IV
TAXATION AND INEQUALITIES IN WEALTH
Before dismissing this subject of a national industrial organization and a better distribution of the fruits thereof brief references must be made to certain other aspects of the matter. The measures which the central and local governments could take for the purpose of adapting our economic and social institutions to the national economic and social interest would not be exhausted by the adoption of the proposed policy of reconstruction; and several of these supplementary means, which have been proposed to accomplish the same object, deserve consideration. Some of these proposals look towards a further use of the power of taxation, possessed by both the state and the Federal governments; but it must not be supposed that in their entirety they constitute a complete system of taxation. They are merely examples, like the protective tariff, of the use of the power of taxation to combine a desirable national object with the raising of money for the expenses of government.
It may be assumed that the adoption of the policy outlined in the last section would gradually do away with certain undesirable inequalities in the distribution of wealth: but this process, it is scarcely necessary to add, would do nothing to mitigate existing inequalities. Existing inequalities ought to be mitigated; and they can be mitigated without doing the slightest injustice to their owners. The means to such mitigation are, of course, to be found in a graduated inheritance tax—a tax which has already been accepted in principle by several American states and by the English government, which certainly cannot be considered indifferent to the rights of individual property owners.
At the present stage of the argument, no very elaborate justification can be necessary, either for the object proposed by a graduated inheritance tax, or for the use of precisely these means to attain it. The preservation intact of a fortune over a certain amount is not desirable either in the public or individual interest. No doubt there are certain people who have the gift of spending money well, and whose personal value as well as the general social interest is heightened by the opportunity of being liberal. But to whatever extent such considerations afford a moral justification for private property, they have no relevancy to the case of existing American fortunes. The multi-millionaire cannot possibly spend his income save by a recourse to wild and demoralizing extravagance, and in some instances not even extravagance is sufficient for the purpose. Fortunes of a certain size either remorselessly accumulate or else are given away. There is a general disposition to justify the possession of many millions by the frequent instances among their owners of intelligent public benefaction, but such an argument is a confession that a justification is needed without constituting in itself a sufficient excuse. If wealth, particularly when accumulated in large amounts, has a public function, and if its possession imposes a public duty, a society is foolish to leave such a duty to the accidental good intentions of individuals. It should be assumed and should be efficiently performed by the state; and the necessity of that assumption is all the plainer when it is remembered that the greatest public gifts usually come from the first generation of millionaires. Men who inherit great wealth and are brought up in extravagant habits nearly always spend their money on themselves. That is one reason why the rich Englishman is so much less generous in his public gifts than the rich American. In the long run men inevitably become the victims of their wealth. They adapt their lives and habits to their money, not their money to their lives. It pre-occupies their thoughts, creates artificial needs, and draws a curtain between them and the world. If the American people believe that large wealth really requires to be justified by proportionately large public benefactions, they should assuredly adopt measures which will guarantee public service for a larger proportion of such wealth.
Whether or not the state shall permit the inheritance of large fortunes is a question which stands on a totally different footing from the question of their permissible accumulation. Many millions may, at least in part, be earned by the men who accumulate them; but they cannot in the least be earned by the people who inherit them. They could not be inherited at all save by the intervention of the state; and the state has every right to impose conditions in its own interest upon the whole business of inheritance. The public interests involved go very much beyond the matter of mitigating flagrant inequalities of wealth. They concern at bottom the effect of the present system of inheritance upon the inheritors and upon society; and in so far as the system brings with it the creation of a class of economic parasites, it can scarcely be defended. But such is precisely its general tendency. The improbability that the children will inherit with the wealth of the parent his possibly able and responsible use of it is usually apparent to the father himself; and not infrequently he ties up his millions in trust, so that they are sure to have the worst possible moral effect upon his heirs. Children so circumstanced are deprived of any economic responsibility save that of spending an excessive income; and, of course, they are bound to become more or less respectable parasites. The manifest dissociation thereby implied between the enjoyment of wealth and the personal responsibility attending its ownership, has resulted in the proposal that fathers should be forbidden by the state to arrange so carefully for the demoralization of their children and grandchildren. Even if we are not prepared to acquiesce in so radical an impairment of the rights of testators, there can be no doubt that, under a properly framed system of inheritance taxation, all property placed in trust for the benefit of male heirs above a certain amount should be subject to an exceptionally severe deduction. Whatever justification such methods of guaranteeing personal financial irresponsibility may have in aristocratic countries, in which an upper class may need a peculiar economic freedom, they are hostile both to the individual and public interest of a democratic community.
Public opinion is not, however, even remotely prepared for any radical treatment of the whole matter of inheritance; and it will not be prepared, until it has learned from experience that the existing freedom enjoyed by rich testators means the sacrifice of the quick to the dead—the mutilation of living individuals in the name of individual freedom and in order that a dead will may have its way. Until this lesson is learned the most that can be done is to work for some kind of a graduated inheritance tax, the severity of which should be dictated chiefly by conditions of practical efficiency. Considerations of practical efficiency make it necessary that the tax should be imposed exclusively by the Federal government. State inheritance taxes, sufficiently large to accomplish the desirable result, will be evaded by change of residence to another state. A Federal tax could be raised to a much higher level without prompting the two possible methods of evasion—one of which would be the legal transfer of the property during lifetime, and the other a complete change of residence to some foreign country. This second method of evasion would not constitute a serious danger, because of the equally severe inheritance laws of foreign countries. The tax at its highest level could be placed without danger of evasion at as much as twenty per cent. The United Kingdom now raises almost $100,000,000 of revenue from the source; and a slightly increased scale of taxation might yield double that amount to the American Treasury, a part of which could be turned into the state Treasuries.
There has been associated with the graduated inheritance tax the plan of a graduated income tax; but the graduated income tax would serve the proposed object both less efficiently and less equitably. It taxes the man who earns the money as well as him who inherits it. It taxes earned income as well as income derived from investments; and in taxing the income derived from investments, it cannot make any edifying discrimination as to its source. Finally, it would interfere with a much more serviceable plan of taxing the net profits of corporations subject to the jurisdiction of the Federal government—a plan which is an indispensable part of any constructive treatment of the corporation problem in the near future.
The suggestion that the inheritance tax should constitute a pillar of central rather than local taxation implicitly raises a whole series of difficult Constitutional and fiscal questions concerning the relation between central and local taxation. The discussion of these questions would carry me very much further than my present limits permit; and there is room in this connection for only one additional remark. The real estate tax and saloon licenses should, I believe, constitute the foundation of the state revenues; but inasmuch as certain states have derived a considerable part of their income from corporation and inheritance taxes, allowance would have to be made for this fact in revising the methods of Federal taxation. It is essential to any effective control over corporations and over the "money power" that corporation and inheritance taxes should be uniform throughout the country, and should be laid by the central government; but no equally good reason can be urged on behalf of the exclusive appropriation by the Federal Treasury of the proceeds of these taxes. If the states need revenues derived from these sources, a certain proportion of the net receipts could be distributed among the states. The proportion should be the same in the case of all the states; but it should be estimated in the case of any particular state upon the net yield which the Federal Treasury had derived from its residents.