(3) inadequacy of local assessment, (4) lack of proper corporation taxes, (5) the franchise evil, (6) undue burden on the farmer, (7) interference with business, and (8) inadequate taxes on to be only a local revenue. All direct taxation was originally local in character, and the assessment of property for local taxation was at the outset a comparatively simple matter. When the need for state revenues made itself felt, it was obviously expedient to tack on to this local taxation a quota for general purposes. But with the great development of state functions, and with the breakdown of the local barriers of commerce and industry, what was originally equal soon turned into inequality, and the attempt to fetter interlocal or even interstate business conditions by the bonds of purely local assessment has proved to be a fruitful source of difficulty. Fourth, the failure to make modern corporations bear their fair share of taxation. ... Fifth, the failure to secure adequate compensation from individuals and corporations alike for the franchises and privileges that are granted by the community. An earnest effort is being made at present throughout the length and breadth of the land to repair this defect. . . . Sixth, the undue burden cast upon the farmer. Practically, this is the problem of taxation in many of our rural districts and in all agricultural communities where the failure of an adequate revenue system and of the readjustment of social resources makes it impossible to secure good schools or fairly decent roads without overburdening what is, after all, the chief source of American prosperity. Seventh, the interference with business, due to the partial and spasmodic enforcement of antiquated laws. Witness the attempt in some states suddenly to levy the mortgage tax, as recently in New York, where the entire building industry was thrown into confusion; or the attempt in other states to enforce . property [taxes] on businesses which led to a change in the location of the business rather than to any increase of revenue. ... Eighth, the failure to make great wealth contribute its due share. In former times, where property was fairly equally distributed and great wealth. conditions simple, inequalities in tax burdens were slight and unperceived. Before the huge aggregations of modern wealth, the crude tax machinery of earlier days stands impotent. And yet we hug ourselves with the delusion that all that is necessary is to patch up the old machinery, whereas what is really needed is to throw the old machinery on the scrap heap, and to utilize entirely new and modern instruments and processes. 188. Breakdown of the general property tax 1 the general property tax. As Professor Seligman has pointed out in the above selection, Failure of the breakdown of the general property tax is first and foremost among the defects of American taxation. Wherever extended investigations of this tax have been made, the conclusion has always been that it is thoroughly inadequate as a source of revenue, and that it is unqualifiedly evil in its effects upon both assessors and taxpayers. Some of the defects of the general property tax are brought out in the following extract from a committee report to the Fourth International Conference on State and Local Taxation, held in Milwaukee, in 1910: for the There are two reasons why the general property tax has failed Two reasons in operation. First, because under modern conditions it cannot be enforced effectively. Secondly, because of a more or less conscious recognition of the fact that strict enforcement would result in a still greater injustice than now prevails. [First, as to impracticability of enforcement]: Under modern conditions, much property that is valuable to its individual owner . . . is in a form that permits of easy evasion. The paper evidences of ownership of property which the general property tax system seeks to reach in the hands of the owner, can readily be concealed, or there can be a colorable transfer of title. Credits and debts can be juggled. Visible personal property can be temporarily transferred into another district or state. Where the taxpayer makes his own return, he can undervalue or omit some of his property. If the assessor tries to inventory the property he may overlook much of it and fail to estimate the value of that which he does find. . . . ... (1) the im practicability of enforce ment, and (2) the injustice of [Second, as to the injustice of strict enforcement]: Public opinion almost invariably recognizes the unfairness of taxing all property by the same rule and at the same rate, whenever enforcement. 1 From State and Local Taxation, Fourth International Conference, August 30 to September 2, 1910. Addresses and Proceedings. International Tax Association, Columbus, Ohio, 1911; pp. 307-310. strict Conclusions. a strict enforcement of the law is attempted. The abstract demand for the taxation of all property alike then gives place to concrete indignation over the actual results. It is always some unknown "they" who ought to be made to pay on everything "they" own. But the property which the assessor does find, often is, in the opinion of its owners, either greatly overvalued, or has been "singled out," or is otherwise quite improperly on the rolls. This attitude of the average property owner is an unconscious resentment at the unfairness of the general property tax theory. The attempt to tax all property at a uniform standard of valuation and at the same rate, regardless of its special characteristics, earning power, or the benefits derived from the expenditures of government, violates the primary rules of just taxation and offends the natural sense of justice. To sum up, your Committee finds: That the general property tax system has broken down; That it has not been more successful under strict administration than where the administration is lax; That in the states where its administration has been the most stringent, the tendency of public opinion and legislation is not toward still more stringent administration, but toward a modification of the system; That the same tendency is evident in the states where the administration has been more lax; That the states which have modified or abandoned the general property tax show no intention of returning to it; That in the states where the general property tax is required by constitutional provisions, there is a growing demand for the repeal of such provisions. We conclude, therefore, that the failure of the general property tax is due to the inherent defects of the theory; That even measurably fair and effective administration is unattainable; and that all attempts to strengthen such administration serve simply to accentuate and to prolong the inequalities and unjust operation of the system. rations are inadequately taxed. There is a widespread feeling among tax experts that under our Why corpopresent laws, business corporations are not made to bear their full share of the tax burden. The chief reason for this feeling is that our tax laws are largely the legacy of primitive conditions, and so do not adequately weigh upon such recent developments as corporate business. The corporation has recently become an important source of wealth, but our tax laws have not yet taken general notice of this new source of revenue. Some of the striking elements in this situation are discussed in the following extract from the proceedings of a taxation conference held in Indiana in 1910: While in primitive society property may be the best available test of ability in taxation, the true test is always ability and not property. . . . The ability and the duty of the owner of property to support the government to the same extent and for the same reason that he supports himself and his family is measured most fairly and accurately by income or productive ability. The test of tax-paying ability. As society develops, economic and industrial conditions become Significance of industrial more complex, property and industry assume more varied forms, changes. and the capacity of the individual or corporation can no longer be fairly determined merely by property ownership. Whether a person is supporting his family on a salary income or from property investments he is equally able and responsible for the support of the government. Property, therefore, must be classified as to its form and productive capacity if we are to have a fair, uniform and comprehensive system of taxation, based on ability to pay and universal in its application. . . out of all The bulk of our intangible property, which has generally escaped paying its fair share of taxes and which is increasing . . proportion to other property . . . is invested or deposited with corporations. The general tendency and natural effect of corporate investment is to concentrate property for the purpose of increasing its earning capacity; thereby collecting into a relatively few organizations or industrial systems, practically all of the intangible, together with a large portion of the tangible, property. 1 From Indiana University, Extension Division, Proceedings of a Conference on Taxation in Indiana, February 5 and 6, 1914. Bloomington, Indiana, 1914; pp. 52–54. Relation of corporate development to intangible property. The proper way of taxing corporations is to ignore the stock holders and the actual property of the corporation, and to levy upon the income or earning capacity of the corporation. Conclusion. The small number of corporations as compared to the large numbe of owners of their securities affords a most compelling argument of convenience and economy for the taxation of the corporation rather than its securities in the hands of their numerous and widely scattered owners, many of whom are never found, so that the portion who are taxed are required to pay in addition to their own fair share of taxes an even greater amount which belongs to the owners of those securities which are not returned, with a resultant rate of taxation imposed on that portion actually paying, frequently approaching the earning capacity of the security itself. ... By taxing all such intangible property at its source or the place of investment, the expense and difficulty of assessing and collecting the tax would be reduced to a minimum and the tax could be practically uniformly levied and universally collected. In other words, let us take the income or earning capacity of the corporation as the measure of its duty and ability to pay taxes and not attempt the impossible and inequitable assessment of its stock or property as such, especially when so much of the property is intangible in form and so incapable of assessment except on the basis of income or earning capacity. . . A tax on corporations measured by corporate income should include every subject of taxation that is legitimately taxable from the economic point of view, for income covers all property and reflects all value necessarily and properly belonging to the corporation. As income or earning capacity determines the value of the property belonging to corporations and furnishes the best measure of taxpaying ability, why not tax it as such, or use it directly as the measure of value in assessing such property? It is fixed and definite, not susceptible of evasion, easily and conveniently ascertained at slight expense to the state as well as to the corporation itself, and furnishes a practical basis of assessment. 190. Social significance of taxation 1 There is no more significant development in recent tax discussions than the proposal to use income and inheritance taxes as a method 1 From Theodore Roosevelt, Annual Message to Congress, December 3, 1907. |