Problems in American Democracy Part 59

Finally, taxation policies should be systematized and coordinated.

402. ESSENTIALS OF A TAX SYSTEM.--The construction of an ideal tax system in this country would involve three steps.

In the first place, each branch of government should be enabled to secure revenues actually needed for justifiable purposes. In this regard the greatest need is to increase the taxing powers of our munic.i.p.alities. This is imperative if the cities of the future are to care for their citizens properly.

A second fundamental step relates to the separation of taxing power.

Each branch of government should pretty well confine its use of the taxing power to definite types of taxable wealth. The Federal government, for example, might secure most of its revenue from import duties, excises, an income tax, and stamp taxes of various kinds. Many taxation experts believe that the states ought to confine themselves mainly to license, corporation, inheritance, and, possibly, income taxes. Local governments might well secure most of their revenue from taxes on franchises, licenses, and real estate. Such a separation of taxing power might aid in the adjustment of fiscal needs to taxing power, as well as helping to remedy the evil of double taxation.

However, a complete separation of taxing powers is not necessarily desirable, and certainly it is not practicable, for there is a growing tendency toward duplication in income, inheritance, and other taxes.

At the present time, for example, not only the Federal government, but many of the states levy income and inheritance taxes.

A third fundamental step would be the coordination of local, state, and Federal taxing authorities. The central aim of such coordination should be so to distribute tax burdens that no form of taxable wealth would escape its just burden, and so that no form of wealth would be subjected to unduly heavy taxation. There is a growing feeling that to prevent double taxation and similar evils, all local taxing bodies ought to be coordinated under the state authorities, while for similar reasons the Federal government ought to have some measure of direction or control over that share of state taxation which is interstate in its effects.

403. REFORM OR ABOLITION OF THE GENERAL PROPERTY TAX.--The reform of state and local taxation logically begins with the general property tax.

In many states attempts are being made to reform this tax. In some cases "tax ferrets" are employed to discover tax evaders, a policy which may easily lead to corruption and favoritism. In other states the conviction is growing that local elective a.s.sessors ought to be supplanted by a permanent corps of state a.s.sessors, appointed under the merit system. This would reduce the danger of unequal and unfair a.s.sessments.

In other states there is a tendency to abandon the general property tax altogether. In New York, Ma.s.sachusetts, Pennsylvania, and other states, there is a marked tendency to turn over the general property tax to local governing bodies. In such cases it is intended that the state shall depend for most of its revenue upon income, corporation, inheritance, and license taxes.

The future will doubtless see a more widespread tendency toward the reform or abolition of the general property tax. In some states, however, such changes in the taxation system require const.i.tutional amendment, and const.i.tutional amendment is often a slow and tedious process.

404. REFORM IN LAND TAXATION.--Coupled with plans for the reform or abolition of the general property tax are proposals for the reform of land taxation. A primary aim of these proposals, some of which suggest elements of the single tax doctrine, is to secure a more correct a.s.sessment of land values. In many cases a state does not now tax the holder of a mortgage when the mortgaged land is also within the state and thus directly subject to taxation. This is a desirable development, but we ought to go still further, so that the holder of a mortgage would not be taxed whether or not he lived in the same state as the owner of the land. A mortgage is obviously not social wealth, but a paper claim on wealth, and this wealth ought not to be taxed twice.

Some authorities believe that the tax rate on land ought substantially to be increased, when it appears that such land is being held for speculative purposes. To encourage improvements, it is also proposed that certain permanent improvements on land be temporarily exempted from taxation. Lastly, it would appear socially desirable to levy special taxes on urban sites, so as to secure for the community some share of the future unearned increment.

405. THE INCOME TAX.--All taxes ultimately come out of income, but when we speak of an income tax we refer to a direct levy upon income as it arises, chiefly in the form of wages, salaries, and profits. A Federal income tax was levied during the Civil War, but in the nineties the Supreme Court held that such a tax violated the const.i.tutional provision that Congress shall not lay direct taxes except in proportion to the population of the states. In 1913 the Sixteenth Amendment to the Const.i.tution permitted Congress to lay and collect taxes on incomes without apportionment among the several states, and without regard to any census or enumeration.

Since 1913 Congress has pa.s.sed several income tax laws, and a number of the states have also adopted this form of taxation. The essential features of these laws are as follows. Incomes below a certain amount are exempt from taxation. The limit of untaxable income is raised for married persons living together. In calculating their net income, individuals may make allowance for debts, business expenses, and certain other items. Upon all taxable income above a certain minimum there is then levied a flat rate, const.i.tuting a "normal" tax. Where incomes exceed a certain amount, there is an additional tax. Thus the income tax is said to be "progressive," that is, the larger the income the higher the tax rate.

Many benefits are claimed for the income tax. It falls upon those best able to pay, and it is not easily evaded or shifted by the person upon whom it is levied. It is elastic and can readily be increased or reduced according as revenue needs change. Its progressive character is a feature which is considered socially desirable.

The chief defects of the income tax are two. In the first place, the effectiveness of the tax depends upon the willingness of the individual to declare his full income. This is not always done, especially where the income tax is regarded as an undue interference in the private affairs of the individual. Second, wealthy individuals often migrate to states where there is either no income tax or only a relatively light one. This last defect of course applies only to the state income tax.

406. THE INHERITANCE TAX.--Taxes upon inheritances have come into prominence since the opening of the twentieth century. Since 1916 the Federal government has levied an inheritance tax. At the present time most of the states also levy this form of tax upon property pa.s.sing by will or under the inheritance laws of the state. The essential features of the tax are everywhere the same. Small legacies are generally exempt. Legacies to direct heirs are either exempt, or are taxed at a lower rate than are legacies to collateral heirs. The rates are progressive, that is to say, they increase with the size of the legacy.

Many benefits are claimed for the inheritance tax. It brings in a large revenue, and falls upon those who are best able to pay. The tax cannot be shifted and it cannot easily be evaded. It is easily a.s.sessed and collected, because all wills must pa.s.s through the probate court. It is held that the state has a social claim upon the property of an individual who has ama.s.sed wealth under the protection of its laws, and that this property ought not to be transferred intact to those who did not aid in its acc.u.mulation.

If carried too far the inheritance tax would undoubtedly discourage the acc.u.mulation of wealth, but tax authorities are already guarding against this danger. On the whole, the inheritance tax is an important addition to our tax system. Its scope is being rapidly extended: rates are being raised, the principle of progression is being more frequently applied, and exemptions allowed direct heirs are being reduced. The tax is increasingly used in the effort to redistribute unearned wealth, though the extent to which this is true depends very largely upon local sentiment.

407. CORPORATION TAXES.--The rapid growth of American industry has been accompanied by an enormous increase in the number and importance of industrial corporations. The proper taxation of these bodies is now challenging the attention of both state and Federal governments.

The difficulties of taxing corporations are two: First, how to prevent that form of double taxation which results from the fact that several states may levy taxes of varying weight upon interstate corporations.

Second, how to prevent that form of double taxation which imposes a burden both upon the tangible property of the corporation and upon the stocks and bonds representing ownership in that tangible property.

A number of taxation experts suggest meeting the last-named difficulty by exempting from taxation stocks, bonds, and other securities, and by imposing, instead, a tax directly upon the capitalization of the corporation itself. In the case of corporations which are local and of moderate size, this might be effected by the reform of tax laws within a single state. Where, on the other hand, corporations are distinctly interstate in character, such reform would require either a careful coordination of the tax laws of the several states, or a corporation tax which should be purely Federal in character.

The first difficulty mentioned above would likewise have to be met, either by the coordination of state tax systems, or by allowing taxes on interstate corporations to be levied solely by the Federal government.

It is claimed by some economists that the virtual impossibility of effectively coordinating the tax laws of the various states renders it imperative that all interstate corporations be taxed solely by the Federal government. In such a case the Federal government would be taxing interstate corporations partly for its own benefit, and partly as the agent of the various states. It is said also that such a Federal tax should be levied on corporations at the source, _i.e._ upon capitalization rather than upon stocks and bonds. Being applied at the source, it would reach all forms of corporation wealth. It would be easy and economical to administer. So far as corporations are concerned, a purely Federal tax on interstate corporations might prevent both forms of double taxation.

Even though the states consented to a purely Federal tax on interstate corporations, however, it might prove difficult for state and Federal governments to agree upon a fair division of the joint revenues derived from such a tax.

QUESTIONS ON THE TEXT

1. Why is the cost of government increasing?

2. Name some sources of public revenue.

3. What is a tax?

4. What is the fundamental defect of American taxation?

5. In what way is there an inadequate apportionment of taxing power to fiscal needs in American government?

6. What is the chief difficulty of tax a.s.sessment?

7. Why is it difficult to tax intangible property?

8. Enumerate the fundamental defects of the general property tax.

9. Distinguish between the two forms of double taxation.

10. Outline some fundamental ideals in taxation.

11. What are the three steps necessary in the formulation of a satisfactory tax system in this country?

12. To what extent is the general property tax being reformed or abolished?

13. Discuss the reform of land taxation.

14. Describe the nature of the income tax.

15. What are the benefits and defects of such a tax?

16. Describe the inheritance tax. What are its benefits? What are its dangers?

17. What are the two difficulties in the way of taxing corporations?

What are some suggested methods of meeting these difficulties?

REQUIRED READINGS

1. Williamson, _Readings in American Democracy_, chapter x.x.xii.

Or all of the following:

2. Bullock, _The Elements of Economics_, chapter xv.

3. Ely, _Outlines of Economics_, chapter x.x.xiv.