the graduation of incomes. In what respect, then, do differ entiation and graduation really infringe upon the principles of uniformity and universality? Let us consider first the question of differentiation.

§6. The Differentiation of Taxation

Uniformity of taxation is tantamount to equality of taxation. That taxes should be uniform implies that there should be an equality in the burdens of individuals. By this, however, cannot of course be meant absolute numerical equality. Such equality would result in a poll tax, and we have seen why a poll tax becomes unjust after property itself develops. Uniformity, therefore, means relative uniformity, or relatively proportional equality. But this in itself does not solve any problem. For the question at once arises, "relative to what" or "proportional to what?" We might take some perfectly absurd criterion, like red hair, let us say, and decree that taxes should be levied only on red-haired men, and in proportion to the redness of their hair. Manifestly, this is not the kind of relative uniformity that is implied in the term. The only equality, therefore, which can possibly be intended is that which has reference to the principle that ought to govern the fiscal relations of the individual to the government. This principle, as we have seen, is that of faculty or ability to pay, and we are thus at once led back to the problem of ascertaining the correct criterion or test of this ability to pay. We have learned, however, that income as such, regarded as an absolute quantity, is not a theoretically correct criterion of faculty, and that it is necessary at all events to make a distinction between different kinds of income, since the same amount of income derived from different sources often connotes a varying degree of ability to pay. We are therefore logically forced to the conclusion that the relative equality, or the uniformity which is demanded by justice, is not only compatible with, but in reality leads to, the principle of discrimination. The only question that remains is to ascer

tain how far this principle of discrimination is to be carried, and where we reach the point when discrimination involves a real breach with the principles of relative uniformity.

The American courts, in interpreting the term "uniformity" as found in the state constitutional provisions affecting taxation, have decided that uniformity does not require exactly identical treatment of the different kinds of property or business subject to taxation. A reasonable classification is almost universally held to be legitimate; and a classification may, of course, involve a discrimination between the different classes. Now all that is meant by the principle of discrimination, as applied to the income tax, is that different classes of income may be treated differently. What are these classes? The distinction that has become most familiar in recent times is that between earned and unearned incomes. This distinction is based on the principle that the income is derived in the one case primarily from personal exertion, and in the other case without personal exertion. All manner of terms have been applied to this distinction. Thus temporary incomes are contrasted with permanent, labor with property incomes, spontaneous with fixed incomes, precarious with realized incomes, and even, to use Gladstone's celebrated phrase, “industrious" with "lazy" incomes. To draw a sharp line between such incomes is indeed difficult, because in incomes nominally derived from property there may be all degrees of coöperation on the part of the owner, the strenuous exertion that may be needed to have the property yield any income at all, the more or less active superintendence of the proprietor, the exercise of only a little care in the choice of investment, or absolutely no effort at all on the part of the owner. In the great mass of business incomes where large capital is invested, the revenues undoubtedly partake in some cases almost equally of both characteristics.

Notwithstanding the difficulty, however, of drawing any hard and fast line, the distinction may undoubtedly be discerned at either end. Especially in modern times, with the immense growth of private fortunes, it has come every

where almost instinctively to be recognized that an income derived solely from an individual's own strenuous personal exertions ought not to be treated in the same way as the income which comes, let us say, from government bonds or from the securities of a corporation in the management of which the bondholder or stockholder actually takes no part at all.

The principle of discrimination rests ultimately upon the doctrine of equality of sacrifice, but interpreted in a somewhat different way from that which has been made familiar by John Stuart Mill. The sacrifice of which he spoke is the sacrifice imposed upon the individual in parting with the amount of the tax, as compared with the residue of income that is left for purposes of enjoyment. On the other hand, the sacrifice which emerges when we are dealing with the problem of discrimination is the sacrifice involved, not with reference to the expenditure of the income, but with reference to the creation of the income. The one might be called, if we are willing. to coin such phrases, a consumptional sacrifice; the other, a productional sacrifice. The sacrifice involved in earning a given amount of income is a very different thing from the sacrifice involved in receiving an equivalent amount of unearned income.

How far the principle of discrimination should be carried is, of course, a moot question. Most countries have been content with its application in a very moderate way to labor and to property incomes. In a few countries, like Italy, the distinction is carried somewhat farther, so as to classify incomes into temporary, permanent, and mixed incomes. There seems to be no reason to doubt that with the progress of time a more refined method of discrimination will be attained, and that the classes will be made more numerous.

When we leave the question of the kind of discrimination, and approach that of the amount of discrimination, we of course enter upon a field where the use of a principle may degenerate into its abuse. As soon as we depart from the doctrine of absolute numerical equality and adopt that of relative equality, the door is naturally opened to misapplica

tions of the relation. It might, for instance, conceivably result in the complete exemption of all labor incomes, and place such a high rate upon incomes derived from property of a certain class, as virtually to confiscate that kind of property. This is, however, a danger against which we can hope to guard by a reasonable public sentiment and by the common sense of the community or, in countries where written constitutions exist, by an appeal to the underlying idea of a rational equality. If absolute uniformity is, as we have seen, really a derogation from justice, it is no objection to the introduction of a relative uniformity that the relativity may be abused. Thus far no attempt has ever been made to abuse this relativity so far as discrimination in the nature of the income is concerned. If the problem ever arises, it will be time to deal with it on the general grounds of fiscal justice and actual taxable capacity.

§ 7. Exemption. from Taxation

The other phase of deviation from an exactly identical treatment of incomes has reference not to the nature but to the amount of the income. This problem assumes two forms, either that of the complete exemption of all incomes up to a certain point, with the same treatment of all above that point; or, on the other hand, that of a varying treatment of incomes according to their magnitude, irrespective of the amount of exemption. Naturally, also, there may be various combinations of these two plans. Fundamentally, however, the problems involved are first, that of exemption, and second, that of graduation.

The question of exemption from taxation is indeed not confined to the income tax, nor is it a modern problem. At all times and in all ages we have had examples of departure from the principle of universality of taxation. In the later Roman Empire, for instance, where the burden of local charges the so-called munera - had become crushing, all kinds of more or less illegitimate privileges were granted to

individuals, until exemption, from taxation-immunitas, or freedom from the particular munus — became the common term for exemption in general, and has been preserved in our modern word "immunity." In the Middle Ages it is well known that the privileged classes, like the nobles, the clergy and the lawyers, secured such immunities for themselves, and that especially in France exemptions could virtually be purchased by any one who was powerful enough to do so. It is no wonder that exemption from taxation should have come into such disrepute. As we have seen above, it was the principle of universality of taxation, with the practical corollary of the general excise, that was invoked by the tax reformers of the seventeenth and eighteenth centuries to stem these enormous abuses.

In modern times, however, exemptions from taxation are of an entirely different character. The mediaval exemptions were an inversion of the principle of faculty; for those who were most able to pay were exempt, and those who were least able to pay were crushed beneath the burden. The modern principle of exemption, on the other hand, is based upon the doctrine of faculty, and is designed to lighten the burden of those who are least able to pay. Thus, from the very beginning in America, certain small amounts of property, as well as property of certain kinds, like mechanics' tools. and growing crops, have been exempt from the general property tax, as was the case also in the later property taxes of the democratic communes of medieval Europe. Το these exemptions, based upon the principle that the property owners are not in a position to pay, have been added in modern times, exemptions of charitable, educational and scientific institutions, and the like, which rest on the principle that inasmuch as they fulfil a quasi-public function, they ought not to be compelled to make additional contributions to the public revenues. An interesting variation of the latter category is the exemption of church property, a question on both sides of which much might be said but which is not pertinent here.