Selected readings in public finance

Front matter

Class Ht J I 4 5 Book . B ' ?

CDIVRiGKT DEPOSm

SELECTIONS AND DOCUMENTS IN ECONOMICS

Preface

This volume aims to bring together under one cover the collateral reading needed for a general course in public finance. It is intended to supplement the instruction usually given by lectures and text-books. The selections have been drawn from a considerable variety of sources, both new and old, and deal with most of the topics ordinarily included in such a course. Upon various controverted questions the arguments of the earlier disputants have been reproduced, and in other cases an effort has been made to draw upon the work of the older standard authors. In this way it is hoped that the book will serve a useful purpose in introducing the student to the literature of the science of finance.

It would-be a pleasure to make express acknowledgment here of the many favors which have been granted in the preparation of the volume. But the footnotes to the various selections serve this general purpose ; and the editor must be content simply to record his appreciation of the cordial cooperation of the authors who have given him permission to draw upon their works, and of the publishers who have consented to the reproduction of copyrighted material. Thanks are due also to the editor's wife, upon whom fell a large share of the harder work attending the preparation of the book.

CHARLES J. BULLOCK

Preface To The Second Edition

This second edition retains the greater part of the original

selections, but replaces a part with later material. It also draws

upon recent scientific and official publications for a number of

new selections.

CHARLES J. BULLOCK

Cambridge, Massachusetts vi

Contents

CHAPTER PAGE

I. The Literature of Public Finance. (The Editor)

1. Mediaeval Finance i

Chapter I The Literature Of Public Finance »

1. Mediaeval Finance. — Some of the subjects treated by public finance have never escaped entirely the attention of historians ^ and writers upon statecraft or political philosophy.^ Until the close of the Middle Ages, however, the financial transactions of European states were not sufficiently important to invite anything approaching systematic study. Kings were supported chiefly by the revenues derived from their private domains or various fiscal prerogatives, while taxation was in theory — and generally in practice — an extraordinary resource, reserved, as Thomas Aquinas held it should be, for unusual emergencies.* The finances of a feudal state were hardly more than the finances of a royal household ; and, in fact, savored rather of private than public housekeeping.^ In the eleventh and twelfth centuries, with the revival of industry and commerce, numerous

^ For an extended bibliography see Stammhammer, Bibliographic der Finanzwissenschaft (1903).

2 A work entitled The Revenues of Athens, commonly attributed to Xenophon, discusses methods of improving the wealth and revenues of that city. Roman historians occasionally mentioned the subject of taxation ; Tacitus and Suetonius are examples.

^ In the thirteenth and fourteenth centuries some of the Schoolmen touched upon certain financial questions. Thomas Aquinas, for instance, considered the rights of the sovereign in respect to taxation. In ordinary times, he taught, the King should live upon the income from his domains ; but in time of extraordinary emergencies, his subjects should subinit to taxation, which, however, ought to be moderate and just. Similar maxims were expressed by Petrarch (De republica optime administranda), and by other Humanists.

^ One of the laws of Charlemagne, the capitulary de villis, lays down the following rules for the management of the Emperor's estates : " We desire that each steward towns began to grow rapidly in various parts of Europe and to gain a large measure of independence in internal affairs. With them, problems of finance soon engaged attention, and financial institutions early assumed something like a modern character. Poll and property taxes were introduced, duties laid upon articles of consumption, and municipal debts created. Yet, so far as we know, these interesting developments did not, outside of Italy, call forth any noteworthy discussion of financial problems.

2. The Formative Period. — In Italy, however, the quickening of intellectual life and the growing importance of commercial and financial transactions led to interesting developments in the fifteenth century. At Florence various financial problems came to the forefront, and the question of progressive taxation aroused the keenest interest.^ In the Kingdom of Naples, moreover, Diomede Carafa, a soldier and statesman, produced a most interesting treatise upon statecraft (De regis et boni principis officio), in which financial questions received more serious treatment than ever before, perhaps, had been accorded to them. Carafa devoted one of the four parts of his work to the administration of the revenues of the prince. In general, he stood upon the ground of his predecessors, such as Aquinas and Petrarch, holding that income from domains should be the basis of state finance, and taxes a subordinate form of revenue. But he proshall make an annual statement of all our income, giving an account of our lands cultivated by the oxen which our own plowmen drive and of our lands which the tenants of farms ought to plow ; of the pigs, of the rents, of the obligations and fines ; of the game taken in our forests without our permission ; of the various compositions ; of the mills, of the forest, of the fields, of the bridges and ships ; of the free men and the districts under obligations to our treasury ; of markets, vineyards, and those who owe wine to us ; of the hay, firewood, torches, planks, and other kinds of lumber ; of the waste lands ; of the vegetables, millet, panic ; of the wool, flax, and hemp ; of the fruits of the trees ; of the nut trees, larger and smaller ; of the grafted trees of all kinds ; of the gardens ; of the turnips ; of the fish ponds ; of the hides, skins, and horns ; of the honey and wax ; of the fat, tallow, and soap ; of the mulberry wine, cooked wine, mead, vinegar, beer, and wine, new and old ; of the new grain and the old ; of the hens and eggs ; of the geese ; of the number of fishermen, workers in metal, sword makers, and shoemakers ; of the bins and boxes; of the turners and saddlers; of the forges and mines, — that is, of iron, lead, or other substances ; of the colts and fillies."

^ Palmieri (1405-1475) and Guicciardini (1483-1540) are the most important writers to be mentioned in this connection. For an account, in English, of progressive taxation in Florence, see Seligman, Progressive Taxation, 22-26, 70.

THE LITERATURE OF PUBLIC FINANCE 3

ceeded to divide public expenditures into three classes: (i) those for the defense of the state ; (2) those for the support of the prince ; and (3) those for contingencies. Expenses, he said, should be moderate, so that a balance may remain which will be available for emergencies ; then, too, economy makes it possible to dispense with bad taxes and to use only the best. Taxes, he argued, should be stable, and should be certain, so that citizens may know precisely what they are expected to pay. All revenues, finally, should be strictly accounted for, and the accounts should be frequently examined by the proper officers. In all things the prince should remember that the wealth of his subjects is the real foundation of a prosperous condition of his finances.-^

By the close of the sixteenth century the growth of vigorous monarchies upon the ruins of the feudal system had proceeded far enough to compel more serious consideration of politics and finance.^ In 1576 Jean Bodin published a celebrated work upon political philosophy (Les six livres de la republique), which for many years exercised a wide influence upon writers in all the countries of Europe. Bodin devoted the sixth book of his treatise to " several political questions," one of which was the proper management of the finances, ''the nerves of the state." For such management, he said, three things are necessary : " The first is honest means of raising revenues ; the second is to employ them for the profit and honor of the state ; and the third, to save some portion of them for time of need." Concerning the first point, he argued that domains are " the most honest and assured " form of revenue ; but he approved of customs duties " upon merchants who bring in or take out commodities, which are one of the oldest, most common, and most equitable " of financial devices ; and admitted the propriety of direct taxes ^

2 Financial problems became important on account of the growth of public expenses, the increasing frequency and weight of taxes, and the many evil expedients, such as forced loans or debasements of the currency, employed in order to raise money.

2 Bodin contended, however, that in Spain, England, Germany, and France it was established, by long custom, that " no prince has power to levy a tax upon his subjects, or to require this duty, without their consent."

upon the subjects of the prince when ''all other means are insufficient and there is urgent necessity of providing for the state." Under the second topic, the employment of the revenues, Bodin mentions the various branches of outlay,^ condemns extravagance, urges the need for economy, and advises that an annual account be prepared, showing the condition of the finances. And, finally, upon the third topic, Bodin urged that out of the revenues a reserve, or treasure, should be accumulated in order that the state "may not be obliged to begin a war by borrowing or levying a subsidy." Borrowing at interest he believed to be the ruin of princes and their finances.

During the seventeenth and eighteenth centuries public finance was increasingly studied in Germany, where not a few professors in the universities and officials in the service of various German states were occupied with the subject. Regarding finance as an important branch of public business, they generally approached it from the point of view of the prudent administrator, anxious to husband and develop the resources of his estate.^ While, at the start, many of them were greatly influenced by Bodin, they investigated assiduously the conditions existing in the German states, and in time gave their studies an independent basis. In the writings of J. H. von Justi^ German financial science of the eighteenth century reached its ripest development. Justi divided finance, as Bodin had done, into three parts : the study of revenues, of expenditures, and of methods of meeting extraordinary emergencies. Like other cameralists, he considered the income from domains the real foundation of public housekeeping, and taxes a subordinate

1 He gives the following resume : " With the King's household maintained, the troops and their officers paid, and just wages given to those who have earned them, it is right that the poor should be remembered. And if any funds remain, they should be employed in rebuilding towns, fortifying strongholds, building forts on the frontier, improving the roads, repairing bridges, equipping ships, constructing public edifices, and establishing colleges of honor, virtue, and learning."

2 Pluance became, in this way, a part of what was known as " cameral science," which included all branches of knowledge needed for the proper administration of the possessions of the prince. Sometimes " cameral science " was used in a narrower sense, as equivalent to financial science, and thus was contrasted with the cameralistic sciences in the broader sense.

THE LriERATURE OF PUBLIC FINANCE 5

form of revenue. Yet this did not prevent him from studying the various kinds of taxes, in their economic and political bearings, more carefully than most other writers had done. Public expenditures he treats in some detail, assigning to mihtary outlay at least one half of the total. In order to finance serious emergencies he favored, like nearly all his forbears, the accumulation of a state treasure ; yet he considers also the other expedient, public debts.

Although Bodin's work was translated into English (1606), financial topics received less attention in England than in Germany during the greater part of the seventeenth century. Sir William Petty 's Treatise of Taxes and Contributions (1662) was probably the first English work which professed to deal primarily ^ with public finance. In this, with numerous digressions, the author treats of public expenditures and revenues. The former he divides into: (i) outlay for "Defence by Land and Sea" ; (2) outlay for the " Maintenance of the Governours, Chief and Subordinate " ; (3) outlay for the support of religion ; / (4) outlay for education ; (5) outlay for the relief of orphans, the impotent, and the destitute ; and (6) outlay for various public works, such as highways and bridges. Petty then considers the various branches of revenue, holding that a tax upon the land of a kingdom is better than the reservation of " Crown Lands." He favored excise taxes, also, believing that they tended to distribute burdens in a fair manner, viz. in proportion to what every man "taketh to himself, and actually en joy eth " ; and discussed the advantages and disadvantages of other forms of taxation. After 1690 the growth of national expenditures and taxes, together with the rapid increase of the national debt, stimulated the discussion of such subjects as taxation and public debts ; so that a large number of tracts and treatises, often of a fugitive character, made their appearance. Methods of dealing with the debt were warmly debated, and the best methods of raising the large revenues now required by the government formed another engrossing topic. Some writers advocated a general excise upon articles of consumption, and others

^ Other works had dealt incidentally and briefly with financial topics. Thomas Mun's England's Treasure by Forraign Trade (written prior "to 1641 and published 1664) devotes three short chapters to public revenues and treasures.

wished to confine such taxation to luxuries ; some preferred a single tax upon land or a tax upon houses, while others argued for a general property tax or a combination of different kinds of taxes. Out of such discussions of particular topics a large body of financial literature had developed in England by the middle of the eighteenth century.^ Yet little of the writing had been systematic, and nothing like a comprehensive treatise upon finance had come into existence.

In France, after the time of Bodin, comparatively little attention was given to the study of finance until disorders and abuses in the public housekeeping had become so grave as to call loudly for reform. Early in the eighteenth century Marshal Vauban, who in the course of his campaigns had observed the wretched condition of many parts of the country, proposed reforms in taxation, by which a tax upon all incomes, supplemented by various duties upon imports and articles of consumption, should replace existing taxes. In 1748 appeared Montesquieu's celebrated Esprit des lois, which treats of both taxation and public debts, briefly, but in a manner which influenced not a little the subsequent course of thought. Montesquieu emphasized particularly the political relations of public finance, observing, for instance, that a free people will submit to heavier taxation than a despotic ruler can impose upon his subjects ; and took a very unfavorable view of public debts. Ten years later Quesnay, the founder of the Physiocratic School, published his Tableau CEconomique, in which he developed the first consistent theory of the production and distribution of wealth, and correlated the theory of taxation with the fundamental doctrines of his new science. Holding that the net produce of the land is the only source from which the wealth of a society can be increased and the only fund from which taxes can be drawn, the Physiocrats argued that all other taxes should be abandoned and public revenue raised by a single tax upon the ^* prodtdt net'' of the soil.^ Beyond urging that govern-

* Of this copious literature David Hume's essays on " Taxes " and " Public Credit " (1752) may be mentioned ; also Sir James Steuart's Inquiry into the Principles of Political Economy (1767), which, besides considering the subject of public credit, devotes an entire book to taxes.

'^ Quesnay, in the Tableau Qiconomique, showed that it followed from his theory of

THE LITERATURE OF PUBLIC FINANCE J

ments should confine their activity to the narrowest possible ^ limits, and, therefore, exercise economy in their expenditures, the Physiocrats contributed nothing further to the history of public finance.

A new era opened with the publication of Adam Smith's Wealth of Nations (1776). Drawing upon the work of his predecessors and the results of his own observations and ripe reflection, Smith skillfully developed a body of doctrine which in finance, as in other departments of economic study, served as the foundation of most subsequent inquiry. Believing that one of the two objects of political economy is "to supply the state or commonwealth with a revenue sufficient for the public services," he devoted the fifth book of the Wealth of Nations to the " Revenue of the Sovereign or Commonwealth," and treated, in order, public expenditures, public revenues, and public debts. ^ Translated into one language after another, the Wealth of Nations exercised a profound influence upon economic thought in the leading countries of Europe ; while it came, before long, to dominate the thought of Great Britain, and was extensively read in the United States. With many topics treated in the following chapters it will be necessary for us to begin by considering the doctrines of Adam Smith.

3. The Nineteenth Century. -^ In Great Britain after the time of Smith the systematic study of public finance seemed to languish. Writers of economic treatises continued to discuss taxation and public debts ; but showed a tendency to confine themselves to questions of more or less abstract theory, and often relegated the subjects to a decidedly subordinate position.^ the " produit net " that taxation " should be placed immediately upon the revenue of the landed proprietor, and not upon commodities where it would multiply the cost of collection and injure commerce."

1 The three chapters, or main divisions, of the fifth book recall clearly the three divisions of Bodin's chapter, viz. "honest means of raising revenues," methods of employing them, and reserving treasure for times of need. Smith placed expenditure first, as Petty had done, instead of second, as Bodin had preferred to do.

'■^ James Mill (1821) treated of taxation while considering the consumption of wealth. John Stuart Mill (1848) discussed somewhat briefly taxation and national debts. Ricardo, on the other hand, entitled his most important work, Principles of Political Economy and Taxation (181 7), and made important contributions to the theory of shifting and incidence.

Yet not a few important pamphlets or treatises were written upon special topics of immediate practical interest;^ and, in 1845, McCulloch published his Treatise on Taxation and the Funding System, which, as the title indicates, deals systematically with two out of the three divisions of public finance recognized in the Wealth of Nations. Not until 1892 did the first real treatise upon finance appear in Great Britain; and this work still holds exclusive possession of the field,^ although there has been an increased output of literature dealing with special parts of the science, particularly with taxation."*

In France during the nineteenth century financial studies followed practically the same course as in Great Britain. General treatises upon economics relegated financial topics to a subordinate position,* while there was a considerable output of meritorious works upon financial history and administration or other special subjects.^ In 1862 Joseph Garnier brought out an unsatisfactory treatise upon public finance,^ and somewhat later Paul Leroy-Beaulieu produced a decidedly superior manual which still ranks with the leading works upon our science.'^ France, too, has given us a very useful Dictionnaire des finances, edited by Leon Say, who, as student, administrator, and publicist, was one of the prominent figures in French finance during the last quarter of the nineteenth century.

In Germany the study of finance had developed so far during the eighteenth century that the production of systematic treatises proceeded apace during the nineteenth. The first important development was the modification of many of the received cam-

1 One of the most noteworthy was Robert Hamilton's Inquiry concerning the Management of the National Debt (1813).

2 C. F. Bastable, Public Finance (third edition, 1903). R. H. Patterson's Science of Finance {1868) is not a treatise upon public finance.

^ It should be observed that the fifth book of Professor Nicholson's extensive treatise, Principles of Political Economy (i 893-1 901), devotes not less than fourteen out of its twenty chapters to public expenditures, taxation, and public debts.

* J. B. Say (1803), for instance, treated expenditures, revenues, and public debts under the head of the consumption of wealth.

5 Especially worthy of mention is Rene Stourm's Le budget (fourth edition, 1900).

® Traite des finances (fourth edition, 1883).

' Traite de la science des finances (eighth edition, 191 2). Mention should be made, also, of the useful work by Jeze and Boucard, Elements de la science des finances et de la legislation financiere fran^aise (second edition, 1901).

THE LITERATURE OF PUBLIC FINANCE 9

eralistic doctrines under the influence of the teachings of Adam Smith. This work was practically accomplished by 1832 when K> H. Rau published the first part of his Grundsatze der Finanzwissenschaft/ which for several decades remained the leading manual for university students and aspirants for administrative posts. After the middle of the century the influence of Smith began to decline, but not until his doctrines had left a permanent impress upon German financial science. Of the modern treatises the chief is Adolph Wagner's Finanzwissenschaft (1877-), which is still uncompleted, although four portly volumes have appeared. Of the shorter works, those by Roscher (fourth edition, 1894), Cohn (1889), Eheberg (seventh edition, 1903), and von Meckel (1907, 191 1) should be mentioned ;^ while we should not overlook the third volume of Schonberg's Handbuch der politischen Oekonomie (fourth edition, 1896-98), which contains a valuable collection of monographs upon the various parts of public finance. Most of the German writers have studied with care existing financial institutions and their history, and public finance has received a noteworthy impetus from their labors.

While financial problems have demanded and received no little attention in the United States ever since the establishment of our national government, systematic study of public finance has been a comparatively recent development. In state papers or the writings of public men who have had to deal with questions of finance, a considerable body of literature has always existed,^ but in w^hoUy unsystematic form. Our earliest text-books on economics accorded financial topics the same cursory treatment which they received at the hands of contemporary English or French writers. During the last forty years federal or state commissions appointed to consider urgent problems have published more or less elaborate reports upon taxation

1 This, according to what has become the traditional German method, formed the third volume of Rau's Lehrbuch der politischen Oekonomie.

2 The volumes by Roscher and Cohn are parts of larger treatises upon economics. Cohn's Finanzwissenschaft has been translated (Chicago, 1895). Eheberg's work is perhaps the most convenient for the student.

3 Hamilton's Report on Public Credit (1790); Walcott's Report on Direct Taxes (1796); Gallatin's Sketch of the Finances of the United States {1796). For a much later period, maybe mentioned John Sherman's Speeches and Reports on Finance and Taxation (1879).

and some other subjects, of which a few have been of high merit/ More recently there has been a gratifying increase of interest in finance,^ as in other departments of economic investigation, which has given us a considerable number of special studies upon taxation,^ public debts,* the financial history of our own country,^ and various other subjects,^ as well as three general treatises upon public finance.'^ Finally, the formation of the National Tax Association has given us a national organization which is actively interested in all branches of public finance and publishes annually a volume of Proceedings.^

1 The New York Commission of 1871 and 1872, the Maryland Commission of 1886, and the Massachusetts Commission of 1897 are examples of the reports dealing with taxation. The federal revenue system was searchingly investigated after the Civil War by Mr. David A. Wells, who, as commissioner of revenue, issued several reports.

2 Of this perhaps the first signs were the numerous articles upon financial topics in Lalor's Cyclopaedia of Political Science (1883-84) and the translation of Cossa's Scienza delle finanze, under the misleading title, however, of Taxation, its Principles and Methods (1888).

3 Ely, Taxation in American States and Cities (1888); Seligman, Essays in Taxation (eighth edition, 1910), The Shifting and Incidence of Taxation (third edition, 1909), Progressive Taxation (second edition, 1909) ; Howe, Taxation in the United States under the Internal Revenue System (1896) ; Wells, Theory and Practice of Taxation (1900).

4 Adams, Public Debts (1887) ; Ross, Sinking Funds (1892); Scott, the Repudiation of State Debts (1893).

^ Works upon special parts of the field are too numerous to mention here. Of general works there are two : Bolles, Financial History of the United States (1879-1886) ; and Dewey, Financial History of the United States (1902).

6 Urdahl, The Fee System in the United States (1898) ; Kinley, The Independent Treasury of the United States (1893) ! Clow, Administration of City Finances in the United States (1901).

' Adams, The Science of Finance (1898) ; Daniels, Elements of Public Finance (1899) ; Plehn, Introduction to Public Finance (third edition, 1909).

8 Proceedings of the National Tax Association (1908-), A. E. Holcomb, Secretary, 195 Broadway, New York.

Chapter II General Considerations Co'ncerning Public Expenditures

4. The Views of Smith and Mill concerning the Functions of Government. — Adam Smith formulated his views in the following passage :^

According to the system of natural liberty, the sovereign has only three duties to attend to ; three duties of great importance, indeed, but plain and intelligible to common understandings : I. the duty of protecting the society from the violence and invasion of other independent societies ; 11. the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice ; and III. the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do mucl^ more than repay it to a great society.

The doctrine that, beyond providing for external defense, affording legal protection, and undertaking a few indispensable public works, the government should not interfere with the affairs of its citizens has often been called the doctrine of laissez-faire. In the middle of the nineteenth century, when its influence was perhaps greatest, the theory was formulated in moderate and effective form by John Stuart Mill., At the outset Mr. Mill remarks 2 that "there must be a specification of the functions which are either inseparable from the idea of a govern-

1 Wealth of Nations, Bk. IV, ch. 9.

2 Principles of Political Economy, Bk. V, ch. i.

II y ment, or are exercised habitually and without objection by all governments ; as distinguished from those respecting which it has been considered questionable whether governments should exercise them or not. The former may be termed the necessary, the latter the optional, functions of government.

The necessary functions of government recognized by Mill are substantially the same as those recognized by Adam Smith, although the later writer does not draw the line of demarcation quite so sharply as the earlier. In fact, Mill says :

In attempting to enumerate the necessary functions of government, we find them to be considerably more multifarious than most people are at first aware of, and not capable of being circumscribed by those very definite lines of demarcation, which, in the inconsiderateness of popular discussion, it is often attempted to draw round them. We sometimes, for example, hear it said that governments ought to confine themselves to affording protection against force and fraud ; that, these two things apart, people should be free agents, able to take care of themselves ; and that so long as a person practices no violence or deception, to the injury of others in person or property, legislatures and governments are in no way called on to concern themselves about him. But why should people be protected by their government, that is, by their own collective strength, against violence and fraud, and not against other evils, except that the expediency is more obvious ?

There is a multitude of cases in which governments, with general approbation, assume powers and execute functions for which no reason can be assigned except the simple one, that they conduce to general convenience. We may take as an example the function (which is a monopoly too) of coining money. This is assumed for no more recondite purpose than that of saving to individuals the trouble, delay, and expense of weighing and assaying. No one, however, even of those most jealous of state interference, has objected to this as an improper exercise of the powers of government.

But enough has been said to show that the admitted functions of government embrace a much wider field than can easily be included within the ring-fence of any restrictive definition, and that it is hardly possible to find any ground of justification common to them all except the comprehensive one of general expediency, nor to limit the interference of government by any universal rule save the simple and vague one that it should never be admitted but when the case of expediency is strong.