Principles of justice in taxation ..

Preface

The subject of this monograph was chosen in 1891 while I was taking post-graduate work at Columbia University. The first draft was nearly finished in the spring of 1894 when I was compelled to give up work for a time on account of ill health. Engaging in academic work in the fall of 1894 I was again obliged to set the monograph aside until the winter of 1900. Since then it has been completely rewritten and chapter VIII added.

For his constant interest and encouragement I feel greatly indebted to Professor Seligman, for otherwise the monograph would not have been completed. I wish, also, to take this occasion to express my appreciation for the courtesy shown to me by the Faculty of Political Science of Columbia University in giving so much extension of time for the completion of my monograph. To Dr. Alvin S. Johnson, of Columbia University, I am indebted for verbal changes of text and for reading of proof,

S. F. W.

Antioch College, Yellow Springs, Ohio, May, igo^.

Table Of Contents

VAGI

Chapter II The Origin And Nature Of The State

I. The Individual and Society 19

II. Origin of the State 24

III. The Nature of the State 26

IV. Characteristics of the State » • • . 28

I. Tht Voluntary and Involuntary Character of Political Organisa'

tion 28

a. The Organic Theory of the State 32

3. The Nature of Sovereignty 36

Chapter III

taxation, economics and kthics

I. Taxation 43

1. The Nature of a Tax 43

2. Characteristics of a Tax 46-

3. The Limits of Taxation 5**

II. Taxation and Economics 54

1. Taxation and Production 55

2. Taxation and Distribution -- - 60

3. Taxation and Consumption • 65

III. Taxation and Ethics * 68

CHAPTER IV THE political BASIS AND PRINCIPLES OF TAXATION

I. The Social Contract and Taxation 76

1. The Political Philosophers 77

2. 7 he Protection Theory of Taxation 85

343] 7

8 CONTENTS [344

PAGB

II. The Evolution Theory of the State and Taxation 90

III. The Utilitarian Theory of the State and Taxation 98

1. Tk£ Theory of Mill 99

2. The Utilitarian Theory of Sax and the Austrian School 102

IV. Social Theories and Taxation 106

1. Anarchism 106

2. Communism 107

3. Socialism 108

V. Conclusions as to the Political Basis and Principles iii

CHAPTER Y the economic basis and principles of taxation

I. The Physiocrats and the Single Taxers 116

1. The Fhysiocrats Il6

2. The Single Taxers : 119

H. The Classical School of Economists 125'

I4 The Benefit Theory of Taxation 125

%4 The Exchange Theory, 129

3» The hisuratue Theory 132

HI. The Productive Theory of Taxation 134

IV. The Utility Theory of Sax 138

1. Its Originality ., 140

2. Simplicity and Truth 141

3. Individual arid Collective Psychology 143

{iy Individual Psychology 145

(a) Collective Psychology 146

4. Collective Needs empirically Considered , 149

(l). Differences in Character 149

(?) Political Factors 151

V. Conclusions as to True Economic Basis and Principles 155

CHAPl'ER VI the ethical basis of taxation

I. The Benefit Theory of Taxation i6o

1. The Cost-of Service Theory 161

2. The Uahie-of- Service Theory 165

(a ) Expenditure 167

(2) Property 168

(3) Income 169

(4) Marginal Utility 1 70

345] CONTENTS

PAGE

II. Ability as an Ethical Basis of Taxation 171

1. Ability and Property i-c

2. Ability and Income j -g

( 1 ) Meaning of Income i nn

(2) Taxable Income 182

III. Ability and Sacrifice igy

I- Mill ,87

2. Wagner and A^eumann 189

3. Meyer ,go

4- Sax ig^

5. 7"^!? Dutch Economists iqy

6. Edgeworth 20 1

IV. Conclusion : Ability versus Sacrifice 206

CHAPTER VII

ethical principles of taxation I. The Principle of Equality 212

1. Rate and Source of Income 21 ^

(i) Funded and Unfunded Incomes 213

(2) Inheritance and Gifts 216

(3) Monopoly and Quasi-Rent Income 217

(4) Income from Speculation 220

2. Rate and Character of Income 221

3. Rate and Amount of Income 224

(i) Proportional Taxation 226

(2) Progressive Taxation 2^1

II. The Principle of Universality 246

1 . The Justification of Exemptions 247

2. The Limitation of Exemptions 2c6

CHAPTER VIII

I, Assessments * 266

1. Declaration vs. Doomage 266

2. Taxable Property ,68

3. Methods of Assessment 270

II. The True Tax System 276

I. Subjects and Methods of Taxation 277

( 1 ) Taxes on Consumption 278

(2) Taxation of Real Estate 280

(3) Taxation of Personal Property 281 lO

CONTENTS [346

PAGB

(4) Taxation of Mortgages 282

(5) Taxation of Corporations 283

(6) Taxation of Inheritances 287

Siate and Local Taxation 290

(i) National Taxes 291

(2) State Taxes 292

(3) Local Taxes 293

Introduction

A THEORY of taxation is necessarily bound up with fundamental questions of political science, economics and ethics. By abstracting any one of these elements and making it alone the determining factor, or by giving it an undue importance, a theoretical solution of the problem may be made a comparatively easy task. But such a solution, like most schemes based upon one-sided or partial truths, is necessarily defective and not infrequently Utopian, The real difficulty arises when "these factors are comprehended in their full significance, or in their true relation to one another ; but only in this way can the problem be fully understood in its various bearings, or a solution be offered that is satisfactory alike to reason and to the requirements of justice. This difficulty is two-fold. In the first place our views will necessarily be colored according to which of these factors we consider the foundation-idea of our theory and which we regard as incidental or supplementary ; and in the second place very much depends upon our interpretation of the fundamental idea and of the character of its relation to the other factors. Even if but one of these factors is considered as having any importance, the question is not altogether a simple one, for there still remains the difficulty arising from the interpretation we may give to the chosen factor as the only one for consideration. It is such facts as these that account for the general disharmony in theories of taxation.

An illustration of the difficulties referred to is found when 347] II the political factor is made the only one or the fundamental one. For if, on the one hand, we regard the individual as the only important factor, and the state as merely an accidental but necessary evil, the tendency v^^ill be to an extreme of individualism; if, on the other hand, the individual be regarded as a mere part of an organic whole, a cell of a living organism, we are in danger of the opposite extreme of socialism. The one extreme tends to the contract theory of Hobbs, Locke and Rousseau with its individual independence and its protective theory of taxation ; the other to a personified social organism which directs the economic activities of its units and utilizes taxation to produce artificial equalities of wealth. Both of these extremes are false, although they involve the important truth that principles of taxation are intimately associated with a political philosophy.

Not less are the difificulties, nor more satisfactory the results, if the question be approached from a purely economic point of view. Different theories will be maintained and different conclusions reached according as production, distribution, or consumption is made the basis of the economic theory. Moreover, different conclusions will result from different assumptions respecting economic principles, or from the importance attached to specific economic laws. If, for example, production under a laissez faire regime be regarded as the chief end of human activity, it will be concluded that taxation should interfere as little as possible with capital and its accumulation, while the relative productive powers of individuals should be the same after as before the payment of a tax. Or if there be implicit confidence in the doctrine of free competition there will be little concern about the tax system, the shifting and incidence of the tax through the action of competitive forces being relied upon to effect the ends of justice. Similarly we have only to exaggerate other economic elements to get other results.

349] INTRODUCTORY 13

So, too, the ethical factor may lead to equally divergent results according as Hedonistic or utilitarian principles, or the realization of the idea of man, is made the dominant feature of our ethical system. The difficulty is here further exaggerated by the fact that there is frequently a difference between theoretical and practical ethics. Harmony between these, whatever our ethical principles, is by no means easy to accomplish. Yet a substantial harmony must be established, or, on the one hand, we shall have only utopianism founded upon abstractions, and, on the other hand, expediency founded upon concrete facts without reference to ideas of justice.

But a more fundamental difficulty than that which arises within the separate factors themselves is the determination of their relative importance. Each one must receive due consideration ; the political, because the relation of the state to ' the individual is primarily involved ; the economic, because/ matters of taxation are essentially of an economic character; the ethical, because the subject and the end of the whole proceeding is man, a spiritual and therefore an essentially ethical entity. But which is the ruling factor? The importance of this question, together with the full recognition of the separate factors, is so great that we shall treat this aspect of the subject somewhat 'at length before taking up the main question — that of justice in taxation. Indeed, this method of procedure is indispensable since the principles of justice can not be determined before the basis upon which they rest is established.

It may be premised here, however, that the whole subject; of taxation revolves about man as its center — man in his relation to society, to his family and to himself; to the ends, that is, of his own existence. It has not, indeed, to do with the whole of man's activities and relations, but only with a small portion of them; in fact, with only a portion of those involved in his political existence — the maintenance and support of the state, or what may be called the satisfaction of the collective needs of the individual. But because these needs and their satisfaction are common and involve human relations, an equitable distribution of the burden is demanded. In brief, the question of taxation is a part of the larger question of distributive justice. But it is not with ideal men or ideal conditions with which we have to do, but / with actual men and conditions. Hence, the specific forms which the principles may take will depend upon the prevailing moral and intellectual, the political and economic development.

But while the ultimate end is ethical, the means thereto are largely economic. Both a theoretical and a practical determination of what is justice in taxation presupposes a knowledge of economic laws and of their influence upon the efifects of any system of taxes. ^ It could not be otherwise, since all the phenomena concerned are economic. The end alone is ethical. But the ethical is not so far conditioned by the economic that it is only a consequence of economic laws. There are, however, certain fundamental principles in taxation (and it is these with which we shall have specially to do) that are not directly concerned with economic laws. They presuppose, indeed, certain economic conditions and certain economic forces, but their real justification is to be found in a political philosophy and in the ethical end of man. It is more directly with the practical side of justice that economic forces have their importance ; although it is true that the theoretical principles of justice depend upon economic facts for their interpretation.

Notwithstanding this close relation of the economic and the ethical, they are entirely distinct, being related as means to an end, or as proximate and ultimate ends. This fact is

^ Cf. Bastable, Public Finance, p. 9.

351] INTRODUCTORY 1 5

universally recognized in every financial doctrine ; for, consciously or unconsciously, the ultimate sanction of every theory is its conformity to what are assumed to be the ends of justice. Even those who, like Sax, deny that ethics has any place in finance, are forced to this standard, as we shall have occasion to see later. With all, the attainment of ? justice in the distribution of the tax burden, is the ruling ^ idea. Thus, in fact, as well as from the nature of the subject itself, the ethical element is made the predominating element in determining the principles of taxation. But unanimity of thought respecting the end does not guarantee unanimity of doctrine. Such agreement of doctrine depends upon the conceptions of ethical ideals, and in these the differences are as great as those already noted.

Finally, the difficulties of the problem of taxation and of the attainment of a common agreement of doctrine do not consist alone in differences of fundamental presuppositions or of ideals. Not the least of the difficulties is a logical consistency in the development of a theory from its presuppositions. Too frequently prejudice, sentiment or expediency 3 usurp the place of logical thinking, which not unfrequently results in conclusions in no way related to the premises assumed, even if they are not in direct opposition to them.

Without a further enumeration it must be evident that the problem that we have assumed to discuss is full of perplexing difficulties. That we shall be able wholly to avoid them cannot be presumed, for many of them are inseparable from the subject itself. We must necessarily start with assumptions, and the merits of our treatment must be measured by the rationality of these assumptions and the logical consistency with which the idea contained in them is developed. A philosophical or scientific treatment must further be devoid of any personal bias. While it shall be my aim to attain this standard there will undoubtedly be some who l6 JUSTICE IN TAXATION [352

will consider my point of view, if not my reasoning, vitiated by an undue ethical emphasis. But apart from the fact that the real subject of my study is an ethical one, I believe that in emphasizing the ethical element of the problem I am only recognizing what is implied, if not expressed, in other theories. While we start out with the idea of ascertaining the principles of justice in taxation we endeavor to start without any presuppositions as to what those principles are. Our presuppositions are in the assumption of fundamental principles, not in the conclusions ; but without such assumption no rational treatment of the subject is possible.

What, then, is the assumption with which we start out? It is the conception of man as a personality, and as such as an end in himself whose fullest realization is the purpose and end of his existence ; and that this realization takes place very largely in and through institutions, one of the most important of these being the political institution — the state. The assumption, however, is not a mere assumption. It has rational justification ; but the demonstration of this belongs to the field of metaphysics ' and for our purpose will be presumed. Of special and more immediate importance to our thesis is the relation of the state to the individual in this process of realization. Hence, a conception of the nature of the state and its relation to the individual will constitute the foundation of our thesis and form the basis of our argument. What the nature of the state is belongs to political philosophy to determine ; but since political philosophy afTords so many different conceptions of the state, and since our own argument must depend upon our own conception, it will be necessary to lay our own foundations by first discussing the origin and nature of the state before discussing the principles upon which the state should be maintained — or the principles of taxation. This we shall

^ See T. H. Green's Prolegomena to Ethics.

3531 INTRODUCTORY ' 17

attempt to do in the following chapter so far as is necessary to make clear our own point of view. We shall then discuss the nature of taxation and its relation to economics and ethics, after which we shall take up the subject of our thesis proper.

Before beginning our discussion, however, it may be well to clear up an ambiguity suggested in the wording of our subject. "Justice in Taxation" maybe considered either! from a practical or from a theoretical point of view. Under I the former the subject would involve the setting forth of a detailed system of taxes that would realize justice to the individual taxpayer. A theoretical treatment, on the other hand, involves a discussion of principles rather than of kinds or systems of taxes. It is the latter view that forms the chief subject of our inquiry, although from neither point of view can a discussion of justice in taxation wholly ignore the efTects of taxation ; as, for example, the phenomena of shifting and incidence are closely related to the problem of rates and exemptions. Principles, however, must precede definite systems just as a fundamental assumption must precede the determination of principles, for without a norm of judgment no definite conclusions are possible.

The necessity of this norm must be our answer to the "practical man" who distrusts all theorizing not based upon empirical facts alone, and who seeks to determine justice inj' taxation by purely objective standards. Such a procedure is, to our mind, comparable to the attempt to obtain a knowledge of an object from mere sensations without reference to a unifying and interpreting agency to give them meaning. Like sensations, mere facts are without significance. The so-called facts of the empiricist must be given a meaning by reference to fundamental concepts. The principles once established, it is for the practical statesman or financier to put them into operation. If the principles are not practicable they must be considered as Utopian, at least under existing conditions. The ideal, however, has its place and importance, but the necessity of its modification in practice according to circumstances must be recognized. The nearest approximation to justice is always the ideal under any given conditions.

Chapter II The Origin And Nature Of The State

A STUDY of the origin and nature of the state is a neces sary preh'minary to a study of the nature of taxation and is indispensable as a foundation for the determination of the principles on which taxation should be based. It furnishes, moreover, an explanation of the reason why these principles should be based upon ideas of justice. That justice should be the aim in all taxation, is now universally admitted, and appears, indeed, so self-evident that proof is deemed unnecessary; but the proof is always implied, and is to be found in the nature of the state, or rather in the nature of the individual and his relation to the state.

I. The Individual and Society

The nature of the state is determined by the nature of society as the nature of society is determined by the nature of the individual. But the individual and society are sointimately related that they mutually condition each other, and hence our study must begin with a study of the individual and society.

Beginning, then, with man, the individual, it is possible to conceive of him in three dififerent aspects : As related to himself, that is, as a distinct personality ; as related to society, or as a complex personality; and as related to the Infinite, or as a permanent personality. These three aspects are expressive of the ethical, social and religious nature of man, and without their co-ordination we have only the imperfect and undeveloped man. Our concern, however, is 355] 19 with only the first two of these aspects — man the individual and man in society. In respect to the former we assume, and without attempting a metaphysical proof, that man is a human spirit and, as such, a personality, and therefore exists as an end in himself; that it is the purpose of his life to realize that end — to develop his highest personality, to perfect himself. Otherwise man would exist without any rational purpose. It is not the nature of the human spirit to be content with mere existence, except, perhaps, in its lowest form, where the animal predominates over the human. It is rather its nature to develop, to unfold itself, to manifest its possibilities, and in doing so it reveals and perfects its own personality.

But the development of individual personality can not take place by itself. It is possible only in and through a society of similar personalities, a society oi persons. As a person in a society of persons the individual, in being conscious of his own end. as an end in itself, recognizes that every other individual is likewise an end in himself, and therefore an end to be realized. In this reciprocal recognition of similar natures, effort towards the realization of others becomes a part of the realization of self. Thus, though an end in himself, the individual does not exist solely for himself, but is at once his own end and a means to the ends of others. His development is conditioned by their development, as their development, in turn, is conditioned by his. The joint effort towards the realization of individual personality centers in the social nature of man and necessarily involves social relations. Only through the development of the social nature is the development of the individual nature made possible, as only by the co-ordination of the individual and social side of human nature can true personality exist.

The development of the social, and therefore also of the individual, nature of man takes place in manifold ways, but more and more, with the progress of his development, through social relations that manifest themselves in social institutions, in whose complex phenomena we have what is called " society." To borrow Hegelian terminology, the human spirit in realizing itself objectifies itself in social institutions— in society. Such a society being a manifestation of, and so constituted by, persons is something more than a mere aggregate of individuals, a mere numerical quanitcm. It is the result of social forces, and aggregation is not socialization. The bond that transforms human aggregates into living societies is psychical. But at the same time that it is a uniting, it is also a differentiating force; thus, while giving unity to the social elements and to the social whole, it permits expression of the manifold human interests in social efTort. It is, furthermore, purposive in character, uniting common interests to common ends, and so re-enforcing the recognition by self-conscious spirits of persons as means to the ends of others, as ends to themselves. To the extent that this common interest and recognition do not exist the self-seeking spirit of man tends to the disintegration of society; or to the assumption by a part of society that certain classes of individuals are only means to the ends of others, a practical denial of their existence as persons, as ends in themselves. The existence of such a negative force in society has far-reaching consequences, not only in matters of taxation but in the whole economic and social life; for to the failure to recognize individual personality as an end in itself are very largely due the antagonisms of social classes. Only in the complete recognition of the ethical nature and end of the human person can society fulfill its highest purpose, as expressing the objective realization of the individual — of personality; and the more this becomes a reality in life the more will justice between man and man be realized. And the more that society is recognized to be a society of persons the more will these ends be attained.

But if it is true that society is constituted of persons, and that without persons there is no society, it is not less true that without society there are no persons.' Persons and society are, in fact, correlative to each other. Each presupposes the other. In society personality and individuality unfold themselves; in society the human spirit seeks its realization. Without society the person has only potential capacity, while it is only in society, " only in the intercourse of men, each recognized by each as an end, not merely as a means, and thus as having reciprocal claims, that the capacity is actualized and that we really live as persons." ' If the evolution of social relations, indeed, is but the gradual tracing out of the evolution of the human spirit, these relations, as they at any time exist, are the embodiment of all past, and condition all future, social development. But although society and the individual mutually presuppose each other the end of social evolution is not in society, as such, but in the realization of the individual, to which end society is a condition and a means. And in the character of society as a society of persons, and as a condition of their development, we have indicated the ethical character of all social institutions, and the necessity of ethical considerations in all social relations. Related as subjective to objective the development of one implies the development of the other. And as the development of the ethical life takes on the form of a change in extent rather than in the fundamental ideas,^ embracing an ever larger circle of persons in the consciousness of the unity of purpose and ends, so in social evolution there is an ever increasing multiplicity in the numbers and variety of social institutions, an ever growing organization of common interests and common ends, the complexity of the social relations being a reflex of the complex nature of the

* Green, op. cit., p. 199.

individual, a means of his giving expression of himself — of his being a person.

The complexity of social relations is not a miscellaneous complexity. Every human interest, when it becomes sufficiently important and sufficiently general according to circumstances, is focussed in an organized body of persons with the purpose of giving realization to the common interest. Thus, out of social relations are formed social groups, whose totality constitutes society. These groups tend to embrace every human interest of social importance — intellectual, moral, religious. They divide and subdivide, ever increasing in numbers and variety with intellectual, moral and religious progress. In content these groups tend to become more specialized, in extent more generalized; a condition due to scientific progress, as in means of communication, on the one hand ; and to a broader human fellowship, an enlarging consciousness of the unity of interests and ends, on the other hand. But the consciousness of a community of interests and ends that gives rise to social groupings is not a reflective consciousness of ultimate ends, except, perhaps, in certain religious groups. The determining consciousness is that of immediate interests and ends. Consciousness of ultimate ends has little direct influence upon social groupings. The ultimate end is revealed only by a reflective analysis of the philosophy of social life with reference to the life of the individual. Yet it is only in and through the almost countless number of these groups, ever increasing in numbers and variety, that the human spirit finds its fullest realization. And the " unity in complexity " of these groups is typical of the highest form of social evolution.'

The tendency towards social organization, however, is not without its opposing influences. The presence of self-seeking spirits as the dominant factor in human life is a dis-

* Cf. Spencer, Principles of Sociology, Ft. v, chs. 2-4.

integrating social force and produces a retardation if not a negation of social organization. Social development is conditioned not only by the presence of positive social forces and favorable conditions, but by the absence of negative forces and conditions. Progressive realization of the human spirit is possible only where the conditions are favorable to its voluntary and spontaneous activity, both with respect to individual undertakings and with respect to associated effort such as is manifested in the social groups seeking a common purpose. That these positive and negative conditions should be maintained becomes, then, a matter of the first importance and of general interest. To this end a coercive power is a necessary requisite, and hence, in its maintenance and support there is a universal interest. Such a power is realized in the political organization of society, the state — the all-comprehensive social group representing the universal common interest. In this group is centralized both the objective and the subjective complexity of society, in it social life reaches its highest culmination.

II. Origin of the State

With the actual historical origin or with the evolution of the stale we have no concern. Being in search of principles our point of view is wholly that of a philosophy of the state, and is therefore an inquiry into its underlying principle and cause, of which the historical state is a manifestation, whatever may have been the course of its development. From this point of view the state's origin may be considered under two aspects, its objective necessity and its subjective necessity.

By objective necessity I understand the necessity, pointed out above, of a coercive power to give unity to society and to make possible the conditions of social, and thereby individual, development. For without such a dominating

36 I ] ORIGIN AND NATURE OF THE STATE 25

social group society would at best be but an unorganized mass of social groups in perpetual and unrestrained conflict with anti-social forces, thus destroying the effectiveness of social organization and social effort in the work of the realization of man. The necessity, indeed, of this restraining and controlling power has been recognized, however unconsciously, from the very dawn of society, though its earliest manifestation was in other social groups, such as the family and religious groups. In the course of time the ever increasing manifoldness of interests, by a process of social evolution, gave rise to a differentiation of the groups, a distinct political group ultimately emerging with the specific function of maintaining the order and conditions necessary to the ends of individual and social life. Assuming the realization of the individual as the unrestrainable and impelling force, the necessity of the objective conditions may be considered as one of the unconscious forces that brought the state into being. In brief, its very indispensableness is the cause of its being. With human nature as it is the state can not be conceived not to be.