the supreme court; but when a legal conclusion is based on an economic argument which is plainly fallacious, it is time to call a halt. In this instance the economic reasoning of the supreme court is so obviously defective that it invalidates the entire conclusion. A specific and exclusive tax on state bonds would indeed have the consequences ascribed to it by the court; a general tax could not possibly have those consequences. A tax on the income of state or municipal bonds as a part of a general income tax would leave everything as it was before the tax. If the operations of state governments were previously not burthened, they would not be burthened by such a tax. If the power of the state to contract was not affected before the imposition of the tax, it would not be affected by the imposition of the tax. The economic situation would be unchanged.

It may be claimed, however, that, even if the preceding argument is valid, and even though state and municipal bonds will not suffer in price by being subjected to a general income tax, a special exemption of state and municipal bonds from taxation. will enhance their price. Therefore a failure to exempt them might be regarded as virtually tantamount to an attack on the state's credit. This claim is specious, but it is not valid.

In the first place, the actual enhancement of prices due to special exemption will be far less than is usually imagined; for not only will an income tax or an exemption from such a tax have, as pointed out above, no significant influence on the capital value of the security, but the mere fact of the general exemption of all state and municipal bonds would, in itself, tend to mimimize even this slight influence. The exemption of the bonds of a particular municipality might well be expected to exert an influence on their price. But in proportion as other municipal bonds in the state, and state and local securities in other states, come to enjoy the same privilege, the advantage would tend to be neutralized. If the exemption were to apply to all state and local bonds, amounting to many hundreds, or perhaps in the near future even thousands, of millions of

dollars, we should see the same development which, as explained above, has actually worn away the original advantage attaching to the tax-exempt bonds of New York City. The broader the exemption area, the less the value of the exemption.

The argument that tax exemption is especially needed in times of crisis is thus robbed of most of its force; for if tax exemption has little value under normal conditions, it can have no great value in times of crisis. At such times, indeed, it will have no value; for in crises bonds are almost completely unsalable. The drop in their price is so great that the question of their taxation or exemption becomes immaterial.

It may be urged, further, that even if the exemption of state securities from a federal income tax were of real advantage to the states, there seems to be no reason why the federal government should confer upon them this advantage. The constitutional inhibition, if it means anything, means only that the national government shall not discriminate against the states by injuring their power to borrow. It does not mean that the national government should discriminate in favor of the states by enhancing their power to borrow. A special exemption of state bonds from a general income tax would, if it increased the market price of these securities, be tantamount to a gift from the national government to the state government. Such a relation, however, is not contemplated by the constitution. It is not the function or the province of the national government to confer gifts or favors upon the state governments. The states can look after themselves, and all that they have a right to ask from the national government is that there shall be no unconstitutional interference with their powers. Equality under the constitution they have a right to claim; special favors they have no right to demand.

Moreover, such an exemption of state and municipal bonds would be inconvenient to the national government and unjust to the individual citizen. Federal securities have at times been taxed by the federal government. It may again become desirable that they shall be so taxed; all the important

European countries now find it, on the whole, advisable to tax their own securities. If the bonds of the United States were taxed under a general income-tax law, and if at the same time state and municipal bonds were exempt, it will be readily seen that this would in effect be subordinating the credit of the United States to that of the local divisions. Such a contingency can be contemplated only with apprehension. Of still greater importance is the consideration that, if state and local bonds were especially exempt as over against the whole mass of private and corporate securities, the individual citizen would have a just cause for complaint. Not only would it mean an escape from taxation for all those who chose to invest in state or local bonds; but, if the advantage were at all appreciable, the increasing demand for these state and local bonds would mean such a transfer of investments as to cause a sensible depreciation in the market value of other securities, and the unfortunate possessors of those other securities would have to suffer a loss, the corresponding gain accruing to the happy possessors of the tax-exempt state and local bonds.

Thus, from every point of view, the special exemption of state bonds from a general income tax is indefensible. It would in all likelihood not accomplish the object which it is designed to attain; but in so far as it did accomplish this ob ject, it would create a glaring inequality, inimical alike to the maintenance of the national credit and to the interests of the mass of the individual taxpayers.

§ 4. The Immunity of State and Municipal Bonds from Taxation.

We come now to the final consideration. Even if it were true, as it is not, that the proposed constitutional amendment empowers the national government to tax the income of state bonds, there are valid reasons to justify such a change in the law. Even if the amendment may be so interpreted as to give the federal government this new power, it ought still to prevail.

On what ground, however, it may be asked, can we defend the immunity of national bonds from state taxation, and at the same time uphold the possible legitimacy of the federal taxation of state bonds? Does not the same principle, the independence of each government within its own sphere, apply in both cases? Let us look into this question.

If we examine the successive legal decisions on the subject, we shall find that there have been three stages in the development of the doctrine that the states may not tax the agencies of federal government. In the case of McCulloch vs. Maryland, in 1819, the objection was to a special and exclusive state tax on an agency of the federal government; for the tax in question was levied on "all banks, or branches thereof, in the state of Maryland, not chartered by the legislature," and the only bank at that time fitting the description was the Bank of the United States. In the case of Weston vs. Charleston, in 1829, the second step was taken by declaring unconstitutional a state or local tax which was indeed not exclusively levied on the instrumentalities of the national government, but which specifically and by name included federal bonds in a list of taxable securities. The third and final stage was reached in the case of Dobbins vs. Commissioners of Erie County, decided in 1842, in which it was held that a local tax, entirely general in character and making no special mention of government salaries, was nev ertheless invalid so far as it affected the salaries of federal officers. And in the same way, a few decades later, in 1862, it was decided in Bank of Commerce vs. New York City that a state tax on federal bonds was unconstitutional even if the tax were entirely general in character and did not mention federal bonds at all. Thus we have a gradual evolution of the doctrine, from the initial stage of exclusive taxation through that of specific mention to the final stage of general taxation.

On the other hand, in the reverse case of the attempt of the federal government to tax state agencies, there was no such gradual evolution of the doctrine. The theory which had

reached its complete formulation in 1842 and in 1862, with reference to state taxation of federal agencies, was now, in 1870, taken over bodily to apply to the federal taxation of state agencies. In the case of Collector vs. Day it was decided that a general federal income tax was unconstitutional so far as the salaries of state judicial officers were concerned, even though they were not at all specifically mentioned in the law. And in the Pollock case this reasoning was applied to a general federal income tax so far as it reached the income of municipal bonds.

On what grounds, now, can we justify the rule of non-interference with agencies of government in the first set of cases and withhold our approval from its application to the second set of cases? It may at once be conceded that a tax on the agencies of state government which really impairs the operations of state government would be just as obnoxious to the constitution as a similar state tax on federal agencies. It may further be conceded that a special federal tax on state bonds or on the income of state bonds would be just as indefensible as a similar state tax on federal bonds. The question at issue, however, is a different one-it is whether the taxation of federal bonds under a general state tax law is to be put in the same category as the taxation of state bonds under a general federal tax law. In our opinion the two cases are not on a par, and for the two following reasons, the one political, the other economic.

The political ground on which a distinction may be drawn between the two cases is this: a state legislature may frequently find it in the interest of the state to follow a policy which is different from that of other states, and which may even be distinctly opposed to that followed in federal legislation. The states, acting through their legislatures, may regard only their peculiar narrow interests, and may consider them superior to those of the country as a whole. On the other hand, Congress is composed of representatives from all the states, and in the Senate, in particular, equal voice is given to the wishes of each state. There is