Rural Wealth and Welfare: Economic Principles Illustrated and Applied in Farm Life

by Geo. T. Fairchild

It is easy to see that such a distinction is difficult. [pg 352] Every owner of wealth will consider taxes connected with its possession a part of the cost of such wealth, and wherever possible in the conditions of the market will count a tax in the selling price. It is impossible to judge from the form of wealth or the nature of the service when the tax can be transferred to a final user. A farmer's wheat may be the source from which he pays the total cost of raising it, including taxes upon the land employed. If, in the condition of the wheat market, he has still a profit upon his management, he will assume that the wheat buyers have paid the taxes. If the market price is so low as to not cover the cost, he will emphasize the fact that he pays the taxes. Yet probably the fact is the same in both cases, that the owner of the land has his profits diminished by the actual amount of the tax. More strictly, the tax is taken from the rent of his land. In any case of over-production, when land gives no rent, the tax will be paid by the producer out of other income. So far, however, as farm products conform to the principle of cost of production in the tendency of prices, there will be a corresponding tendency to shift the tax upon the final consumer.

Thus direct and indirect taxes are not always distinguishable; but in the tax systems of the United States most state and municipal taxes are assumed to be direct, because levied upon persons and more permanent forms of property, while the taxes of the general government are by the Constitution indirect, unless levied upon the states according to population. They are in the form of customs or excise, in which some article of commerce or some service rendered gives a value upon [pg 353] which the tax may be transferred. Thus the state, the county, the city and the school district levy upon assessment of property and enumeration of polls. The United States collects upon imported goods of various kinds, upon special articles of manufacture, upon persons or corporations carrying on particular business, and upon commercial transactions of various kinds.

Assessment of direct taxes.—Assessment implies an enumeration of property in the possession of supposed owners and an appraisement of its value. The officer making the assessment is under constraint of an official oath to give a fair valuation. The market price is supposed to control his judgment, and is usually explicitly named in law.

In actual practice in various states of the Union assessed valuation often falls as low as one-third or even one-fifth of a fair estimate at market value. This is brought about by several causes. Each assessor fears over-valuation, lest his district will bear too large a share of more general expenses; and his successor is inclined rather to lower than raise the standard of value, from neighborly interest. Even if the assessors of an entire county agree upon terms of valuation, they are together under the same influence with reference to state and special taxes. A more definite cause of under-valuation is the practice of exempting a certain limited amount of property from all taxes. If personal property worth $200 is exempt from taxation for every householder, the smaller the assessment for his total property, the larger in proportion is the exemption. Specific taxes at a fixed rate, for state or school or improvement purposes, [pg 354] operate in the same way to force down the valuation of property in the entire state or district. In assessment of real estate even greater violence is sometimes done to equity. In newly settled portions of the country the valuation of land held in the name of non-resident owners is notoriously high. Often in cities the assessor is subject to political influences and social connections in such a way as to destroy all equity in taxation. The official oath attached to such assessments is a sham.

If all property of stated kinds were equally and fairly valued, the burden of taxation would be most fairly distributed as regards property owners. Any tendency to undervalue is sure to oppress the weaker part of these property holders. If the price of a horse is fixed at twenty dollars, when the average price is sixty, the more wealthy owner of horses whose average value is above the general average has a larger part of his property exempt than the poorer owner whose horses are below the average. In the same ratio all household goods and even farms and buildings are under-estimated.

In this connection it is proper to mention the exemption of certain property devoted wholly to public welfare and contributing alike to the good of all citizens. In every state there are multitudes of schools, created and sustained by gifts of benevolent men. These supplement and extend the work of the state for general enlightenment, and are wisely encouraged by exemption from the burden of taxation, because their entire income is devoted to the same ends which the state serves. Public libraries and churches, devoted to such general [pg 355] enlightenment and moral growth, are wisely included in this exemption. Nobody suffers, but everybody gains, by the use of private property for such purposes. If in any way these institutions serve the private ends of individuals, those individuals become themselves property owners, subject to the same taxation as others. Such exemptions may extend even to art collections made by private funds, and to extensive grounds laid out in parks, provided they are open to the public and serve as a means of wholesome recreation and culture.

In general, however, specific exemptions of private property from any taxes lead to abuse of privileges, jealousies and popular dissatisfaction, which result in danger to government and harm to the people. Exemptions of property used for particular purposes, like a farmer's team, may be thought of as a bounty upon such means of production. But the effect is almost always to the disadvantage of the weak, and the practice gives a general encouragement to the disposition to escape taxes. Farmers, of all classes of people, are most interested in a fair and painstaking assessment of all forms of property. Their influence is most widely extended and far-reaching in its effects. The whole community should be led to realize the absolute necessity of fair taxation and prompt meeting of individual responsibility. Fraud in the treatment of taxes is a crime against society, whether it involves false swearing or not. It partakes of the nature of treason, and may well be subjected to severe penalties. Usually, however, a penalty in the shape of additional taxes and forfeiture of property by sale for taxes, with room for [pg 356] redemption at considerable expense, are sufficient to secure a proper assessment and collection, if the community are really in earnest in resisting the fraud.

Indirect taxes.—The methods of indirect taxation by excise and custom duties have been familiar for ages. They are usually favored by politicians who dread the opposition of the people to taxation, because the collection is so incidental to ordinary expenditures as scarcely to be realized and never clearly measured. Few users of tobacco or strong drink have any distinct idea what portion of the cost represents the government revenue. Still less in drinking the cup of coffee, or sweetening it with sugar, does the person benefited weigh the tax he pays. It is doubtful if most of those who read this, actually know that sugar pays a tax, while tea and coffee do not, in our country.

So convenient is this mode of taxation that it forms the favorite mode of discrimination in favor of productive industries. A tariff of 50 per cent upon imported cloth may actually increase the price of similar cloths manufactured at home by nearly that amount, thus fostering cloth-making by a premium on the product, while only a few discover the added burden of the tax. Yet these modes of taxation are usually costly to the people. Even if free from complications with either preventing vice or fostering industry, they require a separate body of officials from those provided for direct taxation. They involve investment by every wholesale and retail dealer of extra capital in taxes, upon which extra interest and profit is expected. The actual consumer bears this extra burden with only partial realization [pg 357] of its bulk. If duties are high, the temptation to smuggling and fraud becomes great, and a force of officials must be stretched around the borders of a country to prevent it.

Custom, or duty.—Duties are said to be either specific or ad valorem. Specific duties are a definite sum upon every pound, ton, yard or other unit of measure, applied to the article taxed. They are easily assessed, and misrepresentation or fraud is scarcely possible. Ad valorem duties are a certain rate per cent upon the invoice value of the goods. In these, frauds are abundant, and experts are required to prevent them. Specific duties are relatively heavy upon the consumers of goods of cheaper quality. A tax of 25 cents on each yard of cloth worth a dollar is five times as heavy as the same tax on cloth worth five dollars. Equalization is frequently attempted by combination of specific duties upon all goods of a certain character with ad valorem duties upon all such goods above a certain quality.