Principles of Political Economy

by Arthur Latham Perry

To the general question, then, in what proportions shall the citizens contribute in taxes to the support of government, the general answer comes, that they ought to contribute in proportion to the gains of their exchanges, of whatever kind they may be. The farm, the foundry, the mill, the railroad, the real estate of every name; personal property of every kind; and personal acquirements and efforts of all descriptions, best appear, for the purposes of taxation, through the gains realized by means of them. If, for any reason, any of these become unproductive, taxes should cease to be derived from them; indeed, must cease to be derived from them, because their owners can no longer pay by virtue of them. It may be objected that lands, for example, presently unproductive, may be held untaxed under this principle, held for the sake of a prospective rise of price. Very well; when they are sold at a profit, let the owner be taxed on that profit: it will be time enough then, especially as men do not like to hold unproductive forms of property. It may also be objected, that, under this principle, wages, the result of personal and professional exertion, would be taxed just the same as profits and rents, the result of previously accumulated property. Very well; they ought to be so taxed. Can anybody give a solid reason why they ought not to be so taxed? One may say, that a professional man earning a large income, on which taxes are paid the same as on a similar income of a land proprietor, dying, leaves to his children no further means of earning, while the land-proprietor, dying, does leave such means. Granted; but the land income continues to pay taxes, while that professional income does not! Other members of the profession will do the business which the former one would have done had he lived, and they will pay taxes on the income from it. What a man transmits to his children, whether a great name or a great estate, has nothing to do with the amount of taxes that he ought to pay while he lives.

There is an illusion about lands and real property that needs to be dissipated before men will understand clearly the whole matter of Taxation. Without constant watchfulness and foresight, without constant efforts in improvements and repairs, almost every form of realized property will rapidly deteriorate and become unproductive. Land even in Great Britain, where land is scarce, is only worth about twenty-five years' rent; and without the exercise of intelligence and will property ceases to be. Property has its birth in services exchanged; services exchanged give rise to gains; taxes can only be paid out of these gains; they ought to be proportioned to the amount of these gains without any reference to the class of exchanges producing them; while the right to tax on the part of the government is connected with a service rendered by government, and both grows out of and is limited by the right to exchange on the part of the citizens. These considerations, though they may exclude the propriety of a poll-tax, are consistent with most other forms of taxation, and give unity to them.

4. Does it not follow from all the preceding, that a single and universal Income-Tax would prove the best form of what is in its own nature a subtraction from the gains of the governed for the maintenance of Government? If the approximate amount of Income could in all cases be ascertained, and if no other form of tax were levied upon the same persons, this would seem to be a perfectly unexceptionable mode of Taxation. The only sources of Income are three: Wages, Profits, Rents. It does not seem that gifts are legitimately taxable; they lie outside the field of exchange; they spring from sympathy, from benevolence, from duty; and while exchange must claim all that fairly belongs to it, it must be careful not to throw discouragements into the adjacent but distinct fields of morals. Hence, it may well be questioned whether legacies, bequeathments, gifts to charitable and educational institutions, and gifts to individuals proceeding from friendship, gratitude, or other such impulse, are properly subject to taxation. The property is taxable in the hands of the donor, and may be in the hands of the recipient, but the passage from one to the other ought to be unobstructed by a tax. Gifts, then, excepted, and plunder, which is out of the question, the sources of income are few and simple, and there is no great difficulty in every man ascertaining about what his annual income is. Because this income, exactly ascertained, exactly measures the gains of his exchanges for that year, a tax upon that income is the fairest of all possible forms of taxation, and might be made with advantage, in time, to supersede all other forms.

Superficial objections may be easily raised, and are raised constantly in the United States, against any form of an income-tax. Reference is often had to our national experience with such a tax during and just after the late Civil War. The truth is, that tax was thrown on in addition to, and in no proper relations with, a large number of other national taxes of all sorts, good and bad; it was no possible experiment in Taxation, because there was no opportunity of watching its operation separate from that of other and confused forms; industry of all kinds was demoralized by the war, and still more by a depreciated and abominable paper money made legal tender for all debts; and the tax became unpopular in influential quarters for certain reasons not inherent in the nature of the tax, and was discontinued in consequence. In order to be fairly tested, an income-tax should either be exclusive, all other taxes being intermitted for the time being; or at least levied simply in itself in connection with a few other simple taxes, each of which can be watched in its incidence and results separately from the others.

Great Britain derives its national revenues almost wholly from five sources; namely, (1) Excises, say £27,000,000 annually; (2) Customs, say £20,000,000; (3) Incomes, say £12,000,000; (4) Stamps, say £12,000,000; (5) Postals, say £9,000,000. The remaining, say £10,000,000, come from miscellaneous sources. One feature of the English Income-tax is, that it is varied from time to time according to prevailing national needs, the rate having been lifted from 2d. to 16d. per pound of income, according to estimated expenditures. In 1857, it realized in our money $80,255,000. In 1866, the largest year, our own national income-tax realized $60,894,135. By varying the rate to the pound of income according to the prospective wants of the Exchequer, the English have found for about forty years their income-tax to be the most uniform, unfailing, expansive, and responsive to control, of all their fiscal expedients.

The Prussians, too, are applying an income-tax as a means of raising revenue with good success. There, as in England it is somewhat complicated with other kinds of taxes, and cannot exhibit itself altogether in its own nature as if it were exclusive, such as all scientific economists would like to see it tried somewhere on a large scale; and the Germans have a different method from the English, of making the tax more or less flexible as circumstances vary. The English change the rate of the tax to the unit of income: the Germans graduate the tax to different classes of income-receivers. For example, those persons having an income between 420 and 660 marks a year pay 84 pennies (pfennige) as income-tax; persons in the next higher class pay 164 pennies a year; those in the class, whose maximum income is 6000 marks, pay 44 marks and 80 pennies a year; and all persons whose income does not rise above 420 marks are not subject to this tax. On account of hard times a few years ago, Bismarck brought it about, that all the classes included between 420 and 6000 marks of income should be wholly exempted from one-quarter's taxes. A mark is 23.82 of our cents; and a pfennig is one-hundredth of a mark.

Besides the complete harmony of an Income-tax with the general principles of Taxation, as already unfolded, it has several specific advantages over other forms of Taxes.

a. It has no tendency to disturb prices. Were there no taxation except on Incomes, and were all the incomes rightly ascertained, the prices of everything would be just as if there were no taxes at all. Taxation would then be like the atmosphere, pressing equally on all points and consciously on none. It is through tricks wrought on Prices, that the greatest and most widely spread injustices have been done and suffered in this country during the past thirty years: a depreciated Money, whether of paper or silver, raises some prices and not others, and some prices before others, and thus distributes its mischiefs unequally; protectionist tariff-taxes play of design fantastic tricks with prices, raising some and depressing others, thus working monstrous injustice on a vast scale; and almost all forms of taxation become unequal and unjust through their diverse action on Prices. But a universal Income-tax exclusive of all others, properly levied and fully responded to by the payers, would have no influence at all upon prices, could by no possibility work essential injustice, and would be certain to be very productive without becoming burdensome.

b. A second great advantage of such an Income-tax in such a country as this, would manifestly be, that all men would be obliged to keep exact pecuniary accounts; more orderly methods of Business would generally prevail; most men would know much better than they do now how they stand themselves, and whom of others to safely trust; sudden commercial failures, indeed failures at all, would be less frequent and severe; and everything in the business world would be more aboveboard and better known.

c. A third advantage of such an Income-tax, and the chief, would be its tendencies to fiscal simplicity. Complexities in the Exchequer are always and in many ways expensive to the People. In this country, where distinct taxes have to be paid, first to the local municipality, then to the State, and last to the Nation, Income-taxes, were all others abolished, would have this striking advantage, that the local municipality might best ascertain the incomes of all its legal residents once for all, no matter from what sources local or other the incomes be derived; and, having collected its own local per centum, the State and then the Nation would each have to collect an additional per centum on the same income for themselves. Or, better still, by an amicable arrangement, neither party yielding up its inherent right to tax, one set of officials might ascertain the incomes and also collect the tax for all three governments once for all. It may be long, it doubtless will be, before we shall ever come to such economy and simplicity and fiscal beauty as this is; for the pride of sovereignty is very strong both in State and Nation; each is jealous of the powers of the other, each is fond of the pelf and patronage and officialism connected with the gathering of the taxes, and each would be disinclined to yield anything to the other; but the fact remains, that, as it is of acknowledged moment to have the single Cæsar's image and inscription on every piece of the national Money, so it is of almost equal moment in point of cheapness and clearness and simplicity to have the hand of Cæsar seen but once in taking in the Taxes.