives from the
government’s work. Do some individuals, for example, obtain more benefit
than others from the maintenance of law and order or do all derive
benefit alike? Who gets the greater benefit from clean streets, the rich
man who drives his motor car over them, or the poor man whose children
use the streets as a playground? Taxes could not be adjusted to benefit.
Even if they could be so proportioned, it would be unwise to do so. The
general interest requires that everyone should enjoy the benefits of
police protection, the public schools, the parks, the playgrounds
whether they are able to pay for them or not.[215] So taxes are levied
in order to pay for these things, not on a basis of individual benefit,
but simply by putting the heaviest burden in the first instance upon
those who are best able to pay it, letting them shift it if they can.
=Principles upon which Taxes are Levied.=—How is the ability of
individuals to pay taxes estimated? It is done by taking some such thing
as property or income as the basis. Those who have more property or
income are called upon to contribute more than those who have less.
[Sidenote: The basic principles of taxation according to Adam Smith.]
About a hundred and fifty years ago a famous writer on economics, Adam
Smith, laid down four principles to which all taxation should conform.
These maxims of taxation are now everywhere recognized as valid and are
worth remembering. Briefly stated, they are as follows: People should be
taxed according to their ability to pay; all taxes should be definite
and not uncertain or arbitrary; they ought to be levied at the time and
in the manner which causes the least inconvenience to the people; and
they should be so contrived as to take out of the pockets of the people
as little as possible over what is needed by the public treasury. Those
who make the tax laws do not always heed these maxims, and taxes are
sometimes levied on the principle of getting the most money with the
least trouble.[216]
[Sidenote: Taxes on property.]
=Local Taxes.=—The greater portion of the taxation levied by cities,
counties, towns, and villages is in the form of taxes on property. This
is a direct tax and as a rule it is levied on all private property, of
whatever sort, at a uniform rate of so much per thousand dollars of
valuation. [Sidenote: The general property tax.] A tax levied in this
uniform way on all private property is called a _general property tax_.
In some states, however, provision has been made for classifying the
various kinds of property and taxing each kind at a different rate.
Property is first classified into two divisions, real property, and
personal property.[217] Real property (or real estate) consists of land,
buildings, and other fixtures established on the land; personal property
consists of, first, tangible things of a movable nature such as
household furniture, machinery, merchandise; and second, intangibles
such as bonds, mortgages, and bank deposits. [Sidenote: The classified
property tax.] Where there is a classified property tax, each of these
three forms (real property, tangibles, and intangibles) is taxed at a
different rate. One reason for taxing them at different rates is that
real estate requires a great deal more in the way of public services
(for example, in paved streets, water supply, sewerage, etc.); another
reason is that while real property cannot evade taxation intangibles can
usually do so when the tax is too heavy.[218] If the rate of taxation on
intangibles is lowered, the temptation to evade is not so great. It will
usually be found that more money will come into the public treasury from
a moderate rate of taxes on stocks and bonds than from an oppressively
high rate.
[Sidenote: Other local taxes.]
A few communities also obtain some revenue from another direct tax, the
poll tax, which amounts to one or two dollars per year on each adult. In
some cities franchise taxes are laid upon public service companies (such
as gas, electric lighting, and street railway companies). The proceeds
from these sources do not form any large proportion of the total
revenue.
[Sidenote: Assessments for purposes of taxation.]
All collecting of taxes is preceded by a formal step known as
assessment. No tax can be legally collected unless it has been assessed
in ways prescribed by law. Property of all kinds is valued for taxation
by officials known as assessors. Usually they are county or city
officials, sometimes appointed, sometimes elected. They re-value
property at stated intervals and set their assessment at what they
believe to be the market value (unless they are instructed to assess at
a percentage of the market value as is the case in some states). Income
taxes, corporation taxes, and inheritance taxes are assessed by the tax
officials on the basis of sworn statements made to them by the
taxpayers.
[Sidenote: Special assessments.]
In the case of such public improvements as sewers, street pavements, and
sidewalks it is the custom in many cities to levy a special assessment
upon the owners of the property that is benefited. These special
assessments are levied in proportion to the benefit received; they are
not taxes in the ordinary sense. [Sidenote: Taking property for public
use.] When the nation or state or city requires land for public
improvements it has the right to acquire it from the owner, even though
he be unwilling to sell. The public authorities, by their right of
eminent domain, can take land or other property for public use at any
time, but must give the owner just compensation. If the amount of
compensation cannot be agreed upon between the government and the
private owner, it is fixed by the courts.
[Sidenote: The sources of state revenue.]
=State Taxes.=—The states obtain their revenue in various ways. One
common method is by requiring the cities, counties, or towns to pay over
to the state a certain fraction of the sums which they collect on
property. Thus, when the citizen gets his bill for local taxes he finds
it itemized—so much for state taxes, so much for county taxes, and so
much for city or town taxes. Most of the states also levy taxes on
corporations, including railways, telephone companies, insurance
companies, and banks. These taxes may be calculated upon capital or net
earnings or deposits or upon some other basis. A few states tax
inheritances and a few levy a state income tax. Taxes on inheritances
are usually progressive, that is, the rate is higher in the case of
large inherited fortunes. State income taxes are levied upon the net
earnings of individuals or partnerships, a certain minimum income being
left exempt. Most of the states have other miscellaneous sources of
revenue, some of them important, as, for example, the annual license
fees imposed upon all owners of motor vehicles.
[Sidenote: Income and excess profits taxes.]
=National Taxes.=—The national government, by reason of its need for
larger revenues in recent years, has resorted to many forms of taxation.
At the present time the principal sources of national revenue are the
taxes on the incomes of corporations and individuals, the customs
duties, the excises, and the inheritance taxes. The national income
taxes are levied upon the net earnings of all individuals, partnerships,
and corporations above a certain minimum. The rate of taxation, in the
case of individual incomes, is progressive—a normal tax is laid upon all
incomes up to a certain figure and surtaxes are levied upon incomes
above this amount.[219] Under the original provisions of the
constitution, the national government could not levy _direct_ taxes
unless it apportioned them among the several states according to their
population, and according to a decision of the Supreme Court in 1894 an
income tax is a direct tax.[220] But the Sixteenth Amendment, adopted in
1913, now gives the national government authority to tax incomes “from
whatever source derived” without the necessity of apportionment among
the states. Once a year every person or corporation earning a net income
above the prescribed minimum must make a sworn statement setting forth
the exact amount of such earnings, and upon this “income tax return” the
legal rate is assessed.
[Sidenote: Duties on imports.]
Duties on imports still yield a large revenue, as they have done every
year since 1790. No duties may be laid upon _exports_, such duties being
forbidden by the constitution. This is in some respects unfortunate,
because duties on exports go into the price of the exported goods and
thus fall upon the foreign consumer. A tariff on exports (such as
lumber, coal, and ore) would not only yield a considerable revenue but
would help to conserve the natural wealth of the United States. The
excises are levied upon tobacco, theatre tickets, and other things which
are rated as luxuries.[221] The national government also levies an
inheritance tax, the rate of the tax depending upon the value of the
property inherited. These various taxes bring in between three and four
billion dollars per year.
[Sidenote: Taxes for revenue and taxes for regulation.]
=The Two Purposes of Taxation.=—The main object of all taxation is to
produce a revenue. But this is not the only object. Taxation may also be
used to bring about such social reforms as the nation or the community
may deem desirable, and taxes are sometimes adjusted to this end. For
example, the manufacture of goods by the use of child labor can be
checked by placing a heavy excise tax upon such products.[222] It is
believed that the growth of large fortunes can be checked by the
imposition of heavy surtaxes on large incomes and on inheritances; the
present national taxes on incomes and inheritances have been framed with
this end in view to some extent. In other words the system of taxation
can be used and is being used in some measure to secure such economic
and social readjustments as Congress and the state legislatures think
desirable. The question is: How far should the law-making bodies go in
this direction? Many people believe that “swollen fortunes” are an evil
in a democratic society and that all earnings above a certain point
should belong to the community. Others feel that heavy surtaxes place a
damper upon ambition, that they lessen the amount of money saved by the
whole people, thus reducing the amount of capital available for
industry, and that they give the government large sums which are spent
wastefully.[223]
[Sidenote: Taxation and class prejudice.]
=Tax Exemptions and Extravagance.=—When taxation is regarded as a means
not only of raising a revenue but also of redistributing wealth it takes
on grave possibilities of abuse. The majority among the voters can
always find reasons for increasing the burdens on the minority; the
wage-earners urge that more taxes ought to be placed on the rich and
insist that they themselves be exempted from taxation upon their
incomes. The chief evil in all this is not the injustice to the rich,
for they usually manage to shift the burden down the line till it comes
back upon the wage-earner; the unfortunate part of it is that the masses
of the people, proceeding under the delusion that they pay none of the
taxes, are quite unconcerned when they see large sums of money being
collected by the government and spent wastefully. They do not realize
that it is _their_ money; that they earned every cent of it before the
government obtained it to spend. If they could be induced to see matters
in this light, they would never permit their representatives in
Congress, in the state legislatures, and in city councils to throw money
around with such a lavish hand. Tax exemptions and extravagance are twin
brothers.
[Sidenote: The single tax.]
=Proposed Reforms in Taxation.=—Various new forms of taxation are
proposed from time to time. Many years ago a well-known American social
reformer, Henry George, advocated the placing of all property taxes on
land alone, allowing buildings and personal property to go untaxed
altogether. His argument was that the high value of land in cities and
towns is created by the community, not by the owner. Vacant land in the
downtown portion of a large city is sometimes worth many hundred dollars
per foot. What gives it this high value? Not the owner, for he has done
nothing to improve it. The growth of the city round about this land has
made it valuable. This “unearned increment” of value, therefore, Henry
George proposed that the community should take by levying a very heavy
tax upon it.[224]
[Sidenote: Objections to the single tax.]
The single tax proposition, as above outlined, has many earnest
advocates; but it has made very little progress as a practical policy in
this country. The objection commonly raised against the proposal is that
it would be an outright confiscation of a certain form of private
property, namely, vacant land; that the single tax on the site value of
improved land, like taxes on buildings used for industrial or mercantile
purposes, would merely be shifted to the tenant and by him transferred
in the form of higher prices to the consumer; and that the amount
derived from the single tax would not yield enough to relieve the people
from paying other forms of taxation.
[Sidenote: The proposed sales tax.]
More recently a good deal of discussion has taken place concerning the
desirability of a general tax on sales at a uniform rate. It is argued
that such a tax would fall directly and proportionately on all the
people; that it would be so small as to have only the slightest effect
upon prices; that it would be easy to collect and hard to evade. Such a
sales tax at one per cent would probably yield nearly a billion dollars
per year to the national treasury. On the other hand the objection is
made that a tax of this sort would be a real hardship upon masses of the
people who have small incomes and would be felt much less severely by
the well-to-do.[225]
[Sidenote: How money is appropriated.]
=The Spending of Public Money.=—When taxes are collected they go into
the public treasury of the nation, state, or community. Once in the
treasury the money cannot be spent until it has been finally
_appropriated_ by Congress, by the state legislature, by the county
board, by the city council, or by whatever body possesses the power to
make appropriations. Appropriations are usually made once a year in the
form of a budget, and the manner of making a budget is as follows: On or
before a given date the various administrative departments (such as the
parks department in cities or the departments of highways in states)
make their estimates of expenditure for the next twelve months. Along
with this, for purposes of comparison, a statement of probable revenue
from taxes and other sources is prepared by the financial officers of
the state or local government.
[Sidenote: The estimates.]
The estimates are put together and submitted to the mayor, the governor,
or some other designated officer, who transmits them to the council or
legislature as the case may be. The lawmaking body then considers the
estimates, item by item, and finally votes the entire list after making
such changes as it finds desirable. This budget, in cities and states,
usually requires the approval of the mayor or the governor and may be
vetoed like other measures. In some states the governor may veto
individual items in the budget while letting the others stand, but as a
rule he is required to accept or reject the appropriation bill as a
whole. The general tendency is to give the executive branch of the state
and local governments larger powers in budget-making so that the
responsibility for any extravagance may be better centralized.
[Sidenote: The older method of making appropriations, in Congress.]
=The National Budget System.=—Until 1921 the national government made
its large annual expenditures without any regular budget system at all.
Each department (war, navy, agriculture, and so on) prepared its
estimates and sent them to the Secretary of the Treasury, who presented
them to the President for transmission to Congress with whatever
recommendations he might choose to make. In addition to this every
senator and representative had the right to propose appropriations, and
hundreds of such proposals were made in Congress at every session. The
practice, prior to 1921, was to refer all the departmental estimates and
all the individual proposals to various committees. All estimates and
bills for army expenditures went to the Committee on Military Affairs;
all such measures relating to the postal service went to the Committee
on Post-Offices, and so on. Eight or nine committees each took a hand in
considering these proposals to spend money; each did its work without
reference to what the other committees were doing; and each made its own
recommendations to Congress.[226]
[Sidenote: Results of this method.]
The result of this procedure was that no general plan for keeping down
the expense could ever be effectively put into force, there being too
many independent committees to deal with. In 1921, however, Congress
passed an act providing for the establishment of a national budget
system and the rules of both chambers in Congress were altered so as to
carry the new plan into effect. [Sidenote: The new budget system.] The
departmental estimates now go to an official in the Treasury Department
known as the Director. He puts them together into a budget and with the
President’s approval submits them to the House of Representatives. Here
they are considered by a single large committee, known as the
Appropriations Committee, and all proposals of expenditure made by
individual congressmen (after they have been approved by the committees
directly concerned) are also submitted to this committee. The latter
then lays before the House a complete budget or plan of expenditures for
the ensuing fiscal year. When this budget, with or without changes,
passes the House, it is forwarded to the Senate, where it is likewise
considered by a single committee. After it has been passed by the Senate
it goes to the President for his approval. The President cannot veto
individual items in the budget but must accept or reject it as a whole.
This is a serious handicap because the rejection of the entire budget
would leave the departments without funds with which to carry on their
work. The great advantage of the new budget system is that it enables
Congress to make a comprehensive plan of expenditure for the year and
thus to hold the expenses within the estimated revenues.
[Sidenote: Is it necessary for governments to borrow?]
=Public Debts: Why Governments Borrow Money.=—Nearly all nations,
states, counties, cities, and even villages have debts. Why do they find
it necessary to borrow money? Why should they not, like wise
individuals, adopt a pay-as-you-go policy? The reason is that such a
policy would be very unfair to the present taxpayers. Suppose, for
example, that a town or city builds a new high school. The building will
cost a great deal of money and may reasonably be expected to serve its
purpose for twenty, thirty, or even forty years. Now there are two ways
in which the community can defray the cost: It can levy a heavy tax rate
upon the property of the people at once, doubling or trebling the usual
tax rate if necessary, and thereby obtaining the money with which to pay
cash for the school. Or, on the other hand, it may borrow the money and
arrange that this amount (with interest) shall be repaid in annual
installments over twenty or more years, thus spreading the burden over
the whole period in which the building fulfils its purpose.
[Sidenote: Proper and improper borrowing.]
Which of these is the fairer method? The latter plan has the merit of
placing the burden upon all those who get the benefit; but it has the
defect of saddling the taxpayers of the future with a debt which they
have had no share in creating. Governments, however, are much more
concerned with the present than with the future, for it is the present
taxpayer who decides the elections. Wherever practicable, therefore,
they endeavor to finance public improvements by selling bonds rather
than by increasing the present tax rates. State roads, public buildings,
bridges, and other costly enterprises are financed by borrowing. The
construction of the Panama Canal by the national government was not paid
for at the time; the money with which to build it was borrowed by
issuing long-term bonds. Governments sometimes go further and borrow
money to make good a shortage in current expenses. This is an unwise
policy; not one honest word can be said in favor of it. Current expenses
should be paid from the taxes of today, not from the taxes of ten years
hence. When a government borrows money to pay current expenses it
usually defends its action by saying that the people approved it at the
polls. Of course the people will usually approve things of this sort.
When you ask a man whether he prefers to pay for a thing himself or let
somebody else pay for it, there is little doubt what his answer will be.
War is the greatest cause of borrowing. During the Civil War the United
States government borrowed about three billion dollars, most of which
was repaid within thirty years. During and immediately after the World
War it secured, by the issue of Liberty Bonds and Victory Notes, about
twenty-six billion dollars, all of which becomes repayable at various
dates before 1950.[227]
------------------------------------------------------------------------
THE NATIONAL DEBT
1860-1920
The largest additions to the national debt of the
United States were made during the years 1861-1865,
and the years 1917-1919. During the former of these
two periods the debt rose from less than fifty
millions to nearly three billions; during the years
1917-1919 it increased from one to twenty-seven
billions or thereabouts. By using the logarithmic or
proportional scale for comparing these two periods
it will be seen that the ratio of increase was less
in the later period than in the earlier.
It will be noticed that although the national debt
was much reduced during the twenty-five years which
followed the Civil War, it never dropped anywhere
near its pre-war level. The enormous debt which we
piled up during the World War is already being
reduced. Will it ever be cut to the level of 1916?
[Illustration:
THE NATIONAL DEBT
1860-1920
]
------------------------------------------------------------------------
[Sidenote: Long- and short-term loans.]
=How Borrowing Takes Place.=—When governments decide to borrow money
there are two ways of doing it. If the money is needed for a short time
only, for example, to pay expenses until the taxes come in, it can be
borrowed from the banks on short-term notes. The national government,
for its short-term borrowing, issues treasury notes, running for a year
or less. These bear interest and are sold to the banks which re-sell
them to private investors. But if the money is needed for a longer
period, the usual plan is to issue bonds. These bonds, as already
pointed out (p. 445) are promises to pay, and the government pledges its
credit to repay them promptly when they mature, with interest every year
or every half-year meanwhile. National, state, and local bonds are for
the most part exempt from taxation.[228]
[Sidenote: How the war increased the national debt.]
=The Burden of the Public Debt Today.=—The borrowing power of the
national government is not limited by any provision of the constitution.
Congress may borrow money up to any amount. The national debt today is
about twenty-three billion dollars, as against only one billion before
the war. The yearly interest on the present debt, in fact, is about as
large as the whole of the old debt. Arrangements are being made,
however, to lessen this interest-burden by obtaining interest payments
from foreign countries upon the loans made to them by the United States
during the war.
[Sidenote: Debt limits.]
In the case of the states and cities the power to borrow money is not
unlimited. The state constitutions usually contain provisions as to how
much money may be borrowed and for what purposes. Sometimes they provide
that state debts may not be created except by vote of the people. Cities
are also, in most cases, bound by debt limits which are fixed by the
state constitution or by state laws. The limit, as a rule, is flexible;
it enables the city to borrow money up to a certain percentage of its
assessed valuation, so that when the value of property goes up the
borrowing power becomes enlarged. State and city debts have been
increasing at a rapid rate; on the whole more rapidly than population or
wealth.[229] The tendency is to put a large share of the burden on the
shoulders of the next generation. It is right that future taxpayers
should bear their share, as has been said; but they should not be called
upon to do more than that.[230] It is probably within bounds to say that
thirty to forty cents out of every dollar which we pay in taxes today
goes for interest and debt repayments. Before long, if we keep on, half
the taxes will go to pay for past obligations. The large cities are the
worst offenders; some of them are mortgaging the future at an alarming
rate. Stricter laws relating to local borrowing are needed, but more
essential still is the awakening of public opinion to the realities of
the situation.
=How Public Debts are Repaid.=—When bonds are issued by the public
authorities some provision ought to be made for paying them at maturity;
but this is not always done. [Sidenote: Refunding.] The national debt,
when portions of it become due, is sometimes refunded, that is, paid off
by issuing new bonds. [Sidenote: Sinking funds.] In the states and
municipalities the usual plan has been to establish a sinking fund when
the bonds are issued, and then to pay a certain installment into this
fund out of each year’s taxes. By this process the sinking fund grows
year by year until it is sufficient to pay off the bonds when they
become due. [Sidenote: Serial issues.] A better plan is to issue the
bonds in such form that they will fall due serially, that is, one or
more bonds coming due in each successive year of the loan period. Then,
instead of creating a sinking fund to pay off the whole debt at one
time, the bonds are paid off one by one. The serial bond plan does away
with the necessity of holding large sums in hand awaiting the maturity
of the debt, and thus diminishes the risk of loss through poor
investment or corruption.
=Are Public Debts a Public Evil?=—Alexander Hamilton, who was Secretary
of the Treasury in Washington’s first cabinet, propounded the doctrine
that a public debt, if not too large, is a source of strength to the
government. He argued that when government bonds are widely held by the
people, all those who own the bonds are interested in the stability and
prosperity of the nation. Other noted financiers at various times have
contradicted Hamilton and have declared all public debts to be public
evils in that they impose burdens on the people without giving them
anything tangible to show for it. But the truth is that public debts do
not fall entirely in either class. They are benefits in one sense and
evils in another. The power to borrow, like any other power, may be used
wisely or unwisely. In times of great emergency, or for public
improvements of permanent value, money may very properly be obtained by
borrowing; always provided, however, that arrangements are made to pay
off the debts within a reasonable time. The evil comes when governments
borrow money in order to pay current expenses or to defray the cost of
improvements which are not needed, and when they complacently allow the
debt to pile up, year after year, with no thought of reducing it.
“Sufficient unto the day is the evil thereof”, it is said; but we can
also make the evil sufficient unto the future as well.
General References
C. A. BEARD, _American Government and Politics_, pp. 358-378; _Ibid._,
_Readings in American Government and Politics_, pp. 323-342;
F. W. TAUSSIG, _Principles of Economics_, Vol. II, pp. 483-561;
EVERETT KIMBALL, _National Government of the United States_, pp.
445-479;
W. B. MUNRO, _Government of the United States_, pp. 233-245; _Ibid._,
_Principles and Methods of Municipal Administration_, pp. 403-478
(Municipal Finance);
C. F. BASTABLE, _Public Finance_, pp. 261-280;
E. R. A. SELIGMAN, _Essays in Taxation_ (9th edition), pp. 66-99 (The
Single Tax);
C. J. BULLOCK, _Selected Readings in Public Finance_, pp. 39-49;
143-157; _Ibid._, _Introduction to the Study of Economics_, pp. 493-520;
C. C. PLEHN, _Introduction to Public Finance_, pp. 310-327;
American Academy of Political and Social Science, _Taxation and Public
Expenditures_, pp. 1-283 (Annals, Vol. XCV, May, 1921).
Group Problems
=1. Should the present rate of national income taxes and surtaxes be
raised or lowered?= The Income Tax Law of 1913. The increase in rates
during the war. The changes made in 1921. Are the present exemptions
fair? How do the surtaxes operate? Are they shifted by the taxpayers to
others? How? The flow of investments into non-taxables. Examples. Is a
progressive rate justifiable in order to promote a greater approach to
equality in net incomes? Conclusions. =References=: C. C. PLEHN,
_Introduction to Public Finance_, 4th ed., pp. 270-309; G. N. WILSON,
_The Income Tax_, pp. 1-11; F. R. FAIRCHILD, _Federal Taxation of Income
and Profits_ (American Economic Review, Vol. XI, No. 1, Supplement, pp.
148-159); R. M. HAIG, _The Federal Income Tax_, pp. 1-25; J. A. HOBSON,
_Taxation in the New State_, pp. 95-110; American Academy of Political
and Social Science, _Taxation and Public Expenditure_, pp. 180-187
(Annals, Vol. XCV, May, 1921).
=2. How public budgets are made.= H. J. FORD, _The Cost of Our National
Government_, pp. 11-21; S. G. LOWRIE, _The Budget_, pp. 11-30; F. A.
CLEVELAND, _Chapters on Municipal Administration and Accounting_, pp.
67-81; _Cyclopedia of American Government_, Vol. I, pp. 181-184;
Massachusetts Constitutional Convention, 1917-1918, _Bulletins_, No. 2
(State Budget Systems in the United States); American Academy of
Political and Social Science, _Public Budgets_, pp. 36-46 (Annals, Vol.
LXII, No. 151); _Ibid._, _Taxation and Public Expenditure_, pp. 228-250
(Annals, Vol. XCV, May, 1921); U. S. Bureau of the Census, _Financial
Statistics of States_; _Financial Statistics of Cities_. (Each is
published annually.)
=3. A study of the per capita cost of selected administrative
departments in your own state or community compared with those of other
states or communities.= (Adequate data for this study can be found in
two annual publications of the U. S. Census Bureau, namely, _Financial
Statistics of States_, and _Financial Statistics of Cities_. For an
example of such a study, in brief form, see W. B. MUNRO, _Principles and
Methods of Municipal Administration_, p. 457.)
Short Studies
1. =The principles underlying taxation.= F. W. TAUSSIG, _Principles of
Economics_, Vol. II, pp. 483-496.
2. =The power of Congress to tax.= W. B. MUNRO, _The Government of the
United States_, pp. 221-227.
3. =Income taxes in foreign countries.= E. R. A. SELIGMAN, _The Income
Tax_ (2d ed.), England, pp. 167-218; France, pp. 273-328; Germany, pp.
223-272.
4. =How the Civil War was financed.= D. R. DEWEY, _Financial History of
the United States_, pp. 298-333.
5. =The mobilization of American finances during the World War.= W. F.
WILLOUGHBY, _Government Organization in War Time and After_, pp. 50-66;
E. R. A. SELIGMAN, _Essays in Taxation_ (9th ed.), pp. 750-782.
6. =Excises as a source of revenue.= C. J. BULLOCK, _Selected Readings
in Public Finance_, pp. 449-472.
7. =The general property tax.= F. W. TAUSSIG, _Principles of Economics_,
Vol. II, pp. 528-549.
8. =The tariff as a source of revenue.= C. J. BULLOCK, _Selected
Readings in Public Finance_, pp. 425-448.
9. =The single tax.= E. R. A. SELIGMAN, _Essays in Taxation_, pp. 66-99.
10. =The wastefulness of the old appropriation system.= P. S. REINSCH,
_Readings on American Federal Government_, pp. 355-361.
11. =State debts and debt limits.= Massachusetts Constitutional
Convention, 1917-1918, _Bulletins_, No. 15 (Constitutional Restrictions
on State Debts).
12. =Municipal debts and debt limits.= _Ibid._, No. 14 (Constitutional
Restrictions on Municipal Indebtedness).
13. =Methods of borrowing: sinking funds vs. serial bonds.= _Ibid._, No.
21 (Methods of Borrowing: Sinking Funds _vs._ Serial Bonds).
14. =The classification of property for taxation.= _Ibid._, No. 20
(Classification of Property for Purposes of Taxation).
15. =The new national budget system.= F. A. CLEVELAND and A. E. BUCK,
_The Budget and Responsible Government_, pp. 371-381.
Questions
1. Show how taxes are related to the cost of living. What forms of
taxation are most closely related to it?
2. Can you add any other principles of taxation to those laid down by
Adam Smith?
3. Select from the constitution all the provisions which relate to
taxation and put them together in this form: “Congress may impose any
sort of taxation except that——and that——and that, etc.”
4. What is the incidence of (_a_) import duties; (_b_) export duties;
(_c_) a tax on vacant land; (_d_) a tax on a factory; (_e_) a normal tax
on incomes; (_f_) a poll tax; (_g_) a tax on inheritances; (_h_) a tax
on the profits of theatres; (_i_) a tax on motor trucks?
5. Is it right that income from government bonds should be exempt from
taxation?
6. Which of the following taxes is the wage-earner likely to feel the
least, and why: tariff duties, a property tax, income taxes, a sales
tax, a poll tax?
7. Should different forms of property (land, buildings, household
furniture, stocks, bonds, automobiles, etc.) be taxed at different
rates? Should factories be taxed at a different rate from homes? If all
men are equal in the eyes of the law, why should they be taxed at
different rates?
8. It cost only a billion dollars a year to run the government before
the war. Interest on the debt now amounts to nearly another billion. But
the government is spending about four billions. Why is this? Now that
the war is over, why is it not possible (apart from interest on the war
debt) to get back to the old scale of expenditures?
9. What are the chief defects in our present system of raising public
revenues? What improvements can you suggest? Would you favor a sales
tax? Do you believe that Congress was unwise in abolishing the tax on
excess profits?
10. Enumerate all the different forms of taxation that any one man may
have to pay in the United States at the present day.
11. How is the budget prepared and passed in your state? Compare the
relative influence of the governor with that of the legislature in
determining what the state government spends.
12. Explain treasury notes; refunding; debt limit; surtaxes; net debt;
progressive taxation; sinking fund; serial bonds; special assessments.
13. Two cities of about the same size may have approximately equal
amounts of net debt yet one may be in a much better financial position
than the other. Account for this.
14. When Chief Justice Marshall said: “The power to tax involves the
power to destroy”, what did he mean? Should the power to tax be used to
secure a more nearly equal distribution of wealth and net annual incomes
among the people?
Topics for Debate
1. The salaries of government officials should be taxed like the incomes
of private individuals.
2. No man’s income should be twice taxed (once by the nation and once by
the state).
3. Property should be taxed by a uniform rule and should not be
classified for taxation.
4. No debt limits should be fixed for cities by state law, cities being
allowed to decide for themselves how much they shall borrow.
5. Assessors should be appointive state officials and should not be
elected by the voters of cities, counties, or towns.
-----
Footnote 211:
If anything, this estimate is probably too low. In 1921 the tax
commissioner of Massachusetts estimated the tax burden in that state
to be $117 per capita.
Footnote 212:
The cities spend a great deal more than the rural districts and the
per capita burden there is consequently much heavier.
Footnote 213:
In the case of some heavily-taxed forms of merchandise, such as
tobacco, more than half the price is made up of taxes.
Footnote 214:
There are some cases, of course, in which the tax cannot be shifted;
for example, taxes on vacant or unimproved land, or taxes on fixed
incomes and salaries. But all this is a small element in the total tax
bill.
Footnote 215:
Many public services which are now paid for out of the general taxes
were at one time supported by charging only those who made use of
them. Many of the first macadam roads were built by private companies,
which collected a few cents in toll from every person using them. Toll
bridges were not uncommon a generation ago and they still exist in
some places. Fees were charged in many places by the schools, so much
per pupil. Before regular police forces were established, well-to-do
people hired watchmen to patrol the streets around their property, the
poorer sections of the city being left without any protection at all.
Footnote 216:
The French statesman, Colbert, chief minister of Louis XIV, once said
that the art of taxing the people was like that of plucking a goose,
namely, to get the largest amount of feathers with the least amount of
squawking. There is more truth than fiction in that remark.
Footnote 217:
In a general way the distinction between _real_ and _personal_
property is simple enough, but the exact line between the two is not
as a practical matter so easy to draw. For example: Is grain growing
in the field real or personal property? Which is it after it is cut by
the reaper? To which class do the trees in the forest belong (_a_)
before they are cut down, (_b_) after they have been felled? Would it
be correct to say that cattle grazing in the field are converting real
estate into personal property?
Footnote 218:
Real estate is in plain sight and cannot be concealed from the taxing
authorities; but stocks, bonds, notes, and so forth, are kept in a
safe where no one sees them but the owner. There is no way of knowing
how much taxable wealth a man has hidden away unless he is honest
enough to tell. In some states the plan of taxing intangibles has been
given up altogether on the ground that such taxes are too easy to
evade. As a substitute these states impose a tax on _the income_ from
intangibles and require every person to make, once a year, a sworn
statement of such income.
Footnote 219:
The exemptions, allowances, and rates change from time to time. The
existing rules can be found in the latest edition of the _World
Almanac_. They cannot be briefly stated without serious danger of
inaccuracy.
Footnote 220:
See _Cyclopedia of American Government_, Vol. III, p. 492. The court
held that a tax on land was a direct tax; that a tax on the income
from land was in effect a tax on land, and hence also a direct tax.
Footnote 221:
During the years 1918-1921 these excises were also laid on railway
tickets, telegrams, and sales at soda fountains. The excess profits
tax, which also brought in a large revenue during the years 1918-1922
was levied upon all business profits above a designated standard.
Footnote 222:
Every state undoubtedly has power to lay such a tax. There is some
doubt whether the national government also possesses it, because a tax
on the products of labor is in reality a means of regulating the
conditions of labor, and the constitution gives the national
government no authority to regulate the conditions of labor; such
authority belongs to the states. The question whether the national
government can levy a tax on the products of child labor is now
pending before the Supreme Court. See also p. 415.
Footnote 223:
People who have large fortunes may invest them in non-taxable
investments, such as state and municipal bonds, thus evading the heavy
surtaxes on incomes.
Footnote 224:
Henry George advocated that on all land a tax should be levied equal
to the full amount of its ground rent (see p. 43) and that all other
taxes should be abolished. This, in effect, would do away with the
private ownership of land, making the government the real owner. Mr.
George endeavored to prove that nearly all our economic troubles are
due to the private ownership of land and land monopoly. “What I
therefore propose”, he said, “as the simple yet sovereign remedy which
will raise wages, increase the earnings of capital, extirpate
pauperism, abolish poverty, give remunerative employment to whoever
wishes it, afford free scope to human powers, lessen crime, elevate
morals and taste and intelligence, purify government and carry
civilization to yet nobler heights, is—to appropriate rent by
taxation.” _Progress and Poverty_, Book VIII, Ch. ii. This is a good
example of the extravagant and Utopian hopes held out by reformers who
are carried away by a single idea. If earth could be changed into
heaven by merely taxing one thing instead of another, the
transformation would have been made long ago.
Footnote 225:
President Harding, early in 1922, suggested the imposition of a sales
tax as a practicable method of obtaining money with which to pay a
bonus to veterans of the World War.
Footnote 226:
It was the custom to take such individual measures as were approved by
the various committees and put them all together into what was called
an “omnibus bill”, providing for many millions of dollars to be spent
upon the erection of new post-offices, the dredging of harbors, and so
on. In these bills every congressman expected to get something for his
district, whether there was need or not. Such grants of money were
commonly known as “pork barrel” appropriations. One way of keeping
congressmen in Washington until the very last day of the session was
to hold back these appropriations until just before adjournment. Every
senator and representative would then stay at his post lest by some
mishap his particular item might be dropped out.
Footnote 227:
About ten billion dollars of this total was loaned by the United
States to England, France, and other countries to help them carry on
the war (see pp. 613-614).
Footnote 228:
There are some exceptions. The income from the first issue of Liberty
Bonds is entirely exempt from national taxation; the income from the
other issues is exempt up to a certain amount for a designated period
of years. All the bonds issued by the national government are exempt
from state and local taxation. Bonds issued by states, counties,
cities, and other municipalities are exempt from national taxation;
they may or may not be exempt from state and local taxes, depending
usually upon where the owner resides. For example, if a man owns bonds
issued by the city of San Francisco and resides in California, the
income from these bonds is exempt from state and local taxes; but if
the owner resides in some other state which has an income tax, the
income is taxable.
Footnote 229:
The debt of New York state is about one hundred and thirty-five
millions; no other state has a debt half as large. A few states have
no debts at all. The total net debt of the counties, cities, towns,
villages, and other communities is nearly five billions. It would be
conservative to say that the total public indebtedness of the American
people today is about twenty-eight billions. From this may be
subtracted, of course, the ten billions owed to the United States by
other countries. But even allowing for this, the debt is about $700
per family.
Footnote 230:
It is a sound rule of public finance that bonds ought not to run for a
longer period than the estimated life of a public improvement. For
example, if a new street pavement is estimated to be good for twenty
years, the bonds should all be repayable within that term. Very often,
however, the taxpayers of American cities have been paying off paving
bonds long after the pavements have completely worn out.