At this point of the discussion it is desirable to obtain a clear and true idea of the meaning or definition of the phrase "diffusion of taxes." As sometimes used in popular and superficial discussions, it is held to imply that every tax imposed by law distributes itself equitably over the whole surface of society. Such implication would, however, be even more fallacious than an assumption that every expenditure made by an individual distributes itself in such a way that it becomes equally an expenditure by every other individual. On the other hand, a fair consideration of the foregoing summary of facts and deductions would seem to compel every mind not previously warped by prejudice to accept and indorse the following as great fundamental principles in taxation: First, that in order to burden equitably and uniformly all persons and property, for the purpose of obtaining revenue for public purposes, it is not necessary to tax primarily and uniformly all persons and property within the taxing district. Second, equality of taxation consists in a uniform assessment of the same articles or class of property that is subject to taxation. Third, taxes under such a system equate and diffuse themselves; and if levied with certainty and uniformity upon tangible property and fixed signs of property, they will, by a diffusion and repercussion, reach and burden all visible property, and also all of the so-called "invisible and intangible" property, with unerring certainty and equality.
All taxation ultimately and necessarily falls on consumption; and the burden of every man, under any equitable system of taxation, and which no effort will enable him to avoid, will be in the exact proportion or ratio which his aggregate consumption maintains to the aggregate consumption of the taxing district, State, or community of which he is a member.
It is not, however, contended that unequal taxation on competitors of the same class, persons, or things diffuses itself whether such inequality be the result of intention or of defective laws, and their more defective administration. And doubtless one prime reason why economists and others interested have not accepted the law of diffusion of taxes as here given is that they see, as the practical workings of the tax systems they live under, or have become practically familiar with, that taxes in many instances do seem to remain on the person who immediately pays them; and fail to see that such result is due—as in the case of the taxation of large classes of the so-called personal property—to the adoption of a system which does not permit of equality in assessment, and therefore can not be followed by anything of equality in diffusion. Such persons may not unfairly be compared to physicists, who, constantly working with imperfect instruments, and constantly obtaining, in consequence, defective results, come at last to regard their errors as in the nature of established truths.[18]
According to these conclusions, the greatest consumers must be the greatest taxpayers. The man also who evades a tax clearly robs his neighbors. The thief also pays taxes indirectly, for he is a consumer, and must pay the advanced price caused by his own roguery for all he consumes, although he does steal the money to pay with. Idlers and even tramps pay taxes, but the amount that they indirectly pay into the fund is much less than they take out of it. People are sometimes referred to or characterized as non-taxpayers, and in political harangues and socialistic essays measures or policies are recommended by which certain persons or classes, by reason of their extreme poverty, shall be entirely exempt from all incidence or burden of taxation. Such a person does not, however, exist in any civilized community. If one could be found he would be a greater curiosity than exists in any museum. To avoid taxation a man must go into an unsettled wilderness where he has no neighbors, for as soon as he has a companion, if that companion be only a dog, which he in part or all supports, taxation begins, and the more companions he has, the greater improvements he makes, and the higher civilization he enjoys, the heavier will be the taxes he must pay.
Taxes legitimately levied, then, are a part of the cost of all production, and there can be no more tendency for taxes to remain upon the persons who immediately pay them than there is for rents, the cost of insurance, water supply, and fuel to follow the same law. The person who wishes to use or destroy the utility of property by consumption to gratify his desires, or satisfy his wants, can not obtain it from the owners or producers with their consent, except by gift, without giving pay or services for it; and the average price of all property is coincident with the cost of production, including the taxes advanced upon it, which are a part of its cost in the hands of the seller. Again, no person who produces any form of property or utility, for the purpose of sale or rent, sustains any burden of legitimate taxation, although he may be a tax advancer; for, as a tax advancer, he is the agent of the State, and a tax collector from the consumer. But he who produces or buys, and does not sell or rent, but consumes, is the taxpayer, and sustains a tax in his aggregate consumption, where all taxation must ultimately rest. In short, no person bears the burden of taxation, under an equitable, legitimate system, except upon the property which he applies to his own exclusive use in ultimate consumption. The great consumer is the only great taxpayer.
Finally, a great economic law pointed out by Adam Smith, which has an important and almost conclusive bearing upon this vexed problem of the diffusion of taxes, should not be overlooked—namely, his statement in The Wealth of Nations that "no tax can ever reduce for any considerable time the rate of profit in any particular trade, which must always keep its level with other trades in the neighborhood." In other words, taxes and profits, by the operation of the laws of human nature, constantly tend to equate themselves. Man is always prompted to engage in the most profitable occupation and to make the most profitable investment. And since the emancipation from feudalism with its sumptuary laws, legal regulations of the price of labor and merchandise, and other arbitrary governmental invasions of private rights, individual judgment and self-interest have been recognized as the best tests or arbiters of the profitableness of a given investment or occupation. The average profits, therefore, of one form of investment, or of one occupation (as originally shown by Adam Smith), must for any long period equal the average profits of other investments and occupations, whether taxed or untaxed, skill, risk, and agreeableness of occupation being taken into consideration.[19] Natural laws will, accordingly, always produce an equilibrium of burden between taxed and untaxed things and persons. There is a level of profit and a level of taxation by natural laws, as there is a level of the ocean by natural laws. In fact, all proportional contributions to the State from direct competitors are diffused upon persons and things in the taxing jurisdiction by a uniformity as manifest as is the pressure upon water, which is known to be equal in every direction.
A word here in reference to the popular idea that the exemption of any form of property is to grant a favor to those who possess such property. This idea has, however, no warrant for its acceptance. Thus, an exemption is freedom from a burden or service to which others are liable; but in case of the exclusion of an entire class of property from primary taxation, no person is liable, and therefore there is no exemption. An exclusion of all milk from taxation, while whisky is taxed, is not an exemption, for the two are not competing articles, or articles of the same class. It is true that highly excessive taxation of a given article may cause another and similar article, in some instances, to become a substitute or competing article; and hence the necessity of care and moderation in establishing the rate of taxation. We do not consider that putting a given article into the free list, under the tariff, is an exemption to any particular individual; but if we make the rate higher on one taxpayer or on one importer of the same article than on another taxpayer or importer, we grant an exemption. We use the word "exemption," therefore, imperfectly, when we speak of "the exemption of an entire class of property," as, for example, upon all personal property; for if the removal of the burden operates uniformly on all interested, or owning such property, then there can be no primary exemption.