PROPERTY AND CORPORATION TAXES § 1. Importance of taxation as a public question. § 2. The general property tax; nature and difficulty. § 3. Ambiguity of the term "prop erty." § 4. Various temporizing policies. § 5. A consistent policy of wealth-taxation. § 6. Needed reform of assessment. § 7. Separation of state and local taxation. § 8. Federal taxation of commerce. § 9. Proposal of the single tax on land values. § 10. Various reforms in land taxation. § 11. Difficulties in taxing corporations. § 12. Special taxes on banks. § 13. Special taxes on insurance. § 14. Special taxes on transportation. § 15. Alternative policies in corporate tax ation. § 16. General plan for corporate taxation.
§ 1. Importance of taxation as a public question. The discussion of taxation has accompanied the growth of free government in England and America from the time of Magna Charta. The control of the public purse has been found to give the key to political power, and therefore it has frequently become the occasion of conflict between the monarch and the people. But in our own national history, since the adoption of the Constitution, taxation has not had a leading place in politics except in the one aspect of the tariff. The constitu tional question of states' rights long absorbed most of the in terest of citizens and of legislators. But, with the quickened attention of the public to economic questions, the problem of taxation became of increasing importance.
It has come to be recognized that taxation can be made to play, and is bound to play, a leading part as an agency in the distribution of wealth, and thus it is the center of much of almost every proposal of social change and betterment involves the ardent controversy regarding social reform. Ultimately, some cost. The question then must be answered, Who is to receive the benefits and upon whom and how shall new taxes be levied to pay the cost? Further, it is often urged that this result of taxation in redistributing incomes is in itself (or can be made) a virtue ; and some even see in tax reform the answer to the largest social questions of our time. We are now to take up a few of the more important problems of taxa tion, to see the difficulties, and to suggest the direction in which their solution is to be sought. The tariff having been already separately considered, the chief kinds of taxes we have here to treat are property taxes, general and special, and inheritance and income taxes.
§ 2. The general property tax; nature and difficulty. The general property tax is a tax of which the rates both of assessment and of levy are uniform and equal in proportion to the value of all (or nearly all) property in the taxing district.' There are always some exceptions of certain kinds of property, or of the property of certain persons, or of prop erty and things put to certain uses—public, educational, religious, and charitable in their nature.
The federal government levies no general property tax, but the other branches of government 2 receive about three fifths of all their revenues from it.
At first view nothing would seem to be simpler and juster in principle than such a plan of taxation; but those who have most carefully studied its practical operation, almost with For example, the, constitution of Alabama declares: "All taxes levied on property in this st.tte shall be assessed in exact proportion to the value of such etc. And the constitution of Indiana de clares: "The general assembly shall provide, by law, for a uniform and equal rate of assessment and taxation of all property, both real and personal, excepting," etc. Similar statements occur in most state constitutions.
2The general property tax in the United States constitutes: Of the revenue receipts of the states 38 per cent.
Of the revenue receipts of the counties 78 per cent.
Of the revenue receipts of the incorporated places-80 per cent.
one accord pronounce it to be a "dismal failure." The chief reason assigned for this failure has been that the assessment of the tax is imperfect and incomplete because of the in competency or dishonesty of officials. The usual thought is that if all property could be justly assessed the plan would be excellent. Undoubtedly the difficulty of just assessment has its part in the weakness of the tax ; but back of and more important that this is an inherent fallacy in the apparently simple principle of the tax.
§ 3. Ambiguity of the term "property." Unfortunately, the word property is applied, even by the most competent courts, both to the intangible right of ownership (the funda mental meaning) and to the concrete thing that is owned, the source of the income.' But apparently the value of the right to the income yielded by a house, for example, is merely the value of the house. The value of the property in the 0114 sense (the abstract ownership, the intangible right) is merely a reflection of the value of the property in the other sense (the concrete wealth). There are not here two independent bodies of economic wealth. Whatever value belongs to the one is subtracted from the other. Nor is it rational to take the paper document called a deed (which is but the evidence of ownership) and call it tangible property having a value in addition to the house itself. Yet, in fact, all these confusions are constantly made in taxation. The term "intangible per sonal property" is applied to such things as mercantile credits, promissory notes, bonds—in general to ?e right to collect sums from another person, whether these rights arise out of sales or of loans—and all are treated as parts of taxable property. Sometimes the evidences of indebtedness, the promissory notes or the mortgage papers, are even called tangible property, the same term that is applied to land, houses, and machinery. By universal practice supported by a long line of court decisions, these rights (whether evidenced by paper or not) are made subject to taxation, except as by 8 See Vol. I, pp. 264-267, piecemeal legislation certain grudging exceptions have been made. These views and this practice are supported by the popular desire to tax money-lenders. The result is "double taxation" of many sources of income. This involves a burden that is ruinous in some cases, both to borrowers and to lenders, and that tempts in all cases to the evasion of the tax.
Take, for example, a house assessed at $10,000 which is owned free of debt and which has a rental value of $600. If the rate of taxation is 1.5 per cent, the tax paid would be $150. Now if the owner borrows $8000 he is still taxable $150 on the full value of the house, and the lender nearly everywhere is taxable on the amount of his mortgage, which would be $120 additional. The total tax payable out of the one source of income, the house, is then $270. The same analysis will show that any credit is but a contractual claim upon some other source of income which is, or should have been, already taxed.
If one person owns all the capital-value invested in a specific piece of wealth, no attempt is made to tax both the capital and the wealth; but if it happens that two or more persons share the capital-value invested in the same wealth, the attempt is made to tax as a unit the full value of the wealth and, in addition, some part of the capital also. It is, however, easy in most cases to conceal this "intangible prop erty" from the assessor's eyes, and a comparatively small amount of it is ever taxed. This means inequality and hard ship in the operation of the tax and, as a result, unceasing temptation to perjury by the taxpayer and to favoritism and graft by public officials.
Another policy is to maintain the general principle, but to make exceptions here and there. Usually the excep tions are made just at those points where the law would with earnest effort be most easily enforceable, and therefore where it has become most inconvenient. As a result of these changes the state laws display a bewildering and illogical variety. By constitutional interpretation, United States notes and federal bonds are exempt from state and local taxation ; gen erally, by state law, building and loan associations and savings bank loans are exempt, as, in a majority of states, are state and municipal bonds if held within the state. In at least eight states, bonds of the state are exempt, but those of the munici palities are taxable, while in a few states the reverse is the case. In several states both kinds of bonds, when issued after specified dates, are exempt, but in Ohio state bonds are exempt only if issued prior to 1913. All but seven of the forty-eight states, however, attempt to tax the resident holders of state and municipal bonds of other states; but the exceptional states are those in which most of the investors in this class of securi ties reside. In many cases private debts receivable are al lowed to be offset against debts payable. In some states mort gages on real estate are exempted or (in Massachusetts) treated as an interest in the real estate. Rarely mortgages are ex empted up to a certain amount (in Indiana to $700, the pur pose being to tempt the borrower to reveal the name of the lender). Sometimes a special mortgage registration tax, payable but once (New York Y2 of 1 per cent), is levied, and otherwise mortgages are free from taxation. Small as this rate is, the fiscal yield under this plan exceeds that for merly obtained from mortgage taxation under the general property tax.
By the overlapping of these laws, so contradictory in prin ciple, it may happen that securities held by taxpayers residing in other states than those of the issue are taxable two or three or more times; but few if any loans of this kind are made except by those evading all taxation.
The wealth basis is much nearer to the present general property tax as actually administered. The assessment of general tangible wealth would undoubtedly be more easily done than would that of individual capitals, and likewise be both easier and juster than the present inconsistent policy. Tangible things are comparatively easy to find, measure, and evaluate where they are, and if they are all taxed it is evi dently the same as if all the capital values based upon them were taxed in the owners' hands. The various equitable claims of different owners in one source of income could be left to adjust themselves through shifting, mainly in the choice of investments, once the plan had become generally applied.
In legal theory a distinction is sometimes made between qualified and unqualified rights of property. Unqualified property covers all the rights of ownership in a specific piece of wealth, for example, in a house and lot held in fee simple and unencumbered; qualified property is any portion of the total as modified and limited by another's right; for example, the rights of a mortgagor and of a mortgagee in the house are both qualified. The application of these conceptions to questions of taxation would have led legislators and judges to a very different understanding of the general property tax, quite like that above suggested. And this way out of the present difficulties is open to any court that will use it. But, unfortunately, as far as appears, the courts in deal ing with the subject have failed to recognize the usual qualified nature of property rights.
§ 6. Needed reform of assessment. The assessment of the present general property tax is in many communities notoriously inefficient and unjust. The root of most of the present evils (other than those above discussed) is the method of local election of assessors, which usually is by townships, but in some cases by counties. The local assessor's estimate of value is used as a basis for taxa tion not only for his district but for the larger units (county and state). Thus every local assessor is tempted by the conflict of interests not only among the taxpayers in the district which elects him, but by the conflict of interests between his district as a whole and other districts. The lower the ratio of assessment to true valuation in any township com pared with that of the other tax districts, the smaller the pro portion of county and state taxes that the people of the district have to pay. Willingness to under-assess property often be comes thus the chief virtue of an assessor in the eyes of his political constituents. This has led in many cases to absurd under-assessment, which boards of equalization have proved powerless to remedy in any great measure. A sounder plan would be general state assessment, with a permanent expert board of commissioners employing a corps of state assessors under the merit system of appointment. This plan has as yet been applied only to assessment of railroads and some other public-service corporations.
§ 7. Separation of state and local taxation. For the rea son just indicated the failure of the general property tax has been most conspicuous where it is used as a basis for state taxation. This has led some financial students to advocate the plan of separation of state and local taxation. This means the assignment of certain sources of revenue (such as corpora tions and the liquor business) primarily or exclusively to the state, leaving all real estate and the general property of non corporate persons to be taxed by the counties and minor divi sions under the general property tax. The plan has been increasingly applied in New York, until, in 1906, it became almost complete. In 1910 the plan was adopted in California; and it is largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, and to a small extent in some other states. An efficient state assessment of general wealth would accom plish most of the advantages claimed for this plan, while avoiding some of its dangers.
§ 8. Federal taxation of commerce. Customs and in ternal revenue (including the income tax) constitute the chief revenues of the federal government. Unlike the gen eral property taxes, these are not levied upon the main body . of wealth held in possession, but upon income as it accrues or upon articles of merchandise in course of trade and upon business activities. Stamps on receipts, checks, deeds, bills of sale, and licenses on the sale of liquor and tobacco are taxes on business acts which are necessary to the acquisition, use, or expenditure of wealth. Goods imported are taxed at the time of entering the country ; domestic prod ducts, such as cigars, spirituous or malt liquors, playing cards, and (at times) matches, pig iron, and other products, are taxed usually at the time of exit from the factory.
It has already been shown that when the tariff duty pre vents the importation of foreign goods and by raising the price encourages domestic manufacture of the article, there is virtually taxation of the consumer to subsidize the private manufacturer. A system of properly adjusted compensatory duties (tariffs and internal duties combined) which would prevent tariff duties from having any prohibitive effect could, in a great country like ours, be made to produce any revenues desired. Such a system, combined with the federal income
tax, seems destined to be the chief dependence for the national government.
The increasing needs of revenue between 1913 and 1920 led to the development of many forms of federal taxation on business. The most important of these, under the names of the taxes on corporate incomes and excess profits, will be more fully discussed with the income tax, with which, though of a different nature, they have been closely con nected in legislative development.
§ 9. Proposal of the single tax on land values. Besides the general property tax, there are found in the country as a whole a large number of special property taxes. Some of these have been introduced as substitutes for the general property tax; such is the special taxation (above referred to) of mortgages, and bonds. Other special property taxes have been introduced because they were believed to be good in themselves; such are special franchise taxes on corporations and some kinds of taxes on land. A much more drastic policy of special taxation of land, or of land values, was proposed by Henry George and has been advocated by his followers since the publication of his remarkable book "Pro gress and Poverty" in 1879. The doctrine there set forth is that the state should "appropriate land rent by taxa tion," should "tax land values, irrespective of improve ments." It is maintained that a "single tax" of this kind would be quite sufficient for all the purposes of government. The main arguments adduced for this plan may be reduced to three propositions: first, private prop erty in land is essentially unjust, because land is made by nature, not by man; second, the plan would make assessment simple and certain by lim,iting it to the unimproved land and making unnecessary the more difficult assessment both of tangible improvements and of intangible personal property; and third, it would work a marvelous reform in social con ditions, abolishing poverty and greatly increasing produc tion.
It is impossible within our limits of space to discuss this proposal further than to indicate that: (1) It assumes an un tenable theory of property.' (2) It overlooks the difficulty of distinguishing the value of the land, "irrespective of improve ments," from that of the land as it actually is, a difficulty especially great in the case of agricultural lands The diffi culty is present even in the case of urban land when the im provements of filling, draining, and leveling have become in corporated with the site!' (3) The plan ignores the stimulus (motivating force) which private ownership has given and still gives to the maintenance and fuller productive use of land. Nowhere has production thriven where the state was the uni versal landlord.
§ 10. Various reforms in land taxation. While the single tax plan is defective in principle, its wide discussion has served to direct attention toward the need of reform in the taxation of land. Some proposals looking toward this end are widely favored by opponents as well as by advocates of the single tax. Such are the following: (a) The abandonment of the taxation of mortgages."' (b) A more correct assessment, in accordance with the pres ent laws, of lots and lands held for speculative purposes, which in usual practice are now greatly under-assessed.
(c) More adequate special franchise taxation upon corpora tions for special privileges in the public highways.
(d) Exemption, in value equal to the costs, of improvements 4 See ch. 32.
6 See Vol. I, pp. 116, 117, 145, 445-455. 6 See Vol. I, pp. 117, 148, 453.
on land, such as buildings, drains, fences, and fertilizers, for a limited time after they are made, perhaps five years.
(e) The separate assessment of urban lands used as mere building sites and of the buildings on them.
(f) Taxation of the increase ("increment") of urban land values, periodically or on the occasion of transfer of owner ship.
and results in confiscation in many cases. Between this doubt and the practical difficulty of assessment, it turned out that corporate wealth, far from being doubly taxed, was largely escaping even its due single burden.
§ 12. Special taxes on banks. Attempts to deal with the difficulty without clear perception of its cause took the form of legislative tinkering and patching. Taxes were gathered from corporations by any device that seemed workable. The banks, being the earlier important corporations, were first experimented upon. Taxes on capital stock and on circula tion were tried first (in 1805, by Georgia), then a tax on divi dends (in 1814 in Pennsylvania, and in 1815 in Ohio), ex amples that were followed or modified by a number of states. After the national banking system was started in 1864, at tempts to tax both the capital of the banks and the stock in the hands of individuals led to federal court decisions and then to state legislation, by which now in many of the states the banks are separately taxed on their real estate and the shares are assessed to the individual holders (by various rules), but the taxes deducted from dividends and paid by the bank. There are, besides, special franchise taxes and fees paid by banks in various states.
§ 13. Special taxes on insurance. Insurance companies present in a striking manner the complexities of the am biguous property concept. The assets of the insurance companies (we refer here particularly to the reserve com panies), which belong in equity to the policy-holders (less the claim of the stockholders in the case of the stock companies), are nearly all invested in stocks and bonds of corporations and in mortgages on real estate. Now, under the general property tax, strictly interpreted, the policies are assessable at their surrender or reserve valuation in the hands of the policy-hold ers ; secondly, the securities and credits that compose the assets are assessable to the company ; and, thirdly, the railroads, factories, and houses, built with the outstanding loans made by the insurance companies, are assessable as tangible wealth to the various owners (individuals or, usually, corporations) of the wealth. Even more complex problems may and do arise. If such an interpretation were practically enforced it would result in double or multiple taxation levied upon the same economic source, and would be utterly prohibitive of the insurance business. The enforcement has, however, been impossible in practice. Insurance companies have comparatively little tangible wealth excepting real estate for offices. This is taxed locally. Several methods have been tried (beginning as early as 1824) to make insurance com panies pay taxes (usually for state purposes) on something besides tangible wealth. A tax on receipts from premiums proved most workable, first as applied to "foreign corpora tions" (that is, to those of other states) and later, generally, to domestic companies also. Now, amid bewildering variety and interstate rivalries in tax laws, the most usual rate is 2 per cent on gross (in a few cases on net) premiums collected. The taxes on premiums, with various licenses and fees, now amount to 2.15 per cent of the total receipts from life insur ance premiums in the United States. This is taxation not on an existing body of accumulated wealth, or upon income, but upon the process of accumulation, a tax directly on the act of saving. A consistent policy of wealth taxation, combined with income taxation, would require the abandonment of the present forms of special insurance taxes.
§ 14. Special taxes on transportation. Another great group of businesses whose taxation has been especially com plex, because they are distributed throughout different taxing districts, are agencies of transportation and communication, especially railroad, sleeping-car, express, telegraph, and tele phone companies. A state tax on railroad tonnage (Pennsyl vania, 1860) was declared unconstitutional by the United States Supreme Court. But many other plans have been tried to compel the railroads to contribute, the chief being by taxes on dividends, gross earnings, equipment, and valuation of capital stock, taxed either to the company or to the stock holders, (Connecticut since 1849). About a third of the states no longer make the physical plant the basis of taxation, ex cept that in most of them some part or kinds of real estate are taxed Telegraph companies are still locally assessed in most states, but in more than a third of the states are taxed either on gross receipts or on mileage of wire. Telephone companies are sim ilarly taxed, but sometimes on the number of transmitters, or of subscribers, or on each plant, or otherwise. In a similar manner, express and sleeping-car companies are taxed, in the same group of states, on mileage, or on capital stock propor tional to mileage, or by license and privilege taxes.
In the case of these corporations, and also of various other miscellaneous kinds of companies, no clear-cut principles serve to guide. The result is "a chaos in practice—a complete ab sence of principle." 10 § 15. Alternative policies in corporate taxation. If the taxation of corporations is not to continue to be treated in a mere hit-or-miss manner, with every possible kind of incon sistency among the various states, some general principles must be recognized and some clear policy be formulated. But there is no general agreement to-day among jurists and econ omists upon a definite and consistent plan in this matter.
Two alternative policies appear. The first is to make the scheme for taxing corporations quite different in principle and plan from that for taxing natural persons. The assump tion in this is that the "general property tax" is an irreme diable failure, and is particularly inapplicable to corpora tions. This plan goes along with the separation of state and local An unfortunate result of this is to relieve the great mass of taxpayers of the state from any apparent 9 E. R. A. Seligman, "Essays on Taxation" (1895), p. 150.
10 Seligman, op., cit. p. 136.
and measurable part of the tax burden for state purposes, and thus to separate responsibility and power in state government. This policy nevertheless is favored by some of the leading au thorities on finance.
The other policy is to tax the wealth and business of cor porations (excepting those enjoying special privileges) in essentially the same way as other wealth and business. The improvement of corporate taxation would thus be but a part of the transformation of the "general property tax" into a general tax on tangible If first there is recognized the error of assessing the equitable ownership interests in ad dition to the body of wealth, and secondly there is created an efficient agency of assessment, the taxation of corporations can be logically and easily brought into accord with a harmonious system of state and local taxation.
The assessment feature of this proposal is exemplified more nearly than anywhere else, though still imperfectly, in the "Indiana plan." By this all the wealth of the corporation is assessed as a whole, but the shares of corporations are not taxed in the hands of the shareholders.
§ 16. General plan for corporate taxation. The main features in such a plan of reform would be as follows: (a) State assessment: assessment of all wealth by state agency, with expert non-local assessors, appointed and serv ing only under the merit system.
(b) Unit rule: the assessment of the value of each enter prise and body of wealth as a unit for the whole state, and apportioned to the minor divisions as the basis for levying local taxes.
(c) Mileage rule: apportionment of the total value in the state among the localities by general rule, in the case of trans portation and transmission companies, by mileage with due regard to the presence of local real estate and of special in dustrial equipment such as repair shops and power plants.
(d) Interstate comity: taxation of interstate enterprises only in due proportion to the whole business, by mileage or other rules; interstate comity to be further developed in this matter.
(e) Intangible factors in unit valuation: account to be taken, in assessment, of various factors determining the earn ing power, such as good-will, patents, and other monopolistic elements, pertaining to and helping to determine the value of the tangible plant of the enterprise.
(f) Securities not separately taxable: account to be taken of the market value of securities and notes owned by a cor poration, in determining the taxable value of the whole busi ness, but these not to be treated as a separately assessable "property" (in addition to the tangible plant).
(g) Investors exempt on normal tax : exemption of the holders of securities and evidences of indebtedness of corpora 1 though this need not prevent a supplementary system of graduated taxation on incomes )1' (h) Special franchises: treatment of special privileges granted to public-service corporations for the use of streets and public highways on the principle of rent-payment to the community rather than by levying a percentage on an assess ment.
13 See ch. 19, II 11. REFERENCES.
Bullock, C. J., Selected readings in public finance. Bost. Ginn. 1920.
Compton, W. M., Recent tendencies in the reform of forest taxation. J. P. E., 23: 971-979. 1915.
Hamilton, W. H., Readings in current economic problems. Univ. of Chi. Press. 1914. Pp. 560, 581.
Jorgensen, E. 0., One hundred Reasons for the Single Tax. Chicago. The Chicago Single Tax Club. 1920.
Post, L. F., The taxation of land values. Bobbs-Merrill. Indian apolis. 1915.
United States Bureau of Corporations, Report on the taxation of corporations. Pts. I-IV. 1909-1912.
Young, A. N., The single tax movement in the United States. Princeton Univ. Press. 1916.