vary with changes in the fortunes of business enterprise. The development of a new industry making unusual and unexpected profits offers a good opportunity of relieving an old industry that has unexpectedly fallen upon evil days. And for this reason it is highly desirable that state constitutions prescribing a rigidly uniform system of taxation should be amended so as to permit reasonable classification of property and business for purposes of taxation. All these qualifications of the diffusion theory are true and important. But the fact still remains that under ordinary conditions nothing is worse in a tax system than uncertainty, continual tinkering with rates, and capricious readjustment of methods. QUESTIONS AND EXERCISES 1. In accordance with what principles of classification do we distinguish fees, special assessments, and taxes? 2. Enumerate six distinct fees commonly employed by state governments. 3. Can a fee exceed the cost of the service to the state? Is the familiar "high liquor license" a fee or a tax? 4. What accounts for the rapid development of the special assessment in the last fifty years? Is it possible to apportion the benefits of a public improvement with any degree of accuracy? 5. Make a table from the Census Volume on Wealth, Debt, and Taxation, showing the relative importance in each governmental division, of the taxes differentiated in Table I. 6. Why are liquor licenses distinguished from other licenses and permits? 7. Has the state a greater right to tax land and natural agents than wealth which is, in large degree, a product of human labor? 8. May monopolies be equitably subjected to special taxation? Even if the monopoly rests upon superior efficiency, or upon patent rights justly acquired? 9. Is rigid equality of taxation a primary and fundamental desideratum? Is it possible of achievement? Is there any real distinction between the so-called ethical qualities (of equality, uniformity, etc.) and the so-called administrative qualities (convenience, elasticity, productivity, etc.) of a tax? 10. Is the benefit principle wrong or merely impossible of application? If wrong, why do we retain it in fees and special assessments? 11. Is it easier to measure ability than benefits? 12. Is progressive taxation arbitrary? Can it be satisfactorily considered apart from the effect of public expenditures? 13. Work out the effect of an excise tax on a monopoly subject to the law of increasing cost. REFERENCES BASTABLE, D. F. Public Finance, Book III, Chap. III, "The Distribution of Taxation," pp. 281-315; Chap. V, "The Shifting and Incidence of Taxation," pp. 337-362; Chap. VII, "The Canons of Taxation," pp. 382-391. CARVER, T. N. "Ethical Basis of Distribution," Annals of the American Academy of Political and Social Science, Vol. VI, pp. 79–99. COOLEY, T. M. A Treatise on the Law of Taxation (3d ed.), Chap. II, "The Nature of the Power to Tax," pp. 43-82; Chap. VI, “Equality and Uniformity in Taxation," pp. 254-410. CROWELL, T. Y. & Co. (Pub.). Equitable Taxation, Essay by W. E. Weyl, pp. 17-31. ELY, R. T. Taxation in American States and Cities, Part I, Chap. III. SELIGMAN, E. R. A. The Shifting and Incidence of Taxation, Part II, SELIGMAN, E. R. A. Progressive Taxation in Theory and Practice, Part II, National Tax Association. State and Local Taxation [Addresses and Proceed- URDAHL, T. K. The Fee System in the United States, Chap I, pp. 49–67; WESTON, S. F. Principles of Justice in Taxation, passim. Studies in CHAPTER XXXV PUBLIC REVENUES; FEDERAL, STATE, AND LOCAL TAXES FEDERAL TAXATION Direct and Indirect Taxes. The fundamental character of the American revenue system is determined by those clauses of the federal Constitution which provide that "direct taxes shall be apportioned among the several states . . . according to their respective numbers"; that "all duties, imposts, and excises shall be uniform throughout the United States"; and that "no state shall, without the consent of Congress, levy any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws." Just what the words duties, imposts, excises, direct and indirect taxes signify, as used in the Constitution, has been a matter of considerable discussion. Ordinarily the word duty "means an indirect tax imposed upon the importation, exportation, or consumption of goods," being given "a broader meaning than custom, which is a duty imposed upon imports or exports," while "the term impost also signifies any tax, tribute, or duty, but it seldom applied to any but indirect taxes. An excise duty is an inland impost levied upon articles of manufacture or sale, and also upon licenses to pursue certain trades or to deal in certain commodities." But all these definitions are made to hinge upon the meaning of direct and indirect taxes, and that meaning is exceedingly doubtful. Until 1894, it was believed by most persons that as used in the Constitution of the United States, these terms were to be given an historical interpretation, to be accepted as used in 1789, and that in this interpretation capitation and land taxes were probably the only forms of direct taxes. This belief was sustained by the fact that the Federal Supreme Court at various times sanctioned the employment by Congress of income, inheritance, and special property or consumption taxes. But in the income tax decision of 1894 the Supreme Court reversed its earlier decisions, declared the income tax to be "direct," and interpreted the words direct and indirect in accordance with the economic rather than the historical or legal use of those terms. According to most economists, direct taxes are taxes levied by the State upon those who are expected to bear the burden of them, while indirect taxes are supposed to be shifted to other persons. In the economic sense, poll taxes, property, income, and inheritance taxes are usually called direct, while customs taxes and excise taxes are called indirect. It is plain that the economic meaning of these words is exceedingly vague, because it is made to turn upon the expectation of the user concerning the shifting of the tax, and upon no subject in the entire province of political economy is there more uncertainty than upon the shifting of taxes. Because of this uncertainty, economists have for years protested against the use of these terms at all in scientific analysis, although they have tried to introduce a more consistent usage, owing to their constant employment in popular discussion. Under these circumstances, it was exceedingly unfortunate that the Supreme Court turned away from the legal interpretation of the words. When the latter were placed in the Constitution, they probably had no definite or accepted meaning; they had no definite or accepted meaning as used later by economists or publicists; and the only way they could attain precision was by legal interpretation. After a number of consistent opinions which gave the words a definite connotation and promised to clear up a difficult situation once for all, the Supreme Court threw everything into chaos again by revising opinions which had stood unchanged for many years. Use of Direct Taxes by the Federal Government. —- The effect of the constitutional provisions which we have been discussing has been to concentrate federal taxation almost wholly upon con sumption, since direct taxes when apportioned according to population have shown themselves to be unjust, unproductive, and exceedingly difficult of collection. Congress has made use of direct taxes only five times during the history of the national government. Two million dollars was apportioned in 1798; $3,000,000 in 1813; $6,000,000 in 1815; $3,000,000 in 1816; and $20,000,000 in 1861. Except in the tax of 1798, Congress has always permitted any state to assume its quota and raise the money as it saw fit, although provision was always made for the collection of the amount- usually by taxes on lands, houses, and slaves by federal officers, in case the quota was not assumed by the state government. It would be difficult to exaggerate the unsatisfactory character of such taxation. In no case has the federal government ever collected the full amount of the tax. The taxes levied in 1814-1816 continued to be collected until 1839. The last payments on the direct tax of 1861 were not received until 1888; and in 1897 a law was passed abolishing further collections and authorizing the amounts which had been collected under the act of 1861 to be returned. Considerable scandal arose out of this refunding act owing to the enormous commissions paid to certain lobbyists for their work at Washington in securing the passage of the law. Experience has thus made it amply clear that the federal government must put its dependence upon customs duties, excises, and similar taxes. Customs Duties. Among federal revenues, customs duties easily occupy the place of first importance. From the foundation of the federal government in 1789 until the Civil War, with the exception of a few excise taxes collected between 1791 and 1802, the federal government derived nearly all its permanent regular revenues from customs taxation, and since the Civil War considerably more than 50 per cent of the permanent revenue has, on the average, been derived from this source. From the very beginning, moreover, our customs duties have been in spirit, if not in effect, protective; and it thus becomes necessary to consider the connection between the protective and revenue principles, in addition to the more strictly fiscal aspects of customs duties. |