excise taxes imposed by the Federal Government, there is evidently a
distinct change in purpose. However subject to abuse the tax on
distilled spirits has proved, and however frequently its agency has
been invoked to exaggerate the profits of interested parties, there
has never been an open and avowed intention of turning it to private
gain. The policy that has become almost inseparable from the customs
tariff, and is by most people regarded as inherent in all customs
legislation, has not been transferred to the internal revenue taxes
save in one or two instances of recent application and secondary
importance. The danger of permitting taxation to be employed by either
State or Federal Government for a purpose other than that of raising
necessary revenue has been dwelt upon. When a police power is
exercised in conjunction with a tax framed for revenue, and is
regarded as the more important function to be performed, the policy
requires careful examination. If revenue is the real object, the
method of imposing the tax and the determination of the rate which
will give the highest return with the least interference in the
production, distribution, and export of the commodity taxed remains to
be defined. If restriction in manufacture, sale, or consumption is
intended, the question is no longer one of taxation proper, but of
police regulation. The Federal taxes on oleomargarine, filled cheese,
and mixed flour are of the nature of police inspection, and the tax on
the circulation of State banks, amounting, as it has, to prohibition,
is a still more extreme exercise of the same power. The imposition and
collection of these duties have a penal quality, an intention to
restrict or prohibit the production or sale or use of some article.
They are not properly taxes; they are not a proper application of tax
principles, but have originated, in private interest, or in the
deliberate intention to constitute a monopoly, State or other.
The approach of war, or its actual presence, is made the excuse of an
extension of taxes, and the Federal Government tacitly admits its
inability to increase indirect taxes on consumption by its general
resort to an extension of the internal taxes and excise. The
instrumentalities of business offer a fair field for stamp taxes, and
these, when not so burdensome as to invite evasion, are acceptable
because of the ease with which they are assessed and collected. A
specific duty on the more important acts of commerce and daily
business may be evaded, it is true, but not when the paper or
instrument taxed must become public evidence. Stamps of small
denomination on bonds, debentures, or certificates of stock and of
indebtedness; on a bill of sale or memorandum to sell; on bank checks,
drafts, or certificates of deposit; bills of exchange, draft, or
promissory note; money orders and bills of lading; on express and
freight receipts, on telegraph messages, and a large number of legal
and other instruments, such as leases, mortgages, charter party,
insurance policies--these are simple duties, productive of large
returns, and not unequal in their weight. The law of 1898 included
such stamp taxes, as well as others on proprietary articles and wines.
It was not simple to predict the incidence of these rates, and the
distribution has been unequal. The charges of one cent on telegraph
messages and express packages are paid by the sender in the larger
number of cases, the companies merely adding a penny to their rates.
This was not the intention of the law, and the courts have held that
it was not so intended. The individual is powerless in a few
transactions, and only the great concerns are able to avail themselves
of this decision. The duties for seats or berths in a parlor car or
for proprietary medicines, are paid by the company or manufacturer,
though in certain preparations the price to the consumer was advanced
on the passage of the act. With all their drawbacks, and they are not
few in number, these stamp duties afford a ready means of obtaining a
good revenue without increasing unduly the general burdens of
taxation. The law of 1898 was modeled after that of 1863, and many of
the rates and descriptions will undoubtedly be incorporated into the
permanent internal revenue system of the country--a measure enforced
by the remarkably unequal returns derived from the customs.
The existing system of internal duties is even more defensible than
the tariff as a source of revenue. Its inequalities, due to the haste
in which the measure was prepared and the inexperience of those who
framed the provisions and fixed upon the rates, are worn away in use,
and where the rates are moderate and are not infected with a penal
quality, the community adapts itself to them, accepting them as a
necessary convenience. In the United States this spirit of
acquiescence is most marked, not only because of a natural patience of
tax burdens, but because of as natural a fear of other untried and
more radical or oppressive measures. The situation of "business" when
a general tariff bill is pending in Congress is one almost of panic,
and the scramble to protect interests or to obtain some special
advantage against rivals has become a scandalous feature of tariff
revision. Except in the instances named, as oleomargarine and filled
cheese, the internal revenue system presents less of a field for such
an exhibition of greed and self-interest; but the spirit duties, and
even the tobacco rates, may be used in such a way as to favor the
large manufacturer against the small concerns, and are to that extent
misused and applied for purposes antagonistic to those properly
pertaining to taxation. In a time of tax revision the suggestions for
new taxes and ideas for changing the old are freely offered, and do
not stop short of absolute prohibition of an industry, of total
destruction of interest. The vagaries of a legislative body under such
suggestions have instilled into the public mind a wholesome fear of
its possible acts and fully explain the timid and uneasy condition of
"business" when a general tax measure is under discussion. Whether it
be the manufacturer or producer seeking protective duties, or the
Granger or Populist asking for taxes of confiscation against capital
and accumulated property, the spirit is the same--a desire to turn
taxation to improper purposes.
The tendency of Federal taxation to turn to taxes on capital and the
instruments of "business"--direct, rather than indirect taxes--found
its most extreme illustration in the income tax of 1894, the
principles of which have already been discussed. It finds a more
moderate and restricted exercise in certain graduated duties under the
act of 1898, and especially in the duties on legacies and distributive
shares of personal property. It was no sentimental or even theoretical
argument based upon the right of inheritance or the inequality of
taxation that led to the adoption of these duties in 1898; it was only
a blind following of the provisions of the earlier act, and the
consciousness that revenue must be had at every cost, and no possible
source of income should be overlooked. Yet the legacy tax is
essentially a tax of democracy and defensible for much the same
reasons as a tax, whether graduated or not, upon income might be.
By the act approved June 13, 1898, entitled "An act to provide ways
and means to meet war expenditures, and for other purposes," the
national Government imposed a tax upon legacies and distributive
shares of personal property. This tax has been one of the features of
the tax law of 1862 (§§ 111-114), but in a much simpler form and in a
form better calculated to produce a revenue. This earlier law imposed
a duty on all legacies exceeding one thousand dollars in amount, but
very properly made a distinction in the rate according to the degree
of connection between the person from whom the property came and the
receiver of the legacy. Thus, lineal issue or lineal ancestor, brother
or sister, should pay at the rate of seventy-five cents for each and
every hundred dollars of the clear value of the interest in the
property. A descendant of a brother or sister of the decedent paid
double this rate; an uncle or an aunt was taxed three dollars for
every one hundred dollars passing; a great-uncle or a great-aunt, four
dollars; and persons in any other degree of collateral consanguinity,
or a stranger, or a body politic or corporate, five dollars. The only
exemption made was in favor of a wife or husband. As only personal
property was intended to be reached, all land and real estate escaped
the duty.
The law of 1898 made important modifications in these rates and manner
of assessing. In the first place, the rates fell only on legacies in
excess of $10,000, a limit ten times larger than that of the law of
1862. The degrees of relationship were the same, the rates were copied
from those of the earlier act, and the same exemption of property
passing between husband and wife was admitted. But the idea of a
progressive tax was ingrafted into the law. Thus, the old rates
applied only to legacies of more than $10,000 and not more than
$25,000. When the property passing was valued between $25,000 and
$100,000 the rates were multiplied by one and a half; between $100,000
and $500,000, they were multiplied by two; between $500,000 and
$1,000,000, they were multiplied by two and a half; and by three when
the property was in excess of $1,000,000. In restricting the tax to
personal property passing by inheritance the measure aims at a crude
means of making the burdens of personal more nearly approach those of
real property. No such consideration controlled the views of those
responsible for the act, and, after all, it offers only a question of
theoretical interest. The inheritance tax collected in many of the
States may have owed their adoption to such an idea, but the United
States, in taking up these duties, merely saw a means of obtaining
revenue without regarding the actual results of the tax on the estates
paying it.
"The inheritance tax in one form or another has come to stay, and new
States are being added every year to the list of those which have
adopted it. Five years ago it was found in only nine States of the
Union--Pennsylvania, Maryland, Delaware, New York, West Virginia,
Connecticut, Massachusetts, Tennessee, and New Jersey. During the
first half of 1893 Ohio, Maine, California, and Michigan were added to
the list, though the Michigan law was afterward annulled because of an
unusual provision in the State Constitution which was not complied
with. In 1894 Louisiana revived her former tax on foreign heirs;
Minnesota adopted a constitutional amendment permitting a progressive
inheritance tax which has not yet been given effect by the
Legislature; and Ohio added to her collateral inheritance tax a
progressive tax on direct successions. In 1895 progressive inheritance
taxes were adopted in Illinois and Missouri, and an old proportional
tax was revived in Virginia; and last year Iowa adopted in part the
inheritance tax recommendation of her revenue commission."[52]
[Footnote 52: Max West, in North American Review, May, 1897, p.
635.]
The real problems are to be encountered in local taxation. The many
different methods used in the different States, the want of uniformity
in the local divisions of each State, and the extraordinary diversity
in the interpretation or application of tax laws by the courts and
executive authorities of the States have introduced a confusion, to
end which, many would invoke the intervention of the Federal
Government. The haphazard manner in which the laws have been framed
and passed is only the least notable explanation of the variety of
phrase and interpretation to be found. Even were the Federal
Government to establish definitions, and frame rules of uniform
assessment, there would still be room for difference. The customs
tariff is known to be variously applied in the different ports of the
country, and there is greater certainty in the tariff rate than could
be found in a tax resting on the assessed valuation of land, for
example.
The difficulty encountered by France in its attempt to determine the
net income from land for the purposes of taxation carries an important
lesson. Failing to obtain uniformity of appraisement of this net
income under the crude method first employed--of basing it on the
character of soil and nature of cultivation, deducting the expenses of
cultivation--a _cadastre_ was decreed.[53] In this _cadastre_ each
particular piece of property was recorded, with its boundaries, its
manner of cultivation, and its net rental. Begun in 1807, it was not
completed until 1850, and proved of little value, as no provision had
been made for recording the changes in cultivation, rentals, or other
conditions, except those of ownership, buildings, and exemption from
taxes. Instead of proving a successful means to a desired end, it
"turned out to be a stupendous disillusionment." "The experience of
both the western Prussian provinces and of France showed that the
newly constructed _cadastre_ was of considerable service in equalizing
the land tax within a relatively small area, but not as a basis for
alterations in the contingents to be paid by large and widely
separated regions. The officials in charge of the _cadastre_ on the
Rhine, as well as those in France, themselves admitted that any
computation of net income was uncertain; that the coincidence of the
figures obtained by the cadastral computation with the actual net
income could never be assured; that the figures afforded by the
_cadastre_ were rather of the nature of a proportion, while uniformity
of assessment was to be attained rather by observation of the business
transacted than by depending on the figures obtained by
computation."[54] This effort to discover and record the net income
from land was a failure.
[Footnote 53: The word _cadastre_ was derived from the Latin
_capitastrum_, or register of _capita_, _griga_, or units of
territorial taxation into which the Roman provinces were divided
for the purposes of _capitatio terrena_, or land tax. It is of
modern use and is locally found in Louisiana.]
[Footnote 54: Cohn, Science of Finance, p. 477.]
So thorough an experiment, carried through so long a time, and
presenting an example to be avoided, was in fact imitated by Prussia
under a law of 1865. In each division (_Kreis_) was appointed a
commissioner, who was chairman of a committee, the size of which
ranged from four to ten members, according to the size of the
division. One half of this committee was appointed by the
representatives of the division and one half by the central
Government. A number of divisions formed a department, with its
commissioner and committee of similar composition as in the division,
and above all was a central committee, presided over by the Minister
of Finance. The valuation was accomplished in less than four years.
The method was applied only to land employed in agriculture or
forests; a separate law provided for the taxation of buildings and
gardens. In the end the results were no better than those obtained in
France. In either case a plan too refined to work to advantage had
been employed, and, apart from its simplest function, that of making a
general survey of the land and the uses to which it was applied, it
could not advance the theory of a proper land tax. No modification
could make it a better instrument of taxation. The gross income from
land as a taxing basis would involve heavy injustice, and further
supervision by government officers could not do away with the
mechanical difficulties of securing uniformity. The English plan of
making rental value the foundation is more easily applied and gives
better results.
If land be difficult of assessment, personal property offers a very
much more difficult problem. On this particular question this country
has much to learn from the experience of other governments. In Great
Britain a Royal Commission has been making a study of local taxation,
and, in a preliminary report, concludes that an alteration in the law
for the purpose of obtaining a uniform basis of valuation in England
and Wales is a necessary preliminary to any revision of the existing
system of local taxation. It has been already stated that the poor
rate constituted the basis of valuation of property for local rates.
In its development the system has become more complicated. Two
valuations of the same property may be made for raising imperial
taxes--namely, one for the income tax, and one for the land tax. Three
valuations of the same property may be made for raising local
rates--namely, one for the poor rate, one for the county rate, and one
for the borough rate. Here, then, are five different valuations in
activity.
Of these the parish was the first and most important division, having
been introduced in the sixteenth century, when the dissolution of the
monasteries had raised the question of poor relief. It was adopted for
convenience, as the contributions were at first entirely voluntary;
but as the problem of the poor increased in importance, compulsion was
applied, and at the beginning of the seventeenth century, by the acts
of Elizabeth of 1597 and 1601, compulsion was fully established and
the parish adopted as the area for levying rates for the relief of its
poor. It now became necessary to define more specifically the persons
liable for this rate, but the law framed no system by which
assessments were to be made or rates collected. A distinction was made
between the occupier of certain properties (such as lands, houses,
coal mines, or salable underwoods) and an inhabitant of the parish.
The occupier was to be taxed upon the basis of the annual benefit
arising from the property situated in the parish; but the inhabitant
was taxed not in respect to any specified subjects, implying an
intention to tax them upon some other basis. This raised the question
of "ability," and how that question was to be determined. The act said
nothing that could point to personal property, "and it was only on the
ground of his being an inhabitant that any owner of personal property
could be rated for that property, because there was no word in that
statute to include him, except the word inhabitant. Under that
statute, therefore, there was necessarily a distinction between
residents and nonresidents, because the resident would be ratable for
his personalty within the place, the nonresident not. The distinction,
however, under that statute applied only to those kinds of property
which the statute did not specify, for the occupier of lands, houses,
etc., and whatever the statute enumerated, was ratable whether he were
resident or not."[55] And when the judge of assize was asked to give
an opinion he decided that lands should be taxed equally and
indifferently, but an additional tax could be laid on the "personal
visible ability" of the parishioner. Further, "all things which are
real, and a yearly revenue must be taxed to the poor." Yet there were
limitations on this apparently wide interpretation, and as early as
1633 it was only visible properties, both real and personal, of the
inhabitants within the parish, and only within the parish, that could
be taxed. The property to be assessed must be local, visible, and
productive; it must consist only of the surplus left after deducting
debts; it must be rated according to the profit produced; and its
nature must be distinctly specified. "Consequently, such subjects as
wages, pensions, easements, profits derived from labor and talent,
profits from money invested or lent elsewhere, and furniture, were
exempt."
[Footnote 55: Abbott (Chief Justice) in R. _vs._ The Hull Dock
Company, 3 B and C, p. 525.]
The absence of all attempts to tax or value property other than what
was visible and tangible continued to the reign of Queen Anne, when a
single decision of the court pointed to the taxation of the stock in
trade of a tradesman, a decision that does not appear to have been
acted upon. As late as 1775 Lord Mansfield said, "In general, I
believe neither here nor in any other part of the kingdom is personal
property taxed to the poor." At all events, it could not be taxed
unless usage could support it. Toward the end of the century, when
taxation for the Napoleonic wars was touching more intimately the
concerns of the people, the idea of subjecting personal property to
the poor rate was favored, but nearly half a century passed before it
attracted attention. In their report for 1843 on local taxation the
poor-law commissioners gave the following summary of the status of
this question:
"The practice of rating stock in trade never prevailed in the greater
part of England and Wales. It was, with comparatively few exceptions,
confined to the old clothing districts of the south and west of
England. It gained ground just as the stock of the wool staplers and
clothiers increased, so as to make it an object with the farmers and
other rate payers, who still constituted a majority in their parishes,
to bring so considerable a property within the rate. They succeeded by
degrees, and there followed upon their success a more improvident
practice in giving relief than had ever prevailed before in
England.... When the practice of rating stock in trade was fully
established in this district, the ancient staple trade rapidly
declined there and withdrew itself still more rapidly into the
northern clothing districts, where no such burden was ever cast upon
the trade."
A final determination of the question was imposed upon Parliament by
the pressure of the manufacturing and commercial classes arising from
a decision in the case of R. _vs._ Lumsdaine, in 1839, looking to the
taxation of personal property. In consequence, an act was passed (3
and 4 Vict., c. 89), and has remained in force until the present time,
exempting an inhabitant from any tax "in respect of his ability
derived from the profits of stock in trade or any other property, for
or toward the relief of the poor." Thus it is that the English local
taxation has managed to keep clear from the bog of assessing personal
property, and the annual value of immovable property, such as lands
and houses, within the parish has come to be selected as the simplest
and most practicable basis for assessments. The history is of high
importance, because the basis of the poor rate was adopted as the
basis for all other rates levied in local taxation. Whatever confusion
has been introduced has arisen from other causes, such as the
constituting poor-law unions containing more than one parish, the
levying of county rates, a county having a boundary other than a
parish or a union, and the assessing for rates by parish officers who
acted independently of each other. Many efforts have been made to
introduce a uniform system of assessment, but without success. One of
the clearest thinkers on this subject was Sir George Cornewall Lewis.
In appearing before a committee on taxation, in 1850, he said: "We
have never recognized the principle of having one valuation for all
the different rates. If that principle were once admitted, the
inducement to have an accurate and complete valuation would be at its
maximum, because then you would know that whatever charge might be
imposed it would be imposed upon that valuation, whereas if there is
one assessment for one rate and another assessment for another rate,
and an amended assessment for a third rate, no one cares much about
making any assessment perfect. This is one defect of the present
system of valuation."