XX.—THE LAW OF THE DIFFUSION OF TAXES.
PART I.
No attempt ought to be made to construct or formulate an economically correct, equitable, and efficient system of taxation which does not give full consideration to the method or extent to which taxes diffuse themselves after their first incidence. On this subject there is a great difference of opinion, which has occasioned, for more than a century, a vast and never-ending discussion on the part of economic writers. All of this, however, has resulted in no generally accepted practical conclusions; has been truthfully characterized by a leading French economist (M. Parieu) as marked in no small part by the "simplicity of ignorance," and from a somewhat complete review (recently published[7]) of the conflicting theories advanced by participants one rises with a feeling of weariness and disgust.
The majority of economists, legislators, and the public generally incline to the opinion that taxes mainly rest where they are laid, and are not shifted or diffused to an extent that requires any recognition in the enactment of statutes for their assessment. Thus, a tax commission of Massachusetts, as the result of their investigations, arrived at the conclusion that "the tendency of taxes is that they must be paid by the actual persons on whom they are levied." But a little thought must, however, make clear that unless the advancement of taxes and their final and actual payment are one and the same thing, the Massachusetts statement is simply an evasion of the main question at issue, and that its authors had no intelligent conception of it. A better proposition, and one that may even be regarded as an economic axiom, is that, regarding taxation as a synonym for a force, as it really is, it follows the natural and invariable law of all forces, and distributes itself in the line of least resistance. It is also valuable as indicating the line of inquiry most likely to lead to exact and practical conclusions. But beyond this it lacks value, inasmuch as it fails to embody any suggestions as to the best method of making the involved principle a basis for any general system for correct taxation; inasmuch as "the line of least resistance" is not a positive factor, and may be and often is so arranged as to make levies on the part of the State under the name of taxation subservient to private rather than public interests. Under such circumstances the question naturally arises, What is the best method for determining, at least, the approximative truth in respect to this vexed subject? A manifestly correct answer would be: first, to avoid at the outset all theoretic assumptions as a basis for reasoning; second, to obtain and marshal all the facts and conditions incident to the inquiry or deducible from experience; third, recognize the interdependence of all such facts and conclusions; fourth, be practical in the highest degree in accepting things as they are, and dealing with them as they are found; and on such a basis attention is next asked to the following line of investigations.
It is essential at the outset to correct reasoning that the distinction between taxation and spoliation be kept clearly in view. That only is entitled to be called a tax law which levies uniformly upon all the subjects of taxation; which does not of itself exempt any part of the property of the same class which is selected to bear the primary burden of taxation, or by its imperfections to any extent permits such exemptions. All levies or assessments made by the State on the persons, property, or business of its citizens that do not conform to such conditions are spoliations, concerning which nothing but irregularity can be predicated; nothing positive concerning their diffusion can be asserted; and the most complete collection of experiences in respect to them can not be properly dignified as "a science." And it may be properly claimed that from a nonrecognition or lack of appreciation of the broad distinction between taxation and spoliation, the disagreement among economists respecting the diffusion of taxes has mainly originated.
With this premise, let us next consider what facts and experiences are pertinent to this subject, and available to assist in reaching sound conclusions; proceeding very carefully and cautiously in so doing, inasmuch as territory is to be entered upon that has not been generally or thoroughly explored.
The facts and experiences of first importance in such inquiry are that the examination of the tax rolls in any State, city, or municipality of the United States will show that surprisingly small numbers of persons primarily pay or advance any kind of taxes. It is not probable that more than one tenth of the adult population or about one twentieth of the entire population of the United States ever come in contact officially with a tax assessor or tax collector. It is also estimated that less than two per cent of the total population of the United States advance the entire customs and internal revenue of the Federal Government.
In the investigations made in 1871, by a commission created by the Legislature of the State of New York to revise its laws relative to the assessment and collection of taxes, it was found that in the city of New York, out of a population of over one million in the above year, only 8,920 names, or less than one per cent of this great multitude of people, had "any household furniture, money, goods, chattels, debts due from solvent debtors, whether on account of contract, note, bond, or mortgage, or any public stocks, or stocks in moneyed corporations, or in general any personal property of which the assessors could take cognizance for taxation"; and further, that not over four per cent, or, say, forty thousand persons out of the million, were subject to any primary tax in respect to the ownership of any property whatever, real or personal; while only a few years subsequent, or in 1875, the regular tax commissioners of New York estimated that of the property defined and described by the laws of the State as personal property, an amount approximating two thousand million dollars in value was held in New York city alone. Later investigations show that this state of things has continued. Thus, in 1895, out of a population of about two million, it was estimated that only seventy-nine thousand, or not over four per cent of the inhabitants of the city, were subject to primary taxation, and that one half the whole amount collected in that year was paid by less than a thousand persons. In the city of Boston, where the tax laws are executed in the most arbitrary manner, the ratio of population directly assessed is somewhat greater, but aside from the poll tax, which is a per capita and not a property tax, only 7.27 per cent of residents paid a property tax in 1895 out of a population of 494,205. In one of the smaller cities of Massachusetts, where persons and property are capable of more thorough supervision than larger numbers and areas—namely, the city of Springfield, with a population of about fifty thousand—the report of its tax officials shows that for the year 1894-'95 the number of persons and corporations assessed on property (mainly real estate) was 7,745, or one for every 6.4 of its citizens, while 10,560 other citizens were assessed for a poll tax of two dollars only. Of the total amount of taxes assessed—namely, $735,948—the above number, 10,560, paid only $21,120; and this is the experience generally throughout the United States, as it will be in every country under a free popular government, where arbitrary inquisitions and arrests of persons and seizures of property are not allowed, and where a soldier does not practically stand behind every tax assessor and collector.
The time (1871) when the personal investigations above referred to were made was when the masses of the city of New York were moved with indignation at the misuse and private appropriation by a few officials (Tweed and his associates) of the municipal revenues raised by taxation, under cover of instituting public improvements, and which finally led to their prosecution, imprisonment, or self-imposed exile; and the questions which naturally suggested themselves were: If only some forty thousand of the million in New York city paid the taxes, what interest had the other nine hundred and sixty thousand who never saw the face of a tax assessor or collector in opposing corruption? What, in an honest administration of the city government and in a reduction of taxes? Must it not be for the interest of the many that the expenditures of the State shall always be as large as possible? Must they not be benefited by exorbitant taxes on the owners of property, and a distribution of the money collected, even if stolen by corruptionists, but spent by them lavishly on enterprises that will furnish new opportunities for employment or amusement for the masses? Clearly, so far as any personal experience growing out of any direct assessment and levy was concerned, ninety-six per cent of the population of the city had no more cause of personal grievance by reason of the unlawful taking of money from the city treasury than they would have had at the taking of an equivalent amount from the municipal treasuries of London, Paris, or any other city.
The answer to these questions is to be found in the fact, as John Adams once remarked, that "if the Creator had given man a reason that is fallible, he has also impressed upon him an instinct that is sure." And this instinct teaches the masses everywhere, though they have never read a book on political economy, or heard any one discourse learnedly on the principles of taxation, that if taxes are increased, either by a lawful or unlawful expenditure of public money, they can not in any possible way avoid paying some portion of its increase; or, in other words, that increased taxes meant increased cost of living, through increased rents, increased price of fuel, clothing, and provisions, and possibly diminished opportunity to labor through such increased cost of the products of labor as would limit and restrict markets or consumption. In short, that taxes inevitably fall upon them through the increased price of all they consume, even if they pay nothing to the tax collector directly. A large proportion of the masses of the city of New York in 1871-'72, who paid no taxes directly, accordingly and spontaneously joined hands with the comparatively few of their fellow-citizens who did pay in resisting extravagance and corruption.[8]