TAXATION FOR NON-FISCAL PURPOSES A Thesis Presented to the Faculty of the Department of Banking and Finance University of Southern California In Partial Fulfillment of the Requirements for the Degree Master of Business Administration hy Henry F. Schultz May 1941 UMI Number: EP43157 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publ sh ncj UMI EP43157 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106 -1346 This thesis, w ritten by ............... u n d e r the d i r e c t i o n o f hXs.. F a c u l t y C o m m it te e , a n d a p p r o v e d b y a l l it s m e m b e r s , has been presented to a n d accepted by the C o u n c i l on G r a d u a t e S t u d y a n d Research in p a r t i a l f u l f i l l m e n t o f the re q u ire m e n ts f o r the degree o f -MASTER-BUSIHESS-.ADMIMXST-HAT-IOBI-. Dean Secretary D a t e .M & J ..l.y .1 9 .b X . Faculty C om m ittee C hairm an ....... TABLE OF CONTENTS CHAPTER I. II. III. IV. V. INTRODUCTION PAGE ............... 1 NATURE AND FUNCTION OF THE STATE . . . . . . . . TAXATION, ITS DEVELOPMENT ............. THE QUESTION OF SOCIAL TAXATION . . . ........ ARGUMENTS FOR AND AGAINST NON-FISCAL TAXATION . . BIB L I O G R A P H I ....................................... 8 30 59 77 91 CHAPTER I IINTRODUCTION The first task in the scientific study of any problem is to clearly define the problem itself, and all related sub ject matter. employed. Then any one of several techniques may be Perhaps the most popular approach and the one I intend to use is to examine the factors of the past which have built the present situation into a problem. Without an appreciation of such preceding events it is questionable if an accurate evaluation of the current problem is possible. The Dictionary of Business and Finance-*- defines "taxation" as: ""The process by which a tax is imposed upon individuals and enforced for the purpose of providing revenue to the government of a state."" "tax" as: In turn it defines the word ""A compulsory contribution by the taxpayer to meet the cost of government without any specific return ex✓ cept a share in the general benefits of government."" At first reading this sounds comparatively simple, yet upon further study the inevitable conclusion is that the study of taxation is far from a simple matter. For the average layman, the word means little more than that he must -*-The Practical Handbook of Business and Finance (Garden City, New York: Garden“^ity Publishing Company, 1930). put out a certain amount of money at regular intervals to his government and what then becomes of it he doesn't know, and in most cases, doesn't care. On the other hand, those per sons who are striving for a better civilization in which to live find in the intertwining meshes of taxation a most fascinating problem. The interrelationships and effects of taxes are so interlaced that it is practically impossible to make any clear picture of the conglomeration, yet many folk are attempting to do this very thing. Since some form of available revenue is essential to the existence of any state, it seems certain that taxes must have existed in one form or another throughout history, or at least so long as there has been any semblance of state hood in existence. This is true, yet it has only been in recent years that any thorough study of the field has been made. This work has however progressed to such a point that William Raymond Green feels that we may think of taxation as a science, although it can hardly yet be con sidered an exact science. He also says that like medicine, taxation may be looked upon as a progressive science. The progress made in recent years has been almost phenomenal considering that the beginning of its scientific study can hardly be dated any earlier than 1776 with the publishing of Adam Smith's famous "Wealth of Nations", in which the author laid down his now famous canons of taxation, which are followed even today, at least in theory. As we read further into the literature on our subject, we find a large number of definitions of the word "tax”. Each of them is different, yet they all have certain features in common. C. F. Bastable of the University of Dublin says: n”A tax is a compulsory contribution of the wealth of a person for the service of the public powers. P The late Professor E. R* A. Seligman writes: A tax is a compulsory contribution from the person to the government to defray the expenses incurred in the common interest of all, without reference to special benefits conferred.3 Another definition is advanced by Antonio de Marco: The tax is a share of the income of citizens which the state appropriates in order to procure for itself the means necessary for the production of general public services.4 These various definitions agree in at least three points which may be regarded as essential to any satisfac tory definition of a tax. The first of these is that a tax is a contribution from the citizens, individually, or in ^C. F. Bastable, Public Finance (London: and Company, Ltd., 1932), p. 263. Macmillan 3E. R. A. Seligman, Essays in Taxation (New York: The Macmillan Company, 1925), p . 263. 4Antonio de Marco, First Principles of Public Finance (New York: Harcourt Brace and Company, 1935), p. 111. groups, for the general or common use of them all as represent ed in their government. As pointed out by Professor Seligman these contributions are enforced without reference to any special benefits conferred upon the citizens. This dis tinguishes the tax from various other levies of a government upon its citizens, such as the special assessment, which is also compulsory but which is measured ty the benefit received, and the fee which is a noncoercive payment to the government for an administrative service. This contributory element distinguishes the present concept from that held in previous times, particularly during the Seventeenth and Eighteenth centuries when a tax was considered a direct payment for definite services rendered. This service was generally considered a protec tion, but in any case, each side was considered to have given the other a tquid quo pro.* As an example of this idea we find in the "The Leviathan" written in 1651 by Thomas Hobbes The impositions laid on the people by the sovereign power are nothing else but the wages due to them that hold the public sword to defend private men irigthe exercise of their several trades and callings. A second characteristic common in the modern definitions of a tax is that it is a personal obligation. 5 Harley Leist Lutz, Public Finance (New York: D. Appleton & Company, 1924), p . ?A6 ftn. The state is looked upon as an association of persons, and it is these persons, as such, who are responsible for its sup port, This obligation is universal and applies to all, whether citizens or aliens, who are subject to its jurisdic tion, Upon this ground it becomes the right of a state to tax its citizens whether they are living at home or abroad, and to tax all other persons who receive any advantage from activities conducted within its borders. This emphasis upon the compulsory aspect of the tax in the modern interpretation of it is another point in con trast with the earlier definitions. The implication of the older theories was that the taxpayer could refuse the services of the state and so avoid payment of the tax, since the entire concept was based upon the idea of a tax as a part of a bargain or contract. This idea was based upon the fact that in feudal times the ruler depended upon his own possessions and his domain for all of his income, as a result, the citizens frequently made contributions to him for the purposes of the state. These gifts may have been prompted by-the love of the people for their ruler, or may have arisen from,an understanding that it was better to give than to be levied upon. Recorded history is not too clear upon this point. The late Professor Seligman points out in his study of the evolution of taxes that there have been a number of stages covering the entire period of growth from "donum” to "imposition”. The original idea of a tax, as he points out, is that of a gift as represented by the term "donum". Later the idea of assistance to the state, expressed in the word "aid" or "contribution" entered the picture, followed by the idea of sacrifice, and finally the last state, "compulsion". Thirdly, these definitions seem to agree that the purpose of the tax is to provide revenue for the service of the public powers. This does not mean to say that all money collected through taxation will be spent to the advantage of the state. There are a number of ways in which the funds may be dissipated. Many instances are known where money has been spent foolishly much to the harm of the state, or it is possible that the public revenues may be usurped by dishonest authorities. These, however, are exceptions and so cannot be deemed to disprove the above contention although they may interfere with its proper functioning. As a result it would appear rather useless to attempt to frame a definition of the term tax to include such contingencies. However, there is an additional factor which is becoming of importance in recent times, and that is that taxes may be used for other honest purposes than for the service of the public powers. It is these other possible uses of taxes, for social pur poses, that this paper intends to discuss. Such methods have been supported by some public finance authorities and condemned by others, such as Professor Lutz who contends that taxes should be used as a source of public revenues and for no other purposes. He, however, goes on to state that the modern tax concept does not in any way seem to forbid the use of taxes for other purposes, and as such it may be con•<5» eluded that.such methods may be inferred to be proper. It seems extremely interesting to the present writer that such emphasis upon this question should be made as late as 19S6 by Mr. Lutz in the face of so many new.taxes in our own and in other lands which are solely, or largely, for social purposes. The growth of such taxes has only taken place in this country in recent years, but its develop ment has been rapid. The trend is very definite and indi vidual instances are becoming more frequent. We have passed the time when mere fact that revenue is to be raised for social purposes can be made a successful objection to a tax.6 ^William Raymond Green, The Theory and Practise of Modern Taxation (Chicago: Commercial Clearing House, Inc., 19sS)7 p ." 17': CHAPTER II NATURE AND. FUNCTION OF THE STATE Historians and anthropologists, who have studied the lives of early peoples, have pointed out to us that although there apparently was a time when men lived comparably sepa rate lives, they quickly learned the advantages that were to be gained from associating with one another. In the begin ning, it was merely family groups working together, but shortly, different families started working together in a common cause. These groups grew larger and larger, and there gradually evolved what may be looked upon as the first state. At just what stage of development the state may be said to have appeared is somewhat questionable due to the greatly varying definitions of the term put forward by the different authorities. Perhaps the simplest beginning is suggested by Professor Jens P. Jensen, when he writes of the «inevitableness of the state.01 In his opinion a state of some kind appears as soon as persons start co-operating in a common cause. These relations with one another make necessary a functioning authority as to the rules of living and working together, and for dealing with violations of “Kxens P. Jensen, Government Finance (New York: Thomas Y. Crowell Company, 1957), p T T T these rules. These duties he considers the minimum functions of the state, A slightly more advanced stage seems necessary in the writings of Emory S. Bogardus who says that until there is a storage of property suggesting a defense against attack there is not a state. Thus in the primitive hunting society there was" no true state, but with the appearance of the herdsmen, states began coming into existence. In order to keep the large herds of live stock, enemies captured in battle were not killed but enslaved. Such exploitation of human labor is, in his opinion, the economic basis of the state. In summary he writes: "^Social classes develop and economic differentiation takes place. Then comes a ♦definitely circumscribed limit* and the practise of ♦dominion* is completed."**2 This idea of the development of a state is similar to that given by Frans Qppenheimer of the University of Frankfort-on-Main for he writes: The State, completely in its genesis and almost completely during the first stages of its existence, is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from abroad. Teleologically, this dominion had no other purpose than the economic 2 Emory S, Bogardus, The Development of Social Thought (New York: Longmans, Green & Co., 1940), p. 378. 10 exploitation of the vanquished by the victors • . • No primitive state known to history originated in an other manner,3 ‘ From this he goes on to trace the development of the state from its crude beginning to a truly national state. This period of development is divided into six definite stages by Mr, Oppenheimer: fights; (2) (1) Robbery and killing in border Enemies are no longer murdered but are kept as slaves (also pointed out by Professor Bogardus); (5) Peasant groups pay tribute, which may be looked upon as the begin ning of taxation; (4) The uniting of the lands of the aggressor and of the defeated neighbors; (5) The lord or ruler arbitrates the differences between the subjects, and courts are set up; (6) achieved* A sense of »nationality* is Although this may appear to make a rather sordid picture, Professor Oppenheimer feels that all of our states have followed this same course to a greater or lesser degree, A somewhat simpler development is described by L. F, Hobhouse who would divide the state *s growth into only three stages, based upon kinship, upon authority, and upon citizenship. The kinship type of state was that which existed during early patriarchal society, but these soon passed out of existence, whereas the states based upon 3Franz Oppenheimer, The State, translated by John M. Gitterman (New York: B. M. Huebsch Company, 1922), p, 15* 11 authority and citizenship are still in existence today, Mr, Hobhouse*s concept of an authoritative state is exemplified in the monarchlal or autocratic form of government, which reached its ultimate in the concept of *divine right*, and in the German organic theory of the state* This idea of the state pictures it as a superhuman and would seek the solu tion of its problems in the same manner that difficulties in the human body are corrected. Thus pictured, political, economic, and social institutions become literally organs of the body-politic, or functions of the economic order, in much the same way that the heart is an organ performing a necessary function in the human body* This theory was early supported by Thomas Acquinas, and even today has its ex ponents, Writing in the July 1938 edition of the "Scientific Monthly", W, H, Manwearing of Stanford suggests that it should be given more consideration in the study of our own problems today, particularly those having to do with labor. However, despite its present scattered support, it has not been seriously followed since the collapse of the German Empire, leaving the individualistic theory in force, by which the state is an organization of individuals who have learned to co-operate in order to satisfy their different individual wants, as well as those of the group. In this way each person becomes a *citizen*, reaching his ultimate position in a pure democracy. In such a state, government 12 is the will of the masses, expressed either directly, or indirectly through their representatives. The basis of such a setup is individuality and individual liberty to do as one chooses. But these principles of liberty, political, social, economic, intellectual, and religious which appeared to be gaining an upper hand following the first World War seem to be being replaced, in recent years, by a new doctrine, which, although preached by philosophers many years ago, did not receive a large public support for some time. Nicholas Murray Butler has referred to this new concept which is sweeping the Europe of today as an open and declared enemy of our historic ideas of freedom. The doctrine was first propounded by the German philosopher, G. W. F. Hegel, who taught that the state must always be antecedent and superior to the individual citizen, and that the state has in itself the power, authority, and right to turn the individual to such purposes and by such methods as may seem most desirable and wise. He considers that the constitutional monarch is the ideal form for a state. In his opinion pure monarchy and democracy have only accidental and temporary justifica tion, and all of their advantages are also existent in the constitutional monarchy. These features, though vital, are really subsidiary to the more important consideration of the state. Although Hegel spoke of his state as an actualization of concrete freedom, all of those who admire • I democratic methods must take exception to this contention. This philosophy makes an obvious challenge to the ideas of democracy and to the rights of the individual as it completely submerges the will of the individual citizen to the will of the state. Under it individuals do not participate in the building of a great state for they are merely units of a huge machine which moves on independent of the desires of its individual parts* In the beginning this was taught only as an abstract theory, but it has been made a reality through the efforts of Karl Marx and others, who have translated it into real doctrines of antagonism to free institutions. Its threat has become so real that the very foundations upon which our institutions are built are threatened. Although not so radical in his viewpoint, Aristotle also recognized the superiority of the state over the individual. In his own words: . . . it is evident that the State is a creation of nature, and that man is by nature a political animal. And he, who by nature, and not by mere accident, is without a state, is either a bad man or above humanity . . . Further, the state is Iy nature clearly prior to the family and to the individual, since the whole is of necessity prior to the part; for example, if the whole body is destroyed, there will be no foot or hand, ex cept in the equivocal sense, as we might speak of a stone hand; for when destroyed the hand will be no better than that. But things are defined by their working and power; and we ought not to say that they are the same when they no longer have their proper quality, but that they only have the same name. The proof that the state is a creation of nature and prior S 14 to the individual is that the individual, when isolated, is not self-sufficing; and therefore he is like a part in relation to the whole* But he who is unable to live in society, or has no need because he is sufficient for himself, must be either a beast or a god: he is not part of a state*4 In contrast to this idea, instead of holding that the state is prior to the family, Confucius considers that the state is the logical step after the family. upon the state as merely a larger household. He looks His basic idea was that the ruler of a state need only apply upon a larger scale the same principles to his state which would apply to his household. One cannot instruct others who cannot instruct his own children. Without going beyond the family, the prince may learn all the lessons of statecraft, filial piety by which the sovereign is also served, fraternal submission by which older men and superiors are also served, kindness by which also the common people should be ministered unto . . • From the loving example of one family, love extends throughout the state; from its courtesy, courtesy extends throughout the state; while the ambition and perverse recklessness of one man may plunge the entire state into rebellion and disorder.5 The introduction of the term "State”, however, into modern political literature in the sense of a body politic first appeared in the early part of the sixteenth century in Italy. Earlier meanings of the word ’’status" and its ^W. D. Ross, editor, Aristotle Selections (New York: Charles Scribner’s Sons, 1927), pp. 28^-88, ^Miles Menander Dawson, The Basic Thoughts of Confucius (New York: Garden City Publishing Company, 1939), P. 172. 15 modern cognates had been used in reference to estates or a group of estates* The use of the term as a generic name for a body politic, whether republican or absolute, was probably fixed by Ifaehiavelli in his book "The Prince”• Its earliest use in English in this connection appears in Starkey’s ’’England” (1538), a book which was based upon Italian authorities* The meaning became common in France and England during the sixteenth century and was adopted into official language in the expression ’Secretary of State’ an office held by Robert Cecil under Queen Elizabeth* In English the use of the word was probably extended as the older term "commonwealth” was limited to non-monarchial governments, but it has never even today become a precise word in English law. As a generic term the word was used from the start to refer to a land, a people, and a government. In its present usage it implies some lower limits of size and civilization, as compared with the early tribes, and also some degree of political independence, although it is widely applied to governments which do not claim sovereignty. As a result the word commonly denotes no class of objects that can be identified exactly, and for the same reason it signifies no list of common attributes which bears the sanction of common usage* The word therefore must be defined more or less arbitrarily to meet the exigencies of 16 the system of jurisprudence or political philosophy in which it occurs* The fact that the term usually emphasizes political organization makes it specially difficult to draw a clear line between the two words "state” and "government”. During the era of royal absolutism, the distinction was of no particular importance since the sovereignty of the state was embodied in the person of the monarch, while the people and the land figured only as patrimony. The distinction is of fundamental importance, however, for a juristic theory of the state, A series of German theorists from Seydel to Jellinek looked upon statehood as a legal relationship thus breaking down the patrimonial concept in favor of a more juristic view. The monarch and his government became mere organs of the state. In this connection Kelsen has argued that even the juristic concept of the state produces only confusion being merely an invention of a fictitious entity to embody, what is really only a property of the law itself. The juristic theory of the state should be clearly distin guished from the sociological theory of the state. Thus, to those who advocate the former ideas, the state is for the the purposes of practical administration of the government, and they are not concerned about social ethics or prin ciples, This seems to be the idea of the late Pope Pius according to an article appearing in the "Commonweal” by 17 James H, Ryan. fi To the Pope the state is whatever form of government has been adopted freely ty a group of people, regardless of what particular form it might take. nizes the state as the supreme governing body. He recog However, as Mr. Ryan points out, this need not be federal, as is ex emplified in the case of the States of the United States. Here the supreme power, theoretically at least, rests in the government of the individual states and not in the national government• Writing in 1791, Thomas Paine pointed out that government is no more than the management of the affairs of a nation. This power is not the private property of any individual or group but appertains only to the nation as a whole, and any individual powers or authority that do exist are given to him by the state. Abraham Lincoln, writing in 1834 said: The legitimate object of government is to do for the people what needs to be done, but which they cannot, by individual effort, do at all, or do so well for themselves.' In the same article he has defined government as combination of the people of a country to effect certain R James H. Ryan, "What is the State?”, Commonweal, May 29, 1936. ^Michael Oakeshott, The Social and Political Doctrines of Contemporary Europe (London; Cambridge University Press, T§39), p.18. objects by joint effort.”" These services, Lincoln points out, necessarily cost money even in the best ordered govern ments and so arises the need for taxes. This more sociological view of a state looks upon it as merely an association of human beings working together because their wants are best satisfied by means of public services. Proponents of this concept do not look upon the state as a sacred institution which has been handed down from generation to generation but picture it as a collective experiment which is still in progress. Its development has depended upon its ability to satisfy human needs, and upon the idea that government is not the state, but is merely the agency whereby its ends are better secured. Government is but the means of solving the problems of the group as they arise which they, as individuals, cannot solve. This idea of the state of government is not a recent one but seems to date back at least to Confucius, for he said: govern means to rectify.""8 From the great number of varying definitions we may extract one feature which seems to be commonly accepted that the state is a species of juridical organization of human beings. But beyond this point, variations in meaning ®Miles Menander Dawson, The Basic Thoughts of Confucius (Hew Yorks Garden City Publishing Company, 1939), P. l74. 19 begin to appear based upon whether we should consider it as limited to certain clearly defined territory, whether it should be applied only in reference to those who rule, or whether it should be applied to all persons subject to it, and lastly, whether the term is necessarily tied in with its government or whether it is a separate institution. As pointed out above, Professor Jensen apparently considers government as the minimum function of the state. The same idea is expressed by Leonidas Pitamic who writes: ""Law, organization, and people are . . . essential in the notion of the state.h ”9 The interpretation of the term ’’state” as applied only to the rulers rather than to those who are ruled no doubt reached its height under King Louis XIV, whose state was one of absolutism. This doctrine is given expression in the phrase ”L*Etat c*est moi”, which has been attributed to King Louis XIV. Although it is now doubted that he actually said it,'~historians feel that it may be considered a good resume of his speech before the Parliament of Paris April 13, 1655, and as fairly accurately describing the attitude of the people of that period. This idea of the royal prerogatives of the crown has been summarized by more: 9Leonidas Pitamic, A Treatise on the State (Balti J. H. Furst Company, 1933), p.“T5. 20 David Jayne Hill: It is a perversion of the natural order of things to attribute resolutions to subjects and deference to the sovereign; for only the head has the right of delibera tion, and resolution, and the function of the other members consist solely in executing the commandments given to them.10 Under such a doctrine as this, the sovereign of a state has no equal either within or without the state. A similar idea of the state is expressed by Karl Marx who refers to it in his Communist Manifesto as an executive committee for the administration of the affairs of the whole capitalist class. Numerous writers since then have followed this line of thought although they haven't identified the affairs of the state with those of the capitalist class alone. Leon Duguit, for example, explains that by the state is meant those persons who actually hold sway. However, such a view has been more or less dropped in recent times in favor of the term "government”. Widening the definition somewhat, we may turn to Georges Sorel who speaks of the modern state as; . . . a body of intellectuals, which is invested with privileges and which possess means of the kind called political for defending itself against the attacks made upon it by other groups of intellectuals, eager to possess the profits of public employment. Parties are constituted in order to acquire these l°David Jayne Hill, History of Diplomacy in the International Development of Europe~TNew York: Longmans, Sreen and ^Company, 1925), p. 25. 21 payments, and they are analogous to the state. 11 A realistic definition of the state which is more consistent with modern ideas and thus more serviceable for us today is one which includes in the state the whole body of the people, not only the rulers but also those who are ruled. Such a definition is advanced by Jeremy Bentham: When a number of persons are supposed to be in the habit of paying obedience to a person or an assemblage of persons, of a certain and known description, such persons altogether are said to be in a state of political society. That is to say they constitute a state. Thus according to Bentham the basic feature of the state is the habit of obedience on the part of the masses, and of authority on the part of those in authority. However, it isn*t neces sary that those who obey must do so in all things. A body of people may constitute a state although the people dis obey their rulers in some things, and some of the inhabitants may disobey in all things. However, this so-called realistic definition of the state does not solve all the problems involved. Just when does a state cease to exist or come into existence? An excellent example of a case where this question might ■^Arthur N. Holcombe, The Foundations of the Modern Commonwealth (New York: Harper and Brothers, .1923), p. 44. ^Jeremy Bentham, Fragment on Government (Oxford: The Clarendon Press, 1933), p. 5. appropriately be asked is in the case of Scotland. When that country *s king, James VI, became King James I of England in 1603, and the two kingdoms were united under a common sovereign, did Scotland lose identity as a state? Or did it retain its statehood until 1707 when its separate parliament was finally dissolved and Scotchmen received representation in the Parliament of England? Or may it still be considered a state since it has its own laws prescribing rules of con duct in matters different from those concerning other parts of the British Empire? The answer obviously depends upon the definition of "state* that one employs. Another question that might well be asked is as to the status of a state under a change of the form of govern ment. Was Russia, for example, the same state under the provincial government established by the Duma in 1917 as under the Romanoffs? under Soviet rule? If so, was it still the same state Again the answer depends upon the definition of "state" that is used. It seems fairly apparent that changes in rulers might continue indefinitely without destroying a state, if the people recognize the authority of the successive rulers, and submit to their dominion. But the secession of parti cular groups or bodies of people from the original body could hardly continue long without altering the original character so much as to render it unrecognizable. Such a case is seen in the Dual Monarch of Austria-Hungary. is this state now? Where Is just German Austria the true successor to the original country, or has the original state been broken up among so many persons that the identity of the parent country is wholly lost? Strictly speaking it must be considered that any substantial change in the body of people who obey a common ruler may be said to constitute a new state, but for practical purposes It is probably enough to preserve the identity of a state that the bulk of its.people should be the same before and after the change. A mere change of rulers, thus, is to be considered of little con sequence in the determination of the identity of a state so long as the masses acknowledge the change. This same idea of obedience is to be found in the concept of a state advanced by John Austin, a student of Bentham, who says a state consists of a sovereign and sub jects. The very essence of the state is the obedience of the bulk of these subjects to their rulers, and the only perfect state is the sovereign state. Sovereignty, as he explains it, is a relationship that can exist only between one definite person or body of persons and the other members of the state. It implies the existence of a single, recog nized supreme authority. But this problem of authority in a modern state is not so simple. Austin*s ideas might be applicable today if a state consisted of hypothetical 24 political animals, but a state is made-of real men, who are in the habit of obeying various authorities whose supremacy they recognize in their respective spheres of action. The state is only one of several organizations to which they belong• The limitations on the Austinian theory are obvious and have been the source of much controversy and discussion as to its soundness. is a legal fiction. It is obvious that a sovereign state The power of law-making in any state unrestricted by any legal limit is not a reality. The real situation is the existence of rulers who have the ability to secure the consent of those whom they govern to their authority, or at least to command habitual obedience from the majority of those whom they seek to rule. The actual authority of rulers varies greatly in different states, and even within one state from time to time. This authority may cover only a limited number of things or may extend so as to cover all phases of the citizens* lives. One of the powers of a legal sovereign, and the one with which we are con cerned here, is the power to tax. This power is defined by jurists as the power to take the property of a citizen or subject for public use'without direct compensation. This power theoretically may be exerted by the sovereign of a state to the limit where the citizen or subject has no property left. In the terse words of John Marshall, ,twthe 25 power to tax involves the power to d e s t r o y . r a r e l y would it be practicable for a ruler of men to press the power to such a limit. Their authority would be undermined by covert evasion, or might even be overthrown by open resist ance. Statesmen know that, despite the fictions of jurists, their powers are strictly limited by the character and dis position of the citizens of their state. Thus, it would appear that, although the Austinian and other realistic theories of the state were sound enough as far as they go, they are superficial explanations of the data of politics and cannot satisfy the needs of statesmen. The fiction of legal sovereignty may be serviceable to lawyers and jurists since they aren»t concerned with the objectionable features of any system, but the political scientist needs an explanation of the nature of the state which is more substantial and instructive than juristic. The political scientist is not concerned with the legal fictions which may exist for they are not merely interested in what is the law, but are also concerned about what is accomplished in the‘name of the law. They are primarily interested in the power which limits the authority of the legal sovereignty. They are not interested merely in the persons, but also in the people who give them their ^McCulloch Vs. Maryland, 1819, 4 Wheaton 316. 26 authority, and in the way in which it is maintained, for the nature of any state is determined not alone by the extent of the authority of its rulers, but also by the character of the purposes of its people, rulers and ruled together. It is what people seek to accomplish by means of the state that gives it distinction and sets it apart from the other kinds of human organizations. The proper ends of the state, as understood by the American people at the time of the American Revolution, were set forth explicitly or by plain implication in the Declaration of Independence and in other great state papers of that period. The Declaration of Independence does not attempt to consider the purposes of the state in detail but merely described the functions of a government within a state. It asserts that governments are instituted among men to secure certain inalienable rights endowed by their creator among which are life, liberty, and the pursuit of happiness, and furthermore, that whenever any form of government be comes destructive of these ends, it is the right of the people to alter or abolish that government. It would thus appear that in the opinion of these writers the state merely exists in order to secure these rights and privileges for the people, its citizens. Such an expression of the purposes of a state and of a government is very general and lacks precision. There is 27 much room for disagreement and argument as to what is meant. For example, what constitutes the natural and inalienable rights of man. The ones mentioned are not supposed to be a complete list. As a result, the writers of the United States Constitution attempted to be more specific as to what should be accomplished - (1) to establish justice; (2) insure domestic tranquility; (3) defense; (4) to to provide for the common to promote the general welfare; (5) to secure the blessings of liberty to themselves and to posterity. But even these are not fully clear and require even more explanation. Therefore, we may, in general terms, define a state idealistically as a body of people organized, for the pur pose of securing for its citizens and for its future citizens those rights and privileges which are their inalienable heritage. Such a group of persons will occupy a more or less clearly defined territory. For example, the people of a federated state share the possession of their territory with the whole body of people of the federation or union to which they belong, nevertheless they do constitute a state. Each of the states of the United States is an example of this type of statehood. Each of these is indeed a state, but each of their territories belongs to the entire country as well as to themselves. In addition, such a body must possess a government, for without a government, they cannot be organized* Without organization, internal chaos is almost certain to eventually lead to the loss of their identity as a separate state* Equally essential to their existence is a common purpose for in that is the basis of their unity and the real test of their existence as a distinct political entity. Such a commonness of purpose must include within the state not only those who are in power, but also those who are sub jects of that power, for without the inclusion of all of these, any commonness of purpose would be a mere fiction* In the working out of this common purpose, we may be able to bring into our concept of a state the idea of authority emphasized by Austin, and the doctrine of obedience urged by Bentham, but in a modern interpretation of the term, it seems to the present writer that these are but tools for securing the end to which all the persons- within the state are striving. The working together of large numbers of persons in a common interest necessitates the existence of some control over the activities of the masses. This control has ex pressed itself in various forms known as government. But to function smoothly any government must have financial support, the most common source of which is inevitably taxation. The exact method in which this taxation is to be applied is not always the same, but in all cases it is only just that all persons who are working together, and who are benefiting from such co-operation should contribute their share to the maintenance of the state and of its government CHAPTER III TAXATION, ITS DEVELOPMENT Taxation constitutes the chief financial resource of the modern state. In ancient times tribute and returns from the public doman loomed large in finances and, if present tendencies continue, the income account today may soon be dominated by receipts from socialized industry. But in the democratic state of today the great bulk of the public revenue is supplied by compulsory levies, apportioned among the people according to the standards acceptable to their representative legislatures. Historically it appears that taxation has grown from the voluntary contributions characteristic of all primitive societies. Gradually these contributions were transformed into legal obligations of persons to perform services in support of a limited number of specified public objects. As private property and commercial activity developed these obligations evolved first into fees and charges of various kinds and later into levies on exchange and transport, and finally they appeared as compulsory contributions which were apportioned among the peoples according to then understood standards of equity, such as property or income. The taxes levied in the course of centuries have been profoundly affected in character and amount ty the 31 nature of the environment, economic, political, and social. With the growing complexity of economic life, taxation, too, has grown from a simple to a very complex process. Tax bases have varied as the economic factors at the foundation of economic life have changed in importance. Land taxation, for example, played a much more significant role in the agri cultural economy than it does in the present industrial era. The development of large territories for purposes of govern mental and business administration has affected the choice of taxes for financing activities of both the nation and the states, and even locally. Modifications in the form of the ownership of business, such as the advent of the corporation, have raised new problems and have made necessary the intro duction of new type of taxes. Increased skill in administra tion, and in the recording of economic activity and the techniques of appraisal and valuation have given opport unities to refine the distribution of taxes among the tax payers. Changes in habits of thought concerning the measuring of taxability have had their effect in altering the tax bases. Finally the gradual emergence of social ideals of justice and equity have transformed the very foundation upon which tax systems are erected. These changes form the basis of the problems discussed in this writing. The evolution of taxation has been accompanied by striking changes in the attitude of the people generally toward these compulsory levies. In Athens in the time of Pericles taxes were imposed largely upon foreigners and slaves; and in the ancient world generally, where tribute was an important financial resource, tax liability was usually considered a mark of bondage rather than of freedom. During the periods of feudalism and of absolute monarchies, taxation in so far as it was used at all was imposed with little regard to equity. Favoritism was the common rather than the rare thing, the taxes often falling on those per sons who were without special influence. Indeed, so long as rulers were under no obligation to submit their programs of expenditure to parliamentary bodies for approval, the atti tude of the taxpayers was unimportant and their opposition was given little or no consideration as long as the rulerts wishes were met. The development of representative government and of democracy necessitated the use of taxes requiring consider able co-operation from the taxpayer. Such co-operation could be secured only if the taxpayers were given some control over the use to which tax funds were put. This is essential for the proper assessment of property and income taxes, nor could the modern sales tax, or any of the social taxes be used to their best advantage without the whole hearted co-operation of all the taxpayers. But before such a period could be attained, tax methods had to pass through a long and tedious history. Various methods of public finance constituted important phases of the administration of even the primitive community, for the regulation of group life even in its cruder forms requires certain expenditures. In contrast to our ideas today, the expenditure of the funds collected was given little consideration. The only thing of real importance was that the chief got all the funds that he desired, and it mattered not how he employed them after they were his. The absence of any standard system of record-keeping in primitive societies In addition to an almost universal lack of stable currency In which to figure receipts and expenditures made even a most rudimentary bookkeeping an impossibility. Any real evidence of the use of such is to be found from the writings of only the more advanced civilizations. Writing of the Ashanti rulers In West Africa, Professor Herskovits^ points out that the most important source of funds was from death duties. Whenever a man of substance died, his immediate superior received a specified proportion of his personal property. Upon the death of this person, his superior took a similar proportion and it was only upon the demise of this third man that the ruler of the ^Melville J. Herskovits, The Economic Life of Primitive Peoples (New York: Alfred A. Knopf, 194UJ, 468 pp. 34 territory received his share of the estate from which a chain of deductions commenced. The second most important source of revenue to the Ashanti ruler, commonly called a "Stool", was from trade monopolies and taxes on the transportation of commodities. Kola was exported to the north in exchange for slaves, livestock, and "butter. Slaves and gold-dust were sent to the coast, and the carriers returned with rum, guns, gun powder, and salt. While the trading operations of "the Stool" were in progress the roads were closed; when they were reopened, all other traders who passed were assessed kola-nuts according to the amount of the load carried. While porters carrying goods from the north were not taxed, those who returned from the coast with commodities for sale were assessed gold-dust before they were allowed to go on to their home markets. A third source of revenue is what might be termed court fines or fees. One type of fee is foreign to European or American legal procedure. A party acquitted of a charge was required to pay a thank-offering which would also serve for the purpose of securing witnesses to attest to the judgment of the court in case that the trial should ever be questioned. The death penalty also could be remit ted by the chief upon payment of a fine, but unlike other fines, this type was not divided among.his subordinates, 35 and since such fines amounted to about four thousand dollars, they offered appreciable sources of income. Taxes on gold-mining operations comprised a fourth form of revenue. This tax generally amounted to two-thirds of the gold mined, with the miner retaining the other third. This tax finds its counter-part in the so-called severance tax to be found in a number of states in the United States. However, today, it is, theoretically at least, levied pri marily for a social purpose rather than as a source of revenue• Social stratification in the kingdom of Dahomey was much like that of the Ashanti but was marked by sharper delineation and greater rigidity of structure. They had a unique system to maintain control over the collection of public funds* There existed a female bureaucracy within the royal compound which duplicated the hierarchy of male officials who were in charge of the kingdom*s affairs out side the walls, and served as a check upon the reports of these men. All of their taxes were based upon two definite principles. indirect. First and foremost the ruler’s control must be As a result, no one was questioned concerning the number of cultivators in a given village, but the count was quietly obtained when these farmers, village by village, brought their ’’gifts" to the king. The second principle 36 which indirectly throws considerable light on attitudes to ward the taxing process, was that for purposes of what among ourselves would be termed propaganda, the king himself paid the same taxes as his subjects, especially upon the produce of his fields* He thus sought to create in the minds of his people the impression of himself as subject to the same rules as all other Dahomeans. Most of the taxes were either of the commodity or occupational type. In the case of agriculture, each village gave to the palace a certain proportion of their harvest, which varied from year to year. These products were taken to the palace and were in the main saved for the use of the army. Palm groves were assessed approximately one-third of their total yield. Livestock was taxed only every two or three years, the size of the assessment varying according to calculated need and available numbers. A census of the livestock, largely sheep and goats, was taken by villages, and served as a basis for determining the amounts to be demanded. In the case of the occupational taxes, hunters were counted during rituals for the gods of the hunt. Each one belonged to a certain group, and each group had its chief. There were thirteen groups so each had to furnish meat for the palace during one of the Dahomean native months. In other words, one-thirteenth of each hunter»s efforts went 37 as a license fee. Since the heads of all the animals had to be sent to the palace, the amount of game killed as well as the number of hunters was controlled. Salt was considered a necessity and it was considered that its makers should not bear a heavy tax. The total tax was figured as the amount actually required by the palace, Iron-workers were required to make cartridges as their con tribution to the needs of the government. Similarly, weavers were levied upon according to the amount they produced, while wood-cutters were assessed on the basis of how much they had gathered in the period covered. Royal monopolies were declared covering certain commodities. All honey was reserved by the king to be used in curing the meat used by the troops on campaign. In the two districts set aside for this purpose, those who cared for bees also cultivated red and black pepper and ginger for the palace. In addition, each farmer might raise enough pepper to yield himself a raffia-sack full. But this was insufficient even for the simplest household so that a man was compelled to buy the remainder in the open market. Revenue came from the duties levied on the transport of pepper - forty-six cowrie shells were assessed against each sack passing through a customs post. The Dahomeans also found sales taxes were a profit able source of income. The taxes were levied in kind and 38 were not high although in their aggregate they amounted to a large sum. Each trader was held liable for a true measure of every thing he sold. This levy, well documented by those who visited the kingdom before its conquest by the French, is said to be so deeply lodged even today in tradition that voluntary contributions are still made by those who do business in,the markets for the upkeep of the old palace. What was received in taxes went for the lavish sup port of the king and his entourage; for the maintenance and equipment of the army, for compensating the numerous admini strative officials that ruled the kingdom, and for defraying the cost of the expensive ancestral rites of the royal family which were held in order to assure the continued survival and prosperity of the kingdom. As among the Ashanti, every male taxpayer was liable to serve in the army, or, when summoned, to work on roads or at other communal tasks. But, unlike the Ashanti, there was no obligation on the ruler to compensate those who thus gave their time and labor. It is in this impersonal nature of administration, and in the care with which the expected yield was balanced against actual receipts, and the checks on the persons handling the king»s money that the Dahomean monarch was distinctive among the primitive groups. The striking point, however, in these early states was the comparative lack of concern over the expenditure of 39 the collected, funds. Practically all interest was centered in the collection of them. Methods or purposes of the ex penditures was relatively unimportant. The social effects of hoth the collection and spending were probably not given a thought. Not until relatively modern times may it be said that there was a truly widespread interest in public ex penditures, however it was not wholly ignored in certain of the more advanced early states. Carfa, the statesman of Naples, near the end of the fourteenth century, became con cerned about the expenditure of the kingdom. He made three important classes of the purposes for which public funds were used: (1) for the defense of the nation; (2) support of the ruler; (3) for contingencies. for the He contended for a reserve fund to meet emergencies, and for close official supervision of the public accounts. Bodin,2 the first French student of fiscal problems, wrote in the latter part of the sixteenth century, and con tended that the public funds should be used for the honor of the state. He recommended, furthermore, that an annual statement should be made which would show the condition of the state*s finances. He also made a classification of expenditures which was much like Carfa*s only going a little more into detail, and including provisions for the care of 2Jean Bodin (1530-1596) A French political philoso pher. 40 the poor as well as for improvements. •z Sir William Petty, near the middle of the seventeenth century, gave a rather detailed classification of the im portant needs for public funds. He listed expenditures in the order of their importance as: (1) defense; (2) main taining the government; (5) religion; (4) orphans; (6) Yet, notwithstanding such public works. education; (5) studies of expenditures, systems of obtaining the revenue received the major portion of the early study and investiga tion. The methods of expenditure which were developed, prior to this time, in the early state can scarcely be called systematic, because the expenditures were made in a more or less haphazard fashion. The state, in its earliest stages of development, was subordinate, in almost every respect, to the family unit, where most of. the personal needs were supplied. As the power of the state developed, more demands were made upon it. The first distinct public treasury in the different states was usually for religious purposes. There were no expenditures for protection, as the citizens protected the state. In foreign wars the citizens furnished their own weapons and were paid by the spoils of conquest. ®Sir William Petty (1623-1687) English statistician and political economist. 41 The most lavish of early expenditure was found, per haps, in Athens. Large public buildings were erected, and huge sums were spent on public works of various kinds. Ex penditures for religious fetes were often wasteful and extravagant;. An interesting feature of early Athenian ex penditure is that comparatively large sums were spent on the poor and on war orphans, an early form of the use of public funds for social purposes. In Rome, likewise, large sums were spent for religion, while the maintenance of the government, the erection of public buildings, and the construction of roads were items of primary importance. Provision was made for the poor, and various kinds of public charities were established. The system of expenditures in Rome displayed more development than did that in Athens. One outstanding feature was the fact that many citizens who were rendering service to the state were receiving a direct payment from the state. This feature had developed so far that before the fall of the Empire the soldiers were on the payroll of the government. Under feudalism, a study of the expenditures would be a study of the expenditures of the ruler. owner of lands whence came the revenues. He was the The public duties performed by the officials were usually few, and these were performed most often when a private benefit was entailed. Feudalism presented a system in which the public expend!- 42 ture, like the collection of moneys, was primarily in the interest of the ruler. If his interests coincided with the interests of the public, then only did the public benefit from the government's expenditure. This was largely true in all governments before constitutionalism began to grow. An important factor marking the beginning of the growth of constitutional forms of government was the in creasing control which the citizens gained over the public purse strings. Although previously expenditures were in the public*s interest only when their interest coincided with that of the ruler, expenditures now were justified only if they were primarily for the welfare of the public. This change in the nature of the spending of public funds has taken definite form in the constitutions of many democratic countries. In the United States, for example, bills for raising revenue must originate in the House of Representa tives. This was because the members of the House were the only members of Congress directly elected by the people before the adoption of the Seventeenth Amendment to the Constitution, which provided for the choice of Senators in the same manner. The growth of public control over revenue has also done much to strengthen public credit. In the early days of public credit, rulers frequently piled up heavy debts, and then repudiated them in whole or in part. A new ruler would often repudiate all of the existing debts of his predecessor. Under such conditions, public credit was in deed very weak, but as soon as the citizens gained control they began to demand that the government meet its obligations. Since, when the loans were made within the country, the people were the lenders and repudiation was their loss, it is thus easily understood why repudiation of public debts was looked upon unfavorably by the general populace. About the close of the Eighteenth Century it was the general opinion that the new constitutional form of govern ment would put a stop to the rising expenditures and many even expected a decrease. That period marked, to a large extent, the overthrow of the old monarchial regime with its lavish expenditures for the courts of the rulers. The introduction of constitutionalism was expected to materially lessen the cost of military activities which had been mount ing rapidly, and which had become particularly burdensome. It was considered too that the citizenry, which at that time was largely agricultural, must necessarily be freed from some of the tax burdens they had been forced to bear, in order that they could secure a foothold and could meet the urgent need for an Increase in production. The old Mercantilists idea of government was rapidly losing ground, and the laissez-faire policy was being substituted — that government which governed the least was the best, the re 44 suit of which would be the curtailment rather' than the ex pansion of governmental activities. The inaccuracy of this contention, however, was soon shown by the continued rise of public expenditures. Some retrenchment was made in certain types of expenditures, yet any decrease from this was more than counterbalanced by increased expenditures for other lines of activity. The development of commerce and industry increased the social wealth and income and made it possible to secure an amount of revenue much larger than would have been available had the entire burden continued on the agricultural workers. On the other hand, the development of commerce and industry was accompanied by problems which called for an extension of governmental activities and was therefore also an impetus to increased expenditures. A statistical study of public expenditures shows that their increase has indeed been general and rapid. It shows that the increase has not been confined to any type of government, but exists alike in autocracies and democracies, and in federal, commonwealth, and local governmental units. Nor can the tremendous growth of public expenditures always be attributed to war, because some of the countries which have been most free from military activities have shown the greatest increase in expenditures. As a parenthetical point, it may be noted that an increase or decrease in the expenditure of public funds does not necessarily indicate a like increase or decrease in the amount of services rendered. In comparing expenditures with services rendered from time to time, it should be recalled that the value of money is not always constant. As an ex ample, for two decades or more following 1873 increased services might have been given in the United States with a decrease in total expenditures. Prices were falling con siderably and the expenditure of a dollar would give more materials and services than previously. Starting in the late nineties, however, prices commenced to rise and con tinued so until the opening of the World War, when the prices went up even faster. In so far as the state is a purchaser of materials in an open market, it is affected by such rising prices as much as an individual, and an appropri ation of the same number of dollars will mean a curtailment of services. On the whole, however, the state is usually less affected by price changes than are individuals. A larger proportion of its expenditures is for salaries and wages, which rise more slowly than other prices. Because of price changes, therefore, there may be no very direct re lation between a change in the.public expenditures and the amount of service received by the public. To return to our original trend of thought, pro tection is today still the major problem and the chief source of expenditure to any state. This, of course, refers to the federal revenue, rather than to local units. Also, it has been one of the chief factors in the rapid rise of the pub lic expenditures. * Its urgent need has been only too clearly pointed out to those of us living during the present European conflict. This need for increased protection has been prevalent in all countries generally — limited to any particular form of state. totalitarian nations alike require it. it has not been Democracies and Wars are, it is true, less frequent than in early years, but the daily cost of a war, such as the last World War and the current World War, would more than finance an entire conflict in earlier times. A modern twelve-inch gun or battleship would entail, per haps, as much expenditure as an early army or navy. Another important factor in the expenditure for protection today is the maintenance of the large modern.navy and standing army in times of peace. The annual cost of such maintenance usually represents a far greater expenditure than did early wars. Many services which are now furnished ty modern governments and which require considerable financial outlay were formerly supplied by individuals. Most folk today consider such services to be the regular duty of the govern ment to furnish. Few if any people today would think that private individuals should provide all the money for the 47 construction of highways, and despite certain private schools, it is considered, at least in this country, that schools should be maintained by the state offering free education to the youth of the nation. Many countries have gone even further than the United States in offering public services by supplying the services of public utilities. In some countries, the railroads, telephone, and telegraph are owned ty the government, whereas these are largely privately operated in the United States, The agitation for public ownership seems to be growing and the number of public enterprises is rapidly on the increase. larger cities. This is particularly true in the Hot only is there a demand for an extension of public services into new fields but also for its expansion in current enterprises. The recent demands for an extension of free public education has had an important influence in causing expenditures to increase. The same is true of high way construction and maintenance. Catering to the growing demands for increased state services has meant increasing the public debt. The most noticeable of these demands, perhaps, has been for various forms of regulation, and for the development of health and sanitation. The now old laissez-faire policy of govern ment is becoming more and more antiquated, while the public is placing greater reliance upon the activities of the government for the satisfaction of its desires. In the 48 matter of health and sanitation, governments have undertaken many preventative measures in recent years, whereas, formerly, if they were concerned at all, it was simply with repressing epidemics after they had reached dangerous proportions. One additional item which should be mentioned as having contributed to the growing public debt is the ease of public borrowing in modern times. The ease of borrowing has given a supply of revenue which could not otherwise have been obtained. So general has public indebtedness become that nearly every governmental unit practices the policy of deficit financing. Citizens are willing to lend money to the government for its credit is good, and the burden is not so apparent as when revenues are secured through taxes. Except where political units have reached the legal amount of indebtedness, a tendency toward an increased use of this source of revenue is abundantly in evidence. However, the desirability of such methods of financing expenditures is highly questioned by the present ?u*iter. As noted above, the burden upon the individual, and upon the citizenry as a whole, is not so apparent as in the case of immediate taxa tion, but the burden is still there and is just as real. Instead of giving the money to the government in the form of a tax, the amount is given to the government under the disguise of a loan. But this loan must eventually be paid back with interest, and some source of revenue is essential 49 for this* It Is likely It must then come in the form of taxes. Any individual or group of individuals is thoroughly justified in asking the question of the justification of public expenditures. To lay down a rule for the testing of the justification of all expenditures is an impossibility because of the immaterial nature of such a large part of the services rendered. Many of the benefits received, both economic and social, are impossible of measurement. For ex ample, how can one measure the advantage gained by any one individual or group of individuals by the building of any one battleship? Or how may one accurately ascertain the benefits to society of the payments of an unemployment insurance payment? Neither can be measured with any degree of accuracy, yet all must agree that they are advantageous. In general, however, it may be said that a state is not justified in making an expenditure unless society is better off than it would have been had the funds been left in the hands of the individuals. There is a temptation, where a public official is dependent upon the constituency of a particular district, to.spend public funds for the benefit of his supporters. Some of our states have recognized this when their constitutions were written, and have attempted constitutionally to prohibit expenditures the returns from which will be of less value to society than the cost. 50 Pennsylvania is an example of a state which early had a constitutional provision of this nature. The difficulty arises, of course, in attempting to apply this general rule to particular cases. In testing the justification of any single expendi ture or of any group of expenditures, as ’ well as of any tax, both its economic and social effects must be given due con sideration, In writings of the past one may find evidences of much fallacious reasoning. Certain writers have main tained that more and more money should be spent by the public treasury because it put more money into circulation, because it increased the demand for labor, because it relieved the poor ty giving them employment, and because it removed most of the objections to taxes when the government returned so much of it to the public. In this connection, let it suf fice to point out that lavish and extravagant expenditures do not create wealth. The more that a state takes from its citizens and spends out of a given amount, the less is left for individual expenditure. The expenditure of the state for labor and materials is now substituted for what would have been that of the individual. When the state demands materials and services, therefore, this demand Is not added to that of the individuals but merely exists in the stead of that of the individuals. Revenue exacted from industry to pay an army could have been used by industry to pay wages 51 to the same number of men had they hot been employed by the state. The total demand for labor is not thusly increased by state expenditure, in fact, it may be materially decreased because of the costs of administering public funds. In addition to these points, when a state enters into the market for materials or labor, it becomes a competitor with private enterprise for these same commodities or labor. Under normal conditions, because of the widespread activities of governments, the state is a large purchaser of both goods and services. As a result it can secure these at a lower price, and may serve to pull down the general price level. In abnormal times, such as a war, the demands of the state are enormous. Since the income of the governments is not directly dependent upon the enterprises which they undertake, the prices paid for materials and services may be much greater than any money returned from them would warrant, and consequently greater than individuals would feel that they could pay. In cases of emergencies, as in the World War, the government is likely to pay abnormally high wages in order to attract labor, and abnormally high prices to secure the needed supply of materials. A hardship is thus felt among individuals who desire similar services and materials, but cannot pay such high prices. The abnormal wages cannot help but have an effect on the worker. With his increased wages comes a high standard of living, which he naturally desires to maintain. When the emergency is past, and the government demand ceases, he must seek employment where wages are determined on the basis of what individuals can afford to pay. So the tendency is now toward lower wages. The dissatisfaction caused by such shifts will have some effect in causing industrial friction. The abnormal demand of the government for goods, with its abrupt cessation, will have much the same effect on commodity prices in particular lines. Many, if not all, public expenditures are closely related to social conditions. Expenditures for the army and for the navy, to the extent that they are actually needed for protection, result in a feeling of security by the members of society. In the same category may be placed the expenditures for police and fire expenditures. Expenditures for education, which result in the spread and advancement of knowledge, cannot but make for social betterment. The building of highways, and the aid to transportation and communication foster a social solidarity. The very thought of the conditions which would exist if the present inmates of the different kinds of eleemosynary institutions were to intermingle with society is proof of the social benefit of expenditures for these unfortunates. The action of the different governmental units in eradicating causes of dis ease and in enforcing health and sanitation measures has undoubtedly been rewarded by a considerable advance in 53 . social wellbeing. Numerous other public expenditures might be mentioned which would call to mind many social benefits resulting from them. Some expenditures, on the other hand, may not result in social advancement. The conduct of war, for example, may result in the inferior members of society being left to propagate the race, and in a considerable number of unfit to be placed as public charges. Moral conditions are likewise endangered and the spread of disease fostered, the results of which may be felt for many generations in the future. Thus it is to be clearly seen that a single expendi ture or the collection of a certain tax may result in a long-run effect, either economically or socially, or both. As a result, those who are trusted with the charge of the government of any state must study thoroughly the ramifica tions of each assessment. While an immediate effect may be deemed desirous, the long-run effeet may more than counter act this gain. Not only the social gains to be secured by a certain expenditure should be considered, but also the social effects of,the method of securing the funds for this expenditure must be given due consideration, s It goes without saying that useless and extravagant expenditures have no more justification in the activities of a government than in those of an individual. Neither does it follow that a governmental unit can supply all 54 things that the public may desire, any more than can an individual supply all his desires. In other words, in the case of both the government and individuals, only those things can be purchased for which the necessary funds are available. Too often, this principle has been little considered in the conduct of the fiscal affairs of governmental units. Ho better example of this is to be found than the voting of appropriation bills by Congress, state legislatures, and municipal councils on many occasions. It often appears necessary only to convince a majority that the appropriation is needed, and the bill is passed. Far too frequently too little consideration is given to the source of funds to meet the appropriation. In the opinion of the present writer, this has occurred a number of times under our current ad ministration on the questionable grounds of social benefits to be gained. Too frequently the provision for revenue comes as a separate consideration and often is in no special connection with the appropriation bill. Such a method is profitable only when the source of funds is capable of considerable expansion, a condition which is found usually only in a growing country. Such procedure, of course, leads to little consideration of equality of burden, or whether the services repay the costs. When the sources of revenue begin to diminish, then more 55 consideration of the possibility of meeting appropriations becomes necessary. The necessity, -under these conditions, of considering possible revenues when voting appropriations, merely indicates the advisability of doing this under all conditions. Only if some systematic correlation of possible revenues with anticipated expenditures is possible, can any intelligent and satisfactory fiscal policy be formulated. Since the beginning of the first World War the systems of national taxation in the leading commercial nations have been completely transformed. During the years between the Civil War and 1913 nearly all of our national revenues were raised through customs duties and excise taxes, and during the majority of this period no other form of federal tax was imposed. In 1913 the United States imposed only a slight tax on inheritances and a nominal one upon corporation benefits, together with a very low income tax with high exemptions and very moderate progressions. Great Britain also had an income tax, although its rates were very low compared to what were found necessary after the nation entered into the World War. This tax was strongly opposed not only by those who had to pay it, but also by leading economists of most countries. In England almost every Chancellor of the Exchequer talked hopefully of the time when the income tax would be repealed. In a case before the United States Supreme Court, it was said concerning 56 the tax: ""It will mark the hour when the sure decadence 4 of our present government will commence."" However, the great demand placed upon the nations by the war definitely helped in waving away this opposition. In the years following the war, a new trend has appeared in the tax systems of most nations. Many countries have shown an increasing inclination to use more of the proceeds of their taxes for social purposes and it may fairly reliably’be said that the trend of modern taxation is in that direction. Although it has sometimes been said by leading tax authorities that taxes should never be used for social purposes, the several states of our Union have never literally followed this principle. The most important and usually the largest item in the expense of a State and its subdivisions is the cost of public education. This is a familiar example of a tax that is used for social purposes alone. Many of those who pay the greater part of it do not receive any benefit from it except indirectly, and the wealthy man, although he may have no children, is taxed in order that the children of the poor may be sent to school, and it is generally conceded that the higher the education of the masses the greater the producing capacity and the more extended are the opportunities for obtaining wealth. 4pollock vs. Farmers* Loan and Trust Company; 157 U. S. 429. 57 What is more important to all, including the wealthy and the government itself, is the result that the community is more orderly, property is safer, law is better enforced, and the government is more stable. It has only been in comparatively late years that our national government has made expenditures for social purposes other than education, but now it is common to make appropriations for many such purposes and they are becoming more and more frequent. It is often said that this partakes of Socialism, which is true in one sense, but as a prominent English statesman, L0rd Randolph Churchill, said — all Socialists now."* ""We are W e have passed the time when the mere fact that revenue is to be raised for social purposes can be; made a successful objection to a tax. The older objections to this idea have been largely swept aside at least for the present in the rush of interest in such purely social measures as old-age pensions, public clinics, and the like. The further fact that some taxes tend to create an equality in social standing is now being heard as justifi cation for them. It is urged that to the extent that the rich are taxed more in proportion to the benefits received, while the poor receive more in proportion to what they pay, there is an equalizing tendency. In the building of roads, bridges, streets and in the provision of public parks and libraries the burden falls more heavily upon the rich man 58 than upon the poor, although each may share equally in the services rendered. An even more striking innovation, which shows perhaps the greatest extent to which the policy of levying taxes for social purposes has been carried, is found in the -extremely -high rates of income tax on large incomes made by the Revenue Act of 1935, and by the current demands for more and more taxes on those persons in the high income brackets. These rates were imposed pursuant to the recommendation of the President for the purpose of ""encouraging a wider distri bution of wealth"", and under the theory that ""the duty rests upon the Government to restrict such incomes by very high taxes."" No such principle of taxation had ever been presented or advocated before. It is indeed a wide de parture from early taxation doctrines. c ''President Roosevelt»s message to Congress on June 19, 1935. CHAPTER IV THE QUESTION OF SOCIAL TAXATION In the field of public finance, as in almost all other fields of endeavor, the ideas held by people of today are clearly the result of the development of lines of thought from the beginnings of time. Each field, regardless of its subject matter, is highly colored with superficial views and shallow concepts of an earlier period. It might well be con sidered that these fields are suffering from ’hangovers* from past generations. But, also, in each of these groups are to be found those persons who are endeavoring to bring their work into tone with the progressive thinkers of the present day. They are forced to seek not only the answers to the large number of unsolved problems, but must also fight the influence of early erroneous thinkers. About a century and a half ago, J. B. Say urged that the best method of financing any enterprise, public or pri vate, is to spend as little as possible. Following this line of thought, he was forced to conclude that the best of all taxes is that which is the least in amount. many who agree with this doctrine even today. There are There are writings to be found among current literature which start, or appear to start, with the assumption that every tax is an evil and so should be kept at a minimum. As a result, 60 credulous minds become biased from the beginning against all forms of public expenditure. Such an approach can in no way be considered a scientific one. Equally so, it would be definitely unscientific to start with the opposite view that all public expenditure or all taxes are desirable, A truly scientific approach presumes an open and free mind without bias in any direction. I cannot see how anyone can accurately say that each and every tax is an evil and should therefore be done away with for the good of society. A tax upon alcohol, which, by raising its price, diminishes its consumption, may be a positive good. It can hardly be considered socially desirable that any person be allowed to become intoxicated for a few cents, and to become highly inebriated on less than a dollar, or even upon a few dollars. Similarly, of course, I cannot assert that all taxes and all public expenditures are a social good. Expenditures for unnecessary wars are clearly not for the betterment of the masses of the people. In similar vein, a relief expenditure which tends to make men dependent upon society for their support is hardly to be considered wise or good. Consistent with this is the assertion that the taxes whereby such funds are secured are likewise unwise and undesirable. But the mere fact that a tax has been shown to be desirable in theory is not suf ficient evidence to prove that it will inevitably be so in actuality# Taxes which are of themselves good have proved to he failures when put into force because of a weak or in capable administration* The difficulty may be within the tax itself or may lie with the persons who administer it. The last tax just mentioned might easily come under this classification. A well written social insurance, or old age tax might become a social calamity through improper adminis tration. This may be due to inability on the part of the administrators or may be the result of the introduction of personal or political desires on the part of those in charge. Examples of taxes having inherent administrative problems are the poll tax and the excess profits tax. The existence of the former in many of our southern states has been dependent upon the theory that it makes everyone pay a direct tax to the government, but in actual operation it has required great expenditures in order to collect it from many of those persons who pay no other direct tax. In the case of the excess profits tax, one must admit, regardless of his personal belief that it is socially desirable, that it fre quently becomes almost impossible to administer in a really honest and just manner. The tax is supposedly based upon the relation between profits and capital, and if the latter cannot be ascertained with some reasonable precision, erratic results are sure to follow. It Is thus clear that in most cases of public finance a maze of inter-twisting facts are involved. probability is wholly good or wholly bad. No tax in all As a result it is unfair to pass a final and complete judgment upon any oper ation in public finance without balancing against one another all of the advantages and all of the disadvantages involved in both the raising of and the spending of the revenue. An example of this is to be found in the muchly discussed question of fiscal versus non-fiscal taxation. The basis for this distinction of the two types of taxes is usually whether the tax is meant for the purpose of raising public revenue or whether it is intended as a means of securing some desirable change in the existing social relationships. There are those writers who contend that taxes should be levied only for fiscal purposes and never for social reasons. They maintain that the social ends, assumed to be desirable can and should be obtained by some other means than through taxation. On the other hand there are those authorities who find no objection to the use of taxation to secure con ditions which are deemed socially advisable. This situation would seem to indicate that there existed a more or less clear cut issue between the two theories. However, I have not found this to be the case, which seems to be in agree ment with the thoughts of Edwin R. A. Seligman who says that there is really no conflict between the two ideas. In 63 discussing this subject, he writes: This antithesis rests upon a failure to observe that finance, like economics, is a social science, and that even from the narrow political point of view of the relation between the government and the citizen, they cannot derive any revenue - that is, cannot take any part of the social income — without inevitably affecting social relations» In this same connection, William J. Schultz writes ""Every tax is a regulatory tax.”"2 He points out that all taxes affect the economic and social setup of our society to } a greater or lesser extent. Economic-institutions and even the very economic equilibrium *of a nation may be altered by a single tax. As examples he mentions the sales tax which tends to reduce consumptive expenditures considerably more than savings. In contrast to this, an income tax and an inheritance tax tend to do the opposite. Even the taxes of lesser financial significance have their social as well as economic effects. The tax on cigarettes and liquor produce a definite influence on their respective industries. Due to the tax the amount of smoking is cut down and so the tobacco industry is repressed. A heavy liquor licensing tax tends to close the smaller saloons sending the business and thus the profits to a large concern, who may as a result Edwin R. A. Seligman, Essays in Taxation (New York: The MacMillan Company, 1925), p. 316. 2William J. Schultz, "Regulatory Taxes," The Tax Magazine. September, 1939. 64 receive increased, profits despite the greater tax. Taxation may not only influence the volume of business but may also induce changes both in the forms of business organizations and in the methods of doing business. This influence is not merely local but may result in changes of national or even international significance. Custom duties upon foreign importations may stimulate certain productive activities or may, on the other hand, discourage them by their discriminatory influence. Taxes may also definitely influence the direction and quantity of funds seeking invest ment. Opponents of the "New Deal" administration in Wash ington argue that it is repressive taxation which has frozen available funds preventing them from being used in industri al and commercial expansion. This list of examples could be extended to include probably each and every tax, local or national, ever devised. It must inevitably be concluded that all taxes have both their fiscal and their social effects. The most extreme "fiscal tax" has its influence upon society, and conversely, the most extreme "non-fiscal tax" must necessarily have its fiscal features, otherwise it would not be a tax. Attempts have been made to separate the levy of taxes into periods, in one of which their use was only from the fiscal viewpoint; in the other, social con sideration played an important part. It is doubtful, however, if a time can be found when taxes have not 65 been used to some extent as a social measure,5 The large number of different social and economic effects which taxation may engender seems to be limited only by the maximum number of different taxes which may be created and by the number of combinations that may be drawn up. How ever reluctant one may be to admit the fact, it is becoming increasingly evident that all taxation is an instrument of social control. It is truly not a question of fiscal versus non-fiscal taxes but the real issue is merely whether this powerful force for social control is to be intelligently used in the securing of socially desirable objectives or whether it is to get out of hand and become an agency of social destruction. Thus in developing any tax system it becomes requisite to consider not only the fiscal factors involved but the social characteristics as well. overlooked. Neither can be advisedly Some persons may be inclined to give more con sideration to the former while others will favor the social features. In discussing this, one of the better known tax 4 authorities, Professor Lutz, of Princeton University, rates the fiscal features of any tax as of primary significance, 3 Merlin Harold Hunter, Outlines of Public Finance (New York; Harper and Brothers, 1§26), p. 132, 4Harley Leist Lutz, Principles of Public Finance (New York; D. Appleton and Company, 1#56), Chapter XV, 66 but does not go so far as to allege that these should be the only matters considered* He does insist, however, that it is useless to consider other features of any tax unless it is assured that it will produce adequate revenue* On the other hand there are those who would have the social features of a tax be given’first consideration* Their idea seems to arise from the basis that it is the duty of government to promote the public welfare, and that this can be accomplished only when every untiring effort is given to doing the greatest good for the greatest number. Thus, they say, government should not be.so much concerned about the effects of paying the tax upon any individual or upon any small group of individuals but it must be interested chiefly in its effect upon society as a whole. But beyond this point their ideas seem to diverge further and further apart. Various persons have different social purposes that they would have taxation serve depending upon the institution they consider needs correcting. Some of the extremes would have the tax system be used for the purpose of equalizing wealth. For this purpose a highly progressive income and inheritance tax are the more frequently recommended. The argument which has been advanced to justify such a setup is that the great inequalities in wealth and income distri bution has come as a result of governmental activities or inactivities. As a result it is concluded that the govern— ment should be allowed to take steps to correct evils which are present as a result of its own doings. is a glaring weakness in this argument. However, there The inequalities of wealth distribution are a result of the economic order in force, and such an approach is merely attacking the results and is not altering the causes. Continuing from this con tention, some would so set up the tax structure that there could be no great accumulations of wealth. For this purpose it is necessary to first concede that an economic program based upon open individual and competitive production is undesirable and it is questionable how many persons, at least in this country, would be willing to concede to this. Social taxes have been used more frequently for the purpose of doing away with some existing institution which the government does not know how to accomplish in some other manner. A well known example of this sort is to be found in the history of our own country. The federal government wished to stop the circulation of state bank notes but seemed unable to do so. They therefore placed such a heavy tax upon them that it became impractical to use them and so the notes soon became a matter of history. Another example of such taxation is that placed upon certain industries, which, though it does not put them completely out of ex istence, does serve to limit their activities. Notable among these are the taxes already mentioned on the tobacco 68 and liquor industries. The taxes have tended to serve as control measures, but such methods of control are questioned by some as it serves to centralize the industry in a few limited but powerful hands. But this is generally considered to be less undesirable than letting the business run rampant without any control whatsoever. This would indicate that taxes may be used to the advantage of society, although the process may obviously be carried too far, or also may not go so far as might be desired. While Professor W. J. Schultz concedes that all taxes have their regulatory elements, he does not recommend the adoption of any tax merely for regulatory purposes. is no virtue in a regulatory tax per se.«"5 "”There He considers that apart from the revenue, a tax can be considered only a means to an end and so can be judged only upon the merits or detriments of the end itself and not by the qualities in herent within the tax. As examples he refers to the pro posed taxes upon chain stores, the undistributed profits tax, and the frequently suggested antihoarding tax. In deciding if one is in favor of the first one, he does not examine the tax itself so closely but rather the purpose for which it is intended - limiting the activity of chain ^William J. Schultz, ”Regulatory Taxes,” The Tax Magazine, September, 1939. stores. If he favors or is opposed to this purpose, then his conclusion is almost certain. The same is true of the other two taxes mentioned - one will ordinarily favor the tax if they favor the influence that it-is intended to exert• Whatever may he one»s conclusion as to the advisa bility of using taxes for purposes other than for revenue, one must face the fact that at the present time, the trend seems definitely in favor of social legislation. Therefore it seems somewhat useless to condemn the matter wholly as it does have its good points. The wisest thing to do appears to be to study the problems involved and attempt to reach conclusions which will yield the best things for all of society. In discussing this subject Findlay Mackenzie writes: In any new program of social and economic control the fiscal machinery of government, one of the most vulnerable agencies of social compulsion, will be ex tensively employed. It will be used because it is available as an Operative device, and because it can at once be saddled with new duties. But the fiscal system cannot serve as an engine of social control unless it is very materially redesigned and remodeled. It can become a means of social control only by be coming itself the object of control. This process of revision must necessarily be largely empirical? it must be based on cautious modification preceded by careful analysis of the relation of the fiscal system to a nation*s economy. Yet no effective re vision can be expected unless the aid of fiscal theory is solicited or unless enveloping economic philosophies are frequently and sympathetically appraised. Clearly the task is a difficult one. Yet until the fiscal system itself is reformed, the taxing machinery cannot he regarded as an effective device for the extensive program of social control which the future may demand.® Mr. Mackenzie first urges the development of various agencies with enlightened fiscal leadership to study the whole pro blem. He does not feel that legal limits have been extended to their ultimate. He recommends an extension of the ability-to-pay-doctrine, the abandonment of specific-use funds, and the adoption of an improved budgetary technique and control. These changes he believes would start our economy in the direction in which it might be used for in telligent social control. He considers that one of the greatest limitations to our use of taxation as an instrument of control is in the existence of specific constitutional and statutory restrictions upon the type of fiscal taxes which may be levied. The chief complication lies in the cumbersome specifications of detail to be found in many state constitutions, instead of having the basic law made up of general principles which may be adapted to the needs of changing times. He recommends the removal of these un workable minor provisions which have become rooted in our basic laws. If these -unnecessary changes are made, he feels that we may be able-to benefit considerably from the use of York: 6Findlay Mackenzie, editor, Planned Society (Hew Prentiee-Hall Inc., 1937), p".r 49'6"*T" 71 our fiscal system to attain social ends. Probably the greatest exponent of social taxation is Adolph Wagner, who has propounded his theory known as the socio-political theory of taxation. After reviewing this theory, I tend to agree with Professor Seligman that it is inclined to the socialistic viewpoint. Mot only does he attempt to improve the tax structure but attacks the economic system as well. He refers to the frequent evils attached to the system of free competition based upon private initiative which must result in a greatly unequal distribution of in come and wealth. This is particularly bad because the re lationships which are to exist between individuals or groups of individuals depend upon this distribution. What so-called social class one belongs in is a result of this distribution of wealth. He then concludes that all who are of the opinion that the existing economic order is wholly just must also then conclude that the existing unbalanced distribution of wealth is likewise just. He then continues that if this be true, then we must accept all of the ac companying consequences, one of which is that the paying of equal amounts of taxes by all citizens presses with more severity upon some than upon others. This situation must necessarily exist because the tax system cannot be so ar ranged as to alter the existing distribution, as a result of which taxes will be used only for the purpose of raising 72 public revenue. This may be looked upon as a sketch of the financial or fiscal theory of taxation. Under this theory the idea of universality of taxation is taken literally. Each and every citizen would be required to contribute to the public funds, regardless of whether his income was large or small, making no consideration for those living below the level of minimum subsistence. This principle would hoid regardless of the source of one»s income, whether it was derived from invested property or whether it came from physical labor. Furthermore, the concept of equality of taxation would be strictly interpreted to mean the payment of a fixed proportion of one»s income regardless of its total amount. This would eliminate the idea*of progressive taxation upon the incomes in the higher brackets. But, it seems to the present writer, herein is the weakness in Mr. Wagner*s reasoning. I do not believe than an economic system based upon free competition and individual initiative must result in these strict conclusions. I cannot see why some of the advantages in his theory cannot be incorporated into our tax structure without vitally destroying our economic system. According to its author the socio-political theory makes of a tax more than a mere money-getter. Under this doctrine a tax becomes a means of correcting the evils pre sent in the maldistribution of wealth tinder a system of 73 free competition. The first means by which this end is to be achieved is a keen distinction between "earned" and "un earned" income, as well as income which is a result of chance or speculative gain. Secondly, there is a recognition of the fact that those persons who have the greatest incomes also have the greatest:ability to pay the most taxes, and that income from property likewise shows greater ability to bear heavier taxes than income from labor. Upon this basis of reasoning it is then possible to show favor for those per sons in the lovrer income brackets and for those who secure all their income through physical labor. Mr. Wagner recog nizes that this may be a source of objection to his theory since such exemptions must necessarily result in still heavier taxation of the rich, but he feels that such is as justified as the present habit of supplying free education to the poor. This socio-political theory also interprets the postulates of equality in taxation and universality of taxation differently from the strict financial theory of taxation. Equality is not Interpreted to mean that a fixed proportion of all incomes should go in the form of taxes, but rather that the part of one’s income that should go as taxes should be in proportion to his ability, and, as pointed out above, this ability rises as does the quantity of the income. As a result it rejects the idea of pro- portional taxation in favor of progressive taxation. Further more, it does not interpret universality of taxation literally but allows the exemption of those below the level of minimum subsistence and those who are so close to that point that the taxes he would pay would place him below the subsistence level. At first reading the socio-political theory sounds extremely good, but upon closer examination, it is found not to be so perfect. As pointed out above, it is not possible to clearly distinguish between fiscal and non-fiscal or social taxation. influences. All of them have both fiscal and social History does not support Wagner»s contention that taxes have been levied in the past for purely fiscal purposes. It does not appear that any tax forming body has ever completely ignored the social significance of the taxes they have adopted. The entire system of protective tariffs that have been used by various nations do not appear to ever have been adopted merely for the purposes of revenue. History tends to show that their use has always been tied in with the idea of improving social and national prosperi ty. Likewise taxes upon luxuries have never been merely for revenue but appear to have been used as a means of limiting their use as well. Finally, a last objection to the socio-political theory is that the difference between the social element 75 which is present in all taxes and the social idea expressed in this theory is the same difference as exists between social reform and socialism. Those of us who believe in the democratic principles can hardly agree with Wagner*s ideas of social justice* To the democratically inclined person justice means allowing all an equal chance with no undue advantages to any. As a result the job of the state is to assure each citizen equal rights under the law giving each the opportunity to develop his talents and abilities to their maximum. Justice may indeed demand modifications in our economic and tax systems but this requires social reform and not socialism. One of the outstanding critics of the socio-political theory is Professor Seligman who says: . . . on the other hand, it is not allowable to confound this undoubtedly social element in all fiscal policy with what Wagner calls the socio-political, or what may be called more correctly the socialistic element. From the principle that the state may modify its strict fiscal policy by considerations of general national utility to the principle that it is the duty of the state to redress all inequali ties of fortune among its private citizens is a long and dangerous step. It would land us not only In socialism, but practically in communism. If this were one of the acknowledged functions of government, it would be useless to construct any science of finance. There would be only one simple principle: confiscate the property of the rich and give it to the poor. . • • But at all events, the so-called socio-political theory is untenable in so far as it implies a conscious effort on the part of the state to levy higher taxes on the rich in order to reduce them to the level of the poor. 7 7 Charles J. Bullock, Selected Readings in Public Finance (New York: Ginn and Company, 1924), p. 261. CHAPTER V ARGUMENTS FOR AND AGAINST NON-FISCAL TAXATION As has been pointed out many times earlier in this paper, all taxes have both their fiscal and non-fiscal in fluences. nature. None is either wholly fiscal or non-fiscal in But if one wishes to distinguish between the two types he must find some grounds for distinction. For this purpose I turn to the distinction suggested by Professor Fagan'*' of Stanford University who would classify the taxes according to the intent of the legislators. If the intent of the makers of the tax was primarily to raise public revenue, then the tax is to be classed as a fiscal tax although it may have considerable economic and social re percussions. In contrast to this, if the intent was to produce certain desired changes in social or economic con ditions, and the securing of public funds was secondary, then the tax is non-fiscal in nature. A third classifi cation might be added in which would be placed those taxes behind which the fiscal and non-fiscal intentions are of equal significance. A subgrouping may be made of non-fiscal taxes. The ■^Elmer D. Fagan, "Taxation for Non-fiscal Purposes." Proceedings of the Seventeenth Annual Conference of the Pacific Coast Economic Association, December, first group would consist of those taxes which seek to se cure their social ends by direct action. This would include those which would attempt to prohibit or limit some particu lar activity by a direct tax upon it, or those which would attempt to foster some activity by a low tax or complete exemption oh it. An example of the former is the previously mentioned tax which was placed upon state bank notes in order to remove them from circulation. The tax on oleo margarine has been intended primarily to limit its growth in protection of the dairy industry. As an example of the protective type, we might mention the exemption of certain governmental bonds from taxation in order to foster their purchases. The second group of non-fiscal taxes would be those which attempt to reach their goal by more indirect methods. Due to wide variations in possible indirect approaches it would not appear possible to give a clear and limited definition of this class. The undistributed profits tsx is intended to bring about a redistribution of funds which might otherwise lie idle in the hands of a corporation. Highly progressive income and inheritance taxes are based partially on the idea of resulting in a less unequal dis tribution of wealth and income. Writing in the January, 1937 issue of the "American Journal of Sociology", Clarence Heer suggests the adoption of higher taxes on land in order ‘ 79 to bring about a reduced value of it and so to indirectly help solve the problems of farm tenancy and slum clearance. President Roosevelt has frequently turned to taxation as a means of securing social ends. He has probably made more use of it than any other President. However, he is certainly not the first one to employ such. Regardless of this# the method is always greeted with much opposition, which is no doubt one reason that the approach has not been more frequently employed. One of the first complaints heard is that it is socialistic and that it is contrary to the very nature and sanctions of the principles of taxation. True, many writers in the past, as well as writers today, oppose the idea of the use of taxation for any purpose other than securing revenue. Such writers as H. L. Lutz, C. F. Bastable, and H. C. Adams offer definitions of tax ation which would prohibit the use of taxes for social pur poses. But it is also possible to find authorities, as A. G. Buehler, and Adolph Wagner, who offer such a liberal definition as to make it possible. While the former group of writers do not sanction taxes for social purposes, they grant that all taxes have social effects, and Mr. Lutz even goes so far as to say that the modern concept of taxation does not prohibit the use of taxes in order to attain non fiscal ends. As for the socialistic angle, that depends upon the social end which is to be desired. The term 80 "socialistic" has become sort of a red herring which is thrown in the path of all attempts to secure something which one opposes• Proponents of non-fiscal taxes will then answer that sanctions of history and tradition are not necessary and that it is a method of attaining goals which otherwise would be difficult, complicated, and sometimes impossible to reach. The United States early in its history adopted a tariff in order that a going manufacturing business might be built. The founders of our country felt that that was essential in order to secure economic independence as well as political independence of Europe. certain persons objected seriously. As has always happened Many persons said that tariff rates were so high that it would defeat its own pur pose. But the federal government then was not interested in revenue and it was satisfied with the results that were realized. Later on, as has been previously mentioned, legislators were afraid that the oleomargarine market was going to drive the dairy industry out of existence. result it placed a tax on oleomargarine. As a In this way they were able to control that business to a limited extent, whereas if they had passed a law saying that the makers of oleomargarine could make only so much of their product a year as the country wanted to protect the butter market, the law would have been thrown out as ridiculous and uncon- stitutional. The objectors then come forward with a second criti cism which has been well put in the words of C, F. Bastablej «»To mix up with one very important object (of taxation) another different and perhaps incompatible one is to run the risk of failing in both.""** This argument is leaning to the philosophical, but it falls of its own weight. Mr. Bastable no doubt is clear on what he means but he robs -his statement of its strength by the use of so-called "weasel words". There is no finality of conviction in his generalities, which seems to be a weakness of economists, and theorists in general. The "weasel words" to which I refer are "perhaps" and "to run the risk of". This would indicate that his con clusion is not necessarily final. The non-fiscal goal of any tax is not necessarily incompatible with its fiscal objectives. The tariff in the history of this country has yielded considerable revenue and has also served as pro tection for our industry. It is generally accepted that maximum protection and the highest possible revenue from any one tax is impossible but it is not impossible,to se cure a high degree of both. Progressive income taxes and inheritance taxes have also served to bring about desirable 2C . F. Bastable, Public Finance (New York: and Company, 1932). Macmillan 82 social as well as fiscal ends. Finally in reply to this objection, there may be offered the point which has been a theme throughout this paper - that no tax is wholly fiscal or non-fiscal ty nature. Along this line of thought Professor Fagan has said that there is no reason why a tax cannot be dedicated wholly to either a fiscal or a non-fiscal purpose, although there will be some elements of the other factor. A third argument against non-fiscal taxation which has been put forward is that it opens wide the door to and encourages discrimination and favoritism thus making it impossible to apply canons of fair and equitable taxation. The first question to this to be asked would be as to the validity of the canon. If this principle is one which ex cludes taxation for non-fiscal purposes then there clearly can be no answer. However, if this is not so, the question must then rest upon the interpretation of the term equity in taxation. I can see no serious reason why the term could not be understood to mean such taxation as will im prove the public welfare to. the maximum. ' The accomplish ment of this would depend upon a wise and judicious dis crimination and regulation of taxes. Discrimination and regulation are not necessarily bad as the above argument seems to assume. Any tax base, whether based on benefit- received, ability-to-pay, or minimum sacrifice must in 83 volve some wise and deliberate discrimination, otherwise it could not be effective. The degree of discrimination which is to be used must be left up to the wisdom of the state*s authorities. A fourth objection that has been made is that nonfiscal taxes involve grave administrative problems which the average person in administrative positions cannot properly handle. This is indeed a serious attack, but it cannot really be made against non-fiscal taxes as such. Perhaps it might be, if these difficulties were insurmountable, but it does not appear to me or to many other writers whom I have read that they are such. Unquestionably an intelligent administration of social taxation requires a wide knowledge and foresight into all the annals of taxation. Prerequisite is an understand ing of the incidence and effects of the tax involved. Com plete information for all kinds of taxation is not avail able, but the incidence of many of the more common forms of taxes have been comparatively well figured out. This being so, there is no reason why persons with the proper informa tion cannot be secured for these positions. This argument may be valid reason for not adopting social taxes, the incidence of which are not well known, or taxes which cannot be effectively administered because of inherent technical weaknesses, or which cannot be adminis- 84 stered without cost in excess of the benefits received. Another objection which has been urged is even more philosophical than the preceeding - that non-fiscal taxes cannot be successful because they deal with results rather than with causes. This contention has been used by Professor Taussig of Harvard, a well known economist, in connection with progressive taxation as a means of bringing about a more just distribution of wealth and income. He writes: Progressive taxation, so far as it aims to correct unjustified inequalities, evidently deals with results, not causes. It is obviously better to go to the root of the matter, and to deal with the causes. Much the more effective and promising way of reform is to pro mote the mitigation of inequality in other ways - by equalization of opportunity through widespread facilities for rational education, by the control of monopoly industries, by the removal of the conditions which make possible illegitimate profits.3 This same point is discussed by Sir Josiah Stamp, in which he refers to the above quotation of Mr. Taussig*s. He goes on to say, however, that non-fiscal features of a tax are justified if they are secondary to the fiscal factors. professor Taussig has suggested that a cause of inequality in wealth distribution is unequal opportunities. Continuing from here we are apt to find ourselves in a never ending circle. tunities? What is the cause of unequal oppor It may be said to be varying abilities among •2 F. W. Taussig, Principles of Economics (New York: The Macmillan Company, 1927) , pT“51S. 85 persons* But what is the cause of this? It may equally well be said that lack of ability is often the result of lack of opportunity* Thus what once was the cause is now the effect. It often becomes impossible to deal with causes in economic situations, for as Alfred Marshall has pointed out, the full effects of an economic cause sometimes is not realized until after the cause itself is no longer in ex istence. In such a case it is clear that If the undesirable situation is to be corrected one must deal with the existing conditions rather than with causes which have gone out of existence. A final argument which is put forward is that tax ation has failed in actual practice to correct the undesir able social conditions. This no doubt is true but one must consider the difference between completely solving a pro blem and reaching a desirable result in that direction. Various laws that have been passed fail to correct the situation completely. Numerous statutes have been enacted making it illega.l to commit murder. Large numbers of ordinances have been passed to control automobile traffic problems. But murders still occur, and in almost every town traffic problems still remain unsolved yet I doubt if any one would say that we should discard our legal system be cause it has failed to completely solve the problems, nor 86 would they even go so far as to say that we should repeal all laws concerning murder and traffic problems for they specifically have far from solved the undesirable situations which they were intended to correct. Moreover, examples of non-fiscal taxes may be found . which have-achieved the purpose for which they were intended. One such example was the elimination of state bank notesjust after the Civil War through the means of a tax on them. While some taxes have not been so successful, they have im proved conditions and as such have been at least partially successful. The issue thus boils itself down to the question of how far progress must be made in the desired direction before the result achieved is to be considered as really ♦desirablet. Various experiences so far with social security and unemployment relief have not wholly solved the problem concerned but I do not believe that the results so far achieved could be considered entirely undesirable. Should we do away with the entire plan because it has not reached the desired goal although it has made progress towards that end, and may in a relatively short time reach it? say not. I would Further study and research may reveal methods whereby the ultimate that is desired may be attained. It seems that before it is possible to satisfactorily answer the last objection we must first agree as to what is to be ultimately desired in social questions. That such 87 facts can be scientifically determined does not seem im possible* It will require that economists and sociologists get together and find a just balance for their views and differences* Many of the hangover prejudices from past generations must yield to our present day needs* As pointed out by Professor Fagan many of the objections put forward against non-fiscal taxes seem to be based upon an old time idea that all taxes are evil and should be kept at a minimum at all costs, and upon opposition to all political compulsion of any nature* My contention that concrete social objectives may be determined finds support in the statement of Professor Wesley C* Mitchell that welfare • * • is capable of being made objective and definite in reference to such matters as food, clothing, shelter, sanitation, education, fatigue, and leisure. . * . This realm of the definite in welfare will be expanded steadily by quantitative methods, so that we shall develop a criterion of welfare applicable to many lines of effort.4 Thus it would seem that no serious argument can be given against non-fiscal taxes per se. It is generally accepted that all taxes have their social repercussions re gardless of whether they fall into the fiscal or non-fiscal classification* Even the opponents of non-fiscal taxes L e s l e y C. Mitchell, Prospeets of Economics (R. G* Tugwell, editor, The Trend of Economics. New York: A* A. Knopf, 1924), p. 3X7 admit that taxes for revenue only must be carefully studied for their social and economic inplications, and that legis lators should adopt only those taxes for revenue producing purposes which have the least possible undesirable social effects. Thus even to the opponents it appears that the goal of all state, activities should be the welfare of the citizens. Therefore, I can see no reason why a state should not adopt taxation which is consistent with the welfare of its society. This is particularly so when taxation appears to be the most effective means of reaching that end. This also appears to be essentially the argument of Adolph Wagner, the most outspoken proponent of non-fiscal taxation, and does not appear to conflict with the ideas of the so-called founder of the science of taxation, Adam Smith, who favored discriminatory taxation as a means of mitigating the economic and social evils existent in absentee landlordism. While my thesis is that taxation may be employed to secure desirable social ends, such a program must obviously be followed with great care and forethought. While my con clusion may suffice as a general principle, I do not assert that it may be employed in every situation. Surrounding conditions must all be considered before deciding upon any tax, be it a fiscal or a non-fiscal one. During an emergency, as the war which is now going on in Europe, I tend to agree with B. W. Anderson who main- tains that in war times we .should emphasize the fiscal taxes at the expense of the non-fiscal ones. As a general rule, this is very good but it too must be wisely employed. In our.present program of helping Great Britain in her struggle against the threats of dictatorship, the de mand for fiscal taxation is very great. However, despite the serious need for a great amount of public revenue, we cannot afford to ignore all the social factors which are involved. We, as a nation, still have definite social problems and these cannot be completely ignored. BIBLIOGRAPHY- A. BOOKS Bastable, C. F., Public Finance. Company, Ltd*, 1932. London: Bentham, Jeremy, Fragment on Government. Clarendon Press, 1933. Macmillan and Oxford: The Bogardus, Emory S., The Development of Social Thought. New York; Longmans, Green and Company, 194(1. 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New YorET Longmans, Green and Company, 1925. Hobson, J. A., Taxation in the New State. Menthuen and Company, 1919. London: Holcombe, Arthur N., The Foundations of the Modern Common wealth. New York; Harper and Brothers, 1923. Hunter, Merlin Harold, Outlines of Public Finance. York: Harper and Brothers, T926. Jensen, Jens P., Government Finance. Y. Crowell Company, 1957. New York: New Thomas Lutz, Harley Leist, Principles of Public Finance. New York: D. Applet on-Century Company, Inc., 1936. Mackenzie, Findlay, editor. Planned Society. New York: Prentice-Hall Inc., 1937^ Mitchell, Wesley C., Prospects of Economics. R. G. Tugwell, editor, The TrenS oF Economics. New York: A. A. Knopf, 19247"”" Morris, George S., Hegel*s Philosophy of the State and of History. Chicago: S. C. Griggs and Company, 1892. Oakeshott, Michael, The Social and Political Doctrines of Contemporary Europe. London: Cambridge University Press, 1939. Oppenheimer, Franz, The State. Translated by John M. Gitterman. 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XXIV PUBLICATIONS OF LEARNED ORGANIZATIONS Fagan, Elmer D., "Taxation for Non-fiscal Purposes," Proceedings of the Seventeenth Annual Conference of the Pacific Coast Economic Association. December. 1938. D. LAW CASES MeCulloch vs. Maryland, 1819, 4 Wheaton 316. Pollock vs. Farmers» Loan and Trust Company, 157 U. S. 429.