Differentiated The principle of faculty in taxation results not only in gradu ated taxation but in what is called differentiated taxation. Graduated taxation implies a change in the rate according to the amount of the in come of property; differentiated taxation im plies a change in the rate according to the kind of income of the property. The chief example of differentiated taxation is the distinction be tween what Great Britain calls earned and un earned incomes, i.e., taxation from property at a higher rate than income from labor. Other countries, however, like Italy, pursue the idea somewhat further and distinguish between property incomes, mixed incomes and labor in comes,— mixed incomes being incomes from business where both capital and enterprise are needed. The Federal income tax of the United States embodies the principle of graduated taxation, but has not yet accepted that of dif ferentiated taxation. Where the distinction is made in the property tax rather than in the income tax, we are in the habit of calling it classification of taxation rather than differen tiation of taxation. The movement for a clas sified property tax in lieu of the general prop erty tax is making great headway in the United States. Classification for purposes of taxation has been upheld by the United States Supreme Court as involving no derogation from the con stitutional principle of uniformity or equality of taxation.
Principle of The other out come of the doctrine of faculty is universality of taxation. Equality of taxation means among other things that all people should bear their burdens; that everyone should be taxed, and that no one, in contradistinction to his neigh bor, should be taxed more than once. The modern world permits exemptions from taxa tion, but modern exemptions are different from those of former times. The mediaeval exemp tions were class exemptions and were, therefore, reprehensible. Modern exemptions rest upon presumed lack of ability to pay or upon con siderations of public policy. They are-per mitted, not primarily for the benefit of the indi vidual, hut for the benefit of the community. While, with the exception of these justifiable exemptions, everyone should be taxed, it is equally important to avoid double taxation. Double taxation, or duplicate taxation, is of two kinds. It may be imposed by the same jurisdiction or by competing jurisdictions. An example of double taxation by the same juris diction is the simultaneous taxation of property and income. Ordinarily, to tax property is vir tually to tax the income of the property. To tax the income again will then be double taxa tion. Where the purpose is to distinguish between earned or unearned incomes or to se cure differentiation of taxation, where, in other words, the design is to tax property incomes more than other incomes, this form of double taxation is legitimate. Another example of double taxation is to tax the corporation and also the shareholder or to tax both the property and the mortgage on the property, because under the ordinary conditions of American life a tax on the lender will be shifted to the bor.
rower so that the borrower will pay the tax not only on his own property but on that .of the lender. Double taxation by competing- ju risdictions is found when the same Individual or piece of property is simultaneously taxed .by different jurisdictions. An Englishman receiv ing his income from an American business may be taxed in the United States because 'the income is earned there; and taxed in Great Britain because he resides there. An American who dies in one State owning railway shares deposited with a trust company in another State, the chief office of the railway being in a third State and the railway line itself running through a fourth State, may conceivably be subject to taxation on the same property in all four States. The avoidance of such double or multiple taxation is possible either, on the one hand, by international agreement or the exer cise of interstate cotnity or, on the other hand, as in some federal govertunents, by a federal law or ruling which apportions the tax. among several states according to equitable pnnaples.
Classification of There are many different ways in which taxes can be classi fied, according to the criterion employed. If emphasis is put upon property in which taxes are paid, we have taxes in kind and taxes in money. If the criterion is frequency of pay ment, they may be classified in terms of ordi nary and extraordinary taxes. If the criterion is the rate of taxation, we may distinguish be tween apportioned and percentage taxes. A percentage tax is a tax like the income taic where the rate or percentage is lcnown in ad vance; an apportioned taxkis a tax like the real estate tax in the United Sfttes where the rate is arrived at as the result of an apportionment According to the mode of levy, we may distin guish between taxes on persons and taxes on things. According to the method of measure ment we may distinguish between assessed.and expenditure taxes. or between taxes on acqui sition, on possession or on consumption. Ac cording to the methods and results of payment we may distinguish between direct and indirect taxes. This distinction is not very exact. It originated in the idea that where the taxpayer and the taxbearer were the same individual, the tax was a direct tax and, if they were different individuals, it was an indirect tax. The difficulty with this, however, is that the individual who would ordinarily transfer a contmodity to someone else might consume it himself. The suggestion was, therefore, made to relegate the distinction to the intention of the legislator. Here again, however, we are met vnth the fact that the legislator frequently has no intention in the matter or Chat his in tention is unknown. Some European writers, therefore, have contended that the criterion should be found in the permanence of the tax. If the tax is a recurring tax or if the phenome non on which the tax is imposed is recurring, it is indirect, otherwise it is direct In general, however, it may be said that by direct taxes are meant taxes on pollo, property or income, and by indirect taxes are meant taxes on con sumption and on transactions.