CHAPTER V

TAXATION

61. Many Ideas of Taxation Are Inaccurate. To the
layman a tax is any compulsory payment made to a po-
litical division, or, very often, to other institutions. Stu-
dents of fiscal problems, however, cannot accept this broad
characterization, but must make a differentiation between
the compulsory payments to the state and other compul-
sory payments.

Definition of Taxes. A number of attempts have been
made to define taxes, many of which leave something to
be desired. The idea of compulsion is general. Various
ideas as to method and purpose of the levy have been
given. Such ideas as the following may be found in
analyzing the definitions of various writers: Taxes are
legally collected contributions for meeting necessary and
general expenses; taxes are proportional contributions
levied on property; taxes are for the purpose of meeting
public needs; taxes are for the purpose of meeting the
expenses of government; taxes are one-sided transfers
with the intention that a common burden will be main-
tained.

A little inquiry into the nature of the levy of taxes, and
the purposes for which they are used, will show the in-
sufficiency of these statements. Many examples could
be given of where the funds collected from taxes have
been used for other than the necessary and general ex-
penses of the government. In the ancient autocratic state
the funds collected were often used to subserve the private
ends of the ruler. The same is equally true in such mod-
ern states as Turkey. In any state, however, it is not



98 OUTLINES OF PUBLIC FINANCE

difficult to find expenditures from the common fund which
have been so extravagant as to be worse than useless.
Many of the familiar "pork barrel" appropriations of our
Congress are of this nature.

Taxes, moreover, are frequently used for other than
public purposes. Numerous examples may be found where
funds from the common treasury have been used to aid
individuals or groups of individuals in distress. In times
of fire, flood, famine, and pestilence, the purse of political
units has often been called upon to furnish relief. Wealth,
moreover, is not the only criterion which may be taken as
the basis for the tax levy. The wide use of poll taxes, es-
pecially in earlier revenue systems, is evidence of this.
While a tax is not to, be expended for the direct individual
benefit of the one by whom it has been paid, it does not
necessarily convey the idea that the transfer is one-sided.
The prevalence of such an idea would no doubt have the
effect of making taxes very much more unpopular than
they now are.

A proper definition of a tax, then, must be broad enough
to include many of the suggestions in the above paragraph,
and yet narrow enough to exclude voluntary payments,
and those through which the one who makes payment
expects to get a direct benefit from the expenditure of the
fund. The following definition is suggested as one which
meets these requirements. A tax is a compulsory contribu-
tion, exacted by public authority according to some general
rule, without reference to any special benefit conferred by the
expenditure of the funds so exacted. This definition allows
that a state may collect funds from any source, so that
some general rule is followed, and that the expenditure
may be for any purpose that the spending authorities
may desire.

62. Some Terms Used in Connection with Taxes Are
Important. It is important that the student of fiscal
problems know the meaning of a number of terms used in
connection with taxes. Some of the more important are



TAXATION 99

base, rate, ad valorem, specific, customs duties, excise
duties, shifting and incidence, levy, assessments, and tax
list.

The base is the thing or circumstance upon which the
tax is computed. The rate is the amount taken from
each unit of the base. A tax rate of fifteen mills means
that for every unit of the base of the tax, fifteen mills will
be taken. Usually when the rate is so expressed, the unit
of the base is one dollar. The base of the tax, however,
might be a pound, foot, or gallon. A number of taxes are
known by the base upon which the computation is made,
as land, poll, income, or inheritance taxes. The base of
a tax should not be confused with its source. Money
might be borrowed to pay any of the preceding taxes.
The base, then, is the object upon which the computation
is made, and the source is the means by which the result
of the computation is paid.

As already indicated, the base may be either a value
measurement or some other characteristic. When taxes
are computed upon value as a base they are said to be
ad valorem. When some other unit of measure is used, as
pound, yard, or gallon, taxes are said to be specific. A
10 per cent tax on the value of wheat sent from the coun-
try would be ad valorem, while a five-cent tax per bushel
would be specific. Customs duties refer to taxes placed
upon goods entering or leaving a country, while excise
taxes or internal revenues refer to taxes placed upon goods
produced within a country. Shifting of a tax signifies the
removal of the burden from where it was first placed,
while the incidence refers to the place where the burden
finally rests. Shifting and incidence are discussed in de-
tail hi a following chapter, as are also customs duties and
excise taxes.

The levy, assessment, and tax list have to do with the
machinery of taxation. The levy of a tax is the legal
process of its imposition. Since taxation is a prerogative
of the state, the levying process is necessary to establish



100 OUTLINES OF PUBLIC FINANCE

the tax. This process is usually retained by the legislative
department with no power of delegating it to anyone else.
The assessment consists in putting the tax levy into
operation. It includes all the steps in determining the
units of the base, and what the holders of these units must
pay. The tax list is simply a record of this assessment.
It may be used by various governmental units that have
levied taxes upon the same base, or for various legal pur-
poses, such as recording ownership and transfer of
property.

63. The Economic Effect of Taxes Has Received Much
Consideration. When the compulsory payment of funds
to the state became a fixed and important part of fiscal
systems, students became concerned about the economic
effects of such procedure. An idea commonly held among
early writers was that a tax, to some degree at least,
created a new ability on the part of the person who paid
it. It was contended that the fear of being compelled to
change one's manner of living because of the burden of
the tax, would cause exertion to provide for the tax and
still leave the individual as well situated as before. Ex-
amples of the increased exertions during several wars
were cited to prove this effect of taxes. Some pointed out,
however, that such a result could be expected only if the
burden was not so great as to seem insurmountable.
Others took the view that there was no power in a tax to
create ability to meet it that people did not get ability
to spend from spending, but spent because they had the
ability. Energies might be intensified either to pay the
tax or to devise some scheme for evading it, but any other
reason than a tax might have caused a similar intensifica-
tion. Energy itself, moreover, had little power of pro-
duction, but was really effective only when applied to
capital. A tax which curtailed the amount of capital,
therefore, lessened the effectiveness of energy and cur-
tailed the ability to meet the burden.

It is very possible that a tax may stimulate production,



TAXATION 11

but its burden is felt, none the less, in this increased use
of energy which is designed to provide the tax. If taxes
encroach upon capital, it means a lessening of productive
power, and with this a lessening of ability to meet burdens.
The real economic consequences, however, cannot be de-
termined without knowing what would have been done
with the fund had the state not taken it, and then what
use the state makes of it. If the source of the tax is one
which otherwise would have been squandered, perhaps, in
a way to lessen the efficiency of production, then it is
more economical for the state to take it and use it. State
expenditure, moreover, may often increase productive
efficiency, and hence increase the ability of bearing tax
burdens. Expenditures for maintaining a sound system
of banking and currency, standardizing weights and meas-
ures, and providing experiment stations, are no doubt ex-
penditures of this nature.

Many early writers opposed taxes which would affect
capital. Ricardo favored an income tax, though Mill
pointed out that a tax on incomes might affect capital by
impairing savings. All were agreed that capital should
not be impaired by taxation. Whether any tax will im-
pair capital will depend, after all, on the habits and in-
clination of the individual. Two men may each have an
income of $2,000, out of which each has been saving $500.
A tax of $100 is placed upon the income of each. One now
spends only $1,400, and still adds the $500 to his capital
account, in which case the tax has had no effect on the
accumulation of his savings. The other still spends $1,500,
and adds only $400 to his savings account, in which case
the tax has curtailed savings. It can be readily seen,
therefore, that no categorical statement can be made as
to the economic effects of a tax.

64. Adam Smith Gave Four Maxims in Regard to Taxes.
Adam Smith devotes considerable space in his Wealth
of Nations 1 to a treatment of taxation. His four maxims,

1 Wealth of Nations, bk. v, chap. ii.



102 OUTLINES' OF PUBLIC FINANCE

or canons, as they are commonly called, have become
more famous, perhaps, than any other passage in fiscal
literature. Since they are just as applicable to-day as
they were a century and a half ago, space cannot be used
to better advantage than in quoting these canons some-
what at length.

(1) The subjects of every state ought to contribute toward the sup-
port of the government, as nearly as possible in proportion to their
respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state. The expense of
government to the individuals of a great nation is like the expense of
management to the joint tenants of a great estate, who are all obliged
to contribute in proportion to their respective interests in the estate.
In the observation or neglect of this maxim consists what is thaojjality
or inequality of taxation.

(2) The tax which each individual is bound to pay ought to be
certain and not arbitrary. The time of payment, the manner of pay-
ment, the quantity to be paid, ought all to be clear and plain to the
contributor, and to every other person. Where it is otherwise every
person subject to the tax is put more or less in the power of the tax
gatherer, who can either aggravate the tax upon any obnoxious con-
tributor, or extort, by the terror of such aggravation, some present or
perquisite to himself. The uncertainty of taxation encourages the in-
solence and favors the corruption of an order of men who are naturally
unpopular, even where they are neither insolent nor corrupt. The
jgrj/fJnf.y of what each individual ought to pay is, in taxation, a matter
of so great importance, that a very considerable degree of inequality,
it appears, I believe, from the experience of all nations, is not nearly
so great an evil as a very small degree of uncertainty.

(3) Every tax ought to be levied at the time, or in the manner in
which it is most likely to be convenient for the contributor to pay it.
A tax upon the rent of land or of houses, payable at the same time at
which such rents are usually paid, is levied at the time when it is most
likely to be convenient for the contributor to pay, or when he is most
likely to have wherewithal to pay. Taxes upon such consumable
goods as are articles of luxury are all finally paid by the consumer,
and generally in a manner that is very convenient for him. He pays
them by little and little as he has occasion to buy the goods. As he is
at liberty, too, either to buy or not to buy, as he pleases, it must be his
own fault if he ever suffers any considerable inconvenience from such
taxes.

(4) Every tax ought to be so contrived as both to take out and to



TAXATION 103

keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state. A tax may
either take out or keep out of the pockets of the people a great deal
more than it brings into the public treasury, in the four following
ways: First, the levying of it may require a great number of officers,
whose salaries may eat up the greater part of the produce of the tax,
and whose prerequisites may impose another additional tax upon the
people. Secondly, it may obstruct the industry of the people, and dis-
courage them from applying to certain branches of business which
might give maintenance and employment to great multitudes. While
it obliges the people to pay, it may thus diminish, or perhaps destroy,
some of the funds which might enable them more easily to do so.
Thirdly, by the forfeitures and other penalties which those unfortunate
individuals incur who attempt unsuccessfully to evade the tax, it may
frequently ruin them and thereby put an end to the benefit which the
community might have received from the employment of their capi-
tals. . . . Fourthly, by subjecting the people to the frequent visits and
the odious examination of the tax gatherers, it may expose them to
much unnecessary trouble, vexation, and oppression; and though
vexation is not, strictly speaking, expense, it is certainly equivalent to
the expense at which every man would be willing to redeem himself
from it. It is in some one or other of these four different ways that
taxes are frequently so much more burdensome to the people than they
are beneficial to the sovereign.

65. Many Attempts Have Been Made to Classify Taxes.
-The different tax classifications are almost as numerous
as the individuals who have made classifications. The
most significant failures at satisfactory classification have
occurred, perhaps, where the attempt has been made to
follow some natural lines. A little consideration will
indicate the futility of such a basis of classification. Taxes
are used for various purposes in different countries, while
the same tax may be used for different purposes in the
same country. The idea of a just measure for taxes varies
widely, and different bases have always been used to
attempt to arrive at that justice which an adopted theory
might suggest. With such a diversity of fundamentals it
is an idle waste of energy to attempt to place taxes into
natural categories.

on Shares of Social Income. Many attempts have



104 OUTLINES OF PUBLIC FINANCE

been made to base taxes upon the shares into which the
social income may be divided. Adam Smith pointed out
that "the private revenue of individuals arises ultimately
from three different sources rent, profit, and wages.
Every tax must finally be paid from some one or other of
these three different sorts of revenue, or from all of them
indifferently." Others have followed Smith in attempting
to use this classification. If the present social income is
not squandered, so that modern taxes must be paid out
of past accumulations, then it may be said that taxes do
properly fall upon the four shares of distribution: rent,
interest, wages, or profits. As a workable classification,
however, it has little value. A tax placed upon rent may
be paid out of interest. The four shares are often so
combined, moreover, that it would be impossible to de-
termine what part of a $500 tax falls upon each share if
it were placed upon the recipient of all of the four shares.
For example, who could determine the part of a $500 tax,
placed upon an Iowa farmer, which falls upon the separate
items of rent, interest, wages, and profits?

Other Bases of Classification. Other classifications are
taxes upon persons, property, and income, and upon
property in the process of getting, keeping, or spending.
These may be used as long as they simply indicate the
thing against which the tax is levied, but are valueless in
indicating the source from which payment is made.
Taxes upon persons might be levied upon the individual
as such, or upon members of a particular class, designated
by some particular mark, such as property, age, profes-
sion, or title.