Incomes are taxed in a few States; inheritances in many. Poll or capitation taxes are very common, and in some States yield considerable revenue. In cities large sums are collected as water rents, and special assessments for the payment (in whole or in part) for street improvements to abutting property. Water rents and special assessments, however, are not in the strict sense taxes; they are rather payments for social services which the government has chosen to perform. Fines also add materially to the public funds, but they can in no sense be regarded as taxes.

Local Taxation. In matters of taxation cities and counties and other minor civil divisions are strictly under the control of the State government, and the limits of their power to tax are usually defined by the higher authority. In some States the limitations are fixed by the legislature, in others by the constitution. In about one third of the States counties are not allowed to tax beyond a certain per cent. of the assessed valuation of property. Municipalities, in the matter of taxation, are often restricted by the terms of their charters. Taking the country over, however, the localities are quite free to tax themselves as they see fit. The most that the legislature or the constitution undertakes to do is to throw around the local taxing power such safeguards as will prevent bankruptcy.

QUESTIONS ON THE TEXT

1. What restrictions are placed upon the power of the State to tax? By what authority are taxes levied for the support of the State government for the support of local government?

2. What is the rule for levying the general property tax?

3. Explain the work of assessors. What is the assessment? How is the local tax rate determined? the county rate? the State rate?

4. What is the duty of the board of equalization?

5. What is done with delinquent property?

6. What kinds of property are exempt from taxation?

7. Name several kinds of taxes besides the general property tax which are accustomed to be levied in the State.

8. What regulations are made in respect to the taxing power of localities?

SUGGESTIVE QUESTIONS AND EXERCISES

1. "The power to tax is the power to destroy." Why would it not be wise for the federal government to have the power to tax the property of the State and the salaries of its officers?

2. What are the general provisions of the constitution of this State in reference to taxation? What restrictions are placed upon the taxing power of counties? of townships? of cities?

3. Does the right to vote in this State depend in any way upon the payment of any kind of taxes? Ought it to so depend? Do all who pay taxes in this State have a right to vote?

4. Of the several kinds of taxes mentioned in the text, which are levied in this State?

5. Are mortgages taxed in this State? If so, who pays this tax? Are incomes taxed in this State? If so, who pays this tax?

6. What are the several kinds of property exempt from taxation in this State? (See the constitution.)

7. If you owed a man a just debt and saw an opportunity of escaping payment, would you avail yourself of the opportunity? If you owned property which should pay taxes and saw an opportunity to hide the property from the assessors and thus escape the payment of the tax, would you avail yourself of the opportunity?

8. If a man should send you a bill for three dollars when you knew you owed him five dollars, would you call his attention to the mistake? If the assessor should assess your house at $5,000 when it is worth $3,000 what would you do? If he should assess it at $3,000 when it is worth $5,000, what would you do? Do you believe men are disposed to deal as honestly with the government as they are with their neighbors? 9. What is the tax rate of this municipality? of this county? of this State?

10. Under what circumstances would there be no grumbling about taxes?

Topics for Special Work.-Taxation in the States: 21, 559-587. State and Local Taxes: 5, 586-592. State Supervision of Taxation: 18, 249-255.

XXXVIII

PUBLIC DEBT

Public Debt a Necessity. A most important topic of public finance is public debt. The necessity of incurring debt in the conduct of public affairs is perhaps stronger than it is in the management of private business. Governments cannot accumulate money; they must confine taxation to such amounts as are necessary to meet expenses for the current year. At the end of the fiscal year the treasury is supposed to be virtually empty. This is unquestionably the correct policy. A government is sorely tempted to be extravagant when it has more money on hand than it needs. It has been said with some truth that the way to keep governments pure is to keep them poor.

Since it cannot save for a rainy day, when the rainy day comes, and large sums of money must be had at once, government must borrow. Increased taxation cannot be relied upon to supply the necessary revenue. In 1863 the federal government used its taxing power to the utmost to raise the money for the support of its war operations (p. 275), yet it could not collect by taxation one sixth of what it spent during the year. More than five sixths of its expenses had to be met by borrowing.

How Government Borrows Money. When a government wishes to raise money by borrowing, it usually sells its bonds to voluntary buyers. A government bond resembles a promissory note given to an individual who borrows money. In the bond are stated the amount owed by the

government, the date of payment, and the rate of interest. A bond may be for a small sum or for many thousands of dollars. The amount received by a government for a bond depends upon (1) the confidence which lenders have in the government's ability to redeem the bond, that is, to pay the debt, (2) the rate of interest offered, and (3) the length of time the debt is to run. Sometimes the conditions of borrowing are so favorable that government receives as much as one hundred and twenty dollars for a bond of one hundred dollars.

Besides raising money by issuing bonds the national government issued (in 1862-3) paper money and declared this "lawful money and a legal tender in payment of all debts, public and private, except duties on imports and interest on bonds and notes of the United States." This money was printed by the government and paid out to its creditors. Those who received it could compel others to take it in payment of debts. This paper money issue of 1862-3 will be discussed more fully hereafter (p. 322). It is mentioned here because it furnishes an illustration of a method by which government may borrow money. Money secured in this way may be regarded as a forced loan.

The National Debt. The Constitution gives to Congress unlimited power to borrow money (46); it imposes no restriction as to time, or amount, or security, or interest. Congress may not, however, pay any debt incurred in aid of rebellion against the United States (157). The debts contracted by the United States under the confederation were made valid as against the new government (125). Alexander Hamilton, the first Secretary of the Treasury, and the greatest financier perhaps in our history, wished to make the credit of the national government so good that no one would ever hesitate to lend it money. He urged Congress to pay not only the regularly contracted debt of the confederation (foreign, $12,000,000; domestic, $42,000,000), but also to assume the war debt ($21,000,000) in

curred by the States during the War of the Revolution. After a long debate the policy of assumption was adopted, and the new government began its career with a debt of about $75,000,000.

Hamilton was inclined to regard a public debt as a source of strength to a government. By scattering the government's bonds among the people, he contended, you create an interest in its stability. Men will always rally to the support of a government which owes them money. Hamilton's financiering, therefore, did not tend to pay off the national debt as rapidly as possible. When his political rival, Jefferson, who was not deeply concerned about the strength of the central government, came into power, a policy of paying off the debt as fast as possible was pursued, and its amount steadily fell until the War of 1812, when it rose to nearly $125,000,000. After the War of 1812 the policy of reducing the debt continued, and by 1836 the national debt was practically extinguished, and the treasury had on hand about $40,000,000 for which it had no use. The greater part of this surplus was actually distributed among the States according to population.

After 1836 the government began again to incur small debts, and during the Mexican War it borrowed considerable sums. At no time, however, did it become very large until the outbreak of the Civil War, when it jumped from less than $65,000,000 in 1860 to more than $500,000,000 in 1862. After 1862 the debt steadily mounted until 1866, when it approached $3,000,000,000. Since 1866 it has steadily declined, and the interest-bearing debt is now (1909) about $1,000,000,000,1 a sum which is less than one per cent. of the total wealth of the United States.

State Debt. A State must not assume a debt incurred in aid of insurrection or rebellion against the United States

The public debt of the German Empire in 1901 was $1,000,000,000; of England, $3,455,000,000; of France, $6,000,000,000; of Russia, $3,640,000,000.