The courageous advocates of progression base their views precisely on the ground that the existing social order is not perfect and that taxation should be one of the instruments for amending it. Even tho it be an open question whether all inequality in wealth and income be unjust, such great degrees of inequality as the modern world shows are regarded as not consonant with canons of justice. Very rich persons should be called on to pay taxes not only in proportion to their incomes but more than in proportion. This proposal has been called socialistic; and it is, if all measures looking to mitigation of inequality be so called. Those who hold it place progressive taxation in the same class with free education, factory legislation, regulation of monopolies, extension of government management— measures all of which are based on a desire to improve the social order in the direction of less inequality. The extent to which they are willing to go with progression no doubt depends on the degree of their fervor for social reform in general; nor are they themselves able to give a precise answer to the question often asked, how far is progression to go? Their opponents have urged, to use a much-quoted phrase of McCulloch's, that when once you diverge from the rule of proportion you are at sea without rudder or compass. The same difficulty might be urged against all sorts of movements for reform. Few except the rigid and extreme socialists have clear notions about their ultimate goal. It suffices for the average man to know in what direction he is moving. Most persons in the advanced countries of modern times, tho they have very hazy ideas about taxation and socialism and economics in general, will instinctively declare it "right" that the rich should contribute to the public burdens, as compared with the poor, not only in proportion to their incomes but more than in proportion. In so saying they show that influence of the spirit of the time from which none of us can escape.
Sundry phrases have been used, embodying supposed principles of taxation, which fail to face this fundamental problem. It is often said that taxation should be based on "ability" (the Germans use the word Leistungsfdhigkeit) or on "faculty." Yet it is by no means clear either that this principle conforms to economic justice or that it leads to any certain conclusion on the crucial point—proportion or progression. No doubt the rich man's ability to pay is greater than the poor man's. Does it follow that he should pay more heavily toward public charges? His ability to pay for bread and coal is also greater; yet we accept it is a matter of course and as reasonable and just that he should pay for them at the same prices as persons of small income. It may be questioned whether this be really just— whether the strong and efficient, the fortunate and favored, should be in a position of economic advantage. But such is the way of the modern world under the regime of private property. Why, under that regime, should an entirely different principle be applied in regard to taxation? Can the principle of "ability" be declared abstractly just without maintaining also that our economic system is in general unjust? In any case the principle of ability leads to no clear conclusion on the question of progression. Granted that the rich should pay on the basis of ability, the question remains, how is that "ability" to be measured? Does their ability increase in exact proportion to their incomes or more than in proportion? Those who advocate ability or faculty as the just principle for apportioning taxes usually come to a conclusion in favor of progression. Yet their principle does not necessarily lead to that conclusion. They are influenced, tho not always consciously, by an underlying belief that the rich in general are in an unduly favored position and that it is therefore equitable to apply to public charges a different rule from that which holds in other affairs.
The same sort of difficulty, and the same inevitable harking back to the fundamental questions of social justice, arise from another phrase much used in these discussions; namely, that taxes should be so levied as to bring "equality of sacrifice." Unflinchingly applied, this principle would lead to high progression in taxation. Take away half the income of a poor man and the sacrifice imposed on him is vastly greater than when you take away half the income of a millionaire. In the case of the poor man taxation at this rate would exact what is essential for life or for meager comfort; in that of the rich man only the means for luxury and ostentation. To bring about equality of sacrifice you must take away a much larger proportion from the millionaire. The fundamental question recurs: why equality of sacrifice here when in other matters no such rule is followed? Efficiency, not sacrifice, is the dominant principle in existing distribution. Problems of taxation can arise only in communities founded on individualism and private property; and to apply in these a principle of equality of sacrifice is to admit that the working of individualism is not to one's liking—that is, to undertake in this regard at least a change and a reformation.
This same insistent question presents itself with regard to another much-debated point: whether property incomes shall be taxed at the same rate as labor incomes. In the literature on taxation the terms "funded" and "unfunded" incomes are much used. Funded incomes are those derived from income-yielding property—interest or rent or established monopoly gains. Unfunded incomes are salaries, wages, business profits, professional gains. I shall speak of them as property incomes and labor incomes respectively. The former last indefinitely; the latter cease at latest with the lives of their holders. Should they be taxed at the same rate or at different rates? The difference in duration between the two gives no solid reason for discrimination. If it be said that the property incomes, because lasting longer, are really larger, the answer is that the tax too lasts longer. If the income lasts forever, the tax will go on forever. There is indeed, in one respect, a substantial difference in the weight of taxation; the holder of the labor income is in many instances under a moral obligation not to use the whole of his income but to save some considerable portion. What he puts aside for the future use of wife or children is virtually no part of his present income. It will become later a part of the income of the dependents. If it is taxed now and is taxed again when it reaches the beneficiaries; or if, after it has been invested, an income from it inuring later to the beneficiaries is taxed in their hands—then there is double taxation of the same income. The holder of a property income may indeed do the thing and his savings also may become the occasion of double taxes; but he is not so likely to put aside part of his present income, since this passes on, presumably undiminished, to his heirs. On such grounds countries which levy an income tax often permit the deduction, from the amount prima facie taxable, of certain sums paid out for life insurance premiums. The sums so allowed to be deducted are limited and only unmistakable savings out of income (evidenced by insurance premiums) are considered; precautions of this sort being necessary to prevent the mitigation from becoming a means of evasion. But the principle of lesser taxes on labor incomes is thus recognized, and recognized on the precise ground of not taxing such sums as are no effective constituents of present income.