Taxation remains the principal source of revenues for all modern governments, and one that is growing rather than lessening i in im portance. A tax may be defined, n John Fiske's alliterative description, as a °portion of private property taken for public purposes.° It must always be for a public purpose and it in volves the power of legal coercion on the part of the sovereign. Because of this characteris tic it is highly essential that a tax system be just and equitable. Probably no passage in the literature of finance is more celebrated than that in which Adam Smith stated his well known canons of taxation, which may be sum marized as follows: al. The subjects of every state ought to con tribute toward the support of the government, as nearly as possible in proportion to their re spective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
.2. The tax which each individual ought to pay ought to be certain and not arbitrary.
°I Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.
°hi. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.° In addition to these requirements of justice, certainty, convenience and economy, a satisfac tory tax system should also be productive of adequate revenues, and elastic or responsive to the needs of the government.
Some writers, as for instance the Physio crats of the 18th century, and the single taxers of to-day, argue that a simple system of taxa tion is preferable to a multiple system, and both of these schools have urged the substitu tion of a single tax on land or on land values for all existing taxes. It may be urged, how ever, that it is possible to realize the various ideals just enumerated, especially of adequacy and elasticity, only by a multiple or plural sys tem of taxation. Moreover, only by the employ ment of various kinds of taxes is it possible for a government to achieve other ends by means of the taxing machinery, as protection, regula tion of the liquor traffic, etc. All modern governments use a plural system of taxation, in some cases leaving but a few sources of revenue untapped.
The canon of taxation upon which most emphasis has always been laid by writers on public finance is that of justice. The first question that suggests itself in this connection concerns the relative duty of citizens to pay taxes for the support of the state. How shall the tax burden be apportioned among the tax payers? Two main answers have been given to this problem: the benefit and the ability theories of taxation. According to the benefit theory taxes should be apportioned among the citi zens according to the value of the services of the government to them — a sort of pay-as-you use plan. It is evident that an attempt to carry
out such a theory practically would result in imposing excessive taxes upon those least able to bear them; the defectives in our state in stitutions would bear the heaviest burdens. It may be observed, however, that every taxpayer should receive very real benefits from the gov ernment which he helps to support, and indeed unless taxationyielded such, benefits there would be no justification for it. This, however, is a very different thing from saying that the tax burden should be apportioned in accord ance with the benefits which one receives from the government. The more generally accepted theory is the so-called ability theory, according to which each citizen is expected to pay for the support of the state in proportion to his ability as compared with the ability of others. It is the application of Christian ethics to public finance. This is stated in the first canon enumerated above by Adam Smith. (In the observation or neglect of this maxim,' he went on to observe, (consists what is called the equality or inequality of taxation .° His suc cessors have carried on a lively debate as to what constitutes equality, and, particularly, whether a proportional or progressive rate of taxation corresponds most nearly with the de mands of justice. To a consideration of this disputed topic we may, therefore, next turn.
By a proportional tax is meant one that is levied at a constant rate irrespective of the amount of property or income from which it is paid. For instance, a proportional income tax of 2 per cent would exact always the same proportion of the income no matter how lax this might be: $20 if the income is $1,000, if the income is $10,000 and $20,000 if the in come is $1,000,000. On the other hand in the case of a progressive tax the rate increases as the amount of property or income to be taxed grows greater. Thus in the illustration given above the rate might be 2 per cent on incomes of $1,000 (tax would be $20), 5 per cent on in comes of $10,000 (tax would be $500 instead of $200), and 10 per cent on incomes of $1,000,000 (tax would be $100,000 instead of $20,000). Un der progressive taxation a relatively bigger slice of the large incomes in taken than in the case of the smaller incomes. The point at issue in determining the question as to whether propor tional or progressive taxation best accords with the principle of justice or equity in the distribu tion of taxation is whether a man's ability to pay is measured by the amount of property or income he enjoys, or whether his ability in creases at a rate more rapid than the growth of his property or income.