It seems reasonable to conclude, then, that neither the limitation of possessions nor the limitation of inheritance is necessarily a direct violation of the right of property, but that the possible and even probable evil consequences of both are so grave as to make these measures of very doubtful benefit. Whether the dangers in question are sufficiently great to render the adoption of either proposal morally wrong, is a question that cannot be answered with any degree of confidence. What seems to be fairly certain is that in our present conditions legislation of this sort would be an unnecessary and unwise experiment.
Limitation Through Progressive Taxation
Is it legitimate and feasible to reduce great fortunes indirectly, through taxation? There is certainly no objection to the method on moral or social principles. As we have seen in chapter viii, taxes are not levied exclusively for the purpose of raising revenue. Some kinds of them are designed to promote social rather than fiscal ends. Now, to prevent and diminish dangerous accumulations of wealth is a social end which is at least as important as most of the objects sought in license taxes. The propriety of attempting to attain this end by taxation is, therefore, to be determined entirely by reference to its probable effectiveness.
The precise method of taxation available here is a progressive tax on incomes and inheritances. By a progressive tax is meant one whose rate advances in some definite proportion to the increases in the amount taxed. For example, a bequest of 100,000 dollars might pay one per cent.; 200,000 dollars, two per cent.; 300,000 dollars, three per cent., and so forth. The reasonableness of the principle of progression in taxation has been well stated by Professor Seligman: "All individual wants vary in intensity, from the absolutely necessary wants of mere subsistence to the less pressing wants which can be satisfied by pure luxuries. Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice upon us. But the sacrifice involved in giving up a portion of what enables us to satisfy our necessary wants is very different from the sacrifice involved in giving up what is necessary to satisfy our less urgent wants. If two men have incomes of one thousand dollars and one hundred thousand dollars respectively, we impose upon them not equal but very unequal sacrifices if we take away from each the same proportion, say ten per cent. For the one thousand dollar individual now has only nine hundred dollars, and must deprive himself and his family of necessaries of life; the one hundred thousand dollar individual has ninety thousand dollars, and if he retrenches at all, which is very doubtful, he will give up only great luxuries, which do not satisfy any pressing wants. The sacrifice imposed on the two individuals is not equal. We are laying on the one thousand dollar man a far heavier sacrifice than on the one hundred thousand dollar man. In order to impose equal sacrifices we must tax the richer man not only absolutely, but relatively, more than the poor man. The taxes must be not proportional, but progressive; the rate must be lower in the one case than in the other."[198]
The principle of equality of sacrifices which underlies the progressive theory does not justify the levelling and communistic inferences that have sometimes been brought against it. Equality of sacrifice does not mean equality of satisfied, or unsatisfied, wants after the tax has been collected. If Brown pays a tax of one per cent. on his income of two thousand dollars, it does not follow that Jones with an income of ten thousand dollars should pay a sufficiently high rate to leave him with only the net amount remaining to Brown; namely, 1980 dollars. Equality of sacrifice means proportional equality of burden, not equality of net resources after the tax has been deducted. The object of the progressive rate is to make relatively equal the sacrifices caused by the tax itself, not to equalise the sum total of burdens or unsatisfied wants that exist among men.
Another objection to progressive taxation is that it readily lends itself to confiscation of the largest incomes. All that is necessary to produce this result is to increase the rate with sufficient rapidity. This could be accomplished either by large steps in the rate itself or by small steps in the income increases which formed the basis of the advances in the rate. For example, if the Federal income tax, which at present levies two per cent. on incomes of more than three thousand dollars, and three per cent. on incomes of over twenty thousand dollars, should thereafter progress geometrically with every geometrically progressive increment of income, the rate on incomes above $640,000 would be 96 per cent.! Or if the rate should progress arithmetically with every ten thousand dollars of increase above twenty thousand dollars, it would be 100 per cent. on incomes of over $990,000!
To this objection there are two valid answers. Even if the rate should ultimately reach one hundred per cent. it need not, and on progressive principles it should not, effect confiscation of an entire income. The progressive theory is satisfied when the successive rates of the tax apply to successive increments of income, instead of to the entire income. For example, the rate might begin at one per cent. on incomes of one thousand dollars, and increase by one per cent. with every additional thousand, and yet leave a very large part of the income in the hands of the receiver. Each one thousand dollars would be taxed at a different rate, the first at one per cent., the fiftieth at fifty per cent., and the last at one hundred per cent. If the hundred per cent. rate were applied to the whole of the higher incomes, it would be a direct violation of the principle of equality of sacrifice. In the second place, the progressive theory forbids rather than requires the rate to go as high as one hundred per cent. While the sacrifices imposed by a given rate are greater in the case of small than of large properties, they become approximately equal as between all properties above a certain high level. After this level is reached, additional increments of wealth will all be expended either for extreme luxuries, or converted into new investments. Consequently they will supply wants of approximately equal intensity. For example, the wants dependent upon a surplus of 25,000 dollars in excess of an income of 100,000 dollars, and the wants dependent upon a surplus of 75,000 dollars above the same level do not differ materially in strength. To diminish these surpluses by the same per cent., say, ten, would impose proportionally equal burdens.
Hence the rate of progression should be degressive; that is, it should increase at a constant pace until a certain high level of income is reached, then increase at a steadily diminishing pace, and finally become uniform on the very highest incomes. For example; if the rate increased one per cent. with every additional five thousand dollars, reaching fifteen per cent. on incomes of seventy-five thousand dollars, it should be on eighty thousand dollars, not sixteen but fifteen and one-half per cent. On 85,000 dollars the rate should be 15¾ per cent.; on 90,000, 15⅞ per cent.; on 95,000, 1515⁄16 per cent.; and on all sums of 100,000 and over, 16 per cent. The point at which the increments in the rate began to decline would be that at which differences in wants began to diminish, and the point at which the rate became stationary would be that at which wants fell to the same level of intensity.
The Proper Rate of Income and Inheritance Taxes
While the principle of equality of sacrifices forbids a rate of tax that would reach or approximate confiscation, it gives no definite indication of the proper scale of progression, or of the maximum limit that justice would set to the rate. Under our Federal law the highest rate on incomes is now 13 per cent.; under the Wisconsin law it is 6 per cent.; under the law of Prussia it is 4 per cent.; and under the British act of 1909 it is about 8½ per cent. Evidently a much higher rate than any of these would be required to make any impression upon swollen fortunes. The British government recently (September, 1915) made the maximum rate about 33⅓ per cent. To be sure, this is a war measure which probably will not continue after the restoration of peace. However, if it were made permanent it could not be proved to be unjust, provided that it were applied to the increments of income above a certain high limit, but not to these incomes in their entirety.