Government Industries May Have the Effect of
Excise Taxes. It was pointed out hi an earlier chapter
that a state may take over and conduct an industry, and
that in doing this it may be impelled by any one of several
motivating forces. If the thing which leads the state to
enter industry be primarily fiscal or sumptuary, then the
effect is much the same as that produced by the use of
excise taxes. As long as the motivating force is to give a
service at the lowest possible cost, the situation is differ-
ent. When Queen Elizabeth granted monopolies to par-
ticular industries in return for a payment to the state,
while it was not precisely a state industry, yet the effect
was much the same as if there had been a levy upon the
articles produced. The plan of producing and distributing
intoxicating liquors which is used by some of the smaller



EXCISE, CAPITATION, AND BUSINESS TAXES 221

European countries, as well as the state dispensary sys-
tem, which was formerly used in South Carolina, are
examples of the interference of governments in industry
for sumptuary purposes. At present, in some of the Euro-
pean countries, government monopolies are maintained
over particular industries, primarily for the purpose of
securing revenues. Monopolies of the salt and match
industry are found, but the best example is the tobacco
monopoly, which is found in Austria, Italy, and France.
The most systematic use of this monopoly is in France,
and as an illustration of a government monopoly for
revenue, a brief examination will be beneficial.

French Tobacco Monopoly. The French tobacco mo-
nopoly is by no means a new experiment, but was begun
nearly two hundred and fifty years ago, and has had an
uninterrupted existence for more than a hundred years.
The growth of tobacco is prohibited except in certain
districts, and here it is only allowed by persons to whom
licenses have been granted. Painstaking government su-
pervision and inspection are carried out, primarily to pre-
vent any of the crop from passing into other hands than
those of the government. The prices allowed for the crop
are determined by a board of experts. The manufactur-
ing is carried on in government factories, and the selling
is done by government officials. As a general thing the
price has been much higher for tobacco in France than in
most other countries. It has been so high, in fact, as to
act to some extent as a sumptuary institution, yet even
with this situation enormous revenues are secured.

Government Ownership. This is not the place for a dis-
cussion of the merits or demerits of government owner-
ship and operation of industry. That it can be used suc-
cessfully, both for fiscal and sumptuary purposes, cannot
be denied. This does not mean, however, that the state
can enter all fields of industry to advantage to its citizens.
While revenue may be secured, the keenness in develop-
ing a perfected plant, and in adopting more effective pro-



222 OUTLINES OF PUBLIC FINANCE

ductive processes, may be much less than if the plants
were competitively run by individuals. In such cases the
patrimony of the state is impaired, and a greater burden is
placed upon posterity because their income will not be as
great as it might have been. The quality of materials
and services is not always of the highest, consequently all
these indirect effects must be weighed when a question of
the state's entering industry is under consideration.

123. Capitation Taxes Are No Longer Important in Fis-
cal Systems. Capitation or poll taxes have never occu-
pied a place of importance in Federal revenue systems,
yet they have played a role of more or less importance in
some of the states and minor political divisions. Their
importance is waning, however, and consequently this
source of revenue warrants but a brief discussion. In the
early history of many countries poll taxes occupied the
place of primary importance in fiscal systems. The injustice
which comes from a uniform assessment upon individuals
was soon felt, and the tax, while still often designated as
the poll tax, was graduated according to property, per-
sonal rank, or some other such evidence of ability to meet
burdens. In many cases the poll tax has gradually de-
veloped into other forms of taxes where an attempt is
made to levy in accordance with the ability to pay. In a
few foreign countries, however, the tax is still assessed at
a definite amount per capita.

In American States. The most extensive use of the poll
tax has been in the American states. At the beginning of
the present century its use was still found in about half
of these commonwealths. Its retention is most general
in the Southern and some of the New England states.
Its use was extensive in the Colonies, and frequently the
entire amount of revenue was collected from this source.
Gradually, however, its importance as a source of revenue
was replaced by other taxes, yet the payment of the poll
tax was often retained as a prerequisite of certain political
privileges, usually the right of suffrage. The fiscal irn-



EXCISE, CAPITATION, AND BUSINESS TAXES 223

portance of the tax throughout its history has been small,
while frequently great importance has been attached to
the other aspects.

Objections to Poll Tax. The poll tax is the source of
much corruption and little revenue in the states where it
is still retained. In many of the Southern states the pay-
ment of the poll tax has been made a prerequisite to suf-
frage, with the express intention of limiting the number of
voters. This purpose often has been worse than frus-
trated by unscrupulous politicians, who make a practice
of paying the tax in return for the support of the voter.
It was the development of this practice which led many
of the New England states to give up this qualification
for suffrage.

In most states and localities where the tax is retained
as a fiscal measure, it is unproductive of revenue because
no attempt is made to administer it. The amount of
the tax is so small that, where it cannot be assessed and
collected in connection with property, the administrative
expense proves to be a greater item than the amount of
the tax itself. It is, therefore, easy to explain the gen-
eral reports from the various officials that no attempt
has been made to collect the tax, or that the returns from
this source have been insignificant.

Where the tax is levied by local governmental units it
is usually for some specific purpose, such as schools or
roads. The old payment of services is still exacted in
some quarters in the form of requiring every male citizen
between certain ages to execute a given number of days'
labor on the highways. The results are usually not satis-
factory, and the plan is gradually going into discard,
while the highways are kept up by expenditures from the
general tax fund.

The outstanding objections to the modern use of the
poll tax do not justify its retention to anything like the
extent it is still found in the American commonwealths.
It never has been, and never will be, a form of taxation



221 OUTLINES OF PUBLIC FINANCE

which is popular with the citizenship of a country, conse-
quently an extensive evasion may be expected. To be a
general tax, the amount of the levy must be small, and
because of the administrative expense involved, a thor-
ough collection cannot be expected. The use of the tax
as a political prerogative has been the source of so much
corruption as to leave nothing to be said in its favor.
From the fiscal, political, and ethical points of view,
therefore, the poll tax is doomed, and its retention often
can be explained only because of the selfish designs of
political parties.

124. Business Taxes Have Been Extensively Developed
in France and Prussia. In these days of excessive public
expenditure and consequent demands for revenue, fiscal
authorities of all political units are anxious to discover
untapped sources of funds, and, if such are discovered, to
determine the most successful way of making them pro-
ductive. Business and license taxes are one of these
sources which have been used only to a small extent in
the United States, except in certain sections, until com-
paratively recent years. Other countries have preceded
in the use of these taxes, and have worked out de-
tailed systems, some of the successful of which can be
noted with profit by American students, since this method
of taxation doubtless will be extensively used in the future.

Business Taxes in France. The system of business
taxes which had been worked out in France before the
Great War represents, perhaps, the most thorough and
detailed development in fiscal machinery of this na-
ture. Only the briefest outline of the plan will be at-
tempted here. Certain definite principles are recognized,
and these are embodied in the formulation of the sched-
ules. It is assumed, in the beginning, that certain forms
of industry are more profitable than others; that even in
the same class of industry profits vary directly with the
population; that the profits of a manufacturer or mer-
chant will ordinarily vary directly with the size of the



EXCISE, CAPITATION, AND BUSINESS TAXES 225

site which is occupied; and that the kind of residence
which the business man occupies is often an indication of
his business success.

In arriving at the tax assessment, two classes of rates
existed the fixed and proportional. To arrive at the
former three schedules were used. Schedule A includes
merchants and professional classes. The merchants are
further classified as to the nature of the business, whether
it be wholesale, retail, or a combination. After the de-
termination of the kind of business, then it must be placed
in one of the nine classes according to population. Sched-
ule B includes bankers, department stores, transfer com-
panies, etc. The classifications in this group are based
upon the population of the town where the business is
located and upon the number of persons employed.

Industrial establishments are placed in Schedule C.
Population is not used as a criterion of classification here,
but a fixed rate is levied upon each industry of the same
kind, while a variable rate is based upon the amount of
profits. In addition to these schedules another tax is
assessed, w^hich is based upon the site value of the resi-
dence of the individual, together with the value of the site
used in his business. Certain classes, such as lawyers,
physicians, and others of a similar nature, are subject only
to this latter tax.

Tax in Prussia. For many years Prussia used a similar
method of taxing business organizations, but in 1891 the
basis for classification was remodeled. Population of the
place in which the business was located was no longer
used as a principle in classification, neither were the in-
dustries divided into classes because of the nature of the
business. The entire classification, under the revised plan,
is based upon the capital invested and upon the annual
earnings. The earnings are used as the primary basis of
classification, with capital as a modifying factor, in divid-
ing industries into four classes, and the tax is so graduated
as to take about 1 per cent of the earnings.



226 OUTLINES OF PUBLIC FINANCE

The French system appears exceedingly complex, but
does possess some advantages. The business man or his
business is subject to no investigation by fiscal officials,
and consequently the tax is not unpopular. The tax,
moreover, is not upon actual earnings, but upon what
should be earned, ordinarily, under given conditions. The
tax penalty is not upon the enterprising entrepreneur of a
particular class, but upon the laggard. The necessity of
relying upon declarations of the taxpayer is also elimi-
nated. Many inequalities doubtless have arisen, yet the
advantages somewhat compensate for them. The system
has been productive and provided no small part of the
pre-war revenues.

125. Business and License Taxes May Be Extended by
American Fiscal Authorities. The methods to be used by
the different political divisions of the United States in
securing increased revenues, has been an important phase
of recent fiscal discussion, and no little attention has been
given to the possibilities of business and license taxes.
It must not be inferred from this, however, that business
and license taxes have not previously had a place in our
fiscal system. In many of the states they were among
the early sources of revenue, and in some of these states
have had a continuous existence to the present time. The
use of the various kinds of franchise taxes upon corpora-
tions is, of course, a tax upon business, which has so in-
creased in importance in recent years as to deserve treat-
ment in a separate chapter.

Present Use of Tax. The most extensive use of this
form of revenue has been in the Southern states, where
the rates have been gradually increased and extended to
cover a wider range of occupations. Nearly all the states
have made use of the license payment for the purpose of
regulation, as in the case of peddlers, sale of liquor, etc.,
but often the primary consideration was sumptuary
rather than fiscal. Yet in more than one third of the
states rates are assessed against occupations and trades,



EXCISE, CAPITATION, AND BUSINESS TAXES 227

primarily for the purpose of raising revenue. They are
frequently used by the state and county governments,
but the most extensive use of the license tax has probably
occurred in municipalities. These taxes are sometimes
used in connection with the property tax, and sometimes
in addition to it.

The use of these taxes differs greatly in the various
political units where they are found and generalizations
are impossible. A few characteristics, however, may be
noted. Manufacturing plants are usually exempt from
the tax, while mercantile establishments nearly always
have been included. In many places licenses are imposed
upon the professional classes, but this is not general.
Usually no classification or graduation has been attempted.
Louisiana has been a notable exception in this respect in
that a rather extensive graduation is provided. The scale
in most cases is arranged on the basis of sales or gross
earnings, while in some cases other factors are considered
in hotels the number of rentable rooms, in theaters the
number of seats, etc. An interesting basis for graduation
which has been used in the Province of Ontario may be
noted here. Municipalities may levy a tax upon trades
and businesses which is to be some percentage of the
assessed value of the real estate occupied by the business.
Businesses are classified as to their degree of profitable-
ness, and the per cent that is assessed, based on this de-
termination, varies greatly.

Objections and Advantages. Much opposition has arisen
to the extension of the use of business taxes. The objec-
tion that such action will repress industry was to be ex-
pected, since it is made against every tax. The problem
of evasion has been, frequently, a serious one, but this
has been because of a lax administration rather than to
any fundamental defect in the system. The objection
that this form of taxes encroaches upon the use of the
property and income tax is not important, since a business
is an entity distinct from its property and from the ir^



228 OUTLINES OF PUBLIC FINANCE

comes of its individual owners. The problem of valuing
such intangibles as franchises and good will would be no
more difficult for this purpose than for any other. Much
has been made of the inequalities that would occur, espe-
cially among competitors, but this, again, would be due,
not to the system itself, but to an improper classification,
graduation, or administration.

There is, on the other hand, much to be said in favor of
the extension of the use of business and license taxes. One
of the first considerations is the fiscal one they will pro-
duce revenue quickly, at a low cost, and with compara-
tively little objection. This has been demonstrated by
their use not only in this country, but in other countries.
Business, as a unit, possesses a peculiar ability to bear
burdens because of the expenditures the various political
units have made in its behalf. The Federal government
maintains standard weights and measures, a coinage sys-
tem, and regulates transportation rates; the states main-
tain bureaus of research of various kinds, and the munic-
ipalities provide police, fire, and sanitary protection.
Since business organizations do have abilities to meet
burdens, and since this ability is greatly enhanced by gov-
ernmental activities, it is all the more reason why busi-
ness organizations of various kinds mercantile, manu-
facturing, and others should contribute their just share
to the general public treasury.

Use in Future. It is probable that a larger percentage
of state and local revenues will come from these sources
in the future than in the past. In many cities and states
the increase in the returns has been marked. The possi-
bility for the increase in the number of license charges, as
well as an increase in the revenue therefrom is, in many
places, unbounded. The licensing of automobiles by the
states, while of some regulative value, has proved a profit-
able source of revenue and has but suggested future pos-
sibilities. The state of Illinois, for example, with a license
charge much lower than that found in some states, col-



EXCISE, CAPITATION, AND BUSINESS TAXES 229

lected nearly five and a quarter million dollars during the
first half of the year 1920. This can also be made a fruit-
ful source of revenues for municipalities, and many have
begun to avail themselves of it. The licensing of occupa-
tions has not been carried to the extent that it might be,
either from the regulative or the fiscal point of view. In
view of the fact that some remunerative sources of rev-
enue have been cut off, and that expenditures are con-
stantly increasing, it may be confidently expected that
both our states and municipalities, if not the other politi-
cal divisions, will make a more extended use of business
and license taxes in the future than they have in the past.