397. LEGAL RESTRICTIONS UPON TAXING POWER.—A serious defect of American taxation is the lack of correspondence between taxing power and fiscal needs. Let us inquire into this.
The Federal government has important functions to perform, but has practically unlimited taxing power. So far as the national government is concerned, the problem of finding sources of revenue is relatively simple.
The functions assumed by the state governments are as yet relatively few and inexpensive, while the power of the state to tax is but slightly abridged by the Federal Constitution. States have relatively little difficulty in making both ends meet.
Local governments, and especially municipal governments, have a large number of functions which are increasingly important. Of the total government expenditure in this country, about 35 per cent is made by the Federal government, 10 per cent by the state governments, and 55 per cent by the local governments. But whereas Federal and state governments have relatively adequate taxing powers, the taxing powers of local governments are narrowly restricted by the state constitution and statutes. Such local functions as health, public school education, and recreation are constantly demanding greater expenditures, yet local governments as yet have few opportunities for securing necessary funds.
398. DEFECTS IN TAX ASSESSMENT.—The defects of tax assessment are clearly illustrated in the workings of the general property tax, called by some authorities the worst tax in the civilized world. The basis of levy is the work of local assessors, who are generally elective. The assessors estimate the value of millions of dollars' worth of property, and their estimates are the basis of the tax rates for not only township and county, but generally for the state as well. Incapable and dishonest assessors often work injustice by underestimating the value of some forms of property, and overestimating the value of other forms. In addition, political pressure is brought to bear upon the assessor to cause him to undervalue the property of the township or county as a whole, so that the local unit will bear a relatively small share of the taxes of the state.
The estimates of the local assessors are commonly subject to correction by a county, and sometimes by a state, board of equalization. The duty of such a board is to make assessments uniform and just, but notwithstanding the efforts of these bodies, unequal and unfair assessments have persisted.
399. DIFFICULTY OF TAXING INTABGIBLE PROPERTY.—Where taxation is on the basis of assessment, it often happens that the tax burden rests unequally upon different forms of property. Property in tangible form, such as land, cattle, and houses, is easily discoverable, and hence cannot easily evade the payment of taxes. But intangible property, such as bonds, stocks, or mortgage, can easily be hidden, so that owners of this type of property often evade their share of the tax burden.
This evasion is often practiced in the case of the general property tax, which is intended to reach both tangible and intangible property. The general property tax worked well a century ago when the greater share of wealth existed in tangible form, because local assessors could easily locate such things as land and live stock. But the rapid development of corporations, bringing with it a rapid increase in the proportion of intangible forms of property, has rendered the general property tax grossly unjust. The assessors of the general property tax cannot easily discover intangible property, unless taxpayers co÷perate with them. The all too frequent lack of such co÷peration causes a disproportionate share of the tax burden to fall upon tangible property. The general property tax is haphazard, ineffective, and demoralizing to both tax officials and taxpayers.
400. DOUBLE TAXATION.—By double taxation is meant the taxation of an individual or different individuals twice for the same thing. Double taxation is of two kinds.
The first type of double taxation is illustrated by the taxation of both tangible property and the paper claim upon that property. For example, a state may tax a land-owner on his land, and also tax another resident of the state on the mortgage which he holds against that land. Or it may happen that a state will tax the land, buildings and other tangible equipment of a corporation, and at the same time tax those of its residents who hold stock in that corporation, i.e. individuals who hold paper evidence of ownership in the tangible equipment of the corporation. More generally, however, this type of double taxation arises when the holder of the paper claim resides in one state, while the tangible property lies in another state. In such a case, it is common for one state to tax the paper claim, and for the other state to tax the property itself. This type of double taxation is manifestly unfair, and often imposes a ruinous burden upon property.