of the _situs_ of the property taxed, are also an objection to this
system and an obstacle to its application. The want of uniformity can
not be abolished by enactments of law, because absolute uniformity of
laws would not insure as uniform interpretation of their provisions.
The rules for assessment are uniform for the officers of a State, but
the returns made involve such differences in the application of the
rules that one is forced to the conclusion that a misunderstanding of
the spirit of the law exists, coloring differently the view of each
returning officer. Discrimination against the county or municipality
and discrimination against the individual are to be met at every turn.
No wording of the law can eliminate this personal judgment of each
assessing authority, and the supervision of the returns by State
boards of equalization has introduced an even greater departure from
justice, as a majority, based upon selfish interests, may be had, and
its decision may readily be defended as based upon good and sufficient
reasons. An appeal to the last resort, the higher courts, may produce
redress against unjust assessments, but each case must be decided upon
its merits, and only under very exceptional circumstances--as in the
recent case at Tarrytown, New York, where striking and general, even
personal, spite had been shown in the tax levy--can a number of
taxpayers find it their interest to combine and carry the question
into the courts for adjudication.
Imperfect in theory, the machinery of the general property tax is
imperfect. With at present fully two thirds of the personal property
of the State exempted from taxation by law or by circumstances growing
out of its condition, or the natural depravity and selfishness of the
average taxpayer, and with a large part of the other third exempted by
competing nations or neighboring States, what becomes of the theory so
generally accepted in the United States that in order to tax equitably
it is necessary to tax everything? A very slight examination leads to
the conclusion that it is the most imperfect system of taxation that
ever existed; that, with the exception of moneyed corporations, it is
a mere voluntary assessment, which may be diminished at any time by an
offset of indebtedness which the law invites the taxpayers to increase
_ad infinitum_, borrowing on pledge of corporate stocks, United States
bonds, legal-tender notes, etc., all exempt from taxation; that its
administration in respect to justice and equity is a farce and more
uncertain and hazardous than the chances of the gaming table; and that
its continuance is more provocative of immorality and more obstructive
of material development than any one agency that can possibly be
mentioned. A stringent enforcement only leads to greater perversions
and a wider evasion. A lax enforcement does not reduce its
inequalities and general want of application to actual conditions.[10]
[Footnote 10: The commissioners "have no confidence in any system
of inquisition or system which requires assessors to be
clairvoyants; to ascertain things impossible to be ascertained by
the agencies provided in the law; to ascertain the indebtedness
of the taxpayer; to ascertain or know who is the owner of
property at a given time that can be and is transferred hourly
from owner to owner by telegraph or lightning, and that may be
transported into or out of the jurisdiction of the assessor with
the rapidity of steam, or that requires assessors or taxpayers to
make assessments on evidence not admissible in any court, civil
or criminal, in any civilized country where witches are not tried
and condemned by caprice or malice on village or neighborhood
gossip."]
The problem, then, is what taxes to introduce in place of this
confessed failure of the general property tax.
There can be little doubt that the desire for greater simplicity in
taxation is generally felt, and in part put into practice. The mass of
various kinds of imposts, added without any system or real connection
or relation one to another, has often resulted in so large a number of
charges on Government account as to defeat itself. The French taxes at
the end of the last century, with their added fault of inequality and
injustice in distribution, led naturally to the theory of a single
tax--the _impôt unique_ of the physiocrats--which did not become a
fact, yet registered the protest against the multiplicity and crying
oppressiveness of the remains of feudal dues and fiscal experiments
undertaken under the stress of an empty treasury. So it has been noted
at the present time that where an opportunity has offered there is a
tendency in European countries to simplify their taxes, and, as in the
case of Switzerland, prepare the way for income and property taxes. It
is a greater dependence on such direct taxes in place of indirect
taxes that has distinguished the great fiscal changes in recent years.
Germany may have wished to establish a brandy monopoly, and Russia may
resort to a monopoly of the manufacture and sale of distilled spirits.
But England increases her death duties, France and the United States
seek to frame acceptable taxes on income, and Switzerland succeeds in
modifying her system in the line of direct taxes.
There is an earnest movement in favor of a single tax on the value of
land, exclusive of other real property connected with it. As involving
a question of abstract justice the proposition has much in its favor,
but it can not be denied that practical obstacles oppose its adoption.
The recent commission on taxation in Massachusetts thus treats of it:
"It proposes virtually a radical change in the ownership of land, and
therefore a revolution in the entire social body. In this form of
taxation all revenue from land alone is to be appropriated--that is,
the beneficial ownership of land is to cease. Whether or not this
system, if it had been adopted at the outset and had since been
maintained, would have been to the public advantage may be an open
question, but it would certainly seem to be too late now to turn to it
in the manner proposed. In any event, it involves properly not
questions of taxation, but questions as to the advantage or
disadvantage of private property in land."[11]
[Footnote 11: Report of the Massachusetts Commission, 1897, p.
74.]
If securities are to be taxed, the methods adopted should avoid a
double taxation, and an attempt to reach capital outside of the State.
It is evident that a State, like Massachusetts, which taxes the
foreign holder of shares in its corporations as well as the shares of
foreign corporations held by its own citizens, is inviting a dangerous
reprisal from other States. "Wherever the owner may be, if the
corporation is chartered within the State the Commonwealth collects
the tax on the shares. Wherever the corporation may be, if the owner
is within the State the Commonwealth also collects the tax (in theory
of law at least)." If this be the best possible system, and it is
supposed Massachusetts assumes it to be, general double taxation would
follow its adoption by the other States. The effort to carry this rule
into practice proves its injustice as well as futility. The most
searching and inquisitorial methods of seeking such property will not
avail to reach a good part of it, and this results in adding
inequality of burden to its other difficulties. Evasion is too simple
a process to be unused, and the heavier the rate of tax the greater
will be the resort to evasion and even to perjury, express or implied.
The fundamental cause of the failure lies in this, "the endeavor to
tax securities, which are no more than evidences of ownership or
interest in property, and which offer the easiest means of concealment
and evasion, by the same methods and at the same rate as tangible
property situated on the spot."
This inherent difficulty can be cured only by abandoning the attempt
to tax directly securities or evidences of debt, representing
ownership or interest in property beyond the limits of the taxing
authority. In the case of the securities of home companies they may be
readily taxed at the source, but in the case of foreign corporations
it is only by methods almost revolting in their injustice and
treatment of the taxpayer that even a partial success can be secured.
The dependence upon the sworn statement or declaration of the taxpayer
is known to be extremely faulty and to offer a premium on
untruthfulness. So long as this dependence is retained in whole or in
part in a system for taxing personal property, the results must be
unsatisfactory. The most judicious, even if it seems the most radical,
remedy is to abandon the taxation of securities. Certainly it would be
well to put an end to the Massachusetts plan of taxing securities
representing property outside of the State, for that involves double
taxation wherever it has been possible to impose the tax. What can be
reached only by methods at all times trying and difficult, and
sometimes very demoralizing, should not be permitted to remain a
permanent feature of the revenue system of a State.
The New York commission of 1870 proposed to limit the State taxes to a
very few number of objects. That they be "levied on a comparatively
broad basis--like real estate--with certainty, proportionality, and
uniformity on a few items of property, like the franchises of all
moneyed corporations enjoying the same privileges within the State,
and on fixed and unvarying signs of property, like rental values of
buildings"--such was the scheme proposed. The leading object to be
attained was equality of burdens, and a second object of quite as
great importance, was simplicity in assessment and collection.
Granting that real estate, lands, and buildings were taxed on a full
and fair market valuation, and that corporations contributed their
share toward the expenses of the State, it remained to devise a tax
that should reach all other forms of property that could be
properly and easily assessed. This tax was to be known as the
"building-occupancy" tax, and was to be levied on an additional
assessment of a sum equal to three times the annual rent or rental
value of all the buildings on the land.[12] Nearly thirty years later
the Massachusetts commission proposed a modified form of this tax. An
annual rental value of four hundred dollars was to be exempt from
taxation, but ten per cent was to be levied on all rental values in
excess of that amount.
[Footnote 12: The New York commission of 1870 submitted two
propositions on this point:
1. Tax the house or building as real estate separately, at the
same rate of valuation as the land--that is, fifty per cent--and
then assuming that the value of the house or building,
irrespective of its contents, be such contents furniture,
machinery, or any other chattels whatsoever, is the sign or index
which the owner or occupier puts out of his personal property,
tax the house or building on a valuation of fifty per cent
additional to its real estate valuation, as the representative
value of such personal property; or, in other words, tax the land
separately on fifty per cent of its fair marketable valuation,
and tax the building apart from the land, as representing the
owner's personal property, on a _full_ valuation, as indicated by
the rent actually paid for it or its estimated rental value. Or--
2. Tax buildings conjointly with land as real estate at a uniform
valuation; and then as the equivalent for all taxation on
personal property, tax the occupier, be he owner or tenant of any
building or portion of any building used as a dwelling, or for
any other purpose, on a valuation of three times the rental or
rental value of the premises occupied. Tenement houses occupied
by more than one family, or tenement houses having a rental value
not in excess of a fixed sum, to be taxed to the owner as
occupier.--_Report_, p. 107.]
"The advantages of a tax on house rentals," said the commission, "can
be easily stated. It is clear, almost impossible of evasion, easy of
administration, well fitted to yield a revenue for local uses, and
certain to yield such a revenue. It is clear, because the rental value
of a house is comparatively easy to ascertain. The tax is based on a
part of a man's affairs which he publishes to all the world. It
requires no inquisition and no inquiry into private matters; it uses
simply the evidence of a man's means which he already offers."[13] If
this tax were to be given it would be possible to wipe out all the tax
on incomes from "profession, trade, or employment," to abolish the
existing assessments on personal property. The effects would be
far-reaching. If loans of money are free from taxation, the purchasing
power of money in the same degree must diminish, which simply means
that the purchasing power of farms and products of farms for money
must to the same extent increase; hence, the borrower on bond and
mortgage will not be subject to double taxation--first, in the form of
increased rate of interest, and then in taxation of his real
estate--and hence the farmer or landowner who is not in the habit of
either lending or borrowing money will find his ability to meet
additional taxation on his land increased in additional value of land
and products of land in proportion as the tax is removed from money at
interest. Also, the exemption of the products of farms and things
consumed on farms from taxation will give a corresponding increased
value to compensate for the "building-occupancy" tax. Tenants
controlled by all-pervading natural laws can and will give increased
rents, if their personal property is exempt primarily from taxation.
The average profits of money at interest or of dealings in visible
personal property free from taxation can not exceed, for any
considerable length of time, the average profits of real estate, risk
of investment and skill in management taken into consideration; and
therefore the real pressure of taxation under the proposed system will
finally be, like atmospheric pressure or pressure of water, on all
sides, and by a natural uniform law executed upon all property in
every form used and consumed in the State. Persons must occupy
buildings and business must be done in buildings, and through these
visible instrumentalities capital can be reached by a rule of
fractional uniformity, and by a simple, plain, and economical method
of assessment and collection.
[Footnote 13: Massachusetts Report, p. 106.]
This building-occupancy tax, or tax on rental value, does not preclude
a supplementary tax on corporations.
Much has been said of the onerous burdens of taxation endured by
individuals compared with those of corporations, and especially
corporations enjoying certain rights or franchises in public streets
and highways or corporations of a more or less public character. The
phenomenal growth of municipalities has been one of the notable social
movements of the last twenty-five years. The drift of population from
the country districts to cities has increased with each year, and
finds an explanation in many causes. The opportunities offered in a
city for advancement are greater and more numerous; the monotony of
the farm life does not keep the young at home, but drives them for
excitement and profit to the great centers of population. The economic
changes of a half century also have their influence. The competition
of new regions, better adapted for certain cultures on a commercial
scale, has reduced the profitableness of older and more settled
localities, where comparatively costly methods must be resorted to if
the fertility of the land is to be maintained. The wheat fields of the
West narrowed the margin of profit in New England farming, while the
sheep and cattle ranges of the West made it impossible for the same
quality of live stock to be raised for profit in the East. Farms were
abandoned, and the younger blood went West to grow up with the
country, or into the cities to struggle for a living. Further, the
advances in agriculture, the application of more productive methods,
and the introduction of machinery have reduced the demand for labor in
the rural districts, and this has led to a migration to the cities.
The result of this has been an immense development of city life, and
with it an ever-increasing field for investment in corporate
activities. The supply of water is usually in the city's control, but
the manufacture and sale of gas, the production and distribution of
electricity, the street railways, telegraph, and telephone interests
are private corporations formed for profit and using more or less the
public highways in the conduct of their various enterprises. A grant
of a street or highway for a railway or electric-wire subway generally
involves a monopoly of that use, and the privilege or franchise may
become more valuable with the mere growth in the population of the
cities. Assured against an immediate competition, there is a steady
increment in the value of the franchise, and in the case of a true
monopoly there seems to be no limits to its possible growth.
An instance of this nature is so striking in its relations and so
pertinent to the present discussion that attention is asked to it. In
the reign of James I water was supplied by two or three conduits in
the principal streets of London, and the river and suburban springs
were the sources of supply. Large buildings were furnished with water
by tapping these conduits with leaden pipes, but other buildings and
houses were supplied by "tankard bearers," who brought water daily. A
jeweler of the city, Hugh Myddleton by name, believed something better
could be done, and he proposed to bring water from Hertfordshire by a
"new river." He embarked in the undertaking, sank his fortune in its
conduct, and appealed to the king for assistance. James granted this
aid, taking one half of the shares of the company--thirty-six out of
the seventy-two shares into which it was divided. The shares that
remained received the name of "adventurer's moiety." The work was
completed in 1613, and water was then let into the city.
So little was the measure appreciated that its first years were
troublous ones for the shareholders. The squires objected to the
river, believing it would overflow their lands or reduce them to
swamps and destroy the roads. The city residents adopted the use of
the water slowly. The shares were nominally worth £100 apiece, but for
nearly twenty years the income was only 12_s._, or $3, per share. In
1736 a share was valued at £115 10_s._, and by 1800 it had risen to
£431 8_s._ With the first years of this century the company prospered,
and its benefits were widely applied, reflecting this change in the
value of its capital. In 1820 a share was worth £11,500 and in 1878
the fraction of a share was sold at a rate which made a full share
worth £91,000. In 1888 the dividend distributed to each share was
£2,610. Eleven years later, in July, 1889, a single share was sold for
£122,800, or nearly $600,000. The nominal capital of the company in
1884 was £3,369,000, and besides its water franchise it holds large
estates and valuable properties. While the actual real estate
controlled by the corporation accounts for some of this remarkable
rise in the value of the shares, a greater and more lasting cause was
the possession of an almost exclusive privilege or franchise which
assured a handsome and ever-increasing return on the investment. Had
all the other property been deducted from the statement of the
company's assets, there would have remained this intangible and
immeasurable right created and conceded by its charter and long
usance.
A definition of a franchise has been given by the Supreme Court in
terms of sufficient general accuracy to be adopted: "A franchise is a
right, privilege, or power of public concern which ought not to be
exercised by private individuals at their mere will and pleasure, but
which should be reserved for public control and administration, either
by the Government directly or by public agents acting under such
conditions and regulations as the Government may impose in the public
interest and for the public security."[14] A necessary condition,
then, is a public interest in the occupation or privileges to be
followed. The good will of a person or individual trader is not a
franchise in this sense, though a franchise may be enjoyed by an
individual as well as by a corporation, and good will may rest upon
the privilege implied in the franchise.
[Footnote 14: California vs. Southern Pacific Railroad, 127 U.
S., 40.]
The recognition of franchises, a species of property "as invisible and
intangible as the soul in a man's body," as a proper object for
taxation is now beyond any dispute. It is peculiarly appropriate as a
source of revenue for the exclusive use of the State, inasmuch as the
grant of franchises emanates from the State in its sovereign capacity.
In the case of Morgan _vs._ the State of Louisiana, Justice Field, of
the Supreme Court of the United States, said: "The franchises of a
railroad corporation are rights or privileges which are essential to
the operation of the corporation and without which its roads and works
would be of little value, such as the franchise to run cars, to take
tolls, to appropriate earth and gravel for the bed of its road, or
water for its engines, and the like. They are positive rights or
privileges, without the possession of which the road or company could
not be successfully worked. Immunity from taxation is not one of
them."[15] Further, the extent to which this taxation of franchises
may be carried rests entirely in the discretion of the taxing power,
subject only to constitutional restrictions.
[Footnote 15: 93 U. S. Reports, pp. 217, 224.]
The great difficulty in applying such a tax lies in the methods of
reaching an understanding on the value of the franchise. How can this
indefinite something be made visible on the tax books? In many
instances the franchise may be regarded as inseparable from the real
property of the corporation. The rails of a tramway, the poles and
wires of a telegraph company, the pipes and conduits of a gas company,
are real and tangible things, necessary to a proper conduct to the
respective functions of the corporations. But the right to lay tracks
in the public streets, to sink pipes under the streets, or to string
wires overhead is as necessary a possession and as essential to the
performance of what the corporation was created to accomplish. Whether
this permits the franchise to be regarded as "real estate" and so
offers it for taxation is a question of some theoretical interest, but
of little practical importance.[16] Unless the franchise is regarded
in this way, as belonging to real estate, or as forming a taxable
entity apart from other property, it would be simpler to reach it
through a corporation tax in one of the many ways open for applying
that tax.
[Footnote 16: A recent law of New York is very full on this
point: