Federal Taxes and State Expenses; Or, The Public Good: As Distinct from the ...

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Act I., Sc, III, SECOND EDITION, REVISED

NEW YORK & LONDON

P. PUTNAM'S SONS f^e $imIuxbockti (ttig

CNIVERSITl

COPYRIGHT BY

^ectrotyped and Printed by G. P. Putnam's Sons

Wm. H. Jones, Esq., Fort Wayne, Ind.

Dear Sir :

I thank you very much for your little work, Federal Taxes and State Expenses ^ just received on yesterday. I have read it carefully and with great interest. It presents the questions in strong, cogent, and apt style, and if circulated, must serve to awaken thought and stimulate inquiry on subjects not less important to the country, than any that can be discussed ; and you have done good work in this presentation of them.

Very truly Yours,

A. H. Garland.

From The American^ Phila., Oct. 13, 1887.

Whether Mr. Jones is a Republican or a Democrat, a Free- Trader or a Protectionist, we are glad to say does not appear in his book. It has the important merit of discussing this problem of finance entirely apart from the current questions of our party problems. What brings him to the subject is the patent fact of the financial needs of the States under the present system of taxation.

INSCRIBED

TO THE

LATE ATTORNEY-GENERAL OF THE UNITED STATES

IN GRATEFUL ACKNOWLEDGMENT OF HIS GENEROUS ENCOURAGEMENT TO THE AUTHOR TO UNDERTAKE THIS WORK

Preface To The Second Edition

If explanation be needed for publishing a second edition of " FEDERAL TAXES AND State Expenses," it may suffice to say, that the distinction between " The Public Goody' and the " general welfare of the United States/' now for the first time attempted to be supplied, is deemed by the author a sufficient one. From whatever cause the existing lack of distinction between these seemingly like, but essentially different subjects may have arisen, it cfannot be denied, that the difference between them has not hitherto been marked with the clearness necessary to its being readily understood. The line of separation between them has been so obscure, and the two essentially different subjects so generally confounded, that the author has thought the attempt to mark and separate them, at least to the approval of the Lawyer, the Statesman, and the Legislator, if not to the popular apprehension, was at least worth the attempt ; however faulty the attempt may prove. Even positive failure may produce the viii Preface to the Second Edition.

effect to challenge some one else to try for more successful results.

Besides this attempt to distinguish " The Public Good " from the " general welfare of the United States," the author has also essayed the more difficult task of giving exact definition to the latter term, as the same is employed in the Constitution to define both the nature and extent of the federal power of taxation in regard to it.

To such as have found fault with the first edition, from misconception of the subject of it, as stated in the title-page, the author takes this occasion to say, that what are commonly called " the principles of taxation,'* are outside, and apart from the subject of the book. It is only with the subjects of taxation, and the constitutional and politic exercise of the power of taxation over them as implied in the title, that the author has undertaken to deal. These topics are paramount over all others, and " the principles of taxation " (whatever these may be) are wholly subordinated to them throughout ; and whenever referred to, the reference to them is always incidental, and is never essential. In fact, while the author has heard or read much of both declamation and dissertation, about ** the principles of taxation^' he has not been able to learn from it all, any more than the declaimers and dissertators

Preface to the Second Edition. ix

themselves seem to know about them : and, (be it said without intent to offend,) that is very little. It seems never to have occurred to any of them, that during our hundred years of national existence, nothing in the nature of distinctive " principles of taxation,** derived from our own experience, and adapted to the needs of the system of Federal government, as distinguished from the monarchial systems of both mediaeval and more modern Europe, has been developed and so systematized as to guide us. All " the new wine ** of this large ex* perience has been continually put into "the old bottles,** " brought over ** by the Cavalier to Jamestown, the Pilgrim to Plymouth Rock, the Roman Catholic to Maryland, the Quaker to Pennsylvania, and the Salzberger to Georgia: thus named with no other significance than the order of their coming ; for where all is either defective or unsuitable, it were invidious to assign pre-eminence.

The principles of taxation under federal institutions is a subject in and of itself; and too great to be properly treated, in the narrow compass of a little volume such as this; and the subject of " Federal Taxes and State ExpenseSy' is but as a patch on the surface of the broad domain of Public Law pertaining to federal institutions. For there is a Public Law pertaining to federal institutions, as there is an

X Preface to the Second Edition.

essentially different one pertaining to monarchies; but failing to systematize and apply our own, we have gone on continuously for a hundred years, practising " the principles of ' taxation " derived from European monarchies, however unfitted to federal forms, or illy adapted to the needs of the national existence. Though highly inventive in other fields of discovery, our genius for invention seems to have wholly failed us in this one — perhaps the most important of them all.

When the researches and investigations of Copernicus had announced, and those of Galileo with his telescope subsequently demonstrated, the movement of the planets round the sun, a great advance was made in the science of astronomy, over what it had been as known and practised by the mere fortune-telling astronomers of their time. But great as was this advance, it was not until the laws governing the exact movements of the planetary bodies had been discovered and announced by Kepler, that the system first announced by Copernicus, and afterwards demonstrated by Galileo, attained its full completeness and excellence. In like manner the establishment of the Federal Constitution, like the first discovery of the Copernican system of astronomy, though in itself a mighty, if not a marvellous advance on pre-existing systems of government, yet

Preface to the Second Edition. xi

needs some such discovery and application of the laws governing its movements and operations, as was supplied to the science of astronomy by what has since retained the name of " Kepler's laws " ; which demonstrate that the movements of the planets round the sun describe an Ellipse, instead of the Circle supposed by both Copernicus and Galileo. And as without knowledge of the laws discovered by Kepler, it were impossible to account for the alternations of heat and cold and the vicissitude of the seasons in the solar system, so it is impossible to properly adjust the alternations of benefit and burden and the ever constant vicissitude of prosperity and adversity in the wide extent of the Federal jurisdiction, without corresponding knowledge of the laws which produce and govern them.

It is to the task of discovery and application of these laws, that the author's aims have been directed ; with what measure of success or of failure, is now submitted to the impartial judgment of his readers, by

The Author.

September 4, 1889.

Preface

When the investigations which have resulted in the little volume now submitted to the public were begun by the author in 1882, he had no idea of reaching as their result the conclusions stated in the twelfth chapter. Having been mainly influenced in the beginning of his work by the high rate of State taxes on property valuations for State and local expenses of the civil administration, his efforts were long directed to the vain attempt to secure a remedy for the difficulty by harmonizing State and Federal cooperation over the subjects of State taxation. This course at first seemed the only one that could afford ground for hope of lessening State taxes on property valuations, under existing theories of the Federal Constitution and the long-established practice in all the several States concerning these theories ; and traces of these views will be found xiv Preface.

in some parts of the volume, where they have been purposely left as marking the course of investigation rather than as expressing conclusions. When, however, the author had more fully realized the difficulties in the way of concurrent exercise of State and Federal powers of excise taxation over subjects to which each had equal constitutional right, he was constrained to make the distinction between the subjectSy and purposes for which the power of taxation is to be exercised ; and to make for the first time (as he believes) the distinction that while the power of excise taxation is concurrent in the Federal and State governments over all subjects of ity the exercise of this power is as separate and exclusive in the one or the other as to the purposes it is to be exercised for y as any other power with which either is invested under the Federal Constitution. In brief, the power of excise may be stated as concurrent as to subjects^ but separate and exclusive as to purposes,

William H. Jones.

FoET Wayne, Indiana, January 27, 1887.

Chapter I. Pagb

Introductory Chapter . . . . • . i

Use of Federal Excise Taxes on Spirits and Tobacco for Expenses of the General Civil Administrations in the Several States— The Case Stated ... 5

Chapter II

Present Physical and Political Conditions of the United States Compared with Those of 1789 — Former Easy Enforcement of State Excise Taxes — Obstacles in the Way of it Now — Limited Scale of State Expenses in 1789 — Mr. Hamilton's Forecast of Aggregate Annual State Expenses Now Exceeded by Those of ^ Many Single Cities — Co-equal and Concurrent Powers of Federal and State Taxation— -Nos. XXXII., XXXV. of the Federalist on These Concurrent Powers — Difference between Federal and Single Autono-

^ mous States, in Respect to Excise Taxes . . .25

Chapter III

The General Civil Administration as Related to '* The General Welfare of the United States "—Tendency towards Heavier State Taxes to Support It — Preservation of the State Governments as Necessary '* Instrumentalities" of '*The General Welfare of the United States"— What is the General Welfare of the United States? — Two Distinct Phases of It in the Preamble and Subsequent* Provisions — Parallel be-

XVI

Contents.

PAGE tween the Riddle of *'The General Welfare" and that of the Sphinx in the Greek Mythology — The Difference between "Promoting" and "Providing for " the General Welfare — The Despotism of Classes under It— The " King Bolt " Which Holds the Federal Construction Together 40

Chapter IV

History of the Exercise of Concurrent Federal and State Powers of Excise Taxation — Lost Equilibrium between Them — Chief-Justice Marshall's Ruling in 18 19 and Subsequent Act of Cong^ress Limit the State Power of Excise — Summary of Federal Resources for Revenue Contrasted with the Meagre Ones of the States— The Hands of the Federal Authority Tied from Interfering with Subjects of Exclusive State Jurisdiction 64

Chapter V

Excise Taxes as Related to Periodical Depressions in Business — Aggregate Annual State Expenses — The Spirits and Tobacco Taxes Sufficient to Defray Them — Monarchy Cheaper than ** Republican Simplicity" in Taxes on Property Valuations .... 73

Chapter VI

Constitutional Compensations for Loss of State Power of Excise — The State Governments as "Instrumentalities" in Respect of the General Welfare of the United States — Groundless Assumption of Antagonism between the States and the Federal Autonomy — Effect of State Taxes on Property Valuations on "the Labor Class " in Cities — Groundless Complacency of Americans in Respect to Taxes on Property Being Less in the United States than Elsewhere — ^Why These Are Greater Here than Anywhere Else . . 84

Contents. xvii

Chapter VII. Pacs

State Expenses and Distributive Shares of the Spirits and Tobacco Taxes — ^Absurdity of Separate State Taxes for Purposes of the General Welfare, and Free Interstate Intercourse for Purposes of the Federal Autonomy — The * * Rock and Vulture " . . . io6

Chapter VIII

The ** Blair Bill" for Education of the Illiterate— Relief of the Lettered Poor from Unnecessary State Taxes as Essential to the General Welfare as Education of the Illiterate — Better Founded in Public Policy — And Not Obnoxious to the Charge of Class Legislation . ii8

Chapter IX

Aggregate State and Local Public Indebtedness — Its Relation to the General Welfare— State Debts Not Materially Lessened during the Period When the Federal Debt Was Being Practically ** Wiped Out "— This Public Indebtedness a Subordinate National Debt of the United States— And its Creation the Result of Wrong Interpretation of the Federal Power of Taxation 125

Chapter X

Analysis of a County Tax-List — No Trace of Excise Taxes Found on It — Three Classes of Tax- Payers — Reasons for Their Classification — Why State Taxes on Valuations are Necessarily Unequal — Difference in Numerical Percentage of the Several Classes — Unequal Rates of Taxation as Shown in One Township, Illustrate Like Inequalities in All the Others — Penalties and Delinquencies as Related to the Rate of Tax — No Penalty or Delinquency in the System of Excise Taxes, and No Revenue from Direct Taxes without Them — Proposal to Withhold Protection pf the Law from Personal Property Not Listed for Taxation . 133 xviii Contents.

Chapter XI. Page

Poll Taxes— Trifling Amount of These Paid by the Class of Large Property Owners — ^As Peculiar to the Class of Small Property Owners as Penalties and Delinquencies 162

Chapter XII

Conclusion upon the Case Stated in Chapter I. — Classi- ,

fication of Subjects and Objects of Taxation . . 169

FEDERAL TAXES AND STATE EXPENSES.

INTRODUCTORY CHAPTER.

'* Our remedies oft within ourselves do lie, Which we ascribe to Heaven : the fated sky Gives us free scope ; only, do backward pull, Our slow designs when we ourselves are dull."

Alls well that ends well. — Shakespeare.

Under Federal institutions, the terms " Police," "Social Order," and "Right of Eminent Domain," taken together, may be correctly defined to include all that has been meant to be expressed by the absurd and misleading terms, " State Sovereignty," " Sovereignty of the States," " Reserved Rights of the States," etc.

This statement may startle some, and awaken a feeling of antagonism in others, who have not scrutinized the purport of the terms and subjects named. As to the police power in government, no pretence of its existence in the federal authority can be deduced from the provisions of the Constitution of the United States. As to social order, the absence of the necessary police power to enforce and maintain it, is no less conclusive of its non-existence as one of the subjects, or one of the attributes, of federal authority ; while the term " Right of Eminent Domain," though commonly employed only in the restricted sense of separate State power to devote private property to public uses on making just compensation for it, may be correctly, as well as more largely, defined to include every right and subject of legislation not otherwise provided for in the Constitution of the United States. For the recognized right and power in each State of the Federal body, to devote private property to public uses, may well be made to include the subordinate one to regulate and control the terms and conditions of its acquisition, possession, and transfer among its citizens. For example : Purchase, Inheritance, Descent and Distribution of Estates; Execution, Delivery, and Effect of Deeds and • Conveyances ; Making and Probate of Last Wills and Testaments ; Regulation and Enforcement of Contracts and Obligations ; Creation and Control of Corporations, both Public and Private ; Police, and Social Order ; Construction and Maintenance of JJighways and Bridges, Public Buildings for

Legislative, Executive, and Judicial Purposes ; for Public Charities, as well as for Punitive and Reformatory Purposes Essential to the Stability of Social Order — and, in short, all the varied subjects of legislation ordinarily treated in the several State legislatures. The number of them is too great for special naming here ; but a correct idea of it may be gained by count of all the " Acts of Assembly^'' or of State legislatures, of all the States, and eliminating repetitions therefrom ; or, (which will amount to the same thing), from the total conception of all the possible subjects and rights of legislation whatsoever in a sovereign state, deduct those named in the Vlllth Section of the First Article of the Federal Constitution, and the balance left after this deduction may be accepted as the total sum of the subjects of THE PUBLIC GOOD, for which the several States are to provide by legislation,'*' in the due course of the civil administration, each for itself within its territorial limits, under the suggested

* While the several States are thus to provide for the Public good by legislation^ the Federal authority is to provide for the "general welfare of the United States " by taxation, and by taxation only. When the student of federal institutions shall have mastered these two propositions, so as to fully comprehend them, he may feel himself as already well informed concerning the subject of his studies.

Right of Eminent Domain (or Dominion), as a substitute for the less logical, and more perplexing and confusing terms, which in one form or another have hitherto affected the quality of "sovereignty,'* in virtually dependent and subject States.

This form of stating an old case, though obnoxious to the charge of novelty, may claim the merit of freeing the discussion of its subjects from the embarrassing use of terms which, besides obscuring discussion, tend to excite prejudices rather than to enlighten the judgment. Under its influence, when once established among terms and definitions in our political nomenclature, it may reasonably be expected that the substantial difference between the PUBLIC GOOD OF THE PEOPLE, and the General Welfare of the United States shall become more familiar to popular apprehension* than, (be it said without offence,) it has ever been to statesmen and legislators. Hitherto failing to become popularly known under the shadowy disguise of ** State Sovereignty,** this distinction between The Public Good^ and The General Welfare has yet a possible chance for both existence and recognition under these new and more favorable conditions.

Chapter I

Use of Federal Excise Taxes on Spirits and Tobacco for Expenses of the General Civil Administrations in the Several States— The Case Stated.

The proposal to distribute the net proceeds of the Federal tax on production of all sorts of spirits and manufactured tobacco among the several States, in proportion to their census population, for defraying the expenses of the general civil administration under the several State governments, accords with the principles of construction and interpretation of the Federal Constitution established by the Tenth Amendment of it.

The particular provisions of the Federal Constitution relied on for support of this statement are here cited for convenient reference from subsequent chapters, though the logical connection of these with other provisions not here cited will be found an important though subordinate factor in the discussion of the above proposal, viz. :

First. The Preamble : " We, the people of the United States, in order to form a more perfect Union, establish justice, insure domestic tranquillity, provide for the common defence, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.*'

Second. Par. i of Sec. 8 of Art. I. : " The Congress shall have power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defence and general welfare of the United States ; but all duties, imposts, and excises shall be uniform throughout the United States."

Third. Sec. 2 of Art. IV. : " The citizens of each State shall be entitled to all privileges and immunities of citizens of the several States."

Fourth. The Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the

States, are reserved to the States respectively or to the people."

The logic of these several provisions is that while the Tenth Amendment ascertains and perpetuates the general civil administration (legislative, executive, and judicial) in the several States exclusively of each other and of the Federal authority, Section 2 of Article IV. so far hinders the power of State taxation for support of it as to restrict it in practice to polls and property valuations, while both production and consumption of luxuries, such as spirits and manufactured tobacco, are practically exempt from any share in the burden of State taxes necessary to support it ; and that exercise of the concurrent Federal power of taxation over these subjects, under Paragraph i of Section 8 of Article I. is the compensation provided for this loss of State power of excise taxation. Such seems the more reasonable construction of these two provisions, than that the several States should be charged with the obli- !.gation of the general civil administration by the Tenth Amendment, and be limited at the same time by Section 2 of Article IV. to taxes on polls and property valuations for defraying the expenses of such administration, while production and consumption of the luxuries named shall be practically exempt from any share in the taxation ; for the Tenth Amendment, besides establishing the rule for interpreting other provisions of the Federal Constitution, ascertains and perpetuates the general civil administration in the several States. This general civil administration has not been " delegated to the United States by the Constitution, nor prohibited by it to the States '* ; and it is upon the maintenance of it by taxes as little burdensome, and yet as eflcctive as possible, that " the general welfare of the United States ** depends. That this is so, is shown by the fact that independently of the laws of the several States there are none for protection of life and property, or for punishment of offences against either, or for maintaining social order, nor can be. Without this general civil administration by the several States, there would be anarchy in the United States ; and " the general welfare of the United States " would be a practically impossible and unattainable condition in the national existence. " The general welfare of the United States,*' so far as it has any connection with, or dependence upon, the rights of person or property, and social order (and it is hard, if not impossible, to have any notion of it apart from these), has been so far committed to the exclusive jurisdiction of the several State governments, as that the Federal authority may not touch one of these primary and essential elements of it. These are all subjects of exclusive and separate State jurisdiction, and the Federal authority can exercise no other rightful power concerning them than " to provide for " the expense of maintaining them, by exercise of its powers of taxation.

As the problem of Federal taxes " to provide for the general welfare of the United States," is the main one to be considered in the proposal to use the Federal taxes on production of all sorts of spirits and manufactured tobacco for expenses of the several State governments, it seems deserving of notice that the term "general welfare" occurs but twice in the Federal Constitution, viz., once in the Preamble, as an object to be promoted by establishment of the Federal Constitution ; and again in Paragraph i of Section 8 of Article I. as an object to be provided for by Federal taxation lo Federal Taxes and State Expenses.

under it. These two phases of an identical national object are as distinct as the means provided for them in the Preamble and in subsequent provisions of the Federal Constitution ; and there can be no constitutional warrant to lay and collect taxes " to promote the general welfare** of the United States under the paragraph and section of Article I., which does not apply with equal force to any other of the five distinct national objects recited in the Preamble; for instance, "to form a more perfect union/' etc. This plain distinction between the means " to promote," and the means " to provide for/* the general welfare of the United States, has, however, been so far constantly neglected and turned topsy-turvy in Federal legislation, as that the power of taxation vested in Congress by Paragraph i of Section 8 of Article I. of the Constitution " to provide for " the general welfare of the United States, has been hitherto exclusively exercised "to promote " it, while establishment of the Constitution, independently of the concurrent exercise of the power of taxation under it, seems to have been deemed sufficient " to provide for '* that welfare. That there should have been

Federal Taxes aud State Expenses. 1 1

this persistent exercise of the Federal power of taxation for an object for which the power " has not been delegated to the United States by the Constitution " (see Tenth Amendment), and the like persistent neglect to exercise the power for an object for which it has been so "delegated/' is an anomaly under Federal institutions which is hard to be accounted for upon any recognized principle of constitutional interpretation. The fact, however, is indisputable, whatever the causes which have led to it, that while the several States have been stripped of productive and little burdensome sources of revenue by the provisions of the Federal Constitution, as well as by the changed conditions and circumstances of the country since the Constitution was established in 1789, they have also been yet further restricted in available subjects of taxation by the operation of causes wholly beyond separate State control, until polls and property valuations alone remain to them without some check or hindrance.

With the single exception of duties on imports, the right of taxation is coequal and concurrent in the Federal and State governments ; but from the operation of causes which will be pointed out in the ensuing chapters, the equilibrium between these coequal and concurrent rights of Federal and State taxation has been so far lost or destroyed, as that the Federal power to execute it has become overwhelmingly great as compared with that of the several States. Co-operation in exercise of concurrent powers of taxation in the Federal and State governments, to provide for that general welfare of the United States, in which each has mutual and reciprocal interest, is consistent with, and not repugnant to, the relations of the Federal and State systems under the Federal Constitution.

By co-operation in exercise of concurrent Federal and State powers of taxation, is meant that the one shall collect, and the other apply the proceeds of the tax. Instances of such cooperation, in which the States collected the taxes for use of the Federal government, have been frequent. And as to such collection by the Federal government for purposes of the general welfare, see page 90 post.

Though the present purpose concern only the application of the foregoing principles to our own Federal Union, yet is is deemed pertinent to submit the following suggestions, to be kept constantly in view — (to be "read between the lines") — in perusal of the ensuing chapters, viz., that under all federal constitutions having the equivalents of Section 2 of Article IV., and Paragraph i of Section 8 of Article I. of our own, direct taxes on polls and property valuations, with exemption from taxes on production and consumption of luxuries especially, and from excise taxes generally, constitute the rule for State taxes for support of the civil administration, unless the Paragraph I of Section 8 of Article I. be understood to authorize intervention of the Federal authority to co-operate with that of the States in lessening the burden of State taxes on polls and property valuations, by resort to excise taxes on production and consumption of luxuries and on incomes, and distributing the net proceeds of such taxes among the several States according to census population. The absurdity of giving such construction to the provisions of the Federal Constitution concerning the power of taxation as will practically restrict that of the States to the narrow limits of polls and property valuations, will be strikingly apparent

14 Federal Taxes and ^ate Expenses.

when we come to the analysis of a county tax-list in a subsequent chapter.

So far, since establishment of the Federal Constitution, we have combined the principles of autonomous State taxes for expenses of the general civil administration, with interchangeable and unrestricted rights of intercourse and citizenship for purposes of the Federal autonomy ; and while we have thus made the last-named the strongest possible for all purposes both of offensive and defensive war, we have also made it the most burdensome in taxes on property for all other es3ential elements of the general welfare in time of peace; and the result has been to keep the States on the constant footing of war taxes for purposes of the general civil administration in them, while the Federal autonomy, with overwhelming preponderance of revenues, has only to pay the debts and provide for the common defence of the United States in time of peace.