Property and Corporation Taxes

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.

§ 5. A consistent policy of wealth-taxation.

These excep tions still leave the law in its general principles as to the taxa tion of intangible property illogical and unjust. A solution can be found only by abandoning the ambiguous legal concept of property and making use of economic concepts. A con sistent tax law might take either wealth or capital as the basis of assessment, but not sometimes the one and sometimes the other. Wealth is an impersonal basis of taxation; each piece of wealth might be taxed once as a unit no matter how the ownership were divided. Or the other alternative might be chosen. Capital would be a personal basis of taxation ; each person's capital might be taxed, no matter from what sources the incomes were derived (the concrete wealth, of course, then being left untaxed).

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.