The Function of The primary function of taxation, therefore, is to raise rev enue. This may be declared to be the fiscal function of taxation. As a matter of fact, however, taxation has always been used for other purposes which may be declared to be secondary or incidental in character. Such a function may be declared the social, rather than the fiscal, function of taxation. Taxation has been at various times employed to check, to prohibit, to destroy or to foster economic ac tivity. At the present time, in the United States, for instance, we have a tax which com pletely prohibits the issue of State bank notes and certain kinds of future sales on the cotton exchange. We have a tax designed materially to check the import of opium. We have a tax which has' utterly destroyed the production of phosphorus matches. We have, or have had, taxes designed to foster or protect certain forms of domestic industry. In this respect there have been two extreme schools of thought, the one represented in the United States by statesmen like Calhoun or publicists like David A. Wells, who have contended that the only function of taxation is fiscal and that protec tion, for instance, means confiscation. The other extreme represented by certain socialists and by professorial socialists like Adolf Wag ner, have maintained that the primary purpose of taxation is to effect changes in distribution. A logical corollary of this position would be that no payment can be considered a tax unless it seeks to effect social changes. The more modern and more moderate position is that while the primary function of taxation must be the fiscal function, there is no reason for refusing to bring about, incidentally, through taxation, desirable :.ocial reforms that are recog nized as such by the community.
The Nature of Is taxation a good or a bad thing? Is it a benefit or an evil? Here again we have two schools of thought. The older writers, of whom Jean Bapuste Say is a good example, adopted the so-called consumption theory of public finance, and held that governmental functions ought to be reduced to a minimum and that the exercise of governmental power represents the unpro ductive consumption of the community. Tha consequence is that all government expendi tures should be reduced to a minimum and that, as it has been said, the best tax is the smallest tax. At the other extreme is found the state ment which is based upon the productivity theory of public finance. According to this the state is, or ought to be, the chief productive force in the community because, at all events, it is designed to lay the foundations for the exercise of all individual production. Every thing, extracted from the individual and spent by the government would from this point of view, as it has been put, return in a fertilizing shower to the community. Taxation would, .therefore, be the best form of investtnent.
Here again the modern position is midway between the two extremes. It is undeniable that a tax involves a burden or a sacrifice and in this sense it is something. which to that extent represents an evil. But it is equally true that the restilt of the tax is, or may be, to enable the government to accomplish something which is of undeniable advantage to the com munity as a whole, even though the particular benefit which accrues to the individual may not always be definitely measureable. The real question, therefore, is: what is the result of the expenditure or what does the government do with the tax? If the expenditure is a foolish or a wasteful one, if no care has been taken in limiting either the end or the means, there can be no doubt that the tax represents an evil. But if the object to be attained is
economically or socially desirable, if the money is economically spent and if the balance of the social advantage over the social sacrifice is clear —if, in other words, the government is effi ciently carrying out a wise mandate of the peo ple— then the tax represents a good and not an evil. To say that the best tax is the least in amount would bring us bacic to primitive savagery. On the contrary, the distinguishing mark of modern civilization is the growing pro portion betiveen the satisfaction of collective wants on the one hand as over against the satisfaction of individual wants on the other. The more civilized the community the greater, not only absolutely but relatively, will be the amount of taxation as compared with the total social income. While, therefore, it is by no means true that every tax is a good tax or that every expenditure is a wise expenditure, it is nevertheless a fact that in the sense indi cated above taxation is a good rather than an evil because it is a necessary means of accom plishing certain desirable political and social aims. The nearer, in other words, every tax comes to being an ideal tax, the more will it represent a balance of benefits over disad vantages.
The Limits of Even though taxation in the above sense may be declared to be good, there is another sense in which there is a definite limit upon the possible ad vantages of taxation. We have here to con sider taxation not, as above, in relation to the returns to be expected, but in relation to the source from which taxes are derived. It is a question not what do you do with the tax, but from what source do you get the tax? In other words, no matter how ideal in other re spects a tax is, it may impose too heavy a burden upon the community. The limits of taxation may be legal, political or economic. The legal limitations upon taxation are crea tures of positive.law. The government, in the United States for instance, is enjoined from levying a tax on exports. The State govern ments are prohibited from levying any taxes which will interfere with interstate commerce. Both State and local governments are fre quently enjoined from levying tnore than a maximum rate of taxation. The political limits of taxation may be illustrated by the provision of American law, that all taxes must be for a public purpose. The exact formula of what constitutes public purpose is somethin which has given great trouble to our judges and publicists. The economic limits of taxauon are seen when we reflect that the ultimate source of all taxes is the social income and that the demands preferred by government in the form of taxation may trench unduly upon this income. We have had numerous ex amples both of megalomania and of unwise ex penditure in the history of American finance, especially State and local finance. Not a few communities have even become bankrupt through the impossibility of raising sufficient revenue by taxation to defray the present and past expenditures of the community. In the last resort, the community, like the incfividual, tnust cut its coat according to its cloth. It may conceivably levy taxes up to the limit of the social income, but if it exceeds that income or trenches upon the capital-replacement fund of the community, it marks the beginning of a backward step in economic progress.