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

by Geo. T. Fairchild

Excise collections.—The same difficulty is experienced in adjusting taxes by excise under our internal revenue system. Such revenues are largely collected through a sale of stamps, though the dealer himself may be required to pay a license fee, to secure the necessary inspection. Here, too, the tax is specific and bears most heavily upon the users of the poorest grade of goods. If attempt is made to grade it by quality, expensive machinery for preventing fraud is necessary. This is well illustrated in the list of officials required in connection with distilleries and bonded warehouses. Both the [pg 358] manufacture and the sale of alcoholic liquors must somewhere be under the inspection of an expert officer. All this necessary expense of collecting must be borne by the consumers. The bonded warehouse itself must not be mistaken for a part of this machinery, though it is essential to the collection. It is simply a device by which the holder of manufactured liquors subject to sale can avoid the payment of a tax until the time of actual delivery. His warehouse, being under bonds to the government, is open only in the presence of the revenue officer, who carries one of the keys necessary to its opening. Without this the tax would have to be paid at time of manufacture, and interest on that amount, to greater or less extent would finally be paid by the consumer. While this system protects essentially against fraud on the part of the owner alone, it does not protect against the weakness or wickedness of officials, and the temptation is sometimes enormous.

Peculiar taxes.—Aside from these general forms of taxation, peculiar devices are common. The stamps required on official papers or commercial transactions, involving checks, notes, mortgages and deeds, have been familiar at various times in our country, and are associated with the history of the world. These differ little from the practice of affixing stamps to patent medicines, cigars and other articles of trade; but instead of being attached to the article transferred they are affixed to the check or note or deed or bond employed in the transaction. These bear unequally, being proportionally heavy upon the people of small means, and are generally annoying in active business. They are frequently [pg 359] favored, however, as being felt most by those who deal most in commerce.

The heavy taxes laid upon the consumption of alcoholic liquors and tobacco illustrate another device for making so-called luxury bear the heavier portion of taxes. It looks both ways, attempting to check luxurious living or vicious practices by a penalty for indulgence, and at the same time to secure a revenue as the result of such indulgence. Evidently in so far as it prohibits indulgence it is not a revenue measure; and in so far as it secures the revenue it does not prohibit indulgence. It is borne somewhat patiently, because each person feels that he can avoid the payment by ceasing to indulge himself. The universal tendency is to make it purely a revenue measure by fixing the tax just where it will not retard consumption in any material degree, and in some instances will give a quasi dignity to the dealer through his official license.

Taxation of credits.—A very common device adopted in most of the states is that of assessing credits as well as property. The majority of farmers favor the assessment of mortgages upon a valuation equal to, if not higher than, that upon farms. They forget that the ability to pay taxes from year to year comes out of the profit or rent from the farm; and if both farm and mortgage are taxed, the adjustment comes through the interest which the mortgage must bear. To illustrate, a father sells his farm, worth $5,000, to his son, taking a mortgage for the entire value. If mortgages are assessed, the value of that farm for all purposes of taxation is $10,000; and yet the living of both father and [pg 360] son, taxes included, comes out of that farm's production. The two have no more property and no more ability after the transaction than before. Thus the mortgaged farms in every community where mortgages are taxed bear double burden.

In a similar way the taxation of any form of notes or bonds or stock doubles the assessment in form without increasing the abilities. The actual property in use will finally bear the burden of both assessments. The road-bed and rolling stock of a railway are property whose value is readily estimated. The actual ownership is in a corporation which may be distinctly taxed. Certificates of stock are individual titles in that corporation whose property has already been taxed. Its outstanding bonds are simply claims against that corporation, to be paid out of that property which has already been taxed. So every note, being evidence of debt simply, is not a representative of property, but simply a claim against property supposed to exist somewhere else. It may be an absolute fiction, in being a claim against property only hoped for. The result of all efforts to treat certificates of indebtedness as personal property are hardship to debtors and apparent fraud on the part of many creditors. Even though the creditor escapes taxation by hiding his possession of a mortgage, the possibility of its being taxed is always counted in his bargain with the borrower as an important element in interest. The experience of those states in which such taxation has been abolished proves that lower rates of interest are sure to follow.

Income taxes.—A favorite device in some countries, [pg 361] and often advocated in this, is a direct tax upon incomes above a certain amount, graduated so as to give a much larger rate upon large incomes than upon more moderate ones. The most obvious reason for such a distinction against the large incomes is the evident failure of our national system of taxation to distribute the burden according to ability. It is evident that the expenditures of the very wealthy for such articles as bring revenue to the government are not in the same proportion to their income as the expenditures of the poorer people are to their incomes. A further reason is based upon the supposition that large incomes involve a considerable unearned increment, in the shape of rent or extraordinary profits, because of accidental opportunity or the crowding of population. An income tax, carefully graduated, is supposed to cause such extra privileges and opportunities to bear a fair share of government expenses.

There are several difficulties in administering such a tax which have stood in the way of its general and permanent adoption. No one has yet devised a certain or fair method of estimating income. The peculiarities of any business or employment make great variation in the ability given by a certain income in dollars and cents. The business man in a small town, with an income of $5,000, might live in relative luxury, and still have a surplus for investment in his business. The same man, attempting business in a large city, might, even with an income of $10,000, find it barely possible to keep up appearances. The income of farmers is largely in provisions and personal privileges from use of [pg 362] teams, etc., never counted in dollars and cents, while the village mechanic pays from his measured income for all such comforts, or goes without them. The actual, necessary expenses of the business of a professional man in the way of books and travel are as essential to his business as are farm implements and live stock to the farm; yet no one counts such expenses as a subtraction from the income. A teacher promoted to a higher position is at once subjected to extraordinary expenses, and may be less able with a higher salary to meet the requirements of his new life than he was with a lower salary to meet the less expensive requirements.

Another principal difficulty is the unpopularity of such a tax from its necessary interference with private business. The country will be almost certainly more divided along lines of wealth over an income tax than over anything else. On the part of the wealthy it seems an effort of the people to take from them actual property rights. On the part of the poorer classes it fosters the assumption that the more wealthy are unjustly so. In the nature of the case, it is an arbitrary adjustment without the possibility of establishing exact reasons for any distinctions made. Finally, since such distinctions are liable to be varied from time to time, an income tax requires some nice adjustment as to the nature of the income. An income from the sale of property is entirely different in character from the income made by interest on the same property. One is a part of permanent investment, the other is the result of productive investment. One destroys the principal if consumed, the other adds to the principal. Yet no one [pg 363] could arrive at the actual, natural income, without a most intricate system of book-keeping open to public inspection. For without public inspection the temptation to fraudulent returns, under the feeling that the tax is unjust, is so strong as to be demoralizing.

Inheritance taxes.—A device much employed for making large accumulations of wealth bear a larger portion of the community's burdens is a heavy tax upon inheritance. Since such inheritance requires the guardianship of law for security of transfer, government is suffered to take a liberal fee for such transfer. Moreover, the inheritor is assumed to have no such property interest in what has been accumulated by another as to claim that he can be wronged if government takes a portion. It is defended also by socialists on the ground that large estates are dangerous to the general welfare.

Some facts bear upon the opposite side, and are worthy of consideration. A large estate is the accumulation of enterprise and industry on the part of a man of more than ordinary abilities. The presumption is in favor of following his judgment in making that useful after his death. Most frequently it is employed in some huge industrial machine, which the public cannot manage, but can destroy by even taking a portion from it. One of the main stimulants to all accumulation is the provision for the future wants of a family. If the state takes the accumulation, it also takes the responsibility for the successors in the family line. Wherever it is applied, it is felt to be a heavy burden upon the community at large. If the state interferes with the freedom of a testator, the chances are that few estates will [pg 364] be accumulated, and wasteful methods of expenditure, diminishing the power of the entire community, will surely follow. Moreover, evasions of the inheritance tax are comparatively easy, and are likely to be adopted extensively by the holders of large estates. The very rich can give away a large portion of their property before death without material suffering. Only the moderately wealthy are obliged to hold on to their possessions until death. Any wealthy man can dispose of his wealth during his lifetime, and still retain its income, by giving it away, subject to an annuity. To prevent this the law would have to be extended with intricate inspection to cover all transfers of property. Let no one be deceived into feeling that this is a simple and easy way of saddling government expenses upon the rich.