A general poll tax would be an example of
the former, while a poll tax on males over twenty-one
years of age, or upon all owners of land, would be examples
of the latter. Where the tax is upon property or income,
these are considered without reference to the individual.
The tax is against the property or income rather than
against the person. Taxes classified as against wealth in
the process of getting (income), keeping (property), and



TAXATION 105

spending (consumption) simply indicate the stage in this
process against which the tax is levied. Of course all per-
sonal taxes must be paid from some other source than
that against which the levy is made, while a tax on income
might possibly be paid from property, and one on property
will probably be paid from income.

Direct and Indirect Taxes. One early classification,
which has retained its importance to the present, is that
of direct and indirect taxes. A common distinction is
that the burden of a direct tax will remain where the tax
is levied, while the burden of an indirect tax will be shifted
to other than the place of levy. This statement, however,
is too sweeping. It is more nearly correct to say that such
is the intention or expectation of the authorities who levy
the tax. A tax on mortgages, for example, is a direct tax,
for it is expected that the holder will consider it as a part
of his property and pay the tax assessed against it. What
often happens, however, is that enough higher rate of
interest is charged to the mortgagor to offset the tax bur-
den. In this case the burden of a direct tax has been
shifted. Taxes on monopolies, on the other hand, are
generally believed to be shifted over to consumers in the
form of higher prices, and are usually considered indirect.
Modifying factors exist, however, which may cause the
monopoly to bear the tax burden. 1

Direct taxes are usually much more definite and ascer-
tainable than indirect. This is because they are based
upon a more definite fact. Authorities may be sure that
land, buildings, incomes, and similar bases are going to
continue to exist. They cannot be so certain, however, as
to how stable the demand for a particular commodity is
going to be, or how it will be affected by a tax. The best
examples of direct taxes are poll, land, building, income,
property, and inheritance taxes. The best examples of
indirect taxes are the import duties and excise taxes, as
well as a large number of license taxes. A few exceptions

1 For a discussion of the effect of a tax on monopolies, see p. 170.



106 OUTLINES OF PUBLIC FINANCE

may be found to this classification, but in general it will
hold. The Civil War income tax, for example, was held
by the Supreme Court to be an indirect tax, although the
same court some years later held a similar tax to be direct.
Another exception is that the French government does not
class its import duties as indirect taxes.

Direct and indirect taxes do not hold the same relative
importance under different forms of government, or in
the different political divisions of the same country. In
general, direct taxes will be used more extensively in
countries with a democratic form of government, while
the indirect taxes will be more prominent in aristocracies.
The control which the citizens have over revenues and
expenditures under a constitutional government makes
them more willing to contribute directly. Where the citi-
zen does not have this control, or where the expenditure
is likely to be made in opposition to public desire, resort
must be had to the indirect method in order to conceal
the tax burden. The more remote and immaterial the
service which the state gives, therefore, the more difficult
it is to get direct payments. This accounts for the almost
exclusive use of direct taxes by local political units, while
the Federal government uses a much larger proportion of
indirect taxes.

66. Taxes May Be Justified but Not Measured by the
Benefits Conferred by the State. With the advance of
civilization and the development of governments, the
functions of the state increased. To carry on these new
activities, added sources of revenue had to be sought, not
only to meet the increased expense, but also to make up
deficits which had been incurred by giving up some of the
former sources of revenue. The citizen, naturally, de-
manded a reason for the increasing taxes, and the repre-
sentatives of the state were obligated to furnish them, if
the needed funds were to continue to be peacefully secured.
One reason sometimes given was that the citizen should
make a money payment to the state, since the state no



TAXATION 107

longer required services and commodities, as in an earlier
regime. This was the idea of commutation. The more
general justification of taxes, however, was that the citizen
was the recipient of benefits from the expenditure of the
funds. When this conclusion had been reached, the at-
tempt was made to go farther and measure what each
individual should pay by the amount of benefit he re-
ceived. This is known as the benefit theory of taxation
that individuals should contribute to the state in propor-
tion as they are benefited by it. It was pointed out that
larger exactions could justly be made from the wealthier
classes because the state was giving them more benefit
through protecting a larger amount of property.

Difficulties with Benefit Theory. Difficulties at once ap-
pear in attempting to use benefit as a measure of the
amount of taxes to be paid. The state gives a number of
common benefits to all, such as the guarantee of life,
liberty, and the pursuit of happiness. Just what the
benefit of this immaterial service is worth it is of course
impossible to measure. No individual can say just what
good the standing army, or the navy, or the city police
force is to him. No estimate could be formed until the
service was removed and the situation then compared
with the previous one. Not all services are of this in-
tangible nature. In some cases a rather definite estimate
can be formed of the value received from the public ex-
penditures. It is often true, however, that those who
receive the most direct benefits are able to pay the least
in return. If revenues were to be exacted according to
services rendered, a substantial amount would come from
such public institutions as asylums, poor farms, etc. The
inmates of these receive their all from the state clothing,
food, shelter, protection, and medical services. In return
they are unable to give anything for this consideration in
their behalf.

The benefit received from the state may explain to a
rich bachelor why he is expected to contribute, but it does



108 OUTLINES OF PUBLIC FINANCE

not convince him that it is just for him to contribute more
into a fund, a large part of which is used for education,
than does a man whose children are availing themselves
of this utility. Likewise many other examples can be
called to mind of where the payment required is so out of
proportion to the direct benefit received that it is evident
that some other criterion must be found for the measure
of taxes.

Attitude of Courts. In spite of the difficulties with this
measure of taxation, the courts have continued to give it
an important place in their decisions as to justice. The
line of reasoning is that there is a relation between the
amount of property held, or the amount of income re-
ceived, and the protection given by the state. The recog-
nition is made, however, that other benefits exist which
cannot be measured, and that a tax based upon the
benefit received from the protection of property or income
is only an approximation of justice.

67. Faculty Is Usually a Satisfactory Measure for Taxes.
The difficulties encountered in attempting to use the
benefit theory soon led to numerous other proposals. Some
were simply modifications of this theory, while others
sought justice in entirely different lines. The theory
which came to be generally accepted as the one which
would most nearly approximate justice is called the fac-
ulty or ability to pay theory that is, every individual
should pay to the support of the state according to his
ability.

Adam Smith stated the theory in his first canon of taxa-
tion, yet connected it with the idea that benefits measured
ability. Mill approached it from the idea of equality of
sacrifice. Equality should be the rule in taxation, since
it should be the rule in all affairs of government. The
state made no distinction in the strength of individual
claims upon it, consequently its requirements should fall
with the same weight upon all. In this way the least
sacrifice would be felt by the whole. His criterion of



TAXATION 109

equality was that taxes should be so apportioned that in
the contribution of each person no one would feel more or
less inconvenience than any other person. He realized
that this standard of perfection could not be completely
realized, but that the first object should be to know what
perfection is. 1

In this discussion Mill embodies the real justification of
ability to pay as the basis for justice in measuring taxes.
It is in the nature of the state itself. It is an existing
entity only because of the citizens which make it up. If
these are destroyed the state no longer exists. It is an
organization, then, of very much the same nature as other
organizations made up of the membership of individuals,
and whose perpetuation depends upon the interest of the
members. If the membership of a church, lodge, or college
fraternity is destroyed or becomes disinterested, the or-
ganization expires. The state is of much the same nature,
and its continued existence is, or should be, of such vital
interest to each member that its funds can justly be
secured on the same basis as in a church, or other similar
organization. Here the members are not expected to con-
tribute in respect to the benefit received, which may be
immeasurable, but in accordance with their ability. Like-
wise, in raising a building fund, a fraternity expects an
alumni member who has the ability to contribute liber-
ally, while a small amount or nothing is expected of a
student member with little means. It is because of the
nature of the relation of the citizen to the state that taxes
should be levied in accordance with the ability to bear
them.

68. Many Problems Arise in Measuring Ability. The
decision that taxes should be measured by ability to pay
by no means gives a solution to all tax problems. One of
the most puzzling questions is how ability can best be
measured. In early stages of development this was com-
paratively easy. There was little difference in the owner-

1 Mill, Principles of Political Economy, bk. v, chap, ii, sec. 2.



110 OUTLINES OF PUBLIC FINANCE

ship of property, and a poll tax was equitable. As soon as
differences in property developed, however, the idea of
equal obligation vanished and poll taxes now have only
a small place in fiscal systems. The first property distinc-
tions were between those who owned some land, cattle,
slaves, etc., and those who owned more of these same
commodities. As industry developed differences in capi-
tal, wages, and incomes had to be considered in arriving
at the ability to pay. Personal property, both tangible
and intangible, must now be considered, as well as the
earlier forms of wealth. In assessing the product of land
or industry, choice must be made between gross product
and net product. Taxes which can be shifted must be
weighed against those which cannot when the determina-
tion of a proper base for taxes is under consideration.

Proportional Taxes. Land, income, property, imports,
or domestically produced goods might be considered as a
just base for measuring the ability to pay taxes. With
this decided, however, the method of assessment becomes
important. Some have contended that more justice is
secured when the same proportion is taken from each
base, no matter what the size. This is known as propor-
tional taxation the rate remains the same, no matter
how large the base. If 2 per cent is taken from a base of
100 and 1,000, the result is that proportional amounts
have been taken 2 r the amount taken from the 100,
is to 100 as 20, the amount taken from the 1,000, is
to 1,000. The advocates for this method claim that its
justice lies in its definiteness. It is sometimes admitted
that proportional amounts do not always mean equal sac-
rifices, but it is contended that greater injustice will result
if proportion is abandoned. As an early writer put it,
when proportion was abandoned you were at sea without
rudder or compass, and there was no amount of injustice
or folly you might not commit.

Progressive Taxes. Many authorities, on the other
hand,, believe that justice,, equality of sacrifice, and ability



TAXATION 111

to pay can be measured more accurately by using pro-
gressive rates that is, to have the rate increase as the
base increases, and hence take a greater proportion from
a large base than from lesser ones. This system is known
as progressive taxation. Two per cent from a base of
1,000, 4 per cent from a base of 10,000, and 6 per cent
-fronTa base of 100,000 would represent a progressive
scheme.

The first justification for progression is that it more
nearly secures equality of sacrifice than does proportional
taxation. To take $100 from a base of $1,000 would
entail a much greater sacrifice than to take $1,000 from
a base of $10,000. In the one case only $900 are left,
while in the other $9,000 are left. To give up the $100
may mean an encroachment on necessities at least very
much more of an encroachment than to give up the
$1,000. A second important justification for some rate
of progression as best measuring ability is that, as wealth
increases, the ease of producing more wealth increases
faster than at a proportionate rate. That is, the diffi-
culties that must be overcome in producing a second
$10,000 are very much less than those for producing the
first $10,000; the difficulties in obtaining the second half
of the $1,000,000 are much less than those in obtaining
the first half. As wealth or incomes increase, therefore,
the owners become more than proportionately able to
meet tax burdens.

Degressive Taxes. One important objection to pro-
gressive taxation is that with its adoption any definite
rule is abandoned, while the only logical stopping place
is 100 per cent, or confiscation. When this is reached the
source of the tax will be destroyed. This difficulty is
usually alleviated by making the rate degressive that is,
to have the rate increase as the base increases, but by an
ever decreasing amount. This system is known as de-
gressive taxation. A true progressive increase would be
6, 8, 10, etc., until 100 were reached. Degression
would make each increase less than the preceding one, so
that the rate would always be approaching 100, or some
other definite amount as a limit, but would never reach
it.