The modern tendency is to affirm the latter proposition and to make more general use of the progressive principal. In support of this view a few of the leading arguments may be briefly summarized.
Probably the most popular argument in favor of progression is that it tends to break up large fortunes and to equalize the distribu tion of wealth. This is doubtless the motive which has led to the approval of inheritance taxes in this country, but in few cases has the application of the progressive principle been drastic enough really to bring about a redis tribution of wealth. A second argument is the so-called equality of sacrifice idea: if the rich man is to make a sacrifice proportionate with that of the poor man he will have to give up a relatively larger per cent of his income, because as fortunes grow larger the utility of each dol lar grows less. According to this view the burden of the tax is measured by what is left after payment rather than by the payment itself. Another reason has been suggested by Prof. E. R. A. Seligman, namely, that a man's ability to acquire wealth increases progressively makes money' — and hence it is only fair to apply the progressive principle of taxa tion to rich men. Finally Prof. H. C. Adams urges that there will be a social gain if the very rich older men be discouraged from fur ther accumulation, and by withdrawing from active industry both give the younger men a chance and also devote their talents to philan thropy, social betterment, etc. Against the pro gressive principle is usually urged the familiar argument that it would discourage industry and saving, and hence mean an economic loss.
In the discussion thus far it has been as sumed that when the legislator imposed a tax he knew what its effects would be. Such, how ever, is not the case. Taxes are generally shifted by the person who makes the first pay ment to the public treasury by being inco rated in the price of the article taxed. The final resting place of the tax is called its in cidence. Two rather simple theories of shifting and incidence have been held, the one, the dif fusion theory, holding that wherever a tax is originally imposed it gradually diffuses itself throughout society; hence no tax is so good as an old tax. Another theory, which may be called the concentration theory, argues that the whole burden of taxation, no matter where originally placed, tends ultimately to he shifted upon some particular class or form of wealth; this was the idea underlying the impot unique of the Physiocrats. The actual shifting of taxes is, however, much more complicated than either of these theories admits. See article on TAXATION.
The actual tax system of any country is the result of a complex of historical, constitutional and political causes, and that of the United States is no exception. The Federal govern
ment has relied for the most part upon indirect taxes — customs and excise duties — though since the amendment of the Constitution in 1913 it has been able also to make use of an income tax, which has already grown heavier as the needs of the Federal government in creased. Three-quarters of the State revenues are derived from the general property tax, though the unsatisfactory and inequitable ad ministration of this tax has lead a number of the more progressive States to supplement or supplant this by corporation and inheritance taxes. The great expansion of municipal func tions has forced the cities to overhaul their tax systems and to impose heavier burdens upon municipal utilities in addition to real estate.
4. Public Credit—To say that a state makes use of public credit is equivalent to saying that a government borrows money. Public credit is a branch of general credit and like that depends upon trust or confidence. But the fact that a sovereign state is the debtor in the case of public borrowing differentiates a government bond from other securities. In the first place a state cannot be compelled to pay its debts; but in spite of this fact government bonds are eagerly sought after. This is because the mod ern state is compelled to maintain its credit un tarnished as it is almost certain to need to borrow again. On the other hand, the state has eternal life and hence can make perpetual debts; it has sovereign power to raise by means of taxation the funds for payment of interest and repayment of principal In 1820 it was estimated that the civilized governments of the world were resting under a burden of indebtedness amounting to $7,750, 000,000. By 1910 this had grown to $40,000, 000,000, and since the beginning of the European War in August 1914 these debts have prac tically quintupled. The growth of great public debts has been almost wholly a phenomenon of the 19th century, and has attended the develop ment of a money market and improved facilities, better means of communication and transportation and of modern constitutionalism. The cause of the national debts has been al most exclusively war and preparation for war; State and local debts are usually due to im provements and investments, though sometimes improvidence has occasioned them. In general there are three objects for which a government may properly borrow money. These are to cover a casual deficit, to meet a fiscal emer gency and to provide funds for industrial in vestment.