The common practice, however, of taxing property incomes at a higher rate hardly rests on this ground. It rests probably on the same attitude toward social problems as the common acquiescence in progressive taxes—on a half-unconscious admission that justice does not call for identical treatment. Property incomes stand for the leisure class—for those who contribute nothing directly to the community's resources but live on secure income-yielding possessions. The thick-and-thin defender of the existing order will indeed say that these incomes are as just as the incomes of those who now work. Interest and rent are as worthy and as defensible as any other sorts of income, and discrimination against them by higher rates of taxation is an illogical admission of lack of justification. The contention is as unanswerable as is the similar argument against progressive taxes on the rich. Nevertheless most persons, tho they do not formulate their conclusions with care or accuracy, feel that somehow incomes derived from labor do have a more solid justification and that the leisure class incomes do stand on less defensible ground. It may be right that some fortunate individuals, and their descendants forever, should live in leisure, without doing a stroke of work. But this does not seem right in the same degree as "earning" your living. Hence, tho complete confiscation of property incomes, thru taxation or any other machinery, would be condemned by the average man as "dishonest" or "socialistic," some concession to the critical and reforming spirit is made by approving higher taxes on such incomes. Unless there be concession of this sort and on this ground there is no logical basis for the general application of a lower rate of taxation on labor incomes.
Any conclusion, then, in favor of progressive taxation and higher taxation of property incomes must rest, to be consistent, on a frank admission of unwelcome features in existing society and on a program of social reform. The only question will be whether this particular mode of reform, thru taxation, is likely to work well, whether it may not bring evils in its train, whether other ways toward the same end are not better. And here there are serious reasons for proceeding with great caution.
Some difficulties of administration which stand in the way of applying progressive scales will receive attention presently. They vary with different sorts of taxes, as will appear on a consideration of particular levies. Let attention be given first to some questions of principle.
Progressive taxation, so far as it aims to correct unjustified inequalities, evidently deals with results not causes. It is obviously better to go to the root of the matter and to deal with the causes. A more effective and promising way of reform is to promote the mitigation of inequality in other ways—by equalization of opportunity thru widespread facilities for rational education, by the control of monopoly industries, by the removal of the conditions which make possible illegitimate profits. Progressive taxation, which deals with income (or property) solely according to size and not according to social desert, is less discriminating and also less effective in reaching the ultimate goal than the various ways of diffusing material welfare which have been considered in the preceding pages.
It may seem a simple matter to apply the principle of progressive taxation on the basis of the character of the income; to make the rates progressively high, not in all cases where the income is large but in those cases where income is made large in objectionable ways. The principle
seems clear enough: are the inequalities such as induce activity that is advantageous to the community as a whole? Given the institution of private property, with all the motives and ambitions which are part of it, a great range of inequalities is in this sense advantageous. On the same ground interest is not to be dispensed with, nor that return for natural agents which is indistinguishably commingled with interest. Salaries, professional earnings, business profits in the strict sense, are inseparably associated with the exercise of their faculties by those who earn the incomes. The fullest activities are promoted by letting them earn all they can; and the greater the competition thus promoted between them the more likely is it that the community will be amply supplied with useful services. Tax no such incomes on the ground of their size.
But to earmark the incomes thus "legitimately" large and to distinguish them from the "illegitimate" incomes is an extremely difficult matter. The law must deal with unmistakable facts; its specific provisions cannot be based on general principles and rough approximations. On the other hand the conclusions of economic science, above all on the great social questions, are essentially in the nature of rough approximations. What, for example, are "illegitimate" profits? How define them in such manner as to make them subject to special taxation? We may be certain that there are such gains, the results of chicanery, swindling, brow-beating of the weak and inexperienced. How separate them sharply from the profits secured in ways advantageous to the community and in accord with its accepted standards of right conduct? To apply any sort of discriminating taxation without bearing also on the springs of energy and enterprise is impracticable. The best course is to deal with the causes: to protect the weak, to elevate the plane of competition, to improve the law, to prosecute remorselessly the guilty.
Certain kinds of property income are marked off more sharply than others as not essential for the working of the individualistic system and therefore peculiarly fit for taxation. Such are urban site rents, or rather those accretions of future site rents which are not within the principle of vested interests. Monopoly profits are in the same class. Often, it is true, they are as difficult to define with the necessary precision as are "illegitimate" profits. How separate high gains due to enterprise and good management from those arising purely from monopoly? Yet there are cases when this can be done; as where a bank is given the monopoly of note issue or a street railway or gas company the monopoly of serving a city. Then it is clearly proper to provide that profits above a given rate of return on the investment shall be divided with the state. The amount going to the state in such case may be entitled a "tax" or a "share." The name is immaterial; it is in essence a levy on a certain kind of income, justified by the principle of removing inequality which brings no offsetting social gain.