Popular Science Monthly/Volume 51/May 1897/Principles of Taxation: Rules Under a Constitutional Government XVI
| PRINCIPLES OF TAXATION. |
By DAVID A. WELLS, LL.D., D. C. L.,
CORRESPONDANT DE L'INSTITUT DE FRANCE, ETC.
VII.—RULES OR MAXIMS ESSENTIAL TO AN ADMINISTRATION OF RIGHTFUL TAXATION UNDER A CONSTITUTIONAL OR FREE GOVERNMENT. PART II.
IN continuance of the discussion entered upon in the preceding part of this chapter, as to whether under a constitutional and free government, and in virtue also of the natural and inalienable rights of the people governed, a state has a lawful right to levy and expend taxes in furtherance of private interests, more especially by way of bounties, the following additional points may be worthy of consideration:
Probably no better exposition of the limitation on the exercise of the taxing power incumbent on a free government professing a regard for the rights of the people, and more especially on the Federal Government of the United States, under its Constitution, in respect to the granting of payment of bounties for the promotion of the private interests of any of its citizens, can be found than the following, accredited to Justice Thomas M. Cooley:
"It is not in the power of the state, in my opinion, under the name of a bounty, or under any other cover or subterfuge, to furnish the capital to set private parties up in any kind of business, or to subsidize their business after they have entered upon it. A bounty law of which this is the real nature, is void, whatever may be the pretense on which it may be enacted. The right to hold out pecuniary inducements to the faithful performance of public duty in dangerous or responsible positions stands upon a different footing altogether; nor have I any occasion to question the right to pay rewards for the destruction of wild beasts and other public pests, a provision of this character being a mere police regulation. But the discrimination by the state between different classes of occupations, and the favoring of one at the expense of the rest, whether that one be farming or banking, merchandising or milling, printing or railroading, is not legitimate legislation, and is an invasion of that equality of right and privilege which is a maxim in state government. When the door is once open to it there is no line at which we can stop and say with confidence that thus far we may go with safety and propriety, but no further.
"Every honest employment is honorable; it is beneficial to the public; it deserves encouragement. The more successful we can make it the more does it generally subserve the public good. But it is not the business of the state to make discriminations in favor of one class against another, or in favor of one employment against another. The state can have no favorites. Its business is to protect the industry of all, and give all the benefits of equal laws. It can not compel an unwilling minority to submit to taxation in order that it may keep upon its feet any business that can not stand alone."
Although the practice of stimulating the production of beet-root sugar in Europe through high protective duties on imports and export bounties dates back to the first quarter of the century, the present complicated and curious state of affairs is really due to a method of taxing beet sugar by Germany which was adopted in 1869. The idea involved in this method was, in brief, to collect an excise or internal -revenue tax on all sugar produced, and give a bounty on so much of the domestic product as was exported or sold to the people of other countries. The other states of continental Europe, finding the markets of their own product of beet-root sugar everywhere supplanted by the German sugars, and their domestic manufacturers being thereby brought to the verge of ruin, made haste to follow the example of Germany, until the policy of Germany, France, Belgium, Holland, Austria, and Russia seems to have been to stimulate their domestic product of sugar to the greatest extent, and then enter into competition with each other to see which of them could sell cheapest to foreigners at the expense of their own people. The general result is, that the great beet-sugar industry of Europe has been established and is now conducted on what may be regarded as an artificial basis, and one not inaptly characterized as a most ingenious method for entailing money losses on the mass of the people of the countries above mentioned.
The immediate sequence of this policy has been an enormous increase in the beet-sugar product on the Continent of Europe—i. e., from 2,323,000 tons in 1885-’86 to nearly 5,000,000 (4,789,000) tons in 1895-’96—with such a reduction in price that the whole sugar industry of Europe is seriously depressed, with a general complaint on the part of producers that the amount received by them does not cover the cost of production. Under such a condition of affairs, the German Parliament (Reichstag), in May, 1896, accepting a popular declaration that "sugar was the last and only agricultural product in which there remained any profit for the German farmer, and that whatever skillful legislation could do to preserve and protect that industry should in justice to the suffering landowners be given a prompt and thorough trial," passed an act increasing the bounty on the export of sugars to an extent assumed to be sufficient "to enable German exporters to compete against all comers in foreign markets"; advancing the import duty on sugars to a prohibitory degree; and fixing an internal-revenue tax on sugars to such an extent as to yield a net income to the state in excess of its disbursements on account of bounties on exports. The effects of the new statute have now become apparent and ominous. The foreign sugar market has responded to the increased bounty export by a proportionate decline in price; and a movement now finds favor to petition the Reichstag to make certain amendments in the existing statute so as to restrict instead of stimulating production, and to invite international negotiations for the gradual abolition of all export bounties, which have been proved to be simply a burden on the treasury, which pays them for the benefit of non-producing foreign countries.
The present burden which the sugar-bounty system entails upon the taxpayers of Europe is estimated at about $25,000,000 per annum, while the excise tax on sugar in Germany, France, and Austria is said to amount to $100,000,000 per annum. On the sugar consumed by the people of the continental nations of Europe which have adopted the bounty policy there is no bounty, but on the contrary an excise tax; the result of which legislation is to make exported sugars very cheap and home consumption abnormally dear. This is demonstrated by reference to the statistics of the comparative consumption of different countries. Thus in England, whose policy since 1874 has been to give her people sugar free of taxation, the per capita consumption has risen from fifty-six pounds in that year to eighty-six pounds in 1896; while the saving to the British people from the reduction of the cost of this one item of their living has been estimated to be at least 6,000,000 ($30,000,000) per annum. The great reduction in the price of sugar has also given a remarkable impetus to the British industry of manufacturing sweets, in the form of confectionery, preserves, jams, marmalades, etc., which last to a considerable extent have undoubtedly supplanted the use of butter. The present annual average consumption of sugar in Germany is reported to be about twenty-seven pounds per capita. In France the declining consumption of sugar has been made the subject of recent debate in the Chamber of Deputies, where the question was pertinently asked by one of the deputies (M. Méry) if the object of the existing governmental policy in respect to sugar "was mainly to produce it or to have and enjoy it." The Agricultural Society of France has also recently unanimously indorsed a demand of the French sugar makers and refiners that the Government should increase the present bounty on the export of sugar to an extent equivalent to the combined or aggregate bounties allowed in Austria and Germany.
So much, then, for nearly half a century's experience on the part of the leading continental nations of Europe in attempting to regulate the production, price, and consumption of sugar through a system of bounties.
Practical experience in respect to the employment of bounties also leads to a deduction, which may be almost regarded in the nature of a principle, that when bounties are employed for the promotion of some public good, the object sought eventually becomes subordinate to the opportunity which an unnatural and unprincipled perversion of the bounty provisions affords for the promotion of private rather than public interests. The following illustrations, though somewhat comical in their nature, serve to sustain this proposition:
In the early years of the present century the State of Connecticut, having in view the promotion of its agricultural interests, offered a premium on the destruction of the crow; to be paid on the production of the head of the bird to the proper authorities. Thereupon the sons of the farmers, desirous of earning a little money, then much more difficult to obtain than at present, diligently searched the woods for the nests of crows, from which at the proper time the eggs were transferred to sitting hens, by whom they were hatched and the resulting offspring brought up until their heads became available for presentation and procurement of the bounty. A summary of the general results of such experience would be somewhat as follows: First, a perversion of the legitimate industry of the hen; second, an elementary lesson for young persons in perpetrating frauds against the State; third, an impairment of the agency of a bird, whose habits have been proved by subsequent scientific investigations to be beneficial rather than detrimental to the interests of the farmers. Again, in the early history of one of the Northwestern States of the Federal Union a bounty was offered, at the request of the farmers, for the heads of little burrowing animals known as "gophers," which attracted little attention till the experience of several years showed that the disbursements of the State on this account had become abnormal and were rapidly increasing. Investigation then proved that the raising of gophers by citizens of the State for the procurement of bounties had become a regular industry. A like experience in British India is also worthy of note. Some years since the Government, with a view of arresting the mortality among its native population from the bites of poisonous serpents, offered a bounty on their proved destruction; when it was found that for the sake of obtaining the bounties the cultivation of the "cobra" and other like snakes had been actually entered upon.
Third. The sphere of taxation should be limited to persons, property, and business exclusively within the territorial jurisdiction of the taxing power. It would seem to be in the nature of a self-evident proposition, although in fact it is by no means so regarded, that the power of every state or government to tax must be exclusively limited to subjects within its territory and legal jurisdiction. "All subjects," says Chief-Justice Marshall, in giving the opinion of the Supreme Court in the case of McCullough vs. Maryland (4 Wheaton, 431), "over which the sovereign power of the state extends are objects of taxation; but those over which it does not extend are, on the soundest principles, exempt from taxation." And again, "the sovereign power of the state extends to everything which exists by its own authority or is introduced by its permission." "Every nation," says Wheaton, "possesses and exercises exclusive sovereignty and jurisdiction throughout the full extent of its territory. It follows, from this principle, that the laws of every state control, of right, all the real and personal property within its territory. The second general principle is, that no state can, by its laws, directly affect, bind, or regulate property beyond its own territory. This is a consequence of the first general principle; a different system, which would recognize in each state the power of regulating persons or things beyond its territory, would exclude the equality of rights among different states, and the exclusive sovereignty which belongs to each of them." (Wheaton's International Law, chap, ii, § 2; Fœlix International Prisé,§§ 9 and 10.) And in a decision of more recent date (State Tax on Foreign-held Bonds, 15 Wallace, 306, 328), the United States Supreme Court said: "The power of taxation, however vast in its character and searching in its extent, is necessarily limited to subjects within the jurisdiction of the state. Property lying beyond the jurisdiction of the state is not a subject upon which her taxing power can be legitimately exercised. Indeed, it would seem that no adjudication should be necessary to establish so obvious a proposition."
The principle under consideration has also been made the subject of adjudication by the United States Supreme Court in a case of historic as well as of legal and economic interest. In September, 1814, the country being then at war with Great Britain, the town of Castine, in Maine, was captured by the British forces, and remained in their exclusive possession until after the ratification of peace in 1815. During this period the British Government exercised all civil and military authority over the place, established a custom house and allowed merchandise to be imported, some of which remained in Castine after it was evacuated by the enemy. On the re-establishment of the authority of the United States, the American collector of customs for the district, claiming a right on the part of the United States to Federal duties on the goods in question, demanded payment of the same from the owners or importers; and, the claim being resisted, the case went up to the United States Supreme Court, which with complete unanimity gave judgment, through Justice Story, for the owners or importers in the following language:
"We are all of the opinion that the claim for duties can not be sustained. By the conquest and military occupation of Castine, the enemy acquired that firm possession which enabled him to exercise the fullest rights of sovereignty over that place. The sovereignty of the United States was suspended, and its laws could no longer be enforced there, or be obligatory on the inhabitants who remained there and submitted to the conquerors. By the surrender the inhabitants passed under a temporary allegiance to the British Government, and were bound by such laws and such only as it chose to impose. From the nature of the case, no other laws could be obligatory on them; for where there is no protection or allegiance, or sovereignty, there can be no claim to obedience."
Taxes, therefore, are necessarily the creation of each state, and no self-respecting Government ever permits any other Government to interfere with its tax laws or their execution, and a toleration of such interference in any degree presupposes dependence, subjection, or absence of independence. An obvious co-relation of this proposition, and also a matter of fact, is that a violation of the tax or revenue laws of one country has never been regarded as an offense or crime in any other country; and the English courts have held that contracts to evade the customs laws of a foreign country are not illegal. Hence, also, offenders in this respect are never taken into account in extradition treaties between different nations and their governments. Some years ago a United States district attorney in New York procured through the Department of State at Washington the extradition of a person from England on the. charge of forgery. On his arraignment before a United States court it transpired that the offense committed was the manufacture and use of fraudulent invoices, to which forged or fictitious names had been attached, for the purpose of evading the payment of United States customs or taxes on certain imports; and that the intent of the prosecution was punishment, not for forgery in the ordinary sense of the term, but for smuggling, for which latter offense there was no precedent that extradition had ever been granted by any country. The attention of the British Government having been called to the case, a request was preferred by it to the authorities in Washington that the trial of the accused should be discontinued, on the ground that a fugitive from justice, when surrendered by a country in which he had sought refuge, should not be tried for any offense other than the one specified in the extradition demand, and for which extradition was granted. Compliance with the request being refused, although as a matter of fact the trial was discontinued, the British Government took occasion, when extradition was next demanded of her by the United States which happened to be the case of a former well-known citizen of Boston who had committed forgery in the sense that constitutes a crime in all countries—to refuse it, although the offender had in the first instance been arrested in England and was in custody; and for many years subsequent and for reasons above given there was no extradition in force between the United States and Great Britain and her colonies, with the result of making Canada an Alsatia, or place of safe refuge, for all criminals of the former country.
All, therefore, that any government can legitimately ask of another government in respect to taxation is, that its subjects or citizens residing in such foreign state shall not be there discriminated against because they are foreigners; but shall be treated in exactly the same manner as the subjects or citizens of the taxing power and their property are treated—no better and no worse. If foreigners feel aggrieved, they must first exhaust all the remedies against unjust taxation provided by the institutions of the taxing country; as foreign importers, for example, aggrieved by rulings or appraisements at the custom houses of any country, must first appeal for redress to the courts of such country. A recent event of great economic and legal importance is also worthy of narration and consideration in this connection.
A board of appraisers and assessors charged with the duty of assessing, for the purpose of taxation, the property in Ohio of telegraph, telephone, and express companies, discharged the duties incumbent upon it—taking an express company for example—in the following manner: First, by determining the value and liability to taxation of the real estate of the company situated in Ohio; second, the personal property, including moneys and credits, owned by the company in Ohio, and the value thereof; third, the gross receipts during the taxing year of the company in Ohio, from whatever sources derived. It was conceded that the returns made by the company to the above officials were correct, and that the aggregate value of the items included in such returns liable to taxation in 1895—the same as other like property in the State—was $42,065. The board of appraisers and assessors added, however, to this amount the sum of $491,030, making the aggregate of the tax liability of the express company $533,095; and based their action not on any belief or pretense that any considerable amount of real or personal property within the territorial jurisdiction of the State had been discovered which had hitherto escaped taxation, but that sources of reported value which were entirely outside of the territory and beyond the jurisdiction of the State of Ohio—when they constituted a part of the value of the capital or franchise of a corporation located and established in some other State for the purpose of carrying on business, and that business "interstate commerce" entirely within the control of the Federal Government—might be added to the intrinsic value of property within the State; thereby assessing not only property within the State of Ohio, but a proportion also of all property situated without its territorial boundaries. The question involved was therefore the constitutionality of extraterritorial taxation; and the case, after consideration by State and United States Circuit Courts, was finally brought before the United States Supreme Court. Here, notwithstanding the citation of numerous former opinions and judgments of the court wholly adverse to the constitutionality of the principle on which was based the assumption and action of the State of Ohio, the court by a majority of one held to a contrary view; and gave judgment in support of the State assessments on the express company. It is clear, therefore, that the State of Ohio has been justified, for the time being, in an attempt to tax something that it calls property, but which is neither tangible nor visible; that has no intrinsic or essentially inherent value; and which procedure, if generally accepted and put in practice by other States, would antagonize all formerly accepted theories and legal decisions in respect to extra-territorial taxation, and ultimately destroy all interstate commerce between the several States of the Federal Union. An Implied but Fundamental Reciprocal of Taxation.—Notwithstanding the absence of any warrant for assuming that there was ever any real or implied contract, whereby a State in its beginning or development agreed to give a certain amount of protection to life and property in return for an equivalent in money, goods, or services of its citizens an assumption which has been characterized as the "commercial theory of taxation"[2]— it is nevertheless true that the "co-relative" or "reciprocal" of taxation is protection; or, in other words, according to the political theory of our governments, national and State, and in fact of every government claiming the title to be free, taxes may be legitimately assumed to be the compensation which persons and property pay the State for protection. This assumption, it is believed, has been indorsed and accepted by every writer of repute on economic subjects who has discussed taxation from the time of Montesquieu down to a very recent period;[3]an in the repeated instances in which this matter has come before the courts for adjudication, the highest judicial authorities have uniformly given judgment or expressed opinions to the same effect. In confirmation of these statements the following citations are submitted:
"Where there is no protection," said Judge Story (in the case of the United States vs. Rice, 4 Wheaton, 276), "there can be no claim to allegiance or obedience." Again the same eminent authority (in the case of Miles vs. Duryea, Cranch, 481) thus strongly expresses himself: "It is an eternal principle of justice that jurisdiction can not be justly exercised by a State over property that is not within reach of its process that is, property which it can not protect."
"Taxes are a portion which each individual gives of his
property, in order to secure and have the perfect enjoyment of the remainder. Governments are established for the protection of persons and property within the limits of the state, and taxes are levied to enable the government to afford and give such protection. They are the price and consideration of the protection afforded." (Ingersol, J., Circuit Court of the United States, Duer vs. Small.)
"There is nothing poetic about tax laws. When they find property, they claim a contribution for its protection." (Lowrie, Chief Justice, Tinley vs. The City, etc., 33 Penn., 381.)
Montesquieu, writing with the monarchical institutions of France mainly or solely in view, discusses this subject in his Spirit of Laws (book xxxi, chap, i), as follows: "The public revenues are a portion that each subject gives of his property, in order to secure or enjoy the remainder."
"The right to tax an individual results from the general protection afforded to himself and his property."—Vattel, Law of Nations, book i, chap. xx.
"Property and law (i. e., government or the state) are born together and die together. Before laws were made, there was no property; take away laws, and property ceases."—Bentham, Theory of Legislation.
The principle here involved is also clearly and succinctly further expressed in the following citations:
Taxation (if anything in the nature of principle is assumed as its basis) therefore implies that the government imposing it will return an equivalent. But to return an equivalent in the form that was taken, namely, money, would be stultification. The only equivalent that a government can return, and the only one, in truth, that justifies taxation, is in the nature of a guarantee that the person, property, or business on which the tax is imposed shall have all the rights which the civilization of the state represents, or, in other words, "protection."—Redfield.
"If it were practicable to do so," says Justice Cooley, "the taxes levied by any government ought to be apportioned among the people according to the benefit which each receives from the protection the government affords him. This is upon the assumption, never wholly true in point of fact, but sufficiently near the truth for the practical operations of government, that the benefit received from the government is in proportion to the property held or the revenues enjoyed under its protection."—Cooley, On Taxation, pp. 14-17.Notwithstanding this preponderance of opinion, argument, and legal decisions in favor of the correlation of taxation and protection, the truth of this assumption has been called in question in recent years, and even wholly denied by some economic and legal authorities. Thus, in most of the States of the Federal Union (but not in other countries), sovereignty in respect to taxation is assumed, or enacted to embrace "goods, chattels, money, and effects, wherever they are; ships, public stocks and securities, stocks in turnpikes, bridges, and moneyed corporations, within or without the State"; and where the administrators of the law tax residents for personal property, even of a visible, tangible character, having a situs in another State or country; and, by another irreconcilable rule, tax non-residents for all of their personal property having a situs within the State.(Massachusetts Statutes.)
Such antagonism would seem to be wholly due to an inadequate comprehension of the subject. It is assumed, for example, that there can be no necessary reciprocity of the nature indicated between the State and the subjects of taxation, because, in the case of subjects—persons, property, and business—upon which no tax is levied, there can be no correlation, and therefore no claim whatever for protection; and in illustration and support of this proposition it is pointed out that churches and other public institutions, specifically exempt from taxation, need and receive as much protection from the State as structures used for dwellings and stores, and that tramps, who have nothing to pay with, are equally entitled to invoke and use the power of the State for protection as those who are taxed for millions. "So also the business that is not taxed at all, it is said, can no more be plundered with impunity than that which is taxed the heaviest."[4] The error in all this reasoning is fundamental, and arises from a failure to comprehend that in every civilized state every person or thing is taxed, either directly or indirectly, by the diffusion of taxes, and that it is not possible to name anything in such a state that is exempt from taxation; that the primary purpose for which the state exists is to afford protection to persons and property; that it—the state—practically ceases to exist when it is unwilling or unable to afford such protection; and that, even if willing, it could not protect, except through the ability that comes to it through the possession of the power and the exercise of taxation.
Fourth. Taxes should be reasonable, regular, and not arbitrary as respects method, time, and place of assessment and payment, and, above all, proportional.
The justice and the necessity of these conditions as essentials of a true system of taxation ought to command universal assent without argument. Adam Smith held to the opinion, "founded," as he says, "on the experience of all nations, that the certainty of what each individual ought to pay is, in taxation, of so great importance that a very considerable degree of inequality is not near so great an evil as a small degree of uncertainty." The evil of uncertainty does not, however, often characterize the tax systems of the United States, except in the case of taxation by the Federal Government of imports, when rates (customs) are sometimes held for considerable periods in abeyance by reason of political antagonisms of legislators. One of the most remarkable example of this occurred during the months from December, 1893, to August, 1894, when the uncertainty as to the prospective rates on imported merchandise occasioned great stagnation of business in the United States, with inevitable great contingent losses. Another even more striking illustration of the evils of uncertainty in taxation is to be found in the recent (1897) proposition to subject merchandise, imported in strict conformity with established laws and rates at the time of importation, to the retroactive incidence of increased taxes, not certain but prospective in respect to rates, and not enacted or embodied in the form of statute laws. Such action is in the nature of an arbitrary fine or penalty, and not taxation, and probably does not find a parallel in the history of any civilized nation, and would not now be tolerated in any of the most despotic governments of Europe.
The term proportional, which is largely used in constitutional provisions and in statutes relating to taxation, has, however, a meaning so much broader and of such greater significance than is generally attributed to it by law-makers and even law interpreters, that it is worth while to institute an inquiry and endeavor to understand clearly what it does mean. Scientifically considered, it means the making of the burden of taxation equal upon all subjects of immediate competition. This principle is one of the prime essentials of taxation, and when it is violated the act of taking, or the enforced contribution, is not entitled to be considered taxation, but becomes at once an arbitrary spoliation or confiscation. Thus, to illustrate: Suppose it were proposed to tax the stock in trade of red-haired men five per cent, and those of red-nosed men ten percent; or, as was provided in the income-tax law enacted by the Congress of the United States of 1894, which exempted incomes below four thousand dollars per annum from taxation and taxed all above that sum two per cent; or to do as actually once was done in England, under an income-tax law enacted in 1691, tax Catholics at rates double those imposed on Protestants; it seems clear that such transactions could not involve any principle or be regarded in any other light than the mere arbitrary and despotic exercise of power; or the making of the possession of a red nose or red hair, or the result of enterprise, skill, economy, or the fortuitous circumstance of birth or belief, the occasion for inflicting a penalty. Yet this was what substantially was done in the middle ages, when nobles were exempt from taxation because they were nobles, and the common people were taxed because they were villains or bondmen; when Jews were assessed because they were not Christians, and Catholics because they were not Protestants.
It would seem to be clear, therefore, that a tax that is not levied proportionally or, what is the same thing, equally and uniformly upon all subjects in the same field of competition—as, for example, upon all persons engaged in the same business or profession, or upon all property of the same kind and all profit or income (less exemptions in the nature of charities) in the same ratio is a discriminating exaction, without claim to either justice or equality, inasmuch as to the same extent that some are favored by the discrimination others are inevitably plundered or crushed. It is also well to remember that when the term "uniformity" in respect to taxation is used, as it often is, in the place of "proportionality," the meaning is essentially the same; and that uniformity of taxation does not consist in the payment of the same amount by each taxpayer, but that the proportion of the value of each particular class or subject which each person pays in taxation to the state shall be everywhere the same.
In the soundings which have been made at great depths in the ocean for telegraphic or other purposes, the sounding line has not infrequently brought up from the bottom small chambered shells or other minute animals of exquisite organization and structure; and the question naturally arises. How can these minute organisms live and flourish under the enormous pressure that in some instances must be exerted upon them of at least three tons to the square inch? The explanation is to be found in the circumstance that the pressure is everywhere equalized, being as much from within outward as from without inward, and thus an equilibrium is maintained, under which development goes on and existence is made possible; and it is in preserving this equilibrium, this equalization of pressure, that constitutes the very essence of correct taxation.[5]
Another point worthy of attention in connection with this subject is, that forms of taxation which were not authorized with any purpose of making them unequal in their incidence or burden, not infrequently (as is especially the case in the United States) become so by reason of extraneous circumstance; inasmuch as every tax which popular sentiment, year after year, will not allow to be equally enforced, is, to the extent that it is enforced, a discriminating tax of the most unjust and unequal character. Under the internal revenue laws of the United States as they existed not many years ago, there was a very striking example of this character in the case of the tax on matches, to which more particular reference will be made hereafter, and one worthy of notice still exists, in the case of the tax on negotiable securities (or instruments)—as railroad and other corporate bonds—which the laws of every State in the Federal Union make subject to taxation; inasmuch as it is notorious that such taxes are not paid by the great majority of the citizens who own such securities, but are paid as a rule by guardians, trustees, and executors, who are obliged to inventory them in probate offices; with the result that widows, orphans, and minors are plundered and crushed; while those who evade the tax, through the utter inability of the State to collect it, are rewarded for their evasion in an increased rate of interest. Uniformity or proportionality in taxation is, therefore, one of the fundamental principles of every free and just government; and the safety of all tax-payers against the grossest abuses demands that in taxing any class or locality the principle of equality of rate should be kept sacred and inviolate.
The Constitution of the United States requires that "all duties, imposts, and excises shall be uniform throughout the United States"; and the question as to what constitutes uniformity of taxation under this provision has repeatedly come before the courts—Federal and State—for the purpose of definition, and so has become invested with a degree of historical interest. A natural inference, at first thought, would be, that under this provision of the Federal Constitution all property subject to taxation must necessarily be taxed at the same rate or ratio—that is, if horses, wagons, and land are taxed, then the same per cent of value must be assessed upon the horses and wagons as upon the land; and if some eight hundred per cent is assessed upon distilled spirits—whisky—(as is the case in the United States at the present time) every other commodity from which it was proposed to raise revenue ought to be taxed in the same proportion. In like manner under the customs, all imports liquors and pig iron, for example would have to be subjected to one rate of duty. This difficulty, so far as the Federal Government is concerned, has been obviated by an assumption, which the courts have sustained, that a tax "is uniform within the meaning of the constitutional requirement if it is made to bear the same percentage over all the United States"—that is, it must be uniform as regards any particular article in all places; that whisky or any other commodity, for example, shall not be subjected to Federal taxation at one rate in one State and at a different rate in another State, but that different articles may be subjected to different rates, provided they are uniform as between different places and different States; as it obviously "could not have been the intent of the framers of the Constitution that the Government in raising its revenues should not be allowed to discriminate in respect to articles which it desired to tax."[6]
In the case of the several States of the Federal Union, to which the Federal constitutional requirement in respect to uniformity of taxation does not apply, the same question—i. e., as to what constitutes uniformity—has been also a troublesome one, but different in its manifestation. The provisions relating to taxation in the Constitutions of these several States generally start with the idea, expressed or implied, that taxes must be uniform; and a strict construction of this language in a tax statute, operative in only one State, and where the Federal limitation of uniformity as respects place does not apply, might be construed as restraining the authorities of a State from imposing any different rate of taxation on the manufacture or sale of liquors and the manufacture and sale of other merchandise, or on the land and the business of the agriculturist. These difficulties in the way of construction have, however, been largely obviated by recognizing that when in the statute of a State the words "taxes must be uniform" are used, the word "uniform" does not mean, as in the Federal Constitution, uniformity as to "place," but uniformity "with regard to the subject of the tax"; an interpretation in full conformity with the principle before enunciated, that uniformity of taxation consists in the making of the burden of taxation equal upon all subjects which are in the same field or sphere of competition; or, as has been also expressed by Justice (S. F.) Miller, "different articles may be taxed at different amounts, provided the rate is uniform on the same class everywhere, with all people and at all times. Take, for instance, the case of a license: if everybody in any particular class is required to pay a certain license—if all lawyers are taxed twenty-five dollars a year, all merchants one hundred dollars, and all saloonkeepers two hundred dollars—then the license taxation is uniform, because it imposes the same burdens upon every man of the same class, who comes within a circle of well-defined limits. . . . This interpretation," he adds, "may be a little strained, but probably it has arisen from the necessity of enabling the Legislatures to levy taxes according to common sense, if not altogether with regard to strict uniformity."[7]
The opinions expressed by the State courts of the United States when this question of uniformity of taxation has been practically brought before them, is indicated by reference to the following decisions:
These and other like decisions of the State courts of the United States show that in order to sustain a tax law under the requirement of generality or uniformity it is not necessary that all property should be taxed, and that a State has the right to select property for taxation at its discretion. Of course, discrimination may result from the exercise by the State of the power of dividing the objects of taxation into classes, but while persons of the same class and property of the same kind are subjected to an equal burden, the constitutional requirements as to uniformity seem to be satisfied.
The fourteenth amendment of the Constitution of the United States, which prohibits any State from depriving any person of property "without due process of law," is also in conformity with the principle enunciated in the above citations; for taxation without jurisdiction, and therefore without the possibility of the correlative return of any protection as compensation, would obviously be an arbitrary exaction and not due process of law. But if property is otherwise (than by taxation) taken by the Government (as by the so-called law of "eminent domain"), full and fair pecuniary return must be made for its value. This is a principle as old at least as constitutional government, and is so important that it is incorporated in the fundamental law of every State in the Federal Union. Article V of the Constitution of the United States also provides that private property shall not be taken for public use without due compensation. It is clear, therefore, that there must be a line between the taking of private property for public use by the law of eminent domain and by taxation. But how can that line be drawn except by the rule that rightful taxation means uniformity of burden on competing vocations and competing property? The following decision by the Supreme Court of New Jersey is clearly in conformity with this conclusion: "A tax," it said, "upon the persons or property of A, B, and C individually, whether designated by name or in any other way, which is in excess of an equal apportionment among the persons or property of the class of persons or kind of property subject to taxation, is, to the extent of such excess, the taking of private property for a public use without compensation. The process is one of confiscation and not taxation." (Township Committee of Reading, 35 N. J., p. 66, 1872.)
Fifth.Taxation should not he employed as an agency or for the purpose of enforcing morality, or as an instrumentality for correction or punishment.
The punitive or moral idea has probably always entered to some extent as an element in all those taxes which have been levied on luxuries, and more especially on all those forms of luxury which are regarded as frivolous or as mere insignia of wealth and title, such as hair powder, wigs, coats of arms, carriages, etc. But when a government assumes to inquire what are the articles the consumption of which is prejudicial to the interests and well-being of its people, and then embodies the results of such inquiries into its measures of revenue; so that while providing means for the support of the state it also prescribes how the citizen ought to live, dress, eat, or drink, the result is always ineffectual for purposes of revenue, and far more so for the promotion of morality. Examples illustrative and confirmatory of these conclusions are so numerous as to make a selection of them not a little difficult. The following have been cited by the late Sir Morton Peto: "A tax on dice in Great Britain, repealed in 1862, had the ludicrous result of producing for many years a revenue of five shillings per annum from a license of thirty to forty pounds a year on the business of manufacturing them. Another provision of law was that every person having dice unstamped by the revenue officials in his possession was liable to the penalty of five pounds for each pair! But stamped dice could not be obtained. Every one who wanted dice, even cabinet ministers and revenue officials, purchased square pieces of ivory for a few pence and marked them for themselves. As regards packs of cards, the regulations imposed by a number of complicated acts of Parliament were so stringent that legally cards could scarcely be made or sold. Nevertheless for many years cards were hawked about the streets unstamped and without a license; and the manufacture of cards for exportation was so flourishing that nearly half a million packs were estimated to be surreptitiously made for exportation at the time the obnoxious taxes were repealed."
Sixth. No tax should be levied the character and extent of which offer, as human nature is generally constituted, a greater inducement to the taxpayer to evade rather than pay.
The justification and wisdom of the above maxim find support in a lesser degree from argument than from experience, although the deductions from abstract reasoning ought alone to constitute its sufficient indorsement. It has been pointed out by Herbert Spencer that ideal men are possible only in an ideal state; and, conversely, that a perfect social state is possible only when every unit has achieved perfection. As this condition has not been attained, and until the "millennium" arrives is not likely to be, the inference is legitimate that a large proportion of mankind are not "decently honest," inasmuch as in every variety of business where opportunity for the perpetration of fraud exists, much labor is expended in guarding against dishonesty. This is specially exemplified in the case of railroads, "where tickets have to be dated, punched, and carefully collected to prevent their being used again by the masses."
But it is in matters of taxation that the largest amount of irrefutable evidence is to be found in support of the above maxim. Thus in the case of smuggling or the evasion of duties on imports, the experience of all governments and of almost all countries is to the effect, that when sufficient inducement in the way of gain from a violation of the law is offered, such statute can not be executed even when penalties as severe as death have been made contingent on individual arrest and conviction. But it has been reserved for that nation whose people claim to be the most law-abiding and intelligent, to furnish the most confirmatory evidence on this subject—namely, the United States—the Congress of which in 1865 imposed a tax on distilled spirits amounting to more than fifteen hundred per cent on the then average prime cost of production. The result was, that the Government was only able in 1868 to collect the tax on less than seven million gallons out of an annual product of certainly not less than fifty million gallons; which last, sold as it undoubtedly was at the current market price (tax included), left to the credit of popular corruption at least $80,000,000. The United States is confessedly one of the most powerful of nations and governments, but its entire military force can not crush the illicit traffic in refined opium, under a temptation of the realization of six dollars contingent on every pound of this commodity that is successfully smuggled into the country.
- ↑ The policy of payment of bounties for the encouragement of shipping and of shipbuilding enterprise has also, to a limited extent, been established, more especially by the two Governments of France and Italy.
- ↑ "The right of a state to take the citizen's property must be put on higher ground if it is to stand on perfectly safe ground. Of course, such higher ground is not to be found
- ↑ "The philosophy of our plan of voluntary political association is, that all individuals, and all the values within a community, shall aggregate into one mass all the power which they separately contain, which sum total shall constitute a sovereignty of the whole. This sovereignty—the soul of the State, which can not be impaired and the State survive—reflects back upon its constituents, in detail, all that it has received from them. What it receives, and what it returns, is of two kinds, as to both source and object, viz., individual service to the Government, and protection to the individual from it. Thus, in his individual capacity, a man is bound to perform military service, and the State, by the military arm, is bound to protect him from invasion. He is bound to do jury duty, and the authorities are bound, upon his demand, to provide him a jury. He is bound to aid the sheriff, and the sheriff is bound to execute process in his favor by posse comutatus, if necessary. These personal services correspond to those which in feudal times the mesne lord, holding a frank tenement, owed the lord paramount. They can not be compounded for, for their value consists in their being rendered in kind. Their performance is the only price which the citizen pays for his citizenship. The terms are not only consistent and harmonious with our general scheme of government, but are highly politic. To all political privileges we admit each one by virtue of his being a man, free born, and of lawful age; we ask him nothing concerning his property, unless his property asks something from us."—Lowrey, Argument, New York Assembly, 1862.
- ↑ The claim or argument in defense of extra territorial taxation will be more fully considered hereafter.
- ↑ Speech of Mr. Lowe, Chancellor of the British Exchequer, afterward Lord Sherbrooke.
- ↑ Lectures on the Constitution of the United States, Justice Miller, pp. 240, 231.
- ↑ Miller (Justice S.F.), ibid.
in the pretense that the right in question is the simple right of might; that the ruling power, whether monarch or majority, is physically able to take and apply as it chooses all that the individuals ruled over called their own; and that because it can, it morally may, take whatever part it thinks fit. With simple ethics the leviers of taxes, whenever they are a distinct class, are wont to content themselves. But whatever countenance they have received from such moral philosophers as venerate successful force, the principle will hardly serve those who study the matter as taxpayers."—Theodore Bacon.