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THE FUNDAMENTAL PROBLEMS

§ 1. The Development of the Norm of Taxation

THE income tax has come into the forefront of public discussion with comparative rapidity. In France it is now the centre of political agitation. In the United States it is looming large on the political horizon. In Great Britain it has only recently been accepted as a permanent part of the tax system, and important problems of reconstruction have been occupying the centre of the political stage. In Germany the success of the Prussian tax during the last two decades has engendered a strong movement in its favor throughout the remaining commonwealths. Among the smaller states, both of Europe and of other continents, many have already adopted the system, while others are preparing to adopt it. Everywhere, in short, there seems to be a trend toward the income tax.1

1 The literature in English on the subject of the income tax is exceedingly meagre. Bastable, Public Finance, and H. C. Adams, Science of Finance, give only summary accounts. K. K. Kennan, Income Taxation, Methods and Results in Various Countries, Milwaukee, 1910, published since the first edition appeared, contains an account of existing systems.

In Germany good summaries will be found in the text-books on Finance by Wagner, Cohn, Roscher, Stein, and v. Heckel. The best special book devoted to the subject, although now somewhat antiquated, is that of Held. This, as well as the more recent works of Neumann and Fuisting, will be analyzed later.

In France the recent active discussion of the subject has led to a more abundant literature. Apart from the general text-books on Finance by LeroyBeaulieu, Stourm, and Jèze, which contain succinct accounts of the subject, a large number of special volumes have recently appeared. Among the most important are those of Denis, Philippe, Gaston-Gros, Ingenbleeck, and Haristoy. These will be discussed in the chapter on France.

For fairly good bibliographies see Edith M. Phelps, Selected Articles on the Income Tax with Special Reference to Graduation and Exemption. Minneapolis, 1909; and two works issued by the Library of Congress in 1907 and 1911.

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Why is this so? What is the explanation of this essentially modern phenomenon? For what reason are the fiscal systems that have so well served their purpose in the past now everywhere being brushed aside, and being replaced or supplemented by the income tax? What, in short, is the real significance of the movement?

In order fully to comprehend this, it would be necessary to trace the development of taxation and to study the fundamental ideas which lie at the basis of this development. As the general phase of this development, however, has been elaborated in another place,1 it will be necessary here only to recall the broad lines of the evolution, and to remember the process through which voluntary offerings gradually change into compulsory payments, and the primitive fees and tolls evolve into indirect taxes, to be followed, only at a much later stage, by a system of direct taxes. Without going into the details of that development, we may be permitted to recall the conclusion. Amid the clashing of divergent interests and the endeavor of each social class to roll off the burden of taxation on some other class, we discern the slow and laborious growth of standards of justice in taxation, and the attempt on the part of the community as a whole to realize this justice. The history of finance, in other words, shows the evolution of the principle of faculty or ability to pay-the principle that each individual should be held to help the state in proportion to his ability to help himself.

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Premising a general acquaintance with the main lines of fiscal evolution, what interests us here is the tracing of the fundamental ideas on which the evolution was based. other words, taking it for granted - what indeed cannot fail to be granted, after a study of the facts that there has been a progressive attempt to realize the demands of fiscal justice and a more or less unconscious tendency to work out the principle of ability to pay, the question presents itself as to what are the historic forms of the test of this ability. Granted that in some more or less rough way an endeavor is

1 Seligman, Essays in Taxation, 8th ed. (1913), chap. I.

made, almost from the beginning, to apportion public burdens in accordance with the presumed capacity of individuals or classes, the problem arises as to how the capacity to bear this burden is to be measured. Even where it is difficult to recognize any conscious attempt on the part of government to carry this principle into practice, and even where actual fiscal institutions represent more or less thinly disguised efforts of the dominant economic class to roll the burdens on the shoulders of the weak, - even here it is rare to find a cynical disregard of all considerations of equity; and even here a more or less successful effort is made to clothe the hard facts of economic oppression in the garb of some specious explanation. Thus, whether it be actually realized or not, it is possible to interpret the successive stages of fiscal development in terms of an attempt to enforce various criteria of ability to pay.

From this point of view, namely that of the norm or test of faculty, it may be said that no less than five answers have been given in the course of history. At the outset, the individual as such was selected as the norm. Mere numbers suffice in primitive society to answer the requirements of justice. Thus it is that everywhere the beginnings of direct taxation take the form of the poll or capitation tax. In a primitive community where private property has but slightly developed or where the differentiation in economic conditions is insignificant, where there are no very rich and no very poor, where every man works and where individual revenue is derived almost exclusively from individual exertion, it is indeed true that polls form an approximately satisfactory test of ability in taxation. Wherever we have primitive economic and democratic conditions, whether it be in the early stages of Teutonic civilization or in the beginnings of Puritan New England, we find that the poll tax forms an essential ingredient of the fiscal system.

With the development of private property, however, and with the differentiation of economic classes, a change sets in. The original equality of wealth is followed by an inequality

of possessions. The distribution of ownership, in other words, is now gradually divorced from the mere accumulation of numbers. A poll tax responds less and less well to the demands of faculty until it finally becomes, at all events as the sole test of ability, almost wholly a mockery. Efforts may indeed be made to improve the situation for a time by graduating the poll tax according to outward signs so that the poll tax in some cases becomes a class tax, the assessment being graded roughly in accordance with the social position of the individual. But this class or classified poll tax, as we find it in the early Middle Ages, is only a makeshift, and before long the poll tax is either supplemented or supplanted by a property tax.

§2. Property as the Test of Faculty

In this second stage of development, property is accepted as the test of faculty in taxation. For many centuries it forms an admirable test. Amid the rude conditions of ownership that we find at this stage of economic life, private property consists very largely of land and of appurtenances to land, so that the property tax is virtually a tax on real estate. Gradually, as primitive industry and commerce develop, various forms of personal property come into prominence and are added to the tax lists, until finally the two elements are fused together in order to form the general property tax, which is universally found in this stage of economic development. Property becomes the only possible general test of faculty in taxation because it is the specific mark of distinction between classes and between individuals within each class. At first the property tax is shyly and cautiously added to the poll tax, as an unimportant feature of the system; then the property tax grows in significance while the poll tax slowly recedes; until finally the poll tax disappears and the property tax remains in possession of the field. The general property tax is found wherever a primitive democracy is accompanied by a moderate agricultural and commercial development.

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