CHAPTER X

EXCISE, CAPITATION, 1 AND BUSINESS TAXES

112. The Federal and State Governments Impose Many
Taxes. The customs duties have received more consid-
eration than any other form of revenue which has been
used by either the Federal or state governments. This has
been because of the economic and industrial significance
rather than because of any fiscal importance which may
be attached to them. Other sources of revenue of im-
portance exist, however, which are no less remunerative.
It is proposed in this chapter to discuss some of these
sources from which the Federal and state governments
secure funds. The treatment of a part of the sources of
revenue, however, such as the taxation of incomes, cor-
porations, property, and inheritances, will be reserved for
separate chapters.

An important source of revenue of the Federal govern-
ment which, like the customs duties, is not used by the
states or minor political units, is what is frequently called
the excise tax. Until a few years ago the significance of
Federal revenues was almost synonymous with customs
duties and excise taxes. The scope of Federal revenues
has been extended, however, in spite of the constitutional
limitation as to the levy of direct taxes, until nearly all
the sources of revenue which are used by the states must
also be considered as a part of the Federal fiscal system.
It is only in recent years that the Federal government has

1 There is no logical relation between capitation taxes and excise or
business taxes. They are the remnant of an earlier fiscal system, and the
brief consideration which they warrant is inserted in this chapter.



EXCISE, CAPITATION, AND BUSINESS TAXES 203

levied taxes upon corporations and incomes, and it is more
than likely that the emergency use of the inheritance tax
during the war will remain a part of the Federal source of
revenue.

Because of constitutional restrictions, and because of
the peculiar adaptability of some kinds of taxes to the use
of the different political units, it is not to be expected
that the different governmental units will derive their
revenue from exactly the same sources. It will be true,
however, that the overlapping of the sources of revenue
will be more extensive in the future than it has been in the
past.

The breakdown of such sources of revenue as the capi-
tation taxes, and the continual increase in the pressure
for additional funds, has led to the inclusion of new
sources of revenue. One of the most important of these
in the states and minor political divisions, is the use of
licenses and business taxes. In this chapter consideration
will be given to the excise tax, the capitation tax, and
business and license taxes.

113. Excise Duties Are Taxes upon Consumption.
Present excise taxes have, to a large extent, replaced what
were once called direct taxes upon consumption. By the
expression " direct consumption taxes " was meant that
the tax was placed upon the consumer of the commodity
which was the basis of the tax. The use of this form of
tax has existed from the beginning of revenue systems.
The exaction of a share of the commodities which were
produced somewhat resembled this form of levy. Later
the taxes were levied upon particular classes of goods
more with the idea of discouraging their use than with the
hope of securing revenue. Had revenue been the primary
object, the articles chosen would have been in the class of
necessities instead of luxuries, as was usually the case.

The goods most commonly taxed were plate, furniture,
horses, dogs, and servants; later houses were put in tne
same category. While levies on houses were regarded as



204 OUTLINES OF PUBLIC FINANCE

consumption taxes, they perhaps more nearly corresponded
to the modern concept of property tax. In modern times
little use is made of this system, yet all are familiar
with some close approximations which were used during
and after the Great War. The tax which the purchaser
was compelled to pay on theater tickets, railroad tickets,
automobiles, and on many articles of wearing apparel
which retailed for more than a certain amount, are well
known examples. A large class of commodities which
were regarded as luxuries also were subject to the tax.

Modern Excise Taxes. This class of taxes has been re-
placed, to a large extent, by the modern excise tax which
is levied upon the commodity in some stage of its produc-
tion before it reaches the consumer. While the burden
may be as heavy, it does not raise so much opposition,
since the consumer does not realize that a tax is being
paid. From the administrative standpoint, also, the mod-
ern excise tax is more desirable. Before the industrial
revolution the majority of articles were domestically pro-
duced and consumed, and there was but the one place
to levy the tax.

With the development of the factory system of produc-
tion, however, the advantages of using the more indirect
method of levying taxes upon commodities forced itself
upon the attention of fiscal authorities. It is compara-
tively easy, for example, to place a tax upon one million
articles at the place where they are produced, while it
would be a task of no small proportions to collect it from
each of the ultimate consumers. Where the direct con-
sumption tax is used, moreover, because of administrative
difficulties, it must be limited to a comparatively small
list of objects, which usually have been luxuries. The
demand for this class of goods is comparatively elastic,
and a tax would drive the consumer to use substitutes
a feature which destroys the adaptability for fiscal
purposes.

Shifting and Incidence. The adoption of the excise



EXCISE, CAPITATION, AND BUSINESS TAXES 205

method of levy, however, does not destroy the fact that
the taxes upon commodities, wherever levied in the proc-
ess of production, are usually burdens upon the consumers
of the goods. Whether the tax will be shifted to its full
amount will depend upon the principles which govern the
shifting and incidence of taxes. A review of these princi-
ples, which were discussed in the chapter on "The Shifting
and Incidence of Taxes, " will be of benefit here.

The particular phase of shifting and incidence which is
applicable to the present situation is the relative elas-
ticity of supply and demand in the case of the taxed good.
It may be possible, in the process of readjustment follow-
ing the imposition of a tax, that the retail price of the
commodity may not be raised by the amount of the tax,
or may not be changed at all, if the supply be inelastic
and the demand elastic. The current assumption, how-
ever, that taxes on commodities will be shifted to the con-
sumer, is likely to be largely true. In the final result of
the burden there may be little difference whether the tax
be laid directly or indirectly in either case the burden of
a tax on commodities of consumption will usually rest on
the consumer.

114. The Use of Excise Taxes Presents Various Prob-
lems. In framing and administering a system of excise
taxes, a number of difficulties present themselves. Not
least among these is the problem of making the taxes
conform to the principles of justice in taxation. The old
diffusion theory held that any tax, if left in the fiscal sys-
tem long enough, would finally become so diffused and
broken up that it would fall with practically an equal
burden upon the whole of society. If this were true the
only thing necessary to justify excise taxes would be to
leave them till their burden became generally diffused. It
is largely from this reasoning that the dictum, an old tax
is a just tax, arises.

A moment's reflection, however, will show the fallacy
of the above conjectures. Suppose a tax be placed upon



206 OUTLINES OF PUBLIC FINANCE

one particular commodity tobacco, for instance, and on
no others. It is difficult to see how, no matter how long
the tax remained in force, it would place a burden of
any moment on others than those who were connected
in some way with the production or consumption of
tobacco. To argue that such taxes conform to justice is
to affirm that the amount spent is the best measure of
taxpaying ability. Yet there is little relationship between
what a person spends and his ability to bear burdens.
One man may have a large family and it will be necessary
for him to spend his entire income to provide them with
necessities, without any added tax burden, while another
man with the same means may have no family to support.
Each may spend the same amount, yet their taxpaying
ability be entirely different.

Classes of Goods Taxed. The articles upon which the tax
shall be levied are an important consideration in connection
with excise taxes. In the earlier development of this form
of revenue, attempts were made to place the tax upon
every class of commodities, so that equality of burden
might be secured. It was even considered by many that
this form of revenue should replace all other forms. Such
a multiplicity of tax bases, especially in modern times,
would present such a detail and expense of administra-
tion, and be so prejudicial to the peace of mind of indus-
try and individuals that even to suggest such a policy is to
augur defeat.

Since, then, some selection must be made in the number
and kind of articles upon which the tax is to be levied, the
choice of the items becomes a problem of first importance.
The amount of revenue expected to be secured from this
source, together with the other taxes which are in use,
with their incidence, must be considered. If a large
amount of revenue is anticipated the tax must be levied
upon a different class of commodities than if only a small
amount is to be secured.

From the standpoint of justice excise taxes should not



EXCISE, CAPITATION, AND BUSINESS TAXES 207

be levied upon articles which would place an undue bur-
den upon a class of people that is particularly hard hit by
other taxes. It may be considered either that all should
have an exemption equal to a minimum of subsistence, or,
on the other hand, that every citizen should contribute
to the support of the state.

The articles upon which an excise tax would be placed
would differ according to the principle adhered to. If it
be deemed wise to exempt a fixed minimum, then no tax
should be placed upon such necessities as salt, sugar,
flour, and other articles in the class of necessities; if, on
the other hand, it be held that all should contribute some-
thing to the state, no surer method of accomplishing this
can be devised than by placing a tax upon such articles
as those just mentioned. If the idea be to make excise
taxes provide a sort of progressive element to the tax
system, then the levy will be upon objects which enter
primarily into the purchases of the richer classes. If the
primary object be to secure revenue, with no consideration
as to the justice of the incidence, then the objects chosen
for the levy would be the class of goods which are con-
sidered as necessities by the large middle class of citizens.

In the determination of the rate, where the yield of
revenue is the prime consideration, much attention will
have to be directed to the elasticity of the demand for
the various bases of the tax. The actual results from ex-
cise taxes, therefore, because of the many more or less
indeterminate factors connected with them, may vary
greatly from the anticipations which were in mind at the
time of levy.

115. Excise Taxes May Have Industrial and Social
Effects. The use of excise taxes, aside from any fiscal
considerations, may have intentional or unintentional
effects upon industrial and social activities. Obviously,
these effects cannot be accurately measured, perhaps in
no instance, but this does not destroy the fact that these
results exist.

14



208 OUTLINES OF PUBLIC FINANCE

May Counteract Protective Tariff. One use which can
be made of the tax is to offset the effects which may be
caused by other parts of a fiscal system. A good example
of this function is the concurrent use of customs duties
and excise taxes which sometimes occurs. Take, for ex-
ample, the case of a country which wishes to levy an
import duty upon a class of goods which is being pro-
duced under competitive conditions, both at home and
abroad a feature which it is desired to continue. The
levy of the import duty would afford protection to the
home producer unless some equalizing burden be placed
upon his product. The excise tax can be made to fill
such a need.

Suppose the commodity in question be sugar, which is
being produced in each of two countries at about the same
degree of advantage. One country levies a tax of two
cents a pound upon the product from the other country,
which is such a handicap that no sugar is imported, the
home producers have a monopoly of the situation, the
price of sugar will go up, and the government will get no
revenue. An excise tax, however, of two cents a pound
on sugar produced at home will place an entirely different
aspect on the situation. No advantage will be given to
either home or foreign producer because of the tax levies,
and the government will get two cents a pound from all
sugar consumed.

May Affect Progress. Care should be taken in placing
excise duties not to interfere with the natural progress of
industry. In order to prevent fraud and evasion, govern-
ment regulation of the production of taxed commodities
may be necessary. This regulation may be of such a
nature as to check invention and hinder the adoption of
more effective processes of production, and society may
suffer more than enough to compensate for the revenue
which was gained by the state.

The indirect effect of excise taxes upon industry may
also vary greatly. If the tax be levied upon articles which



EXCISE, CAPITATION, AND BUSINESS TAXES 209

are the basic products for industry in general, the effect
will be much more widely felt than if the levy be upon
articles which have little connection with industry. The
effects of a heavy excise tax upon the production of iron
ore, for example, would be felt by nearly all industries,
while a tax upon such an article as coffee would have
indirect effects of little significance. The taxation of
productive materials, such as iron, presents problems
which are not found in connection with the taxing of con-
sumers' goods. To place an estimate upon the real effects
of the duties is very much more difficult because of the
many processes of shifting which are likely to occur. The
ultimate burden on the consumer is likely to be greater,
moreover, because the tax has been advanced very early
in the stage of production, and the individual who has
made the payment will seek a rise in price great enough
to repay him for having waited to collect the tax from the
consumer.

Sumptuary Taxes. The primary purpose for the levy
of excise taxes is often sumptuary. The desire to limit
the consumption of commodities which are considered
harmful has led to their being taxed, at varying rates,
with the expectation that the increased price would lessen
the demand. The fiscal aspect is overshadowed in these
cases by the expected beneficial effects on the moral and
social uplift of the community. The most common exam-
ple of this class of excises has been found in connection
with intoxicating liquors, tobacco, patent medicines, play-
ing cards, and similar articles. The diminution in con-
sumption, however, has not always been what was antici-
pated, and the anticipated results have often been de-
feated by the adulteration of the product, so that a less
desirable commodity is disposed of at the former price.
The use of the excise tax as a sumptuary measure has
not been entirely satisfactory.

Care must be taken, in formulating the excise system,
to make evasion difficult, or at least not to make it profit-



210 OUTLINES OF PUBLIC FINANCE

able. Evasion is likely to arise when the attempt is made
to tax luxuries in proportion to their value. The tempta-
tion is at once given for undervaluation of the products,
which not only defeats the purpose of the tax, but has a
demoralizing effect upon the citizen. The less the incen-
tive to fraud and evasion, therefore, the more salutary
will be the social and moral effects of excise taxes.

116. Different Methods Are Used in Levying Excise
Taxes. The original levy of the excise tax may be made
in different ways, even though the burden is expected to
rest upon the final consumer of the product. These ways
may be divided into two general classes: a license fee or
tax is imposed upon either the producer or seller of the
commodity, or the tax is levied against each unit of the
article. These methods may be used singly or in com-
bination. In the United States the license taxes are col-
lected by means of stamps or licenses which must be con-
spicuously displayed in the place of business. The pur-
chase of the license is a transaction which is necessary
before the conduct of the business becomes legal. Severe
penalties are liable to be inflicted in cases of default. All
persons who are subject to the tax must register with the
internal revenue collector of the district in which he is
located, and furnish specific information of various kinds
in regard to his business. The tax is a graduated one, and
the rates before the Great War ranged from $600 on the
manufacturers of oleomargarine to $20 on the retailers of
malt liquors. The dealers in tobacco were formerly re-
quired to pay a license, but this stipulation was repealed
in 1890.

Tax upon Units of Goods. The levy of a tax upon the
units of goods produced is far more important than the
levy upon producers and dealers. This, in fact, consti-
tutes the real internal revenue system, while the license
taxes are merely auxiliary measures. In the case of the
levy upon the commodity the payment of the tax is usu-
ally required from the manufacturer, for it is here that



EXCISE, CAPITATION, AND BUSINESS TAXES 211

the goods are concentrated, and hence the administrative
work is reduced to a minimum. The most common
method of collecting this form of tax is from the sale of
stamps. These are canceled by the proper official, and
wherever possible are affixed to the package containing
the goods in such a way that the stamp will be broken
upon opening the package. The failure of a package to
bear a stamp is evidence that the tax has not been paid,
and constitutes a basis for prosecution. Where the stamp
cannot be affixed to the article, it is required to be con-
spicuously posted hi the place of business. Some fraud
has come from the re-use of stamps, but this has been
reduced to a minimum.

Commodities Taxed. The principal commodities upon
which the excise tax has been levied in the United States
are distilled and fermented liquors, tobacco, oleomarga-
rine, playing cards, and patent medicines. In times of
emergency, such as a war, this list has been greatly ex-
tended. Cigars and cigarettes are graded both as to weight
and value, while the tax on the other commodities ranges
according to quantity. In countries other than the
United States, excise taxes have been placed upon such
articles as sugar, silk, chocolate, and salt. Salt was for-
merly extensively used as a basis for taxes, and collection
was made in the form of licenses upon producers and dis-
tributors, or by the granting or maintenance of a mo-
nopoly. The tax was productive, but unjust, because it
fell with about the same weight upon all classes of individ-
uals, no matter what their ability to meet the burden.