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For a long time the general property tax functions satisfactorily and responds fairly well to the canons of justice in taxation. But in the inevitable course of economic development, with the growing differentiation of economic classes and with the increasing complexity of economic life, certain difficulties make themselves felt, not only in the practical application of the system but also in the theoretical basis of the tax. With the practical difficulties of the system, this is not the place to deal. The causes of the breakdown of the general property tax and the reasons why it everywhere disappeared in the later Middle Ages in Europe and why it is beginning to disappear in its last stronghold - the United States have been sufficiently expounded elsewhere.1 What interests us in this place. is the theoretical shortcomings of property as a test of faculty in taxation.

These shortcomings may be summarized as follows: In the first place, a gap often discloses itself between property and product. It is indeed true that in the long run the value of a piece of property stands in a close relation to its yield. To use a modern phrase that has become familiar, capital is nothing but capitalized income. That is to say, what a piece of property will fetch in the market represents nothing but a capitalization of its present and prospective yield. While this is, however, true in the long run, it is not true in the short run. The value of a piece of property may bear only a slight relation, or no relation at all, to the yield of that property in any particular year, or even for a term of years. Two farmers may possess homesteads of equal value. The one may have bad luck and suffer drought or inundation, while the other may enjoy a bountiful harvest. With property as a test of faculty, the two farmers will pay the same, although the produce of their farms may differ enormously. Again, of two house owners desiring to rent their property, one may succeed and the other may fail for the year, or for a term of years. Although the unsuccessful owner has no income, he must, with property as the test of faculty, pay the

1 See Seligman, Essays in Taxation, chap. ii.

same amount as the other.

Instances might be multiplied, all tending to show that property and product may frequently diverge.

In the second place, a distinction is gradually observable between property incomes and labor incomes. In the early stages of the development, where property owners bear the greater part of the public burdens, the man who has no property either is reached by the poll tax, or is of such slight taxable capacity that he is entirely omitted. In modern times, however, with the growth of lucrative professions and with the great opportunities for rich salaried positions, labor incomes assume an importance which did not exist in earlier times. It may well be granted that the recipient of a modest salary should be put on a different plane from the individual who receives a like income from invested property; but that is a different thing from claiming that lawyers or doctors or engineers or railway presidents with salaries or professional earnings of from twenty-five to one hundred thousand dollars a year should not be called upon to contribute at all to the public charges. The acceptance of property as the sole test of ability to pay would result in a complete exemption of such classes, and would give rise to countless well-founded complaints.

In the third place, the recognition of property as the test of ability to pay raises a difficulty connected with indebtedness. There is a well-defined distinction between the legal and the economic conceptions of property. By property in the legal sense is meant the ownership of individuals in things or in rights to things, irrespective of the ulterior division of the produce of the property. By property in the economic sense usually denominated wealth is meant the control of the services of the thing possessed. If a part of the services or produce has to be handed over by the individual to some one else, it does not really form a part of his wealth. The owner of a ten-thousand-dollar farm who has mortgaged it for five thousand dollars possesses wealth, or property in the economic sense, to the extent of five thousand dollars. That

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wealth represents the amount that he is worth. His debts are a part not of his assets, but of his liabilities, and must be deducted from the assets in order to strike a correct balance sheet. Legally, however, at all events under the modern law of mortgage- his property amounts to ten thousand dollars. If the government, as is usually the case, looks at the piece of property rather than at the individual condition of the property owner, it will assess the taxpayer on the full ten thousand dollars. In other words, in a property tax the expenses incurred in maintaining the property are ordinarily not considered.

This insistence upon the legal rather than the economic conception of property dates from the period when virtually all existing credit consisted of consumption credit rather than production credit and when indebtedness played a very small rôle in the social economy. In modern times, however, credit has become the very basis of business enterprise. Under these circumstances the problem of indebtedness assumes a new significance. It was but natural, therefore, that the property tax, where it still existed, should take some account of this new condition and should endeavor to make allowance for debts. But experience soon showed that this attempt was fraught with great practical difficulties. As we have seen in the United States, the creation of fictitious debts became such a paying investment that most of the states which introduced the system were compelled again to abolish it. As a consequence, some states today deduct mortgage debts from real estate; others deduct general indebtedness from personal estate; a few permit deduction for indebtedness in general; while most of the states allow either for no deduction at all, or for deduction in only personal or real estate. Such a situation is bound to be unsatisfactory.

In the fourth place, property as a test of faculty fails to draw the correct distinction between the constituent elements of wealth. In former times, when property was scanty and almost entirely used for productive purposes, the situation was simple. But in modern times a sharp line must be drawn between

consumption property and productive capital, between property utilized primarily for purposes of enjoyment and property utilized for the securing of a money income. Take as an example of the first case a private library or art gallery or park which, instead of being the source of a money income, is really the occasion of a distinct expenditure. To put such things on the same footing as property which yields a money income is, to say the least, a procedure open to grave doubt. To tax property as a unit, irrespective of the kind of property or the income from the property or the outlay connected with the property, becomes in modern times a source of increasing embarrassment.

Finally, in the fifth place, the history of the general property tax has everywhere shown that there seem to be insuperable difficulties in reaching the multifold forms of wealth in a developed industrial society. It is everywhere conceded that universality of taxation is one of the leading fiscal principles; yet the growing difficulties of reaching all the different forms of property inevitably lead to the escape of some and to the over-assessment of others. The theory of the general property tax originally rested on the assumption that fiscal equality could be reached by taxing all individuals on their visible property. When the mass of property split up, and the myriad forms of modern intangible personalty disclosed themselves, the basis of the theory was undermined by the new conditions, and instead of equal and universal taxation there was now developed a system of partial and unequal taxation.

If we keep in mind these five different kinds of complication, we shall be able to comprehend how it was that slowly but surely property came to be regarded as a less and less satisfactory form of taxation, and we shall not be surprised to learn that it was gradually replaced by other tests of ability to pay.

§ 3. Expenditure and Product as Tests of Faculty The next step in the development was the selection of expenditure as the criterion of faculty. Expenditure was

first advanced as the best test of ability to pay toward the close of the Middle Ages. The great tax reformers of the sixteenth and seventeenth centuries, like Bodin, Hobbes and Petty, were influenced chiefly by the last argument. The general property tax had everywhere become a mere travesty of justice, and the system was honeycombed by abuses which seemed to be entirely ineradicable. To attain a system of taxation which no one could escape became the watchword of the tax reformers. Since every man, rich or poor, necessarily incurs expenditures, a system of taxes on expenditure was now advocated. This took the form of both direct and indirect taxes on consumption, as well as of taxes on trade and business which were supposed ultimately to reach the consumer. Indirect taxes on trade and commerce had indeed arisen, at a comparatively early period, as a development out of the medieval system of fees and tolls. But now, in the sixteenth, seventeenth and eighteenth centuries, every European country witnessed the growth of a system of excises or expenditure taxes, which grew in importance as the old general property tax dwindled. The general excise or the single excise became the ideal of the publicists, and was in a fair way of being realized in practice.

While, however, consumption taxes succeeded in avoiding some of the worst abuses of the general property tax, it was not long before this system in turn disclosed difficulties in its operation. If the rich man stood from under in the general property tax, it was largely because the rich man's property could not be reached. With the development of expenditure as the test of faculty, however, it was inevitable that the rich man should again escape his share, because of the disparity between expenditure and revenue in the different social classes. The lower we go in the economic scale, the greater is the lack of equilibrium between revenue and expenditure. At the bottom of the scale are those whose incomes only barely suffice for their living, while at the top of the scale are those whose expenditures, no matter how large, are but a fraction of their revenue. In the one case there is abso

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