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Taxation for non-fiscal purposes

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TAXATION FOR
NON-FISCAL PURPOSES
A Thesis
Presented to
the Faculty of the Department of Banking and Finance
University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Master of Business Administration
hy
Henry F. Schultz
May 1941
UMI Number: EP43157
All rights reserved
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This thesis, w ritten by
...............
u n d e r the d i r e c t i o n o f hXs.. F a c u l t y C o m m it te e ,
a n d a p p r o v e d b y a l l it s m e m b e r s , has been
presented to a n d accepted by the C o u n c i l on
G r a d u a t e S t u d y a n d Research in p a r t i a l f u l f i l l ­
m e n t o f the re q u ire m e n ts f o r the degree o f
-MASTER-BUSIHESS-.ADMIMXST-HAT-IOBI-.
Dean
Secretary
D a t e .M & J ..l.y .1 9 .b X .
Faculty C om m ittee
C hairm an
.......
TABLE OF CONTENTS
CHAPTER
I.
II.
III.
IV.
V.
INTRODUCTION
PAGE
...............
1
NATURE AND FUNCTION OF THE STATE . . . . . . . .
TAXATION, ITS DEVELOPMENT
.............
THE QUESTION OF SOCIAL TAXATION . . .
........
ARGUMENTS FOR AND AGAINST NON-FISCAL TAXATION . .
BIB L I O G R A P H I .......................................
8
30
59
77
91
CHAPTER I
IINTRODUCTION
The first task in the scientific study of any problem
is to clearly define the problem itself, and all related sub­
ject matter.
employed.
Then any one of several techniques may be
Perhaps the most popular approach and the one I
intend to use is to examine the factors of the past which
have built the present situation into a problem.
Without an
appreciation of such preceding events it is questionable if
an accurate evaluation of the current problem is possible.
The Dictionary of Business and Finance-*- defines
"taxation" as:
""The process by which a tax is imposed upon
individuals and enforced for the purpose of providing revenue
to the government of a state.""
"tax" as:
In turn it defines the word
""A compulsory contribution by the taxpayer to
meet the cost of government without any specific return ex✓
cept a share in the general benefits of government.""
At first reading this sounds comparatively simple,
yet upon further study the inevitable conclusion is that the
study of taxation is far from a simple matter.
For the
average layman, the word means little more than that he must
-*-The Practical Handbook of Business and Finance
(Garden City, New York: Garden“^ity Publishing Company,
1930).
put out a certain amount of money at regular intervals to his
government and what then becomes of it he doesn't know, and
in most cases, doesn't care.
On the other hand, those per­
sons who are striving for a better civilization in which to
live find in the intertwining meshes of taxation a most
fascinating problem.
The interrelationships and effects of
taxes are so interlaced that it is practically impossible to
make any clear picture of the conglomeration, yet many folk
are attempting to do this very thing.
Since some form of available revenue is essential to
the existence of any state, it seems certain that taxes must
have existed in one form or another throughout history, or
at least so long as there has been any semblance of state­
hood in existence.
This is true, yet it has only been in
recent years that any thorough study of the field has been
made.
This work has however progressed to such a point
that William Raymond Green feels that we may think of
taxation as a science, although it can hardly yet be con­
sidered an exact science.
He also says that like medicine,
taxation may be looked upon as a progressive science.
The
progress made in recent years has been almost phenomenal
considering that the beginning of its scientific study can
hardly be dated any earlier than 1776 with the publishing
of Adam Smith's famous "Wealth of Nations", in which the
author laid down his now famous canons of taxation, which
are followed even today, at least in theory.
As we read further into the literature on our subject,
we find a large number of definitions of the word "tax”.
Each of them is different, yet they all have certain features
in common.
C. F. Bastable of the University of Dublin says:
n”A tax is a compulsory contribution of the wealth of a
person for the service of the public powers.
P
The late Professor E. R* A. Seligman writes:
A tax is a compulsory contribution from the person
to the government to defray the expenses incurred in
the common interest of all, without reference to special
benefits conferred.3
Another definition is advanced by Antonio de Marco:
The tax is a share of the income of citizens which
the state appropriates in order to procure for itself
the means necessary for the production of general
public services.4
These various definitions agree in at least three
points which may be regarded as essential to any satisfac­
tory definition of a tax.
The first of these is that a tax
is a contribution from the citizens, individually, or in
^C. F. Bastable, Public Finance (London:
and Company, Ltd., 1932), p. 263.
Macmillan
3E. R. A. Seligman, Essays in Taxation (New York:
The Macmillan Company, 1925), p . 263.
4Antonio de Marco, First Principles of Public
Finance (New York: Harcourt Brace and Company, 1935),
p. 111.
groups, for the general or common use of them all as represent
ed in their government.
As pointed out by Professor Seligman
these contributions are enforced without reference to any
special benefits conferred upon the citizens.
This dis­
tinguishes the tax from various other levies of a government
upon its citizens, such as the special assessment, which is
also compulsory but which is measured ty the benefit received,
and the fee which is a noncoercive payment to the government
for an administrative service.
This contributory element distinguishes the present
concept from that held in previous times, particularly
during the Seventeenth and Eighteenth centuries when a tax
was considered a direct payment for definite services
rendered.
This service was generally considered a protec­
tion, but in any case, each side was considered to have
given the other a tquid quo pro.*
As an example of this
idea we find in the "The Leviathan" written in 1651 by
Thomas Hobbes The impositions laid on the people by the sovereign
power are nothing else but the wages due to them that
hold the public sword to defend private men irigthe
exercise of their several trades and callings.
A second characteristic common in the modern
definitions of a tax is that it is a personal obligation.
5
Harley Leist Lutz, Public Finance (New York:
D. Appleton & Company, 1924), p . ?A6 ftn.
The state is looked upon as an association of persons, and it
is these persons, as such, who are responsible for its sup­
port,
This obligation is universal and applies to all,
whether citizens or aliens, who are subject to its jurisdic­
tion,
Upon this ground it becomes the right of a state to
tax its citizens whether they are living at home or abroad,
and to tax all other persons who receive any advantage from
activities conducted within its borders.
This emphasis upon the compulsory aspect of the tax
in the modern interpretation of it is another point in con­
trast with the earlier definitions.
The implication of the
older theories was that the taxpayer could refuse the
services of the state and so avoid payment of the tax, since
the entire concept was based upon the idea of a tax as a
part of a bargain or contract.
This idea was based upon the
fact that in feudal times the ruler depended upon his own
possessions and his domain for all of his income, as a
result, the citizens frequently made contributions to him
for the purposes of the state.
These gifts may have been
prompted by-the love of the people for their ruler, or may
have arisen from,an understanding that it was better to
give than to be levied upon.
Recorded history is not too
clear upon this point.
The late Professor Seligman points out in his study
of the evolution of taxes that there have been a number of
stages covering the entire period of growth from "donum” to
"imposition”.
The original idea of a tax, as he points out,
is that of a gift as represented by the term "donum".
Later
the idea of assistance to the state, expressed in the word
"aid" or "contribution" entered the picture, followed by the
idea of sacrifice, and finally the last state, "compulsion".
Thirdly, these definitions seem to agree that the
purpose of the tax is to provide revenue for the service of
the public powers.
This does not mean to say that all money
collected through taxation will be spent to the advantage of
the state.
There are a number of ways in which the funds
may be dissipated.
Many instances are known where money has
been spent foolishly much to the harm of the state, or it is
possible that the public revenues may be usurped by dishonest
authorities.
These, however, are exceptions and so cannot be
deemed to disprove the above contention although they may
interfere with its proper functioning.
As a result it would
appear rather useless to attempt to frame a definition of
the term tax to include such contingencies.
However, there
is an additional factor which is becoming of importance in
recent times, and that is that taxes may be used for other
honest purposes than for the service of the public powers.
It is these other possible uses of taxes, for social pur­
poses, that this paper intends to discuss.
Such methods
have been supported by some public finance authorities and
condemned by others, such as Professor Lutz who contends that
taxes should be used as a source of public revenues and for
no other purposes.
He, however, goes on to state that the
modern tax concept does not in any way seem to forbid the
use of taxes for other purposes, and as such it may be con•<5»
eluded that.such methods may be inferred to be proper.
It seems extremely interesting to the present writer
that such emphasis upon this question should be made as
late as 19S6 by Mr. Lutz in the face of so many new.taxes in
our own and in other lands which are solely, or largely,
for social purposes.
The growth of such taxes has only
taken place in this country in recent years, but its develop­
ment has been rapid.
The trend is very definite and indi­
vidual instances are becoming more frequent.
We have passed the time when mere fact that revenue
is to be raised for social purposes can be made a
successful objection to a tax.6
^William Raymond Green, The Theory and Practise of
Modern Taxation (Chicago: Commercial Clearing House, Inc.,
19sS)7 p ." 17':
CHAPTER II
NATURE AND. FUNCTION OF THE STATE
Historians and anthropologists, who have studied the
lives of early peoples, have pointed out to us that although
there apparently was a time when men lived comparably sepa­
rate lives, they quickly learned the advantages that were to
be gained from associating with one another.
In the begin­
ning, it was merely family groups working together, but
shortly, different families started working together in a
common cause.
These groups grew larger and larger, and
there gradually evolved what may be looked upon as the first
state.
At just what stage of development the state may be
said to have appeared is somewhat questionable due to the
greatly varying definitions of the term put forward by the
different authorities.
Perhaps the simplest beginning is
suggested by Professor Jens P. Jensen, when he writes of the
«inevitableness of the state.01
In his opinion a state of
some kind appears as soon as persons start co-operating in
a common cause.
These relations with one another make
necessary a functioning authority as to the rules of living
and working together, and for dealing with violations of
“Kxens P. Jensen, Government Finance (New York:
Thomas Y. Crowell Company, 1957), p T T T
these rules.
These duties he considers the minimum functions
of the state,
A slightly more advanced stage seems necessary in the
writings of Emory S. Bogardus who says that until there is
a storage of property suggesting a defense against attack
there is not a state.
Thus in the primitive hunting society
there was" no true state, but with the appearance of the
herdsmen, states began coming into existence.
In order to
keep the large herds of live stock, enemies captured in
battle were not killed but enslaved.
Such exploitation of
human labor is, in his opinion, the economic basis of the
state.
In summary he writes:
"^Social classes develop and
economic differentiation takes place.
Then comes a
♦definitely circumscribed limit* and the practise of
♦dominion* is completed."**2
This idea of the development of a state is similar
to that given by Frans Qppenheimer of the University of
Frankfort-on-Main for he writes:
The State, completely in its genesis and almost
completely during the first stages of its existence,
is a social institution, forced by a victorious group
of men on a defeated group, with the sole purpose of
regulating the dominion of the victorious group over
the vanquished, and securing itself against revolt
from within and attacks from abroad. Teleologically,
this dominion had no other purpose than the economic
2
Emory S, Bogardus, The Development of Social
Thought (New York: Longmans, Green & Co., 1940), p. 378.
10
exploitation of the vanquished by the victors • . •
No primitive state known to history originated in an
other manner,3 ‘
From this he goes on to trace the development of the state
from its crude beginning to a truly national state.
This
period of development is divided into six definite stages
by Mr, Oppenheimer:
fights; (2)
(1)
Robbery and killing in border
Enemies are no longer murdered but are kept as
slaves (also pointed out by Professor Bogardus); (5)
Peasant
groups pay tribute, which may be looked upon as the begin­
ning of taxation; (4)
The uniting of the lands of the
aggressor and of the defeated neighbors; (5)
The lord or
ruler arbitrates the differences between the subjects, and
courts are set up; (6)
achieved*
A sense of »nationality* is
Although this may appear to make a rather sordid
picture, Professor Oppenheimer feels that all of our states
have followed this same course to a greater or lesser degree,
A somewhat simpler development is described by L.
F, Hobhouse who would divide the state *s growth into only
three stages, based upon kinship, upon authority, and upon
citizenship.
The kinship type of state was that which
existed during early patriarchal society, but these soon
passed out of existence, whereas the states based upon
3Franz Oppenheimer, The State, translated by John
M. Gitterman (New York: B. M. Huebsch Company, 1922),
p, 15*
11
authority and citizenship are still in existence today,
Mr,
Hobhouse*s concept of an authoritative state is exemplified
in the monarchlal or autocratic form of government, which
reached its ultimate in the concept of *divine right*, and
in the German organic theory of the state*
This idea of the
state pictures it as a superhuman and would seek the solu­
tion of its problems in the same manner that difficulties
in the human body are corrected.
Thus pictured, political,
economic, and social institutions become literally organs
of the body-politic, or functions of the economic order, in
much the same way that the heart is an organ performing a
necessary function in the human body*
This theory was early
supported by Thomas Acquinas, and even today has its ex­
ponents,
Writing in the July 1938 edition of the "Scientific
Monthly", W, H, Manwearing of Stanford suggests that it
should be given more consideration in the study of our own
problems today, particularly those having to do with labor.
However, despite its present scattered support, it has not
been seriously followed since the collapse of the German
Empire, leaving the individualistic theory in force, by
which the state is an organization of individuals who have
learned to co-operate in order to satisfy their different
individual wants, as well as those of the group.
In this
way each person becomes a *citizen*, reaching his ultimate
position in a pure democracy.
In such a state, government
12
is the will of the masses, expressed either directly, or
indirectly through their representatives.
The basis of such
a setup is individuality and individual liberty to do as one
chooses.
But these principles of liberty, political, social,
economic, intellectual, and religious which appeared to be
gaining an upper hand following the first World War seem to
be being replaced, in recent years, by a new doctrine, which,
although preached by philosophers many years ago, did not
receive a large public support for some time.
Nicholas
Murray Butler has referred to this new concept which is
sweeping the Europe of today as an open and declared enemy
of our historic ideas of freedom.
The doctrine was first
propounded by the German philosopher, G. W. F. Hegel, who
taught that the state must always be antecedent and superior
to the individual citizen, and that the state has in itself
the power, authority, and right to turn the individual to
such purposes and by such methods as may seem most desirable
and wise.
He considers that the constitutional monarch is
the ideal form for a state.
In his opinion pure monarchy
and democracy have only accidental and temporary justifica­
tion, and all of their advantages are also existent in the
constitutional monarchy.
These features, though vital, are
really subsidiary to the more important consideration of
the state.
Although Hegel spoke of his state as an
actualization of concrete freedom, all of those who admire
•
I
democratic methods must take exception to this contention.
This philosophy makes an obvious challenge to the
ideas of democracy and to the rights of the individual as
it completely submerges the will of the individual citizen
to the will of the state.
Under it individuals do not
participate in the building of a great state for they are
merely units of a huge machine which moves on independent
of the desires of its individual parts*
In the beginning
this was taught only as an abstract theory, but it has
been made a reality through the efforts of Karl Marx and
others, who have translated it into real doctrines of
antagonism to free institutions.
Its threat has become so
real that the very foundations upon which our institutions
are built are threatened.
Although not so radical in his viewpoint, Aristotle
also recognized the superiority of the state over the
individual.
In his own words:
. . . it is evident that the State is a creation of
nature, and that man is by nature a political animal.
And he, who by nature, and not by mere accident, is
without a state, is either a bad man or above humanity
. . . Further, the state is Iy nature clearly prior to
the family and to the individual, since the whole is of
necessity prior to the part; for example, if the whole
body is destroyed, there will be no foot or hand, ex­
cept in the equivocal sense, as we might speak of a
stone hand; for when destroyed the hand will be no
better than that. But things are defined by their
working and power; and we ought not to say that they
are the same when they no longer have their proper
quality, but that they only have the same name. The
proof that the state is a creation of nature and prior
S
14
to the individual is that the individual, when isolated,
is not self-sufficing; and therefore he is like a part
in relation to the whole* But he who is unable to live
in society, or has no need because he is sufficient for
himself, must be either a beast or a god: he is not
part of a state*4
In contrast to this idea, instead of holding that
the state is prior to the family, Confucius considers that
the state is the logical step after the family.
upon the state as merely a larger household.
He looks
His basic
idea was that the ruler of a state need only apply upon a
larger scale the same principles to his state which would
apply to his household.
One cannot instruct others who cannot instruct his
own children. Without going beyond the family, the
prince may learn all the lessons of statecraft, filial
piety by which the sovereign is also served, fraternal
submission by which older men and superiors are also
served, kindness by which also the common people should
be ministered unto . . • From the loving example of one
family, love extends throughout the state; from its
courtesy, courtesy extends throughout the state; while
the ambition and perverse recklessness of one man may
plunge the entire state into rebellion and disorder.5
The introduction of the term "State”, however, into
modern political literature in the sense of a body politic
first appeared in the early part of the sixteenth century
in Italy.
Earlier meanings of the word ’’status" and its
^W. D. Ross, editor, Aristotle Selections (New York:
Charles Scribner’s Sons, 1927), pp. 28^-88,
^Miles Menander Dawson, The Basic Thoughts of
Confucius (New York: Garden City Publishing Company, 1939),
P. 172.
15
modern cognates had been used in reference to estates or a
group of estates*
The use of the term as a generic name for
a body politic, whether republican or absolute, was probably
fixed by Ifaehiavelli in his book "The Prince”•
Its earliest
use in English in this connection appears in Starkey’s
’’England” (1538), a book which was based upon Italian
authorities*
The meaning became common in France and England
during the sixteenth century and was adopted into official
language in the expression ’Secretary of State’ an office
held by Robert Cecil under Queen Elizabeth*
In English the
use of the word was probably extended as the older term
"commonwealth” was limited to non-monarchial governments,
but it has never even today become a precise word in English
law.
As a generic term the word was used from the start
to refer to a land, a people, and a government.
In its
present usage it implies some lower limits of size and
civilization, as compared with the early tribes, and also
some degree of political independence, although it is widely
applied to governments which do not claim sovereignty.
As
a result the word commonly denotes no class of objects that
can be identified exactly, and for the same reason it
signifies no list of common attributes which bears the
sanction of common usage*
The word therefore must be
defined more or less arbitrarily to meet the exigencies of
16
the system of jurisprudence or political philosophy in which
it occurs*
The fact that the term usually emphasizes political
organization makes it specially difficult to draw a clear
line between the two words "state” and "government”.
During
the era of royal absolutism, the distinction was of no
particular importance since the sovereignty of the state was
embodied in the person of the monarch, while the people and
the land figured only as patrimony.
The distinction is of
fundamental importance, however, for a juristic theory of
the state,
A series of German theorists from Seydel to
Jellinek looked upon statehood as a legal relationship thus
breaking down the patrimonial concept in favor of a more
juristic view.
The monarch and his government became mere
organs of the state.
In this connection Kelsen has argued
that even the juristic concept of the state produces only
confusion being merely an invention of a fictitious entity
to embody, what is really only a property of the law itself.
The juristic theory of the state should be clearly distin­
guished from the sociological theory of the state.
Thus, to
those who advocate the former ideas, the state is for the
the purposes of practical administration of the government,
and they are not concerned about social ethics or prin­
ciples,
This seems to be the idea of the late Pope Pius
according to an article appearing in the "Commonweal” by
17
James H, Ryan.
fi
To the Pope the state is whatever form of
government has been adopted freely ty a group of people,
regardless of what particular form it might take.
nizes the state as the supreme governing body.
He recog­
However, as
Mr. Ryan points out, this need not be federal, as is ex­
emplified in the case of the States of the United States.
Here the supreme power, theoretically at least, rests in the
government of the individual states and not in the national
government•
Writing in 1791, Thomas Paine pointed out that
government is no more than the management of the affairs of
a nation.
This power is not the private property of any
individual or group but appertains only to the nation as a
whole, and any individual powers or authority that do exist
are given to him by the state.
Abraham Lincoln, writing in 1834 said:
The legitimate object of government is to do for the
people what needs to be done, but which they cannot,
by individual effort, do at all, or do so well for
themselves.'
In the same article he has defined government as
combination of the people of a country to effect certain
R
James H. Ryan, "What is the State?”, Commonweal,
May 29, 1936.
^Michael Oakeshott, The Social and Political Doctrines
of Contemporary Europe (London; Cambridge University Press,
T§39), p.18.
objects by joint effort.”"
These services, Lincoln points
out, necessarily cost money even in the best ordered govern­
ments and so arises the need for taxes.
This more sociological view of a state looks upon it
as merely an association of human beings working together
because their wants are best satisfied by means of public
services.
Proponents of this concept do not look upon the
state as a sacred institution which has been handed down
from generation to generation but picture it as a collective
experiment which is still in progress.
Its development has
depended upon its ability to satisfy human needs, and upon
the idea that government is not the state, but is merely the
agency whereby its ends are better secured.
Government is
but the means of solving the problems of the group as they
arise which they, as individuals, cannot solve.
This idea
of the state of government is not a recent one but seems to
date back at least to Confucius, for he said:
govern
means to rectify.""8
From the great number of varying definitions we may
extract one feature which seems to be commonly accepted that the state is a species of juridical organization of
human beings.
But beyond this point, variations in meaning
®Miles Menander Dawson, The Basic Thoughts of
Confucius (Hew Yorks Garden City Publishing Company, 1939),
P. l74.
19
begin to appear based upon whether we should consider it as
limited to certain clearly defined territory, whether it
should be applied only in reference to those who rule, or
whether it should be applied to all persons subject to it,
and lastly, whether the term is necessarily tied in with its
government or whether it is a separate institution.
As
pointed out above, Professor Jensen apparently considers
government as the minimum function of the state.
The same
idea is expressed by Leonidas Pitamic who writes:
""Law,
organization, and people are . . .
essential in the notion
of the state.h ”9
The interpretation of the term ’’state” as applied
only to the rulers rather than to those who are ruled no
doubt reached its height under King Louis XIV, whose state
was one of absolutism.
This doctrine is given expression
in the phrase ”L*Etat c*est moi”, which has been attributed
to King Louis XIV.
Although it is now doubted that he
actually said it,'~historians feel that it may be considered
a good resume of his speech before the Parliament of Paris
April 13, 1655, and as fairly accurately describing the
attitude of the people of that period.
This idea of the
royal prerogatives of the crown has been summarized by
more:
9Leonidas Pitamic, A Treatise on the State (Balti­
J. H. Furst Company, 1933), p.“T5.
20
David Jayne Hill:
It is a perversion of the natural order of things to
attribute resolutions to subjects and deference to the
sovereign; for only the head has the right of delibera­
tion, and resolution, and the function of the other
members consist solely in executing the commandments
given to them.10
Under such a doctrine as this, the sovereign of a state has
no equal either within or without the state.
A similar idea of the state is expressed by Karl
Marx who refers to it in his Communist Manifesto as an
executive committee for the administration of the affairs
of the whole capitalist class.
Numerous writers since then
have followed this line of thought although they haven't
identified the affairs of the state with those of the
capitalist class alone.
Leon Duguit, for example, explains
that by the state is meant those persons who actually hold
sway.
However, such a view has been more or less dropped
in recent times in favor of the term "government”.
Widening the definition somewhat, we may turn to
Georges Sorel who speaks of the modern state as;
. . . a body of intellectuals, which is invested
with privileges and which possess means of the kind
called political for defending itself against the
attacks made upon it by other groups of intellectuals,
eager to possess the profits of public employment.
Parties are constituted in order to acquire these
l°David Jayne Hill, History of Diplomacy in the
International Development of Europe~TNew York: Longmans,
Sreen and ^Company, 1925), p. 25.
21
payments, and they are analogous to the state.
11
A realistic definition of the state which is more
consistent with modern ideas and thus more serviceable for
us today is one which includes in the state the whole body
of the people, not only the rulers but also those who are
ruled.
Such a definition is advanced by Jeremy Bentham:
When a number of persons are supposed to be in the
habit of paying obedience to a person or an assemblage
of persons, of a certain and known description, such
persons altogether are said to be in a state of
political society.
That is to say they constitute a state.
Thus according to
Bentham the basic feature of the state is the habit of
obedience on the part of the masses, and of authority on
the part of those in authority.
However, it isn*t neces­
sary that those who obey must do so in all things.
A body
of people may constitute a state although the people dis­
obey their rulers in some things, and some of the inhabitants
may disobey in all things.
However, this so-called realistic definition of the
state does not solve all the problems involved.
Just when
does a state cease to exist or come into existence?
An
excellent example of a case where this question might
■^Arthur N. Holcombe, The Foundations of the Modern
Commonwealth (New York: Harper and Brothers, .1923), p. 44.
^Jeremy Bentham, Fragment on Government (Oxford:
The Clarendon Press, 1933), p. 5.
appropriately be asked is in the case of Scotland.
When that
country *s king, James VI, became King James I of England in
1603, and the two kingdoms were united under a common
sovereign, did Scotland lose identity as a state?
Or did it
retain its statehood until 1707 when its separate parliament
was finally dissolved and Scotchmen received representation
in the Parliament of England?
Or may it still be considered
a state since it has its own laws prescribing rules of con­
duct in matters different from those concerning other parts
of the British Empire?
The answer obviously depends upon
the definition of "state* that one employs.
Another question that might well be asked is as to
the status of a state under a change of the form of govern­
ment.
Was Russia, for example, the same state under the
provincial government established by the Duma in 1917 as
under the Romanoffs?
under Soviet rule?
If so, was it still the same state
Again the answer depends upon the
definition of "state" that is used.
It seems fairly apparent that changes in rulers
might continue indefinitely without destroying a state, if
the people recognize the authority of the successive rulers,
and submit to their dominion.
But the secession of parti­
cular groups or bodies of people from the original body
could hardly continue long without altering the original
character so much as to render it unrecognizable.
Such a
case is seen in the Dual Monarch of Austria-Hungary.
is this state now?
Where
Is just German Austria the true successor
to the original country, or has the original state been
broken up among so many persons that the identity of the
parent country is wholly lost?
Strictly speaking it must be
considered that any substantial change in the body of people
who obey a common ruler may be said to constitute a new
state, but for practical purposes It is probably enough to
preserve the identity of a state that the bulk of its.people
should be the same before and after the change.
A mere
change of rulers, thus, is to be considered of little con­
sequence in the determination of the identity of a state so
long as the masses acknowledge the change.
This same idea of obedience is to be found in the
concept of a state advanced by John Austin, a student of
Bentham, who says a state consists of a sovereign and sub­
jects.
The very essence of the state is the obedience of
the bulk of these subjects to their rulers, and the only
perfect state is the sovereign state.
Sovereignty, as he
explains it, is a relationship that can exist only between
one definite person or body of persons and the other members
of the state.
It implies the existence of a single, recog­
nized supreme authority.
But this problem of authority in
a modern state is not so simple.
Austin*s ideas might be
applicable today if a state consisted of hypothetical
24
political animals, but a state is made-of real men, who are
in the habit of obeying various authorities whose supremacy
they recognize in their respective spheres of action.
The
state is only one of several organizations to which they
belong•
The limitations on the Austinian theory are obvious
and have been the source of much controversy and discussion
as to its soundness.
is a legal fiction.
It is obvious that a sovereign state
The power of law-making in any state
unrestricted by any legal limit is not a reality.
The real
situation is the existence of rulers who have the ability to
secure the consent of those whom they govern to their
authority, or at least to command habitual obedience from the
majority of those whom they seek to rule.
The actual
authority of rulers varies greatly in different states, and
even within one state from time to time.
This authority may
cover only a limited number of things or may extend so as to
cover all phases of the citizens* lives.
One of the powers
of a legal sovereign, and the one with which we are con­
cerned here, is the power to tax.
This power is defined by
jurists as the power to take the property of a citizen or
subject for public use'without direct compensation.
This
power theoretically may be exerted by the sovereign of a
state to the limit where the citizen or subject has no
property left.
In the terse words of John Marshall, ,twthe
25
power to tax involves the power to d e s t r o y . r a r e l y
would it be practicable for a ruler of men to press the power
to such a limit.
Their authority would be undermined by
covert evasion, or might even be overthrown by open resist­
ance.
Statesmen know that, despite the fictions of jurists,
their powers are strictly limited by the character and dis­
position of the citizens of their state.
Thus, it would
appear that, although the Austinian and other realistic
theories of the state were sound enough as far as they go,
they are superficial explanations of the data of politics
and cannot satisfy the needs of statesmen.
The fiction of legal sovereignty may be serviceable
to lawyers and jurists since they aren»t concerned with the
objectionable features of any system, but the political
scientist needs an explanation of the nature of the state
which is more substantial and instructive than juristic.
The political scientist is not concerned with the legal
fictions which may exist for they are not merely interested
in what is the law, but are also concerned about what is
accomplished in the‘name of the law.
They are primarily
interested in the power which limits the authority of the
legal sovereignty.
They are not interested merely in the
persons, but also in the people who give them their
^McCulloch Vs. Maryland, 1819, 4 Wheaton 316.
26
authority, and in the way in which it is maintained, for the
nature of any state is determined not alone by the extent of
the authority of its rulers, but also by the character of the
purposes of its people, rulers and ruled together.
It is
what people seek to accomplish by means of the state that
gives it distinction and sets it apart from the other kinds
of human organizations.
The proper ends of the state, as understood by the
American people at the time of the American Revolution, were
set forth explicitly or by plain implication in the
Declaration of Independence and in other great state papers
of that period.
The Declaration of Independence does not
attempt to consider the purposes of the state in detail but
merely described the functions of a government within a
state.
It asserts that governments are instituted among men
to secure certain inalienable rights endowed by their creator
among which are life, liberty, and the pursuit of happiness,
and furthermore, that whenever any form of government be­
comes destructive of these ends, it is the right of the
people to alter or abolish that government.
It would thus
appear that in the opinion of these writers the state
merely exists in order to secure these rights and privileges
for the people, its citizens.
Such an expression of the purposes of a state and of
a government is very general and lacks precision.
There is
27
much room for disagreement and argument as to what is meant.
For example, what constitutes the natural and inalienable
rights of man.
The ones mentioned are not supposed to be a
complete list.
As a result, the writers of the United
States Constitution attempted to be more specific as to what
should be accomplished - (1)
to establish justice; (2)
insure domestic tranquility; (3)
defense; (4)
to
to provide for the common
to promote the general welfare; (5)
to secure
the blessings of liberty to themselves and to posterity.
But even these are not fully clear and require even more
explanation.
Therefore, we may, in general terms, define a state
idealistically as a body of people organized, for the pur­
pose of securing for its citizens and for its future citizens
those rights and privileges which are their inalienable
heritage.
Such a group of persons will occupy a more or less
clearly defined territory.
For example, the people of a
federated state share the possession of their territory with
the whole body of people of the federation or union to which
they belong,
nevertheless they do constitute a state.
Each
of the states of the United States is an example of this
type of statehood.
Each of these is indeed a state, but
each of their territories belongs to the entire country as
well as to themselves.
In addition, such a body must
possess a government, for without a government, they cannot
be organized*
Without organization, internal chaos is almost
certain to eventually lead to the loss of their identity as
a separate state*
Equally essential to their existence is a
common purpose for in that is the basis of their unity and the
real test of their existence as a distinct political entity.
Such a commonness of purpose must include within the state
not only those who are in power, but also those who are sub­
jects of that power, for without the inclusion of all of
these, any commonness of purpose would be a mere fiction*
In the working out of this common purpose, we may be able
to bring into our concept of a state the idea of authority
emphasized by Austin, and the doctrine of obedience urged
by Bentham, but in a modern interpretation of the term, it
seems to the present writer that these are but tools for
securing the end to which all the persons- within the state
are striving.
The working together of large numbers of persons in
a common interest necessitates the existence of some control
over the activities of the masses.
This control has ex­
pressed itself in various forms known as government.
But
to function smoothly any government must have financial
support, the most common source of which is inevitably
taxation.
The exact method in which this taxation is to be
applied is not always the same, but in all cases it is only
just that all persons who are working together, and who are
benefiting from such co-operation should contribute their
share to the maintenance of the state and of its government
CHAPTER III
TAXATION, ITS DEVELOPMENT
Taxation constitutes the chief financial resource of
the modern state.
In ancient times tribute and returns from
the public doman loomed large in finances and, if present
tendencies continue, the income account today may soon be
dominated by receipts from socialized industry.
But in the
democratic state of today the great bulk of the public
revenue is supplied by compulsory levies, apportioned among
the people according to the standards acceptable to their
representative legislatures.
Historically it appears that taxation has grown from
the voluntary contributions characteristic of all primitive
societies.
Gradually these contributions were transformed
into legal obligations of persons to perform services in
support of a limited number of specified public objects.
As
private property and commercial activity developed these
obligations evolved first into fees and charges of various
kinds and later into levies on exchange and transport, and
finally they appeared as compulsory contributions which were
apportioned among the peoples according to then understood
standards of equity, such as property or income.
The taxes levied in the course of centuries have
been profoundly affected in character and amount ty the
31
nature of the environment, economic, political, and social.
With the growing complexity of economic life, taxation, too,
has grown from a simple to a very complex process.
Tax bases
have varied as the economic factors at the foundation of
economic life have changed in importance.
Land taxation, for
example, played a much more significant role in the agri­
cultural economy than it does in the present industrial era. The development of large territories for purposes of govern­
mental and business administration has affected the choice
of taxes for financing activities of both the nation and the
states, and even locally.
Modifications in the form of the
ownership of business, such as the advent of the corporation,
have raised new problems and have made necessary the intro­
duction of new type of taxes.
Increased skill in administra­
tion, and in the recording of economic activity and the
techniques of appraisal and valuation have given opport­
unities to refine the distribution of taxes among the tax­
payers.
Changes in habits of thought concerning the
measuring of taxability have had their effect in altering
the tax bases.
Finally the gradual emergence of social
ideals of justice and equity have transformed the very
foundation upon which tax systems are erected.
These changes
form the basis of the problems discussed in this writing.
The evolution of taxation has been accompanied by
striking changes in the attitude of the people generally
toward these compulsory levies.
In Athens in the time of
Pericles taxes were imposed largely upon foreigners and
slaves; and in the ancient world generally, where tribute
was an important financial resource, tax liability was
usually considered a mark of bondage rather than of freedom.
During the periods of feudalism and of absolute monarchies,
taxation in so far as it was used at all was imposed with
little regard to equity.
Favoritism was the common rather
than the rare thing, the taxes often falling on those per­
sons who were without special influence.
Indeed, so long as
rulers were under no obligation to submit their programs of
expenditure to parliamentary bodies for approval, the atti­
tude of the taxpayers was unimportant and their opposition
was given little or no consideration as long as the rulerts
wishes were met.
The development of representative government and of
democracy necessitated the use of taxes requiring consider­
able co-operation from the taxpayer.
Such co-operation
could be secured only if the taxpayers were given some
control over the use to which tax funds were put.
This is
essential for the proper assessment of property and income
taxes, nor could the modern sales tax, or any of the social
taxes be used to their best advantage without the whole­
hearted co-operation of all the taxpayers.
But before such a period could be attained, tax
methods had to pass through a long and tedious history.
Various methods of public finance constituted important
phases of the administration of even the primitive community,
for the regulation of group life even in its cruder forms
requires certain expenditures.
In contrast to our ideas
today, the expenditure of the funds collected was given
little consideration.
The only thing of real importance was
that the chief got all the funds that he desired, and it
mattered not how he employed them after they were his.
The
absence of any standard system of record-keeping in primitive
societies In addition to an almost universal lack of stable
currency In which to figure receipts and expenditures made
even a most rudimentary bookkeeping an impossibility.
Any
real evidence of the use of such is to be found from the
writings of only the more advanced civilizations.
Writing of the Ashanti rulers In West Africa,
Professor Herskovits^ points out that the most important
source of funds was from death duties.
Whenever a man of
substance died, his immediate superior received a specified
proportion of his personal property.
Upon the death of this
person, his superior took a similar proportion and it was
only upon the demise of this third man that the ruler of the
^Melville J. Herskovits, The Economic Life of
Primitive Peoples (New York: Alfred A. Knopf, 194UJ,
468 pp.
34
territory received his share of the estate from which a chain
of deductions commenced.
The second most important source of revenue to the
Ashanti ruler, commonly called a "Stool", was from trade
monopolies and taxes on the transportation of commodities.
Kola was exported to the north in exchange for slaves,
livestock, and "butter.
Slaves and gold-dust were sent to
the coast, and the carriers returned with rum, guns, gun­
powder, and salt.
While the trading operations of "the
Stool" were in progress the roads were closed; when they
were reopened, all other traders who passed were assessed
kola-nuts according to the amount of the load carried.
While porters carrying goods from the north were not taxed,
those who returned from the coast with commodities for sale
were assessed gold-dust before they were allowed to go on
to their home markets.
A third source of revenue is what might be termed
court fines or fees.
One type of fee is foreign to
European or American legal procedure.
A party acquitted of
a charge was required to pay a thank-offering which would
also serve for the purpose of securing witnesses to attest
to the judgment of the court in case that the trial should
ever be questioned.
The death penalty also could be remit­
ted by the chief upon payment of a fine, but unlike other
fines, this type was not divided among.his subordinates,
35
and since such fines amounted to about four thousand dollars,
they offered appreciable sources of income.
Taxes on gold-mining operations comprised a fourth
form of revenue.
This tax generally amounted to two-thirds
of the gold mined, with the miner retaining the other third.
This tax finds its counter-part in the so-called severance
tax to be found in a number of states in the United States.
However, today, it is, theoretically at least, levied pri­
marily for a social purpose rather than as a source of
revenue•
Social stratification in the kingdom of Dahomey was
much like that of the Ashanti but was marked by sharper
delineation and greater rigidity of structure.
They had a
unique system to maintain control over the collection of
public funds*
There existed a female bureaucracy within
the royal compound which duplicated the hierarchy of male
officials who were in charge of the kingdom*s affairs out­
side the walls, and served as a check upon the reports of
these men.
All of their taxes were based upon two definite
principles.
indirect.
First and foremost the ruler’s control must be
As a result, no one was questioned concerning the
number of cultivators in a given village, but the count was
quietly obtained when these farmers, village by village,
brought their ’’gifts" to the king.
The second principle
36
which indirectly throws considerable light on attitudes to­
ward the taxing process, was that for purposes of what among
ourselves would be termed propaganda, the king himself paid
the same taxes as his subjects, especially upon the produce
of his fields*
He thus sought to create in the minds of his
people the impression of himself as subject to the same rules
as all other Dahomeans.
Most of the taxes were either of the commodity or
occupational type.
In the case of agriculture, each village
gave to the palace a certain proportion of their harvest,
which varied from year to year.
These products were taken
to the palace and were in the main saved for the use of the
army.
Palm groves were assessed approximately one-third of
their total yield.
Livestock was taxed only every two or
three years, the size of the assessment varying according
to calculated need and available numbers.
A census of the
livestock, largely sheep and goats, was taken by villages,
and served as a basis for determining the amounts to be
demanded.
In the case of the occupational taxes, hunters were
counted during rituals for the gods of the hunt.
Each one
belonged to a certain group, and each group had its chief.
There were thirteen groups so each had to furnish meat for
the palace during one of the Dahomean native months.
In
other words, one-thirteenth of each hunter»s efforts went
37
as a license fee.
Since the heads of all the animals had to
be sent to the palace, the amount of game killed as well as
the number of hunters was controlled.
Salt was considered a necessity and it was considered
that its makers should not bear a heavy tax.
The total tax
was figured as the amount actually required by the palace,
Iron-workers were required to make cartridges as their con­
tribution to the needs of the government.
Similarly, weavers
were levied upon according to the amount they produced,
while wood-cutters were assessed on the basis of how much
they had gathered in the period covered.
Royal monopolies were declared covering certain
commodities.
All honey was reserved by the king to be used
in curing the meat used by the troops on campaign.
In the
two districts set aside for this purpose, those who cared
for bees also cultivated red and black pepper and ginger for
the palace.
In addition, each farmer might raise enough
pepper to yield himself a raffia-sack full.
But this was
insufficient even for the simplest household so that a man
was compelled to buy the remainder in the open market.
Revenue came from the duties levied on the transport of
pepper - forty-six cowrie shells were assessed against each
sack passing through a customs post.
The Dahomeans also found sales taxes were a profit­
able source of income.
The taxes were levied in kind and
38
were not high although in their aggregate they amounted to a
large sum.
Each trader was held liable for a true measure
of every thing he sold.
This levy, well documented by those
who visited the kingdom before its conquest by the French,
is said to be so deeply lodged even today in tradition that
voluntary contributions are still made by those who do
business in,the markets for the upkeep of the old palace.
What was received in taxes went for the lavish sup­
port of the king and his entourage; for the maintenance and
equipment of the army, for compensating the numerous admini­
strative officials that ruled the kingdom, and for defraying
the cost of the expensive ancestral rites of the royal family
which were held in order to assure the continued survival
and prosperity of the kingdom.
As among the Ashanti, every male taxpayer was liable
to serve in the army, or, when summoned, to work on roads or
at other communal tasks.
But, unlike the Ashanti, there
was no obligation on the ruler to compensate those who thus
gave their time and labor.
It is in this impersonal nature
of administration, and in the care with which the expected
yield was balanced against actual receipts, and the checks
on the persons handling the king»s money that the Dahomean
monarch was distinctive among the primitive groups.
The striking point, however, in these early states
was the comparative lack of concern over the expenditure of
39
the collected, funds.
Practically all interest was centered
in the collection of them.
Methods or purposes of the ex­
penditures was relatively unimportant.
The social effects
of hoth the collection and spending were probably not given
a thought.
Not until relatively modern times may it be said
that there was a truly widespread interest in public ex­
penditures, however it was not wholly ignored in certain of
the more advanced early states.
Carfa, the statesman of
Naples, near the end of the fourteenth century, became con­
cerned about the expenditure of the kingdom.
He made three
important classes of the purposes for which public funds
were used:
(1)
for the defense of the nation; (2)
support of the ruler; (3)
for contingencies.
for the
He contended
for a reserve fund to meet emergencies, and for close
official supervision of the public accounts.
Bodin,2 the first French student of fiscal problems,
wrote in the latter part of the sixteenth century, and con­
tended that the public funds should be used for the honor
of the state.
He recommended, furthermore, that an annual
statement should be made which would show the condition of
the state*s finances.
He also made a classification of
expenditures which was much like Carfa*s only going a little
more into detail, and including provisions for the care of
2Jean Bodin (1530-1596) A French political philoso­
pher.
40
the poor as well as for improvements.
•z
Sir William Petty,
near the middle of the seventeenth
century, gave a rather detailed classification of the im­
portant needs for public funds.
He listed expenditures in
the order of their importance as:
(1)
defense; (2)
main­
taining the government; (5)
religion; (4)
orphans; (6)
Yet, notwithstanding such
public works.
education; (5)
studies of expenditures, systems of obtaining the revenue
received the major portion of the early study and investiga­
tion.
The methods of expenditure which were developed,
prior to this time, in the early state can scarcely be
called systematic, because the expenditures were made in a
more or less haphazard fashion.
The state, in its earliest
stages of development, was subordinate, in almost every
respect, to the family unit, where most of. the personal
needs were supplied.
As the power of the state developed,
more demands were made upon it.
The first distinct public
treasury in the different states was usually for religious
purposes.
There were no expenditures for protection, as
the citizens protected the state.
In foreign wars the
citizens furnished their own weapons and were paid by the
spoils of conquest.
®Sir William Petty (1623-1687) English statistician
and political economist.
41
The most lavish of early expenditure was found, per­
haps, in Athens.
Large public buildings were erected, and
huge sums were spent on public works of various kinds.
Ex­
penditures for religious fetes were often wasteful and
extravagant;.
An interesting feature of early Athenian ex­
penditure is that comparatively large sums were spent on the
poor and on war orphans, an early form of the use of public
funds for social purposes.
In Rome, likewise, large sums were spent for religion,
while the maintenance of the government, the erection of
public buildings, and the construction of roads were items
of primary importance.
Provision was made for the poor, and
various kinds of public charities were established.
The
system of expenditures in Rome displayed more development
than did that in Athens.
One outstanding feature was the
fact that many citizens who were rendering service to the
state were receiving a direct payment from the state.
This
feature had developed so far that before the fall of the
Empire the soldiers were on the payroll of the government.
Under feudalism, a study of the expenditures would
be a study of the expenditures of the ruler.
owner of lands whence came the revenues.
He was the
The public duties
performed by the officials were usually few, and these were
performed most often when a private benefit was entailed.
Feudalism presented a system in which the public expend!-
42
ture, like the collection of moneys, was primarily in the
interest of the ruler.
If his interests coincided with the
interests of the public, then only did the public benefit
from the government's expenditure.
This was largely true in
all governments before constitutionalism began to grow.
An important factor marking the beginning of the
growth of constitutional forms of government was the in­
creasing control which the citizens gained over the public
purse strings.
Although previously expenditures were in the
public*s interest only when their interest coincided with
that of the ruler, expenditures now were justified only if
they were primarily for the welfare of the public.
This
change in the nature of the spending of public funds has
taken definite form in the constitutions of many democratic
countries.
In the United States, for example, bills for
raising revenue must originate in the House of Representa­
tives.
This was because the members of the House were the
only members of Congress directly elected by the people
before the adoption of the Seventeenth Amendment to the
Constitution, which provided for the choice of Senators in
the same manner.
The growth of public control over revenue has also
done much to strengthen public credit.
In the early days
of public credit, rulers frequently piled up heavy debts,
and then repudiated them in whole or in part.
A new ruler
would often repudiate all of the existing debts of his
predecessor.
Under such conditions, public credit was in­
deed very weak, but as soon as the citizens gained control
they began to demand that the government meet its obligations.
Since, when the loans were made within the country, the
people were the lenders and repudiation was their loss, it
is thus easily understood why repudiation of public debts was
looked upon unfavorably by the general populace.
About the close of the Eighteenth Century it was the
general opinion that the new constitutional form of govern­
ment would put a stop to the rising expenditures and many
even expected a decrease.
That period marked, to a large
extent, the overthrow of the old monarchial regime with its
lavish expenditures for the courts of the rulers.
The
introduction of constitutionalism was expected to materially
lessen the cost of military activities which had been mount­
ing rapidly, and which had become particularly burdensome.
It was considered too that the citizenry, which at that
time was largely agricultural, must necessarily be freed
from some of the tax burdens they had been forced to bear,
in order that they could secure a foothold and could meet
the urgent need for an Increase in production.
The old
Mercantilists idea of government was rapidly losing ground,
and the laissez-faire policy was being substituted —
that
government which governed the least was the best, the re­
44
suit of which would be the curtailment rather' than the ex­
pansion of governmental activities.
The inaccuracy of this contention, however, was soon
shown by the continued rise of public expenditures.
Some
retrenchment was made in certain types of expenditures, yet
any decrease from this was more than counterbalanced by
increased expenditures for other lines of activity.
The
development of commerce and industry increased the social
wealth and income and made it possible to secure an amount
of revenue much larger than would have been available had
the entire burden continued on the agricultural workers.
On
the other hand, the development of commerce and industry was
accompanied by problems which called for an extension of
governmental activities and was therefore also an impetus to
increased expenditures.
A statistical study of public expenditures shows that
their increase has indeed been general and rapid.
It shows
that the increase has not been confined to any type of
government, but exists alike in autocracies and democracies,
and in federal, commonwealth, and local governmental units.
Nor can the tremendous growth of public expenditures always
be attributed to war, because some of the countries which
have been most free from military activities have shown the
greatest increase in expenditures.
As a parenthetical point, it may be noted that an
increase or decrease in the expenditure of public funds does
not necessarily indicate a like increase or decrease in the
amount of services rendered.
In comparing expenditures with
services rendered from time to time, it should be recalled
that the value of money is not always constant.
As an ex­
ample, for two decades or more following 1873 increased
services might have been given in the United States with a
decrease in total expenditures.
Prices were falling con­
siderably and the expenditure of a dollar would give more
materials and services than previously.
Starting in the
late nineties, however, prices commenced to rise and con­
tinued so until the opening of the World War, when the
prices went up even faster.
In so far as the state is a
purchaser of materials in an open market, it is affected by
such rising prices as much as an individual, and an appropri­
ation of the same number of dollars will mean a curtailment
of services.
On the whole, however, the state is usually
less affected by price changes than are individuals.
A
larger proportion of its expenditures is for salaries and
wages, which rise more slowly than other prices.
Because of
price changes, therefore, there may be no very direct re­
lation between a change in the.public expenditures and the
amount of service received by the public.
To return to our original trend of thought, pro­
tection is today still the major problem and the chief source
of expenditure to any state.
This, of course, refers to the
federal revenue, rather than to local units.
Also, it has
been one of the chief factors in the rapid rise of the pub­
lic expenditures. * Its urgent need has been only too clearly
pointed out to those of us living during the present
European conflict.
This need for increased protection has
been prevalent in all countries generally —
limited to any particular form of state.
totalitarian nations alike require it.
it has not been
Democracies and
Wars are, it is true,
less frequent than in early years, but the daily cost of a
war, such as the last World War and the current World War,
would more than finance an entire conflict in earlier times.
A modern twelve-inch gun or battleship would entail, per­
haps, as much expenditure as an early army or navy.
Another
important factor in the expenditure for protection today is
the maintenance of the large modern.navy and standing army
in times of peace.
The annual cost of such maintenance
usually represents a far greater expenditure than did early
wars.
Many services which are now furnished ty modern
governments and which require considerable financial outlay
were formerly supplied by individuals.
Most folk today
consider such services to be the regular duty of the govern­
ment to furnish.
Few if any people today would think that
private individuals should provide all the money for the
47
construction of highways, and despite certain private schools,
it is considered, at least in this country, that schools
should be maintained by the state offering free education to
the youth of the nation.
Many countries have gone even
further than the United States in offering public services by
supplying the services of public utilities.
In some countries,
the railroads, telephone, and telegraph are owned ty the
government, whereas these are largely privately operated in
the United States,
The agitation for public ownership seems
to be growing and the number of public enterprises is
rapidly on the increase.
larger cities.
This is particularly true in the
Hot only is there a demand for an extension
of public services into new fields but also for its expansion
in current enterprises.
The recent demands for an extension
of free public education has had an important influence in
causing expenditures to increase.
The same is true of high­
way construction and maintenance.
Catering to the growing demands for increased state
services has meant increasing the public debt.
The most
noticeable of these demands, perhaps, has been for various
forms of regulation, and for the development of health and
sanitation.
The now old laissez-faire policy of govern­
ment is becoming more and more antiquated, while the public
is placing greater reliance upon the activities of the
government for the satisfaction of its desires.
In the
48
matter of health and sanitation, governments have undertaken
many preventative measures in recent years, whereas, formerly,
if they were concerned at all, it was simply with repressing
epidemics after they had reached dangerous proportions.
One additional item which should be mentioned as
having contributed to the growing public debt is the ease of
public borrowing in modern times.
The ease of borrowing has
given a supply of revenue which could not otherwise have
been obtained.
So general has public indebtedness become
that nearly every governmental unit practices the policy of
deficit financing.
Citizens are willing to lend money to
the government for its credit is good, and the burden is
not so apparent as when revenues are secured through taxes.
Except where political units have reached the legal amount
of indebtedness, a tendency toward an increased use of this
source of revenue is abundantly in evidence.
However, the
desirability of such methods of financing expenditures is
highly questioned by the present ?u*iter.
As noted above,
the burden upon the individual, and upon the citizenry as a
whole, is not so apparent as in the case of immediate taxa­
tion, but the burden
is still there and is just as real.
Instead of giving the money to the government in the form
of a tax, the amount is given to the government under
the
disguise of a loan. But this loan must eventually be paid
back with interest, and some source of revenue is essential
49
for this*
It Is likely It must then come in the form of
taxes.
Any individual or group of individuals is thoroughly
justified in asking the question of the justification of
public expenditures.
To lay down a rule for the testing of
the justification of all expenditures is an impossibility
because of the immaterial nature of such a large part of the
services rendered.
Many of the benefits received, both
economic and social, are impossible of measurement.
For ex­
ample, how can one measure the advantage gained by any one
individual or group of individuals by the building of any
one battleship?
Or how may one accurately ascertain the
benefits to society of the payments of an unemployment
insurance payment?
Neither can be measured with any degree
of accuracy, yet all must agree that they are advantageous.
In general, however, it may be said that a state is not
justified in making an expenditure unless society is better
off than it would have been had the funds been left in the
hands of the individuals.
There is a temptation, where a
public official is dependent upon the constituency of a
particular district, to.spend public funds for the benefit
of his supporters.
Some of our states have recognized this
when their constitutions were written, and have attempted
constitutionally to prohibit expenditures the returns from
which will be of less value to society than the cost.
50
Pennsylvania is an example of a state which early had a
constitutional provision of this nature.
The difficulty
arises, of course, in attempting to apply this general rule
to particular cases.
In testing the justification of any single expendi­
ture or of any group of expenditures, as ’
well as of any tax,
both its economic and social effects must be given due con­
sideration,
In writings of the past one may find evidences
of much fallacious reasoning.
Certain writers have main­
tained that more and more money should be spent by the public
treasury because it put more money into circulation, because
it increased the demand for labor, because it relieved the
poor ty giving them employment, and because it removed most
of the objections to taxes when the government returned so
much of it to the public.
In this connection, let it suf­
fice to point out that lavish and extravagant expenditures
do not create wealth.
The more that a state takes from its
citizens and spends out of a given amount, the less is left
for individual expenditure.
The expenditure of the state
for labor and materials is now substituted for what would
have been that of the individual.
When the state demands
materials and services, therefore, this demand Is not added
to that of the individuals but merely exists in the stead
of that of the individuals.
Revenue exacted from industry
to pay an army could have been used by industry to pay wages
51
to the same number of men had they hot been employed by the
state.
The total demand for labor is not thusly increased
by state expenditure, in fact, it may be materially decreased
because of the costs of administering public funds.
In addition to these points, when a state enters into
the market for materials or labor, it becomes a competitor
with private enterprise for these same commodities or labor.
Under normal conditions, because of the widespread activities
of governments, the state is a large purchaser of both goods
and services.
As a result it can secure these at a lower
price, and may serve to pull down the general price level.
In abnormal times, such as a war, the demands of the state
are enormous.
Since the income of the governments is not
directly dependent upon the enterprises which they undertake,
the prices paid for materials and services may be much
greater than any money returned from them would warrant, and
consequently greater than individuals would feel that they
could pay.
In cases of emergencies, as in the World War,
the government is likely to pay abnormally high wages in
order to attract labor, and abnormally high prices to secure
the needed supply of materials.
A hardship is thus felt
among individuals who desire similar services and materials,
but cannot pay such high prices.
The abnormal wages cannot
help but have an effect on the worker.
With his increased
wages comes a high standard of living, which he naturally
desires to maintain.
When the emergency is past, and the
government demand ceases, he must seek employment where wages
are determined on the basis of what individuals can afford
to pay.
So the tendency is now toward lower wages.
The
dissatisfaction caused by such shifts will have some effect
in causing industrial friction.
The abnormal demand of the
government for goods, with its abrupt cessation, will have
much the same effect on commodity prices in particular lines.
Many, if not all, public expenditures are closely
related to social conditions.
Expenditures for the army and
for the navy, to the extent that they are actually needed
for protection, result in a feeling of security by the
members of society.
In the same category may be placed the
expenditures for police and fire expenditures.
Expenditures
for education, which result in the spread and advancement of
knowledge, cannot but make for social betterment.
The
building of highways, and the aid to transportation and
communication foster a social solidarity.
The very thought
of the conditions which would exist if the present inmates
of the different kinds of eleemosynary institutions were to
intermingle with society is proof of the social benefit of
expenditures for these unfortunates.
The action of the
different governmental units in eradicating causes of dis­
ease and in enforcing health and sanitation measures has
undoubtedly been rewarded by a considerable advance in
53
. social wellbeing.
Numerous other public expenditures might
be mentioned which would call to mind many social benefits
resulting from them.
Some expenditures, on the other hand, may not result
in social advancement.
The conduct of war, for example,
may result in the inferior members of society being left to
propagate the race, and in a considerable number of unfit to
be placed as public charges.
Moral conditions are likewise
endangered and the spread of disease fostered, the results
of which may be felt for many generations in the future.
Thus it is to be clearly seen that a single expendi­
ture or the collection of a certain tax may result in a
long-run effect, either economically or socially, or both.
As a result, those who are trusted with the charge of the
government of any state must study thoroughly the ramifica­
tions of each assessment.
While an immediate effect may be
deemed desirous, the long-run effeet may more than counter­
act this gain.
Not only the social gains to be secured by
a certain expenditure should be considered, but also the
social effects of,the method of securing the funds for this
expenditure must be given due consideration,
s It goes without saying that useless and extravagant
expenditures have no more justification in the activities
of a government than in those of an individual.
Neither
does it follow that a governmental unit can supply all
54
things that the public may desire, any more than can an
individual supply all his desires.
In other words, in the
case of both the government and individuals, only those
things can be purchased for which the necessary funds are
available.
Too often, this principle has been little considered
in the conduct of the fiscal affairs of governmental units.
Ho better example of this is to be found than the voting of
appropriation bills by Congress, state legislatures, and
municipal councils on many occasions.
It often appears
necessary only to convince a majority that the appropriation
is needed, and the bill is passed.
Far too frequently too
little consideration is given to the source of funds to meet
the appropriation.
In the opinion of the present writer,
this has occurred a number of times under our current ad­
ministration on the questionable grounds of social benefits
to be gained.
Too frequently the provision for revenue
comes as a separate consideration and often is in no special
connection with the appropriation bill.
Such a method is profitable only when the source of
funds is capable of considerable expansion, a condition
which is found usually only in a growing country.
Such
procedure, of course, leads to little consideration of
equality of burden, or whether the services repay the costs.
When the sources of revenue begin to diminish, then more
55
consideration of the possibility of meeting appropriations
becomes necessary.
The necessity, -under these conditions,
of considering possible revenues when voting appropriations,
merely indicates the advisability of doing this under all
conditions.
Only if some systematic correlation of possible
revenues with anticipated expenditures is possible, can any
intelligent and satisfactory fiscal policy be formulated.
Since the beginning of the first World War the systems
of national taxation in the leading commercial nations have
been completely transformed.
During the years between the
Civil War and 1913 nearly all of our national revenues were
raised through customs duties and excise taxes, and during
the majority of this period no other form of federal tax was
imposed.
In 1913 the United States imposed only a slight
tax on inheritances and a nominal one upon corporation
benefits, together with a very low income tax with high
exemptions and very moderate progressions.
Great Britain
also had an income tax, although its rates were very low
compared to what were found necessary after the nation
entered into the World War.
This tax was strongly opposed
not only by those who had to pay it, but also by leading
economists of most countries.
In England almost every
Chancellor of the Exchequer talked hopefully of the time
when the income tax would be repealed.
In a case before
the United States Supreme Court, it was said concerning
56
the tax:
""It will mark the hour when the sure decadence
4
of our present government will commence.""
However, the
great demand placed upon the nations by the war definitely
helped in waving away this opposition.
In the years following the war, a new trend has
appeared in the tax systems of most nations.
Many countries
have shown an increasing inclination to use more of the
proceeds of their taxes for social purposes and it may
fairly reliably’be said that the trend of modern taxation
is in that direction.
Although it has sometimes been said
by leading tax authorities that taxes should never be used
for social purposes, the several states of our Union have
never literally followed this principle.
The most important
and usually the largest item in the expense of a State and
its subdivisions is the cost of public education.
This is
a familiar example of a tax that is used for social purposes
alone.
Many of those who pay the greater part of it do not
receive any benefit from it except indirectly, and the
wealthy man, although he may have no children, is taxed in
order that the children of the poor may be sent to school,
and it is generally conceded that the higher the education
of the masses the greater the producing capacity and the
more extended are the opportunities for obtaining wealth.
4pollock vs. Farmers* Loan and Trust Company; 157
U. S. 429.
57
What is more important to all, including the wealthy and the
government itself, is the result that the community is more
orderly, property is safer, law is better enforced, and the
government is more stable.
It has only been in comparatively late years that
our national government has made expenditures for social
purposes other than education, but now it is common to make
appropriations for many such purposes and they are becoming
more and more frequent.
It is often said that this partakes
of Socialism, which is true in one sense, but as a prominent
English statesman, L0rd Randolph Churchill, said —
all Socialists now."*
""We are
W e have passed the time when the mere
fact that revenue is to be raised for social purposes can be;
made a successful objection to a tax.
The older objections
to this idea have been largely swept aside at least for the
present in the rush of interest in such purely social
measures as old-age pensions, public clinics, and the like.
The further fact that some taxes tend to create an
equality in social standing is now being heard as justifi­
cation for them.
It is urged that to the extent that the
rich are taxed more in proportion to the benefits received,
while the poor receive more in proportion to what they pay,
there is an equalizing tendency.
In the building of roads,
bridges, streets and in the provision of public parks and
libraries the burden falls more heavily upon the rich man
58
than upon the poor, although each may share equally in the
services rendered.
An even more striking innovation, which shows perhaps
the greatest extent to which the policy of levying taxes for
social purposes has been carried, is found in the -extremely
-high rates of income tax on large incomes made by the Revenue
Act of 1935, and by the current demands for more and more
taxes on those persons in the high income brackets.
These
rates were imposed pursuant to the recommendation of the
President for the purpose of ""encouraging a wider distri­
bution of wealth"", and under the theory that ""the duty
rests upon the Government to restrict such incomes by very
high taxes.""
No such principle of taxation had ever been
presented or advocated before.
It is indeed a wide de­
parture from early taxation doctrines.
c
''President Roosevelt»s message to Congress on June
19, 1935.
CHAPTER IV
THE QUESTION OF SOCIAL TAXATION
In the field of public finance, as in almost all
other fields of endeavor, the ideas held by people of today
are clearly the result of the development of lines of thought
from the beginnings of time.
Each field, regardless of its
subject matter, is highly colored with superficial views and
shallow concepts of an earlier period.
It might well be con­
sidered that these fields are suffering from ’hangovers*
from past generations.
But, also, in each of these groups
are to be found those persons who are endeavoring to bring
their work into tone with the progressive thinkers of the
present day.
They are forced to seek not only the answers
to the large number of unsolved problems, but must also
fight the influence of early erroneous thinkers.
About a century and a half ago, J. B. Say urged that
the best method of financing any enterprise, public or pri­
vate, is to spend as little as possible.
Following this
line of thought, he was forced to conclude that the best of
all taxes is that which is the least in amount.
many who agree with this doctrine even today.
There are
There are
writings to be found among current literature which start,
or appear to start, with the assumption that every tax is an
evil and so should be kept at a minimum.
As a result,
60
credulous minds become biased from the beginning against all
forms of public expenditure.
Such an approach can in no way
be considered a scientific one.
Equally so, it would be
definitely unscientific to start with the opposite view that
all public expenditure or all taxes are desirable,
A truly
scientific approach presumes an open and free mind without
bias in any direction.
I cannot see how anyone can accurately say that each
and every tax is an evil and should therefore be done away
with for the good of society.
A tax upon alcohol, which, by
raising its price, diminishes its consumption, may be a
positive good.
It can hardly be considered socially desirable
that any person be allowed to become intoxicated for a few
cents, and to become highly inebriated on less than a dollar,
or even upon a few dollars.
Similarly, of course, I cannot
assert that all taxes and all public expenditures are a
social good.
Expenditures for unnecessary wars are clearly
not for the betterment of the masses of the people.
In
similar vein, a relief expenditure which tends to make men
dependent upon society for their support is hardly to be
considered wise or good.
Consistent with this is the
assertion that the taxes whereby such funds are secured are
likewise unwise and undesirable.
But the mere fact that a
tax has been shown to be desirable in theory is not suf­
ficient evidence to prove that it will inevitably be so in
actuality#
Taxes which are of themselves good have proved
to he failures when put into force because of a weak or in­
capable administration*
The difficulty may be within the
tax itself or may lie with the persons who administer it.
The last tax just mentioned might easily come under this
classification.
A well written social insurance, or old age
tax might become a social calamity through improper adminis­
tration.
This may be due to inability on the part of the
administrators or may be the result of the introduction of
personal or political desires on the part of those in
charge.
Examples of taxes having inherent administrative
problems are the poll tax and the excess profits tax.
The
existence of the former in many of our southern states has
been dependent upon the theory that it makes everyone pay a
direct tax to the government, but in actual operation it has
required great expenditures in order to collect it from many
of those persons who pay no other direct tax.
In the case
of the excess profits tax, one must admit, regardless of his
personal belief that it is socially desirable, that it fre­
quently becomes almost impossible to administer in a really
honest and just manner.
The tax is supposedly based upon
the relation between profits and capital, and if the latter
cannot be ascertained with some reasonable precision,
erratic results are sure to follow.
It Is thus clear that in most cases of public finance
a maze of inter-twisting facts are involved.
probability is wholly good or wholly bad.
No tax in all
As a result it is
unfair to pass a final and complete judgment upon any oper­
ation in public finance without balancing against one another
all of the advantages and all of the disadvantages involved
in both the raising of and the spending of the revenue.
An
example of this is to be found in the muchly discussed
question of fiscal versus non-fiscal taxation.
The basis
for this distinction of the two types of taxes is usually
whether the tax is meant for the purpose of raising public
revenue or whether it is intended as a means of securing
some desirable change in the existing social relationships.
There are those writers who contend that taxes should be
levied only for fiscal purposes and never for social reasons.
They maintain that the social ends, assumed to be desirable
can and should be obtained by some other means than through
taxation.
On the other hand there are those authorities
who find no objection to the use of taxation to secure con­
ditions which are deemed socially advisable.
This situation
would seem to indicate that there existed a more or less
clear cut issue between the two theories.
However, I have
not found this to be the case, which seems to be in agree­
ment with the thoughts of Edwin R. A. Seligman who says
that there is really no conflict between the two ideas.
In
63
discussing this subject, he writes:
This antithesis rests upon a failure to observe that
finance, like economics, is a social science, and that
even from the narrow political point of view of the
relation between the government and the citizen, they
cannot derive any revenue - that is, cannot take any
part of the social income — without inevitably affecting
social relations»
In this same connection, William J. Schultz writes
""Every tax is a regulatory tax.”"2
He points out that all
taxes affect the economic and social setup of our society to
}
a greater or lesser extent.
Economic-institutions and even
the very economic equilibrium *of a nation may be altered by
a single tax.
As examples he mentions the sales tax which
tends to reduce consumptive expenditures considerably more
than savings.
In contrast to this, an income tax and an
inheritance tax tend to do the opposite.
Even the taxes of
lesser financial significance have their social as well as
economic effects.
The tax on cigarettes and liquor produce
a definite influence on their respective industries.
Due
to the tax the amount of smoking is cut down and so the
tobacco industry is repressed.
A heavy liquor licensing tax
tends to close the smaller saloons sending the business and
thus the profits to a large concern, who may as a result
Edwin R. A. Seligman, Essays in Taxation (New York:
The MacMillan Company, 1925), p. 316.
2William J. Schultz, "Regulatory Taxes," The Tax
Magazine. September, 1939.
64
receive increased, profits despite the greater tax.
Taxation may not only influence the volume of
business but may also induce changes both in the forms of
business organizations and in the methods of doing business.
This influence is not merely local but may result in changes
of national or even international significance.
Custom duties
upon foreign importations may stimulate certain productive
activities or may, on the other hand, discourage them by
their discriminatory influence.
Taxes may also definitely
influence the direction and quantity of funds seeking invest­
ment.
Opponents of the "New Deal" administration in Wash­
ington argue that it is repressive taxation which has frozen
available funds preventing them from being used in industri­
al and commercial expansion.
This list of examples could be extended to include
probably each and every tax, local or national, ever devised.
It must inevitably be concluded that all taxes have both
their fiscal and their social effects.
The most extreme
"fiscal tax" has its influence upon society, and conversely,
the most extreme "non-fiscal tax" must necessarily have its
fiscal features, otherwise it would not be a tax.
Attempts have been made to separate the levy of
taxes into periods, in one of which their use was only
from the fiscal viewpoint; in the other, social con­
sideration played an important part. It is doubtful,
however, if a time can be found when taxes have not
65
been used to some extent as a social measure,5
The large number of different social and economic
effects which taxation may engender seems to be limited only
by the maximum number of different taxes which may be created
and by the number of combinations that may be drawn up.
How
ever reluctant one may be to admit the fact, it is becoming
increasingly evident that all taxation is an instrument of
social control.
It is truly not a question of fiscal versus
non-fiscal taxes but the real issue is merely whether this
powerful force for social control is to be intelligently
used in the securing of socially desirable objectives or
whether it is to get out of hand and become an agency of
social destruction.
Thus in developing any tax system it becomes requisite
to consider not only the fiscal factors involved but the
social characteristics as well.
overlooked.
Neither can be advisedly
Some persons may be inclined to give more con­
sideration to the former while others will favor the social
features.
In discussing this, one of the better known tax
4
authorities, Professor Lutz, of Princeton University, rates
the fiscal features of any tax as of primary significance,
3
Merlin Harold Hunter, Outlines of Public Finance
(New York; Harper and Brothers, 1§26), p. 132,
4Harley Leist Lutz, Principles of Public Finance
(New York; D. Appleton and Company, 1#56), Chapter XV,
66
but does not go so far as to allege that these should be the
only matters considered*
He does insist, however, that it is
useless to consider other features of any tax unless it is
assured that it will produce adequate revenue*
On the other hand there are those who would have the
social features of a tax be given’first consideration*
Their
idea seems to arise from the basis that it is the duty of
government to promote the public welfare, and that this can
be accomplished only when every untiring effort is given to
doing the greatest good for the greatest number.
Thus, they
say, government should not be.so much concerned about the
effects of paying the tax upon any individual or upon any
small group of individuals but it must be interested chiefly
in its effect upon society as a whole.
But beyond this
point their ideas seem to diverge further and further apart.
Various persons have different social purposes that they
would have taxation serve depending upon the institution
they consider needs correcting.
Some of the extremes would
have the tax system be used for the purpose of equalizing
wealth.
For this purpose a highly progressive income and
inheritance tax are the more frequently recommended.
The
argument which has been advanced to justify such a setup is
that the great inequalities in wealth and income distri­
bution has come as a result of governmental activities or
inactivities.
As a result it is concluded that the govern—
ment should be allowed to take steps to correct evils which
are present as a result of its own doings.
is a glaring weakness in this argument.
However, there
The inequalities
of wealth distribution are a result of the economic order in
force, and such an approach is merely attacking the results
and is not altering the causes.
Continuing from this con­
tention, some would so set up the tax structure that there
could be no great accumulations of wealth.
For this purpose
it is necessary to first concede that an economic program
based upon open individual and competitive production is
undesirable and it is questionable how many persons, at
least in this country, would be willing to concede to this.
Social taxes have been used more frequently for the
purpose of doing away with some existing institution which
the government does not know how to accomplish in some other
manner.
A well known example of this sort is to be found
in the history of our own country.
The federal government
wished to stop the circulation of state bank notes but
seemed unable to do so.
They therefore placed such a heavy
tax upon them that it became impractical to use them and so
the notes soon became a matter of history.
Another example
of such taxation is that placed upon certain industries,
which, though it does not put them completely out of ex­
istence, does serve to limit their activities.
Notable
among these are the taxes already mentioned on the tobacco
68
and liquor industries.
The taxes have tended to serve as
control measures, but such methods of control are questioned
by some as it serves to centralize the industry in a few
limited but powerful hands.
But this is generally considered
to be less undesirable than letting the business run rampant
without any control whatsoever.
This would indicate that
taxes may be used to the advantage of society, although the
process may obviously be carried too far, or also may not go
so far as might be desired.
While Professor W. J. Schultz concedes that all taxes
have their regulatory elements, he does not recommend the
adoption of any tax merely for regulatory purposes.
is no virtue in a regulatory tax per se.«"5
"”There
He considers
that apart from the revenue, a tax can be considered only a
means to an end and so can be judged only upon the merits
or detriments of the end itself and not by the qualities in­
herent within the tax.
As examples he refers to the pro­
posed taxes upon chain stores, the undistributed profits
tax, and the frequently suggested antihoarding tax.
In
deciding if one is in favor of the first one, he does not
examine the tax itself so closely but rather the purpose
for which it is intended - limiting the activity of chain
^William J. Schultz, ”Regulatory Taxes,” The Tax
Magazine, September, 1939.
stores.
If he favors or is opposed to this purpose, then
his conclusion is almost certain.
The same is true of the
other two taxes mentioned - one will ordinarily favor the
tax if they favor the influence that it-is intended to
exert•
Whatever may he one»s conclusion as to the advisa­
bility of using taxes for purposes other than for revenue,
one must face the fact that at the present time, the trend
seems definitely in favor of social legislation.
Therefore
it seems somewhat useless to condemn the matter wholly as
it does have its good points.
The wisest thing to do
appears to be to study the problems involved and attempt to
reach conclusions which will yield the best things for all
of society.
In discussing this subject Findlay Mackenzie
writes:
In any new program of social and economic control
the fiscal machinery of government, one of the most
vulnerable agencies of social compulsion, will be ex­
tensively employed. It will be used because it is
available as an Operative device, and because it can
at once be saddled with new duties. But the fiscal
system cannot serve as an engine of social control
unless it is very materially redesigned and remodeled.
It can become a means of social control only by be­
coming itself the object of control. This process
of revision must necessarily be largely empirical?
it must be based on cautious modification preceded
by careful analysis of the relation of the fiscal
system to a nation*s economy. Yet no effective re­
vision can be expected unless the aid of fiscal theory
is solicited or unless enveloping economic philosophies
are frequently and sympathetically appraised. Clearly
the task is a difficult one. Yet until the fiscal
system itself is reformed, the taxing machinery cannot
he regarded as an effective device for the extensive
program of social control which the future may demand.®
Mr. Mackenzie first urges the development of various agencies
with enlightened fiscal leadership to study the whole pro­
blem.
He does not feel that legal limits have been extended
to their ultimate.
He recommends an extension of the
ability-to-pay-doctrine, the abandonment of specific-use
funds, and the adoption of an improved budgetary technique
and control.
These changes he believes would start our
economy in the direction in which it might be used for in­
telligent social control.
He considers that one of the
greatest limitations to our use of taxation as an instrument
of control is in the existence of specific constitutional
and statutory restrictions upon the type of fiscal taxes
which may be levied.
The chief complication lies in the
cumbersome specifications of detail to be found in many
state constitutions, instead of having the basic law made
up of general principles which may be adapted to the needs
of changing times.
He recommends the removal of these un­
workable minor provisions which have become rooted in our
basic laws.
If these -unnecessary changes are made, he feels
that we may be able-to benefit considerably from the use of
York:
6Findlay Mackenzie, editor, Planned Society (Hew
Prentiee-Hall Inc., 1937), p".r 49'6"*T"
71
our fiscal system to attain social ends.
Probably the greatest exponent of social taxation is
Adolph Wagner, who has propounded his theory known as the
socio-political theory of taxation.
After reviewing this
theory, I tend to agree with Professor Seligman that it is
inclined to the socialistic viewpoint.
Mot only does he
attempt to improve the tax structure but attacks the economic
system as well.
He refers to the frequent evils attached to
the system of free competition based upon private initiative
which must result in a greatly unequal distribution of in­
come and wealth.
This is particularly bad because the re­
lationships which are to exist between individuals or
groups of individuals depend upon this distribution.
What
so-called social class one belongs in is a result of this
distribution of wealth.
He then concludes that all who are
of the opinion that the existing economic order is wholly
just must also then conclude that the existing unbalanced
distribution of wealth is likewise just.
He then continues
that if this be true, then we must accept all of the ac­
companying consequences, one of which is that the paying of
equal amounts of taxes by all citizens presses with more
severity upon some than upon others.
This situation must
necessarily exist because the tax system cannot be so ar­
ranged as to alter the existing distribution, as a result
of which taxes will be used only for the purpose of raising
72
public revenue.
This may be looked upon as a sketch of the
financial or fiscal theory of taxation.
Under this theory
the idea of universality of taxation is taken literally.
Each and every citizen would be required to contribute to
the public funds, regardless of whether his income was large
or small, making no consideration for those living below the
level of minimum subsistence.
This principle would hoid
regardless of the source of one»s income, whether it was
derived from invested property or whether it came from
physical labor.
Furthermore, the concept of equality of
taxation would be strictly interpreted to mean the payment
of a fixed proportion of one»s income regardless of its
total amount.
This would eliminate the idea*of progressive
taxation upon the incomes in the higher brackets.
But, it
seems to the present writer, herein is the weakness in Mr.
Wagner*s reasoning.
I do not believe than an economic
system based upon free competition and individual initiative
must result in these strict conclusions.
I cannot see why
some of the advantages in his theory cannot be incorporated
into our tax structure without vitally destroying our
economic system.
According to its author the socio-political theory
makes of a tax more than a mere money-getter.
Under this
doctrine a tax becomes a means of correcting the evils pre­
sent in the maldistribution of wealth tinder a system of
73
free competition.
The first means by which this end is to be
achieved is a keen distinction between "earned" and "un­
earned" income, as well as income which is a result of chance
or speculative gain.
Secondly, there is a recognition of the
fact that those persons who have the greatest incomes also
have the greatest:ability to pay the most taxes, and that
income from property likewise shows greater ability to bear
heavier taxes than income from labor.
Upon this basis of
reasoning it is then possible to show favor for those per­
sons in the lovrer income brackets and for those who secure
all their income through physical labor.
Mr. Wagner recog­
nizes that this may be a source of objection to his theory
since such exemptions must necessarily result in still
heavier taxation of the rich, but he feels that such is as
justified as the present habit of supplying free education
to the poor.
This socio-political theory also interprets the
postulates of equality in taxation and universality of
taxation differently from the strict financial theory of
taxation.
Equality is not Interpreted to mean that a fixed
proportion of all incomes should go in the form of taxes,
but rather that the part of one’s income that should go as
taxes should be in proportion to his ability, and, as
pointed out above, this ability rises as does the quantity
of the income.
As a result it rejects the idea of pro-
portional taxation in favor of progressive taxation.
Further­
more, it does not interpret universality of taxation literally
but allows the exemption of those below the level of minimum
subsistence and those who are so close to that point that the
taxes he would pay would place him below the subsistence
level.
At first reading the socio-political theory sounds
extremely good, but upon closer examination, it is found not
to be so perfect.
As pointed out above, it is not possible
to clearly distinguish between fiscal and non-fiscal or
social taxation.
influences.
All of them have both fiscal and social
History does not support Wagner»s contention
that taxes have been levied in the past for purely fiscal
purposes.
It does not appear that any tax forming body has
ever completely ignored the social significance of the taxes
they have adopted.
The entire system of protective tariffs
that have been used by various nations do not appear to
ever have been adopted merely for the purposes of revenue.
History tends to show that their use has always been tied
in with the idea of improving social and national prosperi­
ty.
Likewise taxes upon luxuries have never been merely
for revenue but appear to have been used as a means of
limiting their use as well.
Finally, a last objection
to the socio-political
theory is that the difference between the social element
75
which is present in all taxes and the social idea expressed
in this theory is the same difference as exists between
social reform and socialism.
Those of us who believe in
the democratic principles can hardly agree with Wagner*s
ideas of social justice*
To the democratically inclined
person justice means allowing all an equal chance with no
undue advantages to any.
As a result the job of the state
is to assure each citizen equal rights under the law giving
each the opportunity to develop his talents and abilities
to their maximum.
Justice may indeed demand modifications
in our economic and tax systems but this requires social
reform and not socialism.
One of the outstanding critics of the socio-political
theory is Professor Seligman who says:
. . . on the other hand, it is not allowable to
confound this undoubtedly social element in all fiscal
policy with what Wagner calls the socio-political,
or what may be called more correctly the socialistic
element. From the principle that the state may
modify its strict fiscal policy by considerations
of general national utility to the principle that
it is the duty of the state to redress all inequali­
ties of fortune among its private citizens is a
long and dangerous step. It would land us not only
In socialism, but practically in communism. If
this were one of the acknowledged functions of
government, it would be useless to construct any
science of finance. There would be only one simple
principle: confiscate the property of the rich
and give it to the poor. . • • But at all events,
the so-called socio-political theory is untenable
in so far as it implies a conscious effort on the
part of the state to levy higher taxes on the rich
in order to reduce them to the level of the poor.
7
7
Charles J. Bullock, Selected Readings in Public
Finance (New York: Ginn and Company, 1924), p. 261.
CHAPTER V
ARGUMENTS FOR AND AGAINST NON-FISCAL TAXATION
As has been pointed out many times earlier in this
paper, all taxes have both their fiscal and non-fiscal in­
fluences.
nature.
None is either wholly fiscal or non-fiscal in
But if one wishes to distinguish between the two
types he must find some grounds for distinction.
For this
purpose I turn to the distinction suggested by Professor
Fagan'*' of Stanford University who would classify the taxes
according to the intent of the legislators.
If the intent
of the makers of the tax was primarily to raise public
revenue, then the tax is to be classed as a fiscal tax
although it may have considerable economic and social re­
percussions.
In contrast to this, if the intent was to
produce certain desired changes in social or economic con­
ditions, and the securing of public funds was secondary,
then the tax is non-fiscal in nature.
A third classifi­
cation might be added in which would be placed those taxes
behind which the fiscal and non-fiscal intentions are of
equal significance.
A subgrouping may be made of non-fiscal taxes.
The
■^Elmer D. Fagan, "Taxation for Non-fiscal Purposes."
Proceedings of the Seventeenth Annual Conference of the
Pacific Coast Economic Association, December,
first group would consist of those taxes which seek to se­
cure their social ends by direct action.
This would include
those which would attempt to prohibit or limit some particu­
lar activity by a direct tax
upon it, or those which would
attempt to foster some activity by a low tax or complete
exemption oh it.
An example of the former is the previously
mentioned tax which was placed upon state bank notes in
order to remove them from circulation.
The tax on oleo­
margarine has been intended primarily to limit its growth in
protection of the dairy industry.
As an example of the
protective type, we might mention the exemption of certain
governmental bonds from taxation in order to foster their
purchases.
The second group of non-fiscal taxes would be those
which attempt to reach their goal by more indirect methods.
Due to wide variations in possible indirect approaches it
would not appear possible to give a clear and limited
definition of this class.
The undistributed profits tsx
is intended to bring about a redistribution of funds which
might otherwise lie idle in the hands of a corporation.
Highly progressive income and inheritance taxes are based
partially on the idea of resulting in a less unequal dis­
tribution of wealth and income.
Writing in the January,
1937 issue of the "American Journal of Sociology", Clarence
Heer suggests the adoption of higher taxes on land in order
‘
79
to bring about a reduced value of it and so to indirectly
help solve the problems of farm tenancy and slum clearance.
President Roosevelt has frequently turned to taxation
as a means of securing social ends.
He has probably made
more use of it than any other President.
However, he is
certainly not the first one to employ such.
Regardless of
this# the method is always greeted with much opposition,
which is no doubt one reason that the approach has not been
more frequently employed.
One of the first complaints
heard is that it is socialistic and that it is contrary to
the very nature and sanctions of the principles of taxation.
True, many writers in the past, as well as writers today,
oppose the idea of the use of taxation for any purpose
other than securing revenue.
Such writers as H. L. Lutz,
C. F. Bastable, and H. C. Adams offer definitions of tax­
ation which would prohibit the use of taxes for social pur­
poses.
But it is also possible to find authorities, as A.
G. Buehler, and Adolph Wagner, who offer such a liberal
definition as to make it possible.
While the former group
of writers do not sanction taxes for social purposes, they
grant that all taxes have social effects, and Mr. Lutz even
goes so far as to say that the modern concept of taxation
does not prohibit the use of taxes in order to attain non­
fiscal ends.
As for the socialistic angle, that depends
upon the social end which is to be desired.
The term
80
"socialistic" has become sort of a red herring which is
thrown in the path of all attempts to secure something
which one opposes•
Proponents of non-fiscal taxes will then answer that
sanctions of history and tradition are not necessary and
that it is a method of attaining goals which otherwise would
be difficult, complicated, and sometimes impossible to
reach.
The United States early in its history adopted a
tariff in order that a going manufacturing business might
be built.
The founders of our country felt that that was
essential in order to secure economic independence as well
as political independence of Europe.
certain persons objected seriously.
As has always happened
Many persons said that
tariff rates were so high that it would defeat its own pur­
pose.
But the federal government then was not interested
in revenue and it was satisfied with the results that were
realized.
Later on, as has been previously mentioned,
legislators were afraid that the oleomargarine market was
going to drive the dairy industry out of existence.
result it placed a tax on oleomargarine.
As a
In this way they
were able to control that business to a limited extent,
whereas if they had passed a law saying that the makers of
oleomargarine could make only so much of their product a
year as the country wanted to protect the butter market,
the law would have been thrown out as ridiculous and uncon-
stitutional.
The objectors then come forward with a second criti­
cism which has been well put in the words of C, F. Bastablej
«»To mix up with one very important object (of taxation)
another different and perhaps incompatible one is to run the
risk of failing in both.""**
This argument is leaning to the
philosophical, but it falls of its own weight.
Mr. Bastable
no doubt is clear on what he means but he robs -his statement
of its strength by the use of so-called "weasel words".
There is no finality of conviction in his generalities,
which seems to be a weakness of economists, and theorists in
general.
The "weasel words" to which I refer are "perhaps"
and "to run the risk of".
This would indicate that his con­
clusion is not necessarily final.
The non-fiscal goal of
any tax is not necessarily incompatible with its fiscal
objectives.
The tariff in the history of this country has
yielded considerable revenue and has also served as pro­
tection for our industry.
It is generally accepted that
maximum protection and the highest possible revenue from
any one tax is impossible but it is not impossible,to se­
cure a high degree of both.
Progressive income taxes and
inheritance taxes have also served to bring about desirable
2C . F. Bastable, Public Finance (New York:
and Company, 1932).
Macmillan
82
social as well as fiscal ends.
Finally in reply to this objection, there may be
offered the point which has been a theme throughout this
paper - that no tax is wholly fiscal or non-fiscal ty
nature.
Along this line of thought Professor Fagan has said
that there is no reason why a tax cannot be dedicated wholly
to either a fiscal or a non-fiscal purpose, although there
will be some elements of the other factor.
A third argument against non-fiscal taxation which
has been put forward is that it opens wide the door to and
encourages discrimination and favoritism thus making it
impossible to apply canons of fair and equitable taxation.
The first question to this to be asked would be as to the
validity of the canon.
If this principle is one which ex­
cludes taxation for non-fiscal purposes then there clearly
can be no answer.
However, if this is not so, the question
must then rest upon the interpretation of the term equity
in taxation.
I can see no serious reason why the term
could not be understood to mean such taxation as will im­
prove the public welfare to. the maximum. ' The accomplish­
ment of this would depend upon a wise and judicious dis­
crimination and regulation of taxes.
Discrimination and
regulation are not necessarily bad as the above argument
seems to assume.
Any tax base, whether based on benefit-
received, ability-to-pay, or minimum sacrifice must in­
83
volve some wise and deliberate discrimination, otherwise it
could not be effective.
The degree of discrimination which
is to be used must be left up to the wisdom of the state*s
authorities.
A fourth objection that has been made is that nonfiscal taxes involve grave administrative problems which the
average person in administrative positions cannot properly
handle.
This is indeed a serious attack, but it cannot
really be made against non-fiscal taxes as such.
Perhaps
it might be, if these difficulties were insurmountable, but
it does not appear to me or to many other writers whom I
have read that they are such.
Unquestionably an intelligent administration of
social taxation requires a wide knowledge and foresight into
all the annals of taxation.
Prerequisite is an understand­
ing of the incidence and effects of the tax involved.
Com­
plete information for all kinds of taxation is not avail­
able, but the incidence of many of the more common forms of
taxes have been comparatively well figured out.
This being
so, there is no reason why persons with the proper informa­
tion cannot be secured for these positions.
This argument may be valid reason for not adopting
social taxes, the incidence of which are not well known, or
taxes which cannot be effectively administered because of
inherent technical weaknesses, or which cannot be adminis-
84
stered without cost in excess of the benefits received.
Another objection which has been urged is even more
philosophical than the preceeding - that non-fiscal taxes
cannot be successful because they deal with results rather
than with causes.
This contention has been used by Professor
Taussig of Harvard, a well known economist, in connection
with progressive taxation as a means of bringing about a
more just distribution of wealth and income.
He writes:
Progressive taxation, so far as it aims to correct
unjustified inequalities, evidently deals with results,
not causes. It is obviously better to go to the root
of the matter, and to deal with the causes. Much the
more effective and promising way of reform is to pro­
mote the mitigation of inequality in other ways - by
equalization of opportunity through widespread
facilities for rational education, by the control of
monopoly industries, by the removal of the conditions
which make possible illegitimate profits.3
This same point is discussed by Sir Josiah Stamp, in which
he refers to the above quotation of Mr. Taussig*s.
He
goes on to say, however, that non-fiscal features of a tax
are justified if they are secondary to the fiscal factors.
professor Taussig has suggested that a cause of
inequality in wealth distribution is unequal opportunities.
Continuing from here we are apt to find ourselves in a
never ending circle.
tunities?
What is the cause of unequal oppor­
It may be said to be varying abilities among
•2
F. W. Taussig, Principles of Economics (New York:
The Macmillan Company, 1927) , pT“51S.
85
persons*
But what is the cause of this?
It may equally
well be said that lack of ability is often the result of
lack of opportunity*
Thus what once was the cause is now
the effect.
It often becomes impossible to deal with causes in
economic situations, for as Alfred Marshall has pointed out,
the full effects of an economic cause sometimes is not
realized until after the cause itself is no longer in ex­
istence.
In such a case it is clear that If the undesirable
situation is to be corrected one must deal with the existing
conditions rather than with causes which have gone out of
existence.
A final argument which is put forward is that tax­
ation has failed in actual practice to correct the undesir­
able social conditions.
This no doubt is true but one must
consider the difference between completely solving a pro­
blem and reaching a desirable result in that direction.
Various laws that have been passed fail to correct the
situation completely.
Numerous statutes have been enacted
making it illega.l to commit murder.
Large numbers of
ordinances have been passed to control automobile traffic
problems.
But murders still occur, and in almost every town
traffic problems still remain unsolved yet I doubt if any
one would say that we should discard our legal system be­
cause it has failed to completely solve the problems, nor
86
would they even go so far as to say that we should repeal
all laws concerning murder and traffic problems for they
specifically have far from solved the undesirable situations
which they were intended to correct.
Moreover, examples of non-fiscal taxes may be found .
which have-achieved the purpose for which they were intended.
One such example was the elimination of state bank notesjust after the Civil War through the means of a tax on them.
While some taxes have not been so successful, they have im­
proved conditions and as such have been at least partially
successful.
The issue thus boils itself down to the question
of how far progress must be made in the desired direction
before the result achieved is to be considered as really
♦desirablet.
Various experiences so far with social security
and unemployment relief have not wholly solved the problem
concerned but I do not believe that the results so far
achieved could be considered entirely undesirable.
Should
we do away with the entire plan because it has not reached
the desired goal although it has made progress towards that
end, and may in a relatively short time reach it?
say not.
I would
Further study and research may reveal methods
whereby the ultimate that is desired may be attained.
It seems that before it is possible to satisfactorily
answer the last objection
we must first agree as to what
is to be ultimately desired in social questions.
That such
87
facts can be scientifically determined does not seem im­
possible*
It will require that economists and sociologists
get together and find a just balance for their views and
differences*
Many of the hangover prejudices from past
generations must yield to our present day needs*
As pointed
out by Professor Fagan many of the objections put forward
against non-fiscal taxes seem to be based upon an old time
idea that all taxes are evil and should be kept at a minimum
at all costs, and upon opposition to all political compulsion
of any nature*
My contention that concrete social objectives may be
determined finds support in the statement of Professor
Wesley C* Mitchell that welfare
• * • is capable of being made objective and definite
in reference to such matters as food, clothing, shelter,
sanitation, education, fatigue, and leisure. . * . This
realm of the definite in welfare will be expanded
steadily by quantitative methods, so that we shall
develop a criterion of welfare applicable to many lines
of effort.4
Thus it would seem that no serious argument can be
given against non-fiscal taxes per se.
It is generally
accepted that all taxes have their social repercussions re­
gardless of whether they fall into the fiscal or non-fiscal
classification*
Even the opponents of non-fiscal taxes
L e s l e y C. Mitchell, Prospeets of Economics (R. G*
Tugwell, editor, The Trend of Economics. New York: A* A.
Knopf, 1924), p. 3X7
admit that taxes for revenue only must be carefully studied
for their social and economic inplications, and that legis­
lators should adopt only those taxes for revenue producing
purposes which have the least possible undesirable social
effects.
Thus even to the opponents it appears that the
goal of all state, activities should be the welfare of the
citizens.
Therefore, I can see no reason why a state should
not adopt taxation which is consistent with the welfare of
its society.
This is particularly so when taxation appears
to be the most effective means of reaching that end.
This
also appears to be essentially the argument of Adolph Wagner,
the most outspoken proponent of non-fiscal taxation, and
does not appear to conflict with the ideas of the so-called
founder of the science of taxation, Adam Smith, who favored
discriminatory taxation as a means of mitigating the
economic and social evils existent in absentee landlordism.
While my thesis is that taxation may be employed to
secure desirable social ends, such a program must obviously
be followed with great care and forethought.
While my con­
clusion may suffice as a general principle, I do not assert
that it may be employed in every situation.
Surrounding
conditions must all be considered before deciding upon any
tax, be it a fiscal or a non-fiscal one.
During an emergency, as the war which is now going
on in Europe, I tend to agree with B. W. Anderson who main-
tains that in war times we .should emphasize the fiscal
taxes at the expense of the non-fiscal ones.
As a general
rule, this is very good but it too must be wisely employed.
In our.present program of helping Great Britain in
her struggle against the threats of dictatorship, the de­
mand for fiscal taxation is very great.
However, despite
the serious need for a great amount of public revenue, we
cannot afford to ignore all the social factors which are
involved.
We, as a nation, still have definite social
problems and these cannot be completely ignored.
BIBLIOGRAPHY-
A.
BOOKS
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Bosanquet, Bernard, The Philosophical Theory of the State.
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Bullock, Charles J., Selected Readings in Public Finance.
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Dalton, Hugh, Principles of Public Finance.
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Dawson, Miles Menander, The Basic Thoughts of Confucius.
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De Marco, Antonio, First Principles of Public Finance.
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Fagan and Macy, Public Finance.
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Green, William Raymond, The Theory and Practice of Modern
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Groves, Harold M., Financing Government.
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Jensen, Jens P., Government Finance.
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Thomas
Lutz, Harley Leist, Principles of Public Finance. New
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Mitchell, Wesley C., Prospects of Economics. R. G.
Tugwell, editor, The TrenS oF Economics. New York:
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Morris, George S., Hegel*s Philosophy of the State and
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The
PERIODICAL ARTICLES
Butler, Nicholas Murray, "The Real Issue," Vital Speeches.
VI (February 15, 1940).
93
Crowell, Chester T., "Taxation not for Revenue," Harpers.
176 (December, 1937).
Heer, Clarence, "Taxation as an Instrument of Social
Control," American Journal of Sociology. XLII (January,
1937).
Manwaring, W. H., "Organic Theory of the State," Scientific
Monthly. XLVII (July, 1938).
Schultz, William J., "Regulatory Taxes," Tax Magazine.
17 (September, 1939).
Ryan, James H., "What is the State?"
(May 29, 1936).
C.
Commonweal. XXIV
PUBLICATIONS OF LEARNED ORGANIZATIONS
Fagan, Elmer D., "Taxation for Non-fiscal Purposes,"
Proceedings of the Seventeenth Annual Conference of the
Pacific Coast Economic Association. December. 1938.
D.
LAW CASES
MeCulloch vs. Maryland, 1819, 4 Wheaton 316.
Pollock vs. Farmers» Loan and Trust Company, 157 U. S.
429.
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