In general, while the arguments are not conclusive, progression certainly secures a nearer approach to the ideal of the ability theory than does proportional taxation. The practical application, after we accept it, is still a difficult matter. It should be applied to the revenue system as a whole by the careful selection of special taxes. As a matter of fact we have just the opposite system in the United States, for the poor man undoubtedly pays out a larger proportion of his income in taxes—principally on articles of consumption—than do his wealthy neighbors.
In the main there has been a clear division in the United States between the sources of income of the Federal Government on the one hand and those of the state and local governments on the other. The Federal Treasury has derived its revenue almost entirely from indirect taxes—excise and customs—while the other governments have depended chiefly upon direct taxes upon persons, property, business, corporations, and inheritances. The division rests upon the constitutional allotment of powers, but it also corresponds very closely to the industrial and political functions of each in their relations to the individual citizens. The chief duty of the Federal Government is that of national defense and foreign intercourse, relations which are national in extent but which affect the individual only remotely; so, too, its taxing area is national and its exactions are felt only distantly. Few persons, it has been said, taste the tax in their tea or their whisky, yet over one-third of all the taxes collected in the United States are derived from either customs or excise duties. Whisky and tobacco contribute most of the internal revenue, while import duties are levied on practically everything brought into the country which could compete with any home product. These two sources yield over $500,000,000 a year to the Federal Treasury. During the Civil War these sources of revenue were supplemented by a federal income tax, but as such a tax was later declared unconstitutional by
the Supreme Court, further recourse to this in the near future seems improbable. From a purely economic and financial point of view this is very regrettable, for the Federal Government should unquestionably have at its command the means of quickly raising large additional revenue with as little disturbance to industry as possible. Such a means would be afforded by the income tax, which moreover can be administered only by the Federal Government, as it must be national in its operations to be fair.
The main reliance of the state and local governments in this country is the general property tax, which amounted in 1902 to over $700,000,000 or almost half of all the taxes collected. This really consists of two very distinct parts, which present quite different problems, namely, the tax on real property and that on personal property. Under our peculiar system, by which property is assessed locally, and upon the basis of that assessment its share of the state taxes distributed to each locality, there is every incentive offered to the local assessor to under-value the land in his jurisdiction, thereby escaping part of the state burdens. This evil of inequality between localities could be obviated by the simple expedient of relieving real estate of all state taxes and leaving it solely to the counties and cities for purposes of taxation. In the case of personal property the great evil is evasion. Much of our modern wealth exists in the form of securities, stocks, bonds, mortgages, etc., and this is practically undiscoverable by assessors except by the voluntary declaration of the tax-payer, which is only truthfully made by trustees and a few conscientious persons. Most of our laws have been directed to the discovery of this intangible property, as it is called, but without avail. In a few of the most progressive states the effort has at last been recognized as futile, and the attempt is now being made to reach these sources of income indirectly, by taxes on corporations, on business, franchises and other tangible evidences of wealth.
Not only are corporation, business, license and similar taxes being developed, but increasing resort is had to inheritance taxes, over thirty states now making use of this form of taxation. They are more frequently imposed on collateral than direct inheritances, and in many states are progressive, both as to amount and as to nearness of relationship. Thus in Wisconsin the rates advance from one per cent for bequests under $25,000 to husband, wife, or lineal relation, to 15 per cent for sums over $500,000 to very distant relatives or strangers. These various forms of taxation are necessary to secure the needed revenues for the state governments, especially if these forego further resort to taxation of realty. The tendency is now sufficiently marked to make it possible to indicate with some certainty the future of taxation in this country. To a certain extent, however, this must be regarded as the expression of an ideal rather than the description of an existing system. The Federal Government should have customs and excise duties, supplemented by an income tax. The state governments should have corporation and inheritance taxes. The cities and minor civil divisions should have taxes on realty, and license and franchise taxes. Such a division is logical and avoids duplication of taxation of the same source by two or more grades of government. In view of the pre-emption of the field of corporation taxation by the states, it is therefore doubly regrettable that the Federal Government should now (August, 1909) have adopted a tax on income of corporations for federal purposes.
Other problems connected with finance are suggested in connection with the universal tendency to increase in governmental expenditures and in public debts. The former is an expression of the growth and expansion of state functions, which will be discussed in the next section. The latter is due in part to this same fact, in part also to the development of credit and the creation of a market for
the sale of public and other securities, and finally to the growth of constitutional government, which has made the people willing to entrust their capital to a government which they themselves as citizens really control.
The question of the tariff involves such important economic as well as financial consideration that it seems best to discuss this form of taxation somewhat more fully. For it has been used not merely as a means of raising revenue but also as an instrument to develop particular industries and prevent foreign competition. Any detailed discussion of this subject therefore involves a statement of the pros and cons of protection and free trade. It should be said, however, in advance that the real issue is not free trade, for that is demanded by only a few doctrinaires, but freer trade through an intelligent revision of the tariff downward. The system of protection has prevailed in the United States for virtually one hundred years, and could not be suddenly changed and abolished if one would. From the financial standpoint, too, import duties are absolutely essential to the support of our Federal Government; the question here is not absolutely free trade, but the choice of articles for revenue purposes. Shall they be those which are not produced in this country or those which enter into competition with domestic products? If financial considerations alone prevailed, the former would undoubtedly be selected as the more convenient, certain, and economical. But in the determination of the tariff policies of the United States economic considerations have been paramount and to an examination of these we must now turn.
Historically the following arguments have played the main role in support of protection at different times in the United States. The infant industries argument was advanced by Hamilton in his celebrated Report on Manufactures in 1791 and has always been important until recently when the infants had grown to be so lusty that it was evident that other reasons for protecting them must
be discovered. This was found in the plea for diversified production, which was necessary for a well-rounded economic development; the need of creating a strong national government and national spirit also played their part. In order to win over the farmers the home market argument was early urged; this has taken various forms. In the first place it was urged that the building up of manufacturing centers and the consequent increase in population would give the farmers a better market than the fluctuating foreign one. As set forth by Carey, it would keep within the country the elements taken from the soil. It would also save the freights on the transportation of goods back and forth across the ocean. Each of these arguments has lost force with the development of the country and the decrease in the cost of transportation. More important today is the wages argument; at first protection was urged because wages were high in the United States and the manufacturer needed to be protected against his foreign competitor who employed cheap labor. Today it is argued that protection has raised wages and must be continued in order to protect the laborer against the pauper labor of Europe. Curiously enough, in France protection is urged for French workmen against the highly paid and efficient American. The effect of the tariff on wages has been greatly exaggerated; wages are high in the United States because the productivity of labor is high. Indeed so far as the tariff raises prices it may be argued that the real wages of labor are lowered. More generally accepted as defensible grounds for protection are the political arguments that a nation should be able to produce its own military armaments and supplies, and that it should be able to use the tariff as a retaliatory measure. Recently this latter has received considerable force from the practice of “dumping,” by which is meant the occasional sale of products abroad at prices lower than those charged at home. Domestic manufacturers in the country thus treated