Resources of government.—All expenditures of government are as subject to economic laws with reference to consumption of wealth as are those of individuals. Actual result in welfare is the only reason for such expenditure. Hence the same tests of economy are applied. Government makes but few expenditures for the immediate purpose of reproducing and increasing wealth. So far as its investments sustain productive industry, and the products of that industry enter into the world's market, they are subject to the same economic laws of supply and demand that govern all production of wealth. If in any case they are not, it is because of government monopoly cornering the market, or because of unnatural conditions of government production undermining the market. In general, government is simply expending for the common welfare a part of the wealth produced by individual effort.
Its resources are in small part derived from fees for special services rendered to individuals of the community. Such are fees for registration of deeds and mortgages, and of the same nature, though for convenience of collection paid in a different way, is the revenue from sale of postage stamps and stamped envelopes. Revenue [pg 347] may come from pay for certain special privileges or franchises established by license or patent. These are supposed to be not so much in payment for special service as for sharing in responsibility and cost of protection. Another source of revenue is in the shape of money penalty, or fine, for minor trespasses upon good order. Such revenues are accidental, and diminish as the government becomes more perfect. Under peculiar circumstances of opposition by citizens or bodies of citizens to the general order, government confiscates property used in such opposition. A good illustration of this is connected with smuggling, where the introducer of foreign goods opposes government in its revenue laws by fraud or violence, and suffers the confiscation of goods so introduced.
None of the foregoing sources of revenue, unless it be the license, and this is sometimes a mere method of taxation, can serve to any great extent the purposes of government. All government expenditures for general welfare must finally be met by some system of distributing the burden over all the people. This method of distribution is called taxation. The principal revenue is raised by taxation of possessors and producers of wealth, in anticipation of current public needs.
If for any reason government expenditures exceed its revenues, the government, like any individual, becomes a borrower. It may borrow by contract to pay at some future time for construction of buildings or machinery, or by issue of scrip in the shape of promises to pay at some definite or indefinite time in the future, or more distinctly still by sale of bonds, which are [pg 348] definite certificates of indebtedness, negotiated like the notes of individuals in great banking centers. Yet all of these are only methods of postponing the taxation which must support the government in its necessary machinery. Government can live upon credit in the same way, and only in the same way, that individuals can. The economic reasons for such credit must be the same as in individual experience.
Principles of taxation.—Since taxation in general is simply a way of distributing expenses to those for whose benefit expenditure has been made, the first question is one of fairness in distribution. The benefits from government expenditure ought to be universal, but are not necessarily equal. Like all the good things of nature, the benefits of the government are not appreciated by all alike. No one would probably suggest the possibility of distributing the expenditure exactly in accord with advantage received. Wherever the service is distinctly personal, as in the regular mail service, an attempt is made to charge each person the average cost of the service. Even the large miscellaneous mail distribution at less than cost may be fairly borne by those who use the mail for personal advantage, since this is likely to be in proportion to the intelligent activity shown in correspondence. Some few taxes upon special commodities of questionable advantage to the multitude, like liquors and tobacco, are supposed to be paid by those who gain the only advantage received by anybody in protecting their use.
Some more general principle, however, must be found for adjusting the burden of general expenses so [pg 349] that each individual will bear his share. If the burden belongs to all, it should rest fairly upon all. Hence equality is usually given as the first principle of taxation. But it is evident that in this case equality means equity, not a mathematical division by the number of taxpayers. The interpretation is therefore “according to ability.” According to Professor Rogers, the student of economic history, “Equality of sacrifice is the only honest rule in taxation.” This means, in practice, that any system of taxation should be planned with distinct effort to distribute the common expenses according to the ability of different members of society to meet them.
It is evident that no exact gauge of ability is at hand. If the actual income of every citizen could be distinctly known, and the burdens of a dependent household clearly expressed, a basis for equal sacrifice, so far as wealth is concerned, might be reached. But no such basis has been or can be actually found. If found, it would not give an accurate gauge of sacrifice, because the actual wants for comfort of different individuals are so widely varied. Two distinct approximations toward this equity are found. The first is in the total annual consumption of the individual taxpayer, especially of such articles as meet wants above the mere maintenance of healthy existence. In this the government assumes that all will spend according to their ability. The second is in a total accumulation of property. In this the government assumes that every man saves for future consumption all that he gains above his present needs. Both assumptions are untrue in individual cases, and [pg 350] only approximately true anywhere. In many instances the expenditure of a given year upon more continuous wants than ordinary, like a home or farm buildings, will count also as wealth laid by. So, in any combination of the two systems of taxation, the more thrifty and far-seeing will bear a double burden. Yet even this combination may not transgress the rule of equity, since such foresight is itself proof of ability.
To this first principle of equity we may add others, less fundamental, but equally important in practice. Taxes must be sufficiently definite to be understood and provided for by every taxpayer. This is needed for maintaining the interest of every citizen in both the necessity and the economy of public expenditures. Taxes must be so levied and collected as to be conveniently paid. This means that private enterprise shall be hindered as little as possible in making assessments, and that times and places of collection shall be suited to the convenience of taxpayers. The collection of taxes must be by such methods as will involve least outlay, either in salaries of officials or in machinery of the collecting process. These four principles of taxation were announced by Adam Smith more than a hundred years ago, and have commended themselves to students of the subject ever since. It is evident that the last three are more explicit methods for carrying out the first. Most briefly stated; they imply equity, definiteness, convenience of paying, and economy in collecting.
Most legislation with reference to taxes shows some effort to carry out one, if not all, of these requirements. It is evident that a tax may be conveniently [pg 351] paid in connection with ordinary expenditures, and at the same time be very indefinite and quite inequitable. Many taxes upon articles of every-day use in the home are of this nature. A very equitable tax may be so inconvenient from its interference with private interests, and require so many officials for collection, as to make it a serious burden to all. Such a tax would be one levied upon net income, supposing it possible to discover the exact facts for such a levy. Taxes levied without consideration of these principles are defended as means of checking extravagance or vice, as equalizing other conditions of welfare, or as correcting inequalities from other existing methods of taxation. Even these last assume the necessity of equity in the entire system or group of systems.
Direct and indirect taxation.—For convenience of study, taxes are spoken of as either direct or indirect; that is, a tax may be levied upon one whose property or earnings must be reduced by the amount of the tax, or a tax may be levied upon one whose property when sold, or whose service when rendered to another, will be worth as much more as the burden of the tax he has paid. A poll tax, an income tax, a tax on the farm, or a tax on household goods and jewelry, is assumed to be paid by the owner or user, without reimbursement. But a tax on stock in trade—like the farmer's live stock—or upon the machinery of production or service—like railroads, insurance companies and banks—is assumed to be transferred as an additional expense to the one who finally enjoys the wealth.