surance compañies and other corporations taxed by special method, it is believed that the rate of the indirect tax burden. upon their credits is in no case more, and in general is less than that cast upon credits held by banks. As to credits held by non-residents it has been seen already that they are subject to no tax burden whatever in this state. Now, if all other credits were assessed and taxed at the full rate imposed upon general property, leaving credits held by banks and the other corporations mentioned, and by non-residents, to bear the much lighter indirect burden now imposed, or none at all, it is plain that an enormous advantage would result in favor of the latter classes of credit holders, who by reason of such advantage would in time come to have a practical monopoly of the business of making loans at interest. Private individuals residing in this state could not successfully compete at such disadvantage with nonresidents and the corporations which would be thus favored. Competition being restricted, rates of interest would naturally be higher than under free competition. There would be nothing to prevent the persons and corporations enjoying such monopoly from shifting the whole burden to their debtors, besides levying upon them the larger measure of profit made possible by such monopoly.

From the foregoing it would seem plain that in any scheme for the taxation of credits it is essential in order to avoid injustice and inequality that all credits should be reached and taxed at substantially the same rate; and that in order to accomplish this it would be necessary to revise and radically change the laws now in force for the taxation of banks, trust and insurance companies and the various other corporations referred to, as well as to devise some scheme for effectually taxing the non-resident creditors of debtors residing in this state. But the laws of the United States forbid the taxation of national banks by any other method than that now in force.1 To tax the

1 The present laws of this state require the shares of stock in national banks, as well as other incorporated banks, to be assessed to the share holders in the district in which the bank is located. The direct assessment of the "capital" of such banks is forbidden, the assessment of the shares being in lieu of assessment of the capital itself. Secs. 1 and 2,

other banks by a different and more burdensome method would be insupportable. To reach the non-resident creditors would involve grave problems of interstate comity to say nothing of the intrinsic difficulty of reaching all kinds of credits in the hands of that class of persons. Then, there is the non-resident debtor to be protected against the avenging spirit of his resident creditor. The case of such debtors may not concern us deeply, but the state cannot justly permit this class of resident creditors to have a clear advantage over their fellows; otherwise the loanable capital of the state would be flowing to more hospitable jurisdictions.

These are some of the difficulties which beset the path of the legislator who would undertake to suspend the operation of the natural laws of trade and finance and to force economic currents to run in a backward course.

It is scarcely necessary to make a formal statement of our final conclusions. It seems very clear that the only just and rational solution of the problem as to taxation of credits is to cease all attempts to tax them-in other words, to exempt them from taxation. This would not be an exemption in any true sense for there is really nothing to exempt. Credits are property for purposes of taxation by legal fiction only. The proposition therefore, is not to exempt property, but to abolish the fiction.

In the report of this commission to the Legislature of 1901, in speaking of taxation of so-called intangible property, including credits, it is said:

The time is perhaps not far distant when a better understanding of these questions will be had and when there will be a more distinct demand than now exists that much of the intangible property, so-called, which under existing practice is virtually

Chap. 102, 1866, being part of the banking laws adopted by vote of the people, and printed in Statutes of 1898 on pp. 1527-1528. But real estate owned by such banks is subject to taxation, and no deduction on that account is allowed in the assessment of the shares of stock. Second Ward Savings Bank vs. Milwaukee, 94 Wis., 587. The statutes of the United States permit the taxation of national banks to the extent and in the manner above indicated and not otherwise. U. S. Rev. Stat., Sec. 5219.

exempt, shall be made expressly exempt from direct taxation It may be remarked in this connection that a transition from virtual exemption under existing practice to substantially the same exemption by legislative act, would involve no disturbance in commercial or industrial conditions.

It is believed that there is a much better understanding of the subject of taxing credits now than two years ago. Something has been learned by the more rigid enforcement of existing laws during the past two years, and such enforcement has led to a great deal of discussion and thought upon the subject among the people of the state. Many persons have come to see and judge of the matter in its true meaning and significance. There is undoubtedly a "more distinct demand" for the abolition of the laws requiring the assessment of credits than ever existed before, and the time seems ripe for legislative action. It is earnestly hoped that such action will be no longer deferred.

It has been often suggested that this step should not be taken until something in the nature of a substitute could be worked out and enacted into law. But in the very nature of things there can be no real substitute for the taxation of credits. The tax upon credits is not a logical or essential feature of the general property tax system. The essential principle of the general property system is to tax property. The credit tax is not a tax upon property but upon a mere fiction specially enacted for that purpose. In its relation to the general property system it has no logical connection; it is an excrescence, a monstrosity, having no basis in economic truth or in substantial justice; working only wrong and injury to individuals and disadvantage to the people as a whole. There can be no substitute for such a thing; there is nothing good in it to be retained by substitute; being wholly bad, it should be lopped off absolutely and without further delay.

IV. Legislation in Other States.

As is generally well known, the direct taxation of credits as property has long been abandoned in nearly every civilized country except in the States of the American Union. This fact will perhaps seem less significant if considered in connection

with the further facts that in most of such other countries personal property is not taxed directly, and in many a tax is imposed upon incomes, mitigated, however, in some instances if not usually, by moderate exemptions. An income tax amounts to an indirect tax upon interest bearing credits just as it is an indirect tax upon all property producing income. But such indirect tax is very small as compared with the amount of tax usually imposed upon credits when taxed directly as property. For example, a tax of five per cent. on income would be equal to a direct tax of only one-fourth of one per cent. on a bond bearing five per cent. interest, assessed at par.

Substantial progress has been made in a number of the American States toward eliminating the feature of double taxation usually involved in the taxation of credits. The legislative efforts in that direction have been thus far confined chiefly to credits secured by mortgage or other express lien upon specific property. As indicated in the foregoing pages, this is the case in California, where the subject has probably received fuller consideration than in any other state and where the protests against this form of double taxation have been most earnest and persistent.

It will be remembered that the essential features of the California plan are, that the credit is considered as an interest in the specific property upon which it is secured by mortgage or other express lien; that it is deemed to have its situs or location for the purpose of taxation, and is required to be assessed, in the assessment district in which the specific property is situated; and although in form assessed to the holder of such credit, the tax levied pursuant to such assessment is made a lien upon the same property on which the debt is secured. Thus credits so secured held by non-residents of the state may be reached as effectually as those held within the State. Legislation upon this plan has been sustained by the supreme court of the United States, the court having final jurisdiction to determine its validity, on the ground that it is competent for a state legislature to treat such credits as an interest in the specific property upon

1

1 Savings and Loan Society vs. Multomah County, 169 U. S. 421.

which the mortgage or other security is given and to fix the situs of such credits accordingly. It is believed, however, that the courts would not uphold legislation fixing the legal situs of credits not secured by mortgage or other express lien upon specific property in any other jurisdiction than that in which the creditor or person in custody of the evidences resides.1 If this view is correct, it would be impossible to extend the California plan to credits not secured upon specific property so as to include those which are held by non-residents of the state. For this reason among others it is not surprising that there has been no attempt in California or elsewhere to extend the plan to credits not secured upon specific property. Apparently, discovery has not yet been made of a satisfactory plan whereby substantially all credits not so secured will be assessed for taxation and relief also be given to debtors by corresponding reduction in the assessment of their actual property.

In a few states, including New York and Vermont, there have been statutes granting to debtors a reduction or exemption in the assessment of their personal property equal to the amount of debts owing, without reference to the manner in which such debts were secured and, usually, without making such exemption conditional upon the assessment of such obligations to their creditors. Inasmuch as such credits have not been assessed to any great extent such statutes have not worked well, but have created much dissatisfaction. They offer a great temptation, which many do not resist, to evade full assessment by the creation or assertion of fictitious debts. Much property otherwise taxable is thereby omitted from the assessment rolls without corresponding assessment of credits. In most of the states, as in Wisconsin, a reduction or exemption is allowed in the assessment of credits only, but not in the assessment of any other property, equal to the amount of debts owing by the person assessed. In some of the states, as in California, the measure of this exemption privilege is limited to the amount of debts owing to residents of the state. This privilege affords the same temptation to create fictitious debts, though not to so many persons, and

1 See Cooley on Taxation, 2nd ed., p. 79, citing State Tax on Foreign Held Bonds, 15 Wall. (82 U. S.), 300, and other cases.