Front Page Titles (by Subject) PART III: TARIFF AND TAXATION - Economics, vol. 2: Modern Economic Problems
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PART III: TARIFF AND TAXATION - Frank A. Fetter, Economics, vol. 2: Modern Economic Problems 
Economics, vol. 2: Modern Economic Problems, 2nd edition, revised (New York: The Century Co., 1923).
Part of: Economics, 2 vols.
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TARIFF AND TAXATION
AMERICAN TARIFF HISTORY
§ 1. Political and trade boundaries. § 2. Prevalence of protective tariffs. § 3. Specific and ad valorem rates. § 4. Some technical features of the tariff. § 5. The tariff, 1789-1815. § 6. The tariff, 1816-1845. § 7. The tariff, 1846-1860. § 8. The tariff, 1861-1871. § 9. The tariff, 1872-1889. § 10. The tariff, 1890-1896. § 11. The Dingley tariff, 1897-1909. § 12. Sentiment favoring lower rates, 1908. § 13. The Payne-Aldrich tariff, 1909-1913. § 14. The Underwood tariff, 1913. § 15. Operation of the tariff, 1913-1921. § 16. The return to high tariff, 1921.
§ 1. Political and trade boundaries. By international trade is meant, in general, trade between persons resident in different countries; comparatively rare is the case in which one of the two parties to a trade is a whole nation acting through its government as a unit (e. g., in the purchase of munitions of war in neutral countries). Outside of a communistic group such as the family, trade is a necessary accompaniment of division of labor. As territorial division of labor began between neighboring tribes,1 international trade was the earliest kind of regular interchange of goods. Indeed, the very word “market” meant originally the boundary between tribes. Thus, from primitive times when wandering savages gave bits of flint or copper in return for salt or fish, individuals have sought to adjust their goods to their desires through trade with men of other political groups. With the progress of the world in the means of communication and transportation, international trade has widened in extent and grown in volume.
Economic relations never have been coextensive with political relations. The economic groupings of men connected by a network of trades never have and never will correspond very nearly with political groupings of men bound together by common citizenship in particular states. Indeed, it is not uncommon for many of the residents in two adjoining states to trade far more with each other than they do with their own fellow citizens. Lawmakers and rulers from the beginnings of formal governments have constantly tried to hinder this kind of trade. They have done this chiefly because of their belief that they could strengthen their states in political and economic ways, and could favor some of their citizens, by confining economic relations within political boundaries—if not exclusively, more closely than when trade was left to take its natural course, guided by individual motives. The regulation of international trade, therefore, has always constituted an economic problem of great importance in the field of political action.
§ 2. Prevalence of protective tariffs. For a century and a half most serious students of economics have favored a larger measure of freedom, if not absolute freedom, in foreign trade. But the actual practice of most nations has never been in accord with the principles laid down by the philosophers. Great Britain alone among the larger countries has, since 1846, steadily pursued a low-tariff policy for revenue only, and her example has been most nearly followed by Holland and Denmark. Germany, which had always had restrictive duties, adopted still more protective measures under Bismarck in 1879. France, Italy, and most of the other nations of Europe have strong protective tariffs. The United States has followed a restrictive policy since near the beginning of the last century. The explanation of this contradiction between precept and practice is not entirely simple. Great interests are affected by foreign trade, and certain of these interests are able to influence opinion and to dominate legislation. Free trade is not the most desirable thing for every one. The general policy of free trade between nations, as advocated by most economists since Adam Smith, has usually been rejected by the people and the legislators.
In its details American policy in tariff legislation under the Constitution has been varied and vacillating. The changes have been determined in most cases by motives of temporary partizan advantage or by the political activity of the immediate beneficiaries rather than by clear knowledge and consistent purpose of the electorate as a whole. Thus its lessons for the student are largely of a negative nature, but they well repay serious study.
§ 3. Specific and ad valorem rates. Before entering upon the history of the American policy let us make clear the meaning of certain technical terms and explain certain methods that are frequently referred to.
Rates (and duties) may be either specific or ad valorem. Specific duties are those that are calculated and levied according to some physical test, as so much per pound, per yard, per hundred-weight, or per ton. Ad valorem duties are those that are calculated and levied according to the value of the goods (usually as it was at the place of shipment), determined by an assessor, by invoice of sale, by statement of the importer under oath, etc. The actual duty collected on any article may result from various combinations of the two rates (as, to take an actual example, $4.50 a pound and 25 per cent ad valorem on cigars and cigarettes) or ad valorem with a minimum valuation so that on the cheaper goods the rate is specific.
Specific rates are more easily applied in administration, not offering the temptation to undervaluation and misrepresentation that ad valorem rates do; on the other hand, specific rates do not adjust themselves to price changes as ad valorem rates do. If the prices of goods go up the specific rate is relatively less and affords less of “protection” to the domestic producer; whereas if prices go down (as, in general trend, the prices of manufactured goods have done most of the time) the specific duties are relatively greater. To take a historical example, the specific rate of 6¼ cents a yard on cotton goods in 1816, which was at first in fact only about 25 per cent, within a few years became about 75 per cent and absolutely prohibitive. For this reason specific rates have most often been used in acts intended to increase the “protective” duties and often as a device for immediately raising rates; while ad valorem rates have been more often used in acts prompted by the desire for less drastic exclusion and for a more adequate revenue; but there is no essential connection between the protective policy and specific rates. Indeed, in the period from 1897 to 1909, when most prices were rising, many of the specific rates under the Dingley Act, intended to be strongly protective, afforded less and less “protection.”2
§ 4. Some technical features of the tariff. All goods not subject to duties are said to be on the free list. It is customary to group articles in schedules, of which there are fourteen in the law of 1913, designated from A to N (for chemicals, pottery, metals, wood, etc.), but the rates are not uniform for all the articles in each schedule. Drawbacks are a certain amount, the whole or a part, of the duties that have been paid on imported commodities, which is paid back by the government on the reëxportation of the goods. Compensatory duties (or compensatory rates) are those levied on certain manufactured articles with the purpose of raising their price as much as domestic producers’ costs are raised by a tariff on their raw materials. Examples are a duty on woolen goods to offset a duty on wool, or a duty on shoes to offset one on hides. They may be intended to be partial or complete or more than sufficient, and are likely in any case to work either more or less to the advantage of the domestic producer than was intended. It may be that the conditions of supply are such that the home price of the raw materials is raised little or none by the tariff, while the price of the finished product is considerably raised, or vice versa.
§ 5. The tariff, 1789-1815. The main difficulty of government in 1781-1789 under the Articles of Confederation was lack of the power to obtain revenues by taxation. The separate states alone could levy duties, and a good many tariff restrictions on freedom of trade among them developed in this period. The Constitution established the principle of entire freedom of trade among the states. The first act of Congress under the Constitution levied a tariff, primarily for revenue purposes, but clearly having a protective purpose in the view of some of the representatives. However, most of the separate rates, as well as the general average rate, were the lowest ever levied by Congress, except that there was no free list and that 5 per cent was imposed upon all goods not otherwise enumerated. Ad valorem duties up to a maximum of 15 per cent (that on carriages) were laid upon certain. articles of luxury, and low specific duties on a few articles such as glass, nails, iron manufactures, hemp, and cordage.
From 1789 until 1812, thirteen tariff laws, all told, were passed. One after another many rates were raised to get larger revenues, but some goods were put upon the free list. The foreign trade, in both imports and exports, grew largely and with considerable regularity, rising then rapidly to a maximum in 1807. Then followed troublous times, with British Orders in Council and our embargo and non-intercourse acts until 1812, and war until 1815, trade falling off at first one half, and at last (in 1814) to less than one twelfth of the former maximum. Just as trade was, in the war period, sinking to the vanishing point, the tariff rates were doubled in hopes of getting increased revenues needed for the war, but in vain.
§ 6. The tariff, 1816-1845. Though rates had been rising, manufacturers had been making efforts to secure higher rates for protection, even as early as 1803. Effectual exclusion of foreign goods and consequent stimulus to the establishment of manufactures in the eastern states resulted, in the period 1808-1815, from the embargoes and the war. On the return of peace, imports were resumed on a large scale and the call for a higher tariff was loud. In the revision of 1816, rates in a number of cases were fixed higher than those before the war. Average rates are said to have been about 20 per cent. The rate on both cotton and woolen goods was 25 per cent (and the minimum on cotton goods was a specific rate of 6¼ cents a yard). High rates were imposed on pig iron (50 cents a hundred), hammered bar (75 cents a hundred), and rolled bar ($1.50 a hundred, equivalent to about 100 per cent ad valorem). Rates were raised on many other articles. The average ad valorem rates collected in 1821 attained the remarkably high figures of 36 per cent on dutiable goods, and almost 35 per cent on free and dutiable together.
In 1824, in response to the growing sentiment in favor of the so-called “American policy of protection,” many rates were still further increased, as those on cotton goods and woolen goods (to 33⅓ per cent) and some kinds of iron. Cheap wool was now taxed 15 per cent, and that valued over 10 cents a pound at 20 per cent (to be 30 per cent after 1826). In 1828, in the “tariff of abominations,” which evoked much bitter criticism, the rates on all these goods were again raised, those on woolen goods being in some cases 100 per cent on the value, and those on iron being from 40 to 100 per cent on the value, and duties were levied on molasses, hemp, and flax. The results appear in the statistics of 1830, showing the average ad valorem rates on dutiable imports to be nearly 49 per cent, and on free and dutiable together to be over 45 per cent. This marks a temporary high point in tariff rates. Revenues were then becoming excessive, and that year the rates on tea and coffee and some other goods were reduced.
Violent protests, especially from the South, were made against the protective system, and the tariff became a more important political issue. Then in 1832 a number of changes were made, mostly downward; the iron tariff, for example, being reduced to about the level of 1824. Average rates were thus brought down to about 33 per cent on dutiable goods. The compromise tariff act of 1833 provided for a process of reduction during a period terminating in 1842, the cut to be small at first, then to be made more rapidly to bring the maximum rate on any article down to about 20 per cent.3 These changes, while as yet incompleted, had, in 1840, brought the average rates on dutiable goods down to but 30 per cent and on free and dutiable together to 15 per cent. The 20 per cent rate, however, remained in effect only two months in 1842, when it was replaced by a tariff with higher rates distinctly protective, passed by the Whig party, and which remained in force four years.
§ 7. The tariff, 1846-1860. The Democratic party, coming into power, passed the act of 1846, called the Walker tariff after the Secretary of the Treasury. As he was a believer in free trade, this act is often mistakenly described as a free-trade measure. It was, in truth, far from that. Most of the rates were, indeed, lower than those that had been in force between 1816 and 1846 (with the exception of those between 1840 and 1842), but still some of the rates were high (a few as high as 100 per cent) and many of them were strongly protective in nature. The fact that tea and coffee were on the free list is marked evidence that considerations of revenue did not dominate. The rate on cotton goods was 25 per cent and the rates on many of the most important other protected articles (iron, woolen goods, manufactures of iron, leather, paper, glass, and wood) were 30 per cent. The average rates under the act for its last eight years (to 1857) were on dutiable 26 per cent, on free and dutiable 23 per cent. The country prospered for eleven years under this tariff. In 1857 rates were again reduced, the more important protective rates from 30 per cent. to a level of 24 per cent. This time partizan considerations played no part in the discussion. The revenues of the government had been excessive and the need of a reduction was admitted by nearly every one. The average ad valorem rates under the nearly four years of the act of 1857 were about 20 per cent on dutiable and 16 per cent on free and dutiable (the lowest in the century between 1812 and 1913).
§ 8. The tariff, 1861-1871. The reduction of rates in 1857 was made just at the time when the country was at the height of a wave of prosperity and of speculation which culminated in the financial crisis of that year.4 As always at such time, the government’s revenues fell greatly. The first purpose in the revision of the tariff in 1861 was simply to restore the rates in the act of 1846. But the Morrill act, which became a law just before Fort Sumter was fired upon, contained many higher rates and its purpose was avowedly protective. This necessarily involved a sacrifice of possible revenues for the government.5 Then from the beginning of the Civil War till its close some rates were raised almost every month with little scrutiny or debate. The average ad valorem rate jumped from 19 per cent on dutiable in 1861 (under the law of 1857) to an average of 35 per cent in the three years, 1862-1865.
The most important tariff acts of the war were those of 1862 and 1864, by which large increases were made on many articles. These tariff acts were passed in connection with far-reaching and burdensome applications of internal revenue taxes on many kinds of manufactures. The tariff rates were primarily intended to offset these taxes, “to impose an additional duty on imports equal to the tax which had been put on the domestic articles,” as was said by the sponsors of the bill. These rates were similar in purpose to compensatory rates, and in many cases they were more than sufficient to offset the internal taxes. Under the last of these acts the duties collected in the six years from 1865 to 1870 averaged nearly 48 per cent on dutiable and nearly 44 per cent on free and dutiable.
The remarkable fact was that soon after the war the internal revenue taxes began to be repealed one after another, and by 1872 nearly all those bearing upon general manufactures (apart from cigars and alcoholic beverages) were gone. The tariff, however, remained almost unaltered. This repeal of internal revenue taxation had the same “protective” effect as raising the tariff rates by so much. As if this were not enough for the protected interests, in 1867 the duty on woolens was further raised, and in 1870 numerous other increases were made in the duties having a protective character. Some reductions were made, but these were almost all on articles of a distinctly “revenue” character such as tea, coffee, sugar, molasses, spices, wines! Revenues were superabundant for current expenses of government, and although there was a large national debt, hardly any of it was redeemable at the time. There was therefore need to reduce taxation, but the attention of the consuming and tax-paying public was distracted by the somewhat passionate issues of the day. Besides, the public had not the technical knowledge or the unified opinion on this subject to protect itself against the greedy lobby in this process of tax revision. And so, selfish commercial interests could get nearly what they asked for in Congress, and politicians at Washington, who had come to have a well-nigh superstitious faith in the efficacy of very high protective duties, could quietly use the opportunity to raise the people’s taxes for the people’s good.
These virtual increases in the protective power of the rates in force are not evident in the statistics of average ad valorem rates, because the higher rates in many cases were sufficient to exclude relatively more of the foreign products to which they applied.6 The imports came, by a process of selection, to consist more largely of goods subject to lower rates. So the year 1868 showed the highest average rate on dutiable goods (48.6 per cent) of any year after the act of 1828 until that of 1890, and the rate fell somewhat each year until in the fiscal year 1872 it was 41.3 per cent.
§ 9. The tariff, 1872-1889. In 1872 the country was again, as in 1857, nearing the crest of a wave of prosperity and of speculation. Imports and customs receipts attained new high points in our history, and, despite the enormous reductions of internal revenue taxation, the government’s receipts continued to be excessive.7 The important revenue articles, tea and coffee, were then transferred to the free list, as were also raw hides and paper stock and some other articles; the rate on salt was reduced one half and that on coal almost as much. Many other specific rates were reduced and the ad valorem rates on a long list of articles were cut to “90 per cent of existing rates.” The effects of these reductions were mingled with those of the severe financial panic occurring in 1873 and of the depression following, which reduced especially the importation of luxuries bearing the higher rates. The average rate of the three (fiscal) years 1873 to 1871 was 39 per cent on dutiable (a fall of 9) and 28 on free and dutiable (a fall of 16). The ratio of imports entering free, which in 1872 was still only about 1 in 14, became the next year 1 in 4. But government revenues falling short in 1874, advantage was soon taken of the circumstances to repeal in 1875 with little discussion the horizontal cut of tariff rates made in 1872. The specific rates that had been reduced in 1872 were little changed, however. From 1876 to 1883 (8 fiscal years) nearly a third of the imports consisted of goods on the free list. The average rate on dutiable was over 43 per cent, and on free and dutiable 30 per cent.
The tariff was a leading issue in the campaigns of 1876 and 1880. In 1876 the Democratic party’s platform contained a plank for “a tariff for revenue only.” It was a time of great industrial depression, and, as is usual in such cases, a large number of electors held the party in power responsible for business adversity (as in turn they credit it with any more or less fortuitous prosperity). The Republican candidate Hayes, after a long contest in Congress, was declared elected by a margin of one electoral vote. His opponent, Tilden, had received a quarter of a million more votes in the country as a whole. In 1880, when business prosperity was rapidly returning, the party in power was successful by a goodly margin of votes in the electoral college, though having a bare plurality of the popular vote. Garfield, the Republican candidate, was known as one of the more moderate protectionists, and his opponent, General Hancock, who was without any political record, declared the tariff to be a “local issue,” to be determined in the Congressional districts. The tariff issue was thus not very sharply drawn. The tragic death of President Garfield left no clear leadership. The tariff question from 1876 to 1884 was politically in the doldrums.
Yet there was undoubtedly a somewhat growing popular demand for some moderation of the very high duties. To this demand the friends of protection who were in power felt compelled to concede something—or to appear to do so. Congress appointed a Tariff Commission of which the chairman was secretary of the wool manufacturers’ association, and after a report the tariff act of 1883 was passed. The net results were almost nil. Some rates were lowered, while others were raised with a definite protectionist purpose. The average rates for the next seven years, 1884-1890, were 45 on dutiable (an increase of nearly 2 per cent) and 30 on free and dutiable (unchanged as compared with the period ending 1883). In 1884 the Democratic party elected its presidential condidate (Cleveland) and a majority of the House, but as it did not control the Senate it could not pass any of the various proposed measures for a “reform” of the tariff. In 1888 the protective principle was a leading issue in the campaign. Although Cleveland received a few ten thousands larger popular plurality than he had obtained four years before, and held the electoral votes of eighteen of the states, he lost New York and Indiana by very narrow margins, a result in which other issues played a large part. Harrison was elected, and the party favoring a high protective tariff came into power.
§ 10. The tariff, 1890-1896. The tariff act (known as the McKinley Act) of October, 1890, followed. This was a general extension of the principle of protection. The rates on woolen goods were on the whole increased and made in more cases prohibitive. The rates on wool were increased. The rates on iron, which was already highly protected, were little changed except by the increase of the duty on tin-plates. The duty on sugar (in the main a revenue duty, yielding $55,000,000 a year) was removed and a bounty was granted to domestic sugar producers. In the next three (fiscal) years, 1892-1894, the average rate proved to be more than 49 per cent on dutiable (4 per cent increase) and 22 per cent on free and dutiable (the remission of sugar duties accounting for the most of this fall of 8 per cent from the average under the preceding law—4 per cent fall from the last year of its operation). Particularly noticeable, however, was the increase in the proportion of goods entering free, which was nearly 55 per cent of all merchandise, as contrasted with about 33 per cent between 1884 and 1890.
Again the political weather-vane shifted. The month after the McKinley Bill became law, the Congressional elections (November, 1890) returned an overwhelming Democratic majority in the House, although this was a period of business prosperity, a fact usually favoring the party in power. In 1892, Cleveland, being again a candidate, was successful over Harrison by a largely increased plurality of the popular vote, and received almost double the electoral vote of his opponent. The House was Democratic, and the Senate soon became so. Business prosperity was rising again to a high level, but there were many features of financial and speculative weakness in the situation, intensified by growing fear of a cheap money (silver dollar) inflation under the act of 1878 providing for the annual purchase of silver. A financial panic occurred in September, 1893, six months after Cleveland’s inauguration.
Nevertheless Congress enacted the next year, August 28, 1894, the Wilson tariff act (named for the Congressman who introduced the bill). The changes made by this legislation were not on the whole very great, but were nearly all in the direction of the lowering of the tariff. Most notable was the putting of raw wool upon the free list. Some rates on woolen goods were reduced, but hardly more than enough to offset the effects, upon manufacturers’ costs, of the reduction of the tariff on raw wool. Likewise small reductions were made on cotton and silk goods, on pig iron, steel and tin-plate, and many other articles; and larger reductions on coal, iron ore, chinaware, and glassware. To make up for the expected reduction of receipts from other sources, a duty was laid again upon raw sugar, and an income tax was passed (this soon, however, to be declared unconstitutional).
Under this law, for three fiscal years (1894-1897) the average rates were 41 per cent on dutiable and 21 per cent on free and dutiable,—pretty high rates. The proportion entering free under this act was actually less than under the McKinley Act, partly because of the sugar item, and partly, probably, because of general business conditions.
§ 11. The Dingley tariff, 1897-1909. The campaign of 1896 was waged almost solely on the issue of free silver. Undoubtedly great numbers of voters supported William McKinley rather despite of, than because of, his high-protectionist beliefs. But his inauguration was promptly followed by the passage of the Dingley Act of July 24, 1897, which embodied a marked increase of protective rates. A duty was again levied on wool, and also on hides, which had been untaxed since 1872. High rates were made for woolens, linens, silks, chinaware, and the rate on sugar was doubled. Provision was made for some reduction of rates by reciprocity agreements, but the conditions were so complex that the effect could not be great. This high protective tariff, thus enacted without popular discussion, remained almost unchanged for twelve years, the longest life, by one year, of any tariff act in our history, while other issues absorbed public attention—the Spanish War, colonial policy, “imperialism,” railway rate regulation, corporation control, etc. The rate under the first full fiscal year of the operation of the Dingley tariff, 1899, was the highest on dutiable in our history, 52 per cent, and was nearly 30 per cent on free and dutiable. In practical operation, however, the average rate steadily became more moderate because of the rapid rise of the general price level that was in progress throughout this period, amounting to 35 per cent from 1898 to 1909.8 The average rate of duties collected for the period of twelve years was 47 per cent on dutiable and 26 per cent on free and dutiable. It was steadily falling, and the last year, 1909, was 43 per cent on dutiable and 23 per cent on free and dutiable.
§ 12. Sentiment favoring lower rates, 1908. While the Dingley Act was thus in operation showing declining average rates, sentiment was developing in every part of the country in favor of a further moderation of the tariff. This was due partly to the discontent resulting from steadily rising general prices, in which change the rise in the prices of food and of many other necessities was not fully compensated by the rise of the wages and incomes of the masses. Partly the growth of this sentiment accompanied the agitation against trusts and the belief that protective duties in some cases were an aid to the formation of domestic monopolies. But, more fundamentally, this changing sentiment was the result of the changing industrial conditions in America. The character of our foreign trade had altered greatly since the early nineties. We were importing relatively less and less of manufactured and finished products, and more of raw materials; and we were exporting less and less of raw materials and more of finished products. A growing number of manufacturers were feeling the need of cheaper raw materials and were looking hopefully toward an enlargement of their foreign trade.
In view of the changing public sentiment, the Republicans in the campaign of 1908 admitted that the protective tariff needed to be revised, but they declared that it should be revised by its friends. It was doubtless the general understanding that “revision” in this promise meant revision downward, though this was left somewhat unclear in a campaign wherein the tariff played a somewhat minor part. The Republican platform formulated a new rule for maintaining “the true principle of protection,” namely, that it “is best maintained by the imposition of such duties as will equal the difference between the cost of production at home and abroad, together with a reasonable profit to American industries.” This rule though fallacious, is very attractive in its suggestion at the same time of the idea of a moderation of the tariff and of an exact practical (not to say scientific) standard for the determination of the proper rate in every case.9
§ 13. The Payne-Aldrich tariff, 1909-1913. The tariff act of 1909 was the attempt of the successful party to redeem its campaign promises in regard to the tariff. Many changes of rates were made, both downward and upward. It was estimated that rates were reduced in 584 instances, affecting 20 per cent of imports. These changes included placing hides upon the free list (taxed 15 per cent before,) and cutting down the rate on leather, shoes, coal, lumber, iron ore, pig iron, and steel-rails. But on the other hand rates were increased in three hundred instances (including many items in the cotton schedule). The general belief that little reduction was effected, on the whole, was confirmed by the experience under the act. As compared with the last two years (1908-1909) of the Dingley tariff the first two years of the Payne-Aldrich tariff showed a decline of 1.5 per cent, and on free and dutiable a decline of less than 3 per cent. These reductions in the statistical results are no greater than occurred within like periods while the Dingley Act continued in operation without change.10
Probably no tariff since “the act of abominations” in 1828 has called forth more widespread criticism than this one, and the tariff became a leading issue in the campaign of 1912. After 1910, The House being Democratic, many bills to reduce duties were presented, and some were passed by both houses; but all were vetoed by President Taft, mainly on the ground that it would be best to await the report of the tariff board which had been authorized and appointed for the purpose of ascertaining the cost of production referred to in the “true principle of protection.”
§ 14. The Underwood tariff, 1913. After President Wilson was inaugurated, March 4, 1913, the tariff was at once taken up by Congress. The general features of the act that was passed were as follows:
(a) Considerable additions to the free list of raw materials.
(b) Abolition of compensatory duties corresponding with the old rates on raw materials.
(c) Replacement of specific by ad valorem rates in many cases.
(d) Taxation of plain kinds of goods less than fancy kinds—luxuries higher than necessities.
(e) Reduction of rates generally (most of the few increases being to correct some apparent error in the old law).
(f) Application of the so-called competitive principle to rates intended to be protective, viz., to leave the rate just barely high enough to keep out foreign products.11
Articles placed on the free list were raw wool (which had borne a rate equivalent to about 44 per cent), metals, agricultural implements, raw sugar (the lower rate to go into effect gradually), coal, lumber, many agricultural products including live cattle, meats, wheat, corn, flax, tea, and hemp, and numerous manufactures including boots, shoes, gunpowder, wood pulp, and print paper.
Moderate reductions were made in the schedules for chemicals, earths, cotton goods, and sundries, while rates on various luxuries were either unchanged or raised. Left almost unchanged were the schedules for tobacco, for spirits and wines, and for silks (already very high).
This act was signed October 3, 1913, and had been in operation about nine months when the great war broke out in August, 1914. What its effects would have been under more normal conditions we can judge little from the actual experience.
§ 15. Operation of the tariff act, 1913-1921. The revision of the tariff of 1913, viewed with non-partizan eyes, appears to have been carried out as consistently with regard to its professed doctrine, and as little influenced by the malevolent arts of the old-time Congressional lobby, as any debated tariff act in our history. It still contained, on the whole, a large measure of protection, evidenced by the fact that in the first eight months that the act was in operation the ad valorem rate on dutiable goods was but 4 per cent less, and the average rate on free and dutiable together was about 3 per cent less, than in the preceding year. Apparently this was far from a “free-trade tariff.” The reduction in the average rate collected was less than was expected. Many of the reductions had little effect, the former rate having been much higher than was needed to exclude the goods. In other cases the old rates were but nominal and inoperative because they were upon goods regularly exported, not imported (e. g., farm products, cotton goods, and some other manufactures). But some of the reductions doubtless would have forced the less efficient plants in some industries to increase their efficiency or go out of business. Time, in any normal period, is needed for adjustment, but an adjustment of a most abnormal kind was in progress during the war. Imports from Europe fell somewhat, while total imports (after 1915) increased, and exports increased enormously. Old industrial establishments were converted to different and temporary uses. The comparatively low duties had no harmful effect, and enabled our trade to adapt itself far more quickly to international conditions and to profit more by the great opportunities than could have been possible with a high tariff.
§ 16. The return to high tariff, 1921. With the ending of warfare in November, 1918, began to be heard anew the agitation for higher duties. Some industries, such as the chemical, which had sprung up during the war, saw their end if, and when, German trade was resumed. The financial depression about the middle of 1920 further stimulated the demand from many quarters for a return to high protective duties to “give employment to our labor.” The demand for a prohibitive tariff is always heard at such times. Our prediction made in 1916 was that12 the conclusion of the war must bring a new readjustment that must cause a severe shock to some enterprises and this must have been so under any possible variety of tariff, for such changes are logically related to the subject of financial crises rather than to that of the tariff.13 Further it was said at that time: “Under various pretexts, such as the danger of a flood of cheap goods after the close of the great war, attempts will be made to make the tariff still more prohibitive. If the attempt is made through temporary rates to reduce the shock of the trade adjustments, of the ‘dumping’ after the war, then the devising and administration of such measures should be delegated to an expert, disinterested, permanent tariff board. The task is to prevent temporary ‘unfair competition’ and sudden changes, rather than to raise permanent barriers to fair trade.”
The sweeping victory of the Republican party in November, 1920, was probably aided in some part by the belief that higher protective duties would remedy the situation. Agricultural interests were particularly hard hit by falling prices due to the closing of European markets because American credit was suddenly withdrawn. So temporary acts providing for higher duties on both manufactured and agricultural products were passed in 1921, and the country moves again toward a period of higher duties.
§ 1. Benefits of international trade. § 2. Erroneous views of benefits. § 3. Relatively advantageous industries. § 4. Persistence of differences between nations. § 5. Doctrine of comparative advantages. § 6. Advantages confused with monetary costs. § 7. Equation or international exchange. § 8. Balance of merchandise movements. § 9. Cancelation of foreign indebtedness. § 10. Par of exchange. § 11. International monetary balance and price levels.
§ 1. Benefits of international trade. International trade is carried on by individual traders in any two countries. What motive impels men to trade across the political boundaries of a state? The simple answer is that each trader has something to give and desires to get something in return. Each is seeking to get something that has to him a greater value than the thing he gives, and he believes he can do this in trade with a foreigner better than by trading at home. In any trade, both parties gain, or think they are gaining.1 In international trade there is the same chance for mistake as in domestic trade, but no more. In a single transaction in either domestic or foreign trade one party may be cheated, but the continuance of trade relations is dependent upon continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another is now generally rejected, but often still it is assumed to be true of international trade. The starting-point for the consideration of this subject is in this proposition: Foreign trade is carried on by individuals, for individual gain, with the same motives and for the same benefits as are found in other trade.
The advantages of international trade are indeed but those of division of labor in general, in the particular case where it happens to cross political boundaries. The great territorial divisions of industry are determined first and mainly by natural differences of climate, soil, and material resources. Thus trade arises easily between North and South, between warm and frigid climates, between new countries and old, between regions sparsely and regions densely populated.2
Territorial divisions of industry are determined, secondly, by social and economic differences such as those with respect to accumulation of wealth, amount of lendable capital, invention, organization and intelligence of the workers, and the grade of civilization.
§ 2. Erroneous views of benefits. Certain erroneous explanations of the advantages of foreign trade may be dismissed with brief mention. It is said to give vent for surplus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the “lump of labor notion,” the destruction of machinery, and the praise of waste and luxury.3 If it were true that sale to backward nations were now necessary to give an outlet for products that would otherwise rot in the warehouses, a time would come at length when the world would have an enormous surplus unless neighboring planets could be successively annexed. Again it is said that the great purpose of foreign trade is to keep exports in excess of imports, so that the money of the country may constantly increase in amount. The ideal of such theorists is an impossible condition where the country would constantly sell and never buy.4 In the narrow commercial view of the subject the sole object of foreign trade is to afford a profit to the merchants, regardless of the welfare of the mass of the citizens.
§ 3. Relatively advantageous industries. Foreign trade normally imparts increased efficiency to the productive forces of each country. In most cases it is apparent that labor is more effective and gets a larger product when it is applied in those ways for which the country is best fitted and for which it offers the best and most bountiful materials. When two countries are somewhat differently situated, such as an old country like England and a newer country like the United States in the nineteenth century, the relative advantages of various industries in the two countries are very unlike. The newer country excels in its broad area, its abundant rich lands, its bountiful natural resources of forests and mines. These are the superior opportunities that give the economic motives for settlement and for continued immigration from other lands. Most of the newcomers find it to their advantage to develop the peculiar opportunities of the new land, rather than to go on producing the same things in the same way as they did in the old country.5 Thus they get a larger quantity of products per day’s labor, and are able to gain by trading a part of these for the products of the older country. Thus the characteristic industries of the two countries must differ. Further, when special branches of industry have developed at one place, they make possible the advantages of large production and of high specialization. Without any government supervision, therefore, but simply through the choice of enterprises, each citizen seeking the best occupation and best investment of capital for himself, industries are developed in which each country is either most markedly superior, or least inferior to its neighbors. If either laborers or capitalists in the new country were to turn to the less-favored industries they would be forced to accept a smaller reward than they can earn in the more favored.
§ 4. Persistence of differences between nations. If both men and wealth interchanged between industries and between countries with perfect readiness and without any outlay whatever for transportation, these differences would soon disappear, and perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and wealth of given quality and amount would receive the same reward. But the interchange of labor and of products between countries is never without friction.
The laborers, enterprisers, and investors in a naturally rich country are thus in a position of more or less enduring advantage relative to those of older and poorer countries. Differences of the same nature appear as between different parts of the same country, as between the northern and the southern states of the American Union, between the eastern and the western states, and even between neighboring towns in the same state. The differences between two countries, however, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages, of interest, and of profit. Although, as Adam Smith said, “a man is of all sorts of luggage the most difficult to be transported,” the higher wages in a new country attract constantly from the older lands a portion of their laborers. The higher rate of interest in new countries constantly attracts investments from abroad; yet, despite these forces working toward equalization, the inequality may remain and, through the working of other influences, may even increase in the course of years.
§ 5. Doctrine of comparative advantages. It may be that two countries both possess the necessary technical conditions for making both articles that are to be traded for each other. It may even be that the people in one country would be able to make not only one of the two objects of trade, but both of them, more easily and with less sacrifice and effort than the people in the other. If, for example, American labor can produce two bushels of wheat in a day and English labor but one bushel a day; and American labor can produce just as much iron in a day as English labor—or more—the question always arises: Is it not foolish and wasteful not to produce both the wheat and the iron?
Now, exactly the same case is presented in almost every simple neighborhood trade. The proprietor may be able to keep his books better than does the bookkeeper whom he employs. The merchant may be able to sweep out the store better than the cheap boy does it. The carpenter may be able to raise better vegetables than can the gardener from whom he purchases. Yet the merchant does not turn to sweeping and the carpenter to raising vegetables, because if they did they would have to quit or limit by so much their present better-paying work, and would lose far more than they would gain.
So whenever the people in one country have a greater advantage in one article than in another, relative to another country, the foreigners, like the low-paid man, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies.
As an example, suppose that a day’s labor in country A will secure two bushels of wheat (2x) and two hundred pounds of iron (2y), whereas in B a day’s labor will secure 1x or 2y. Then A’s comparative advantage in producing x becomes a reason for A’s not trying to produce y. Trade can take place (aside from transportation outlay) at any ratio between 2x = 2y (A’s minimum) and 2x = 4y (B’s maximum). Evidently at any rate between these two ratios each party would gain something by the trade, e. g., at 2x=3y A would get 3 instead of 2y by a day’s labor, and B would get 1⅓x instead of 1x for a day’s labor (2x for 1½ day’s labor instead of for two days’). There can be no motive for trade unless the ratio of exchange is such as to enable the producers in each country to get somewhat more goods by specializing than they could get by applying their labor and resources to both kinds of products.
§ 6. Advantages confused with monetary costs. The doctrine of comparative advantages is always a hard doctrine for the popular mind; and particularly for the commercial mind endeavoring to carry on a business that cannot be made to “pay” in the face of foreign competition. It is easy to believe that a country ought not to import goods unless it is at an absolute disadvantage in their production. It is often declared that as our country can produce any kind of goods “as well” as foreign countries (meaning with as few days’ labor), there is a loss on every unit imported. The fundamental principle of trade as applied to such cases shows that not the advantage which one country enjoys over the other as to a single product determines whether it will gain by producing at home, but the comparative advantages enjoyed in the production of the two articles in question.
The difficulty of clear thinking in this matter is increased by the fact that this theory usually has been, and still is, presented under the name of “the doctrine of comparative costs.” The word “costs” is very misleading in this connection, because it is now generally applied to enterpriser’s outlay. It seems best, therefore, to replace it in this phrase by the word “advantages.” Of course, it never can be true that an article can be “profitably” imported when its monetary costs (all things considered, freights, insurance, merchant’s profit, etc.) are higher in the exporting than in the importing country. Indeed, the importation of any article is proof conclusive that the importer thinks that the monetary costs of an article are higher in the importing than in the exporting country.
How does it happen that the monetary costs of any particular goods in one country are higher than those of another country? The answer to this can be made only in the light of the equilibrium theory of prices.6 “Monetary costs” are but the prices reflected to agents from the products which they aid to produce. The relatively short factor in each of the trading countries is priced higher, the relatively long factor is priced lower, than in the other country. For example, agricultural land in England is priced higher (in grains of gold) per acre than equally good land in America, and an ordinary day’s labor in America is priced higher than similar labor in England. The manufacturer in America who is trying to manufacture something in which the labor element is large has to go into the labor market and pay higher wages than his English competitor just because there are other industries that can afford to outbid him for that labor; whereas the English farmer trying to produce wheat finds that he has to pay land rent per acre much higher than his American competitor in North Dakota whose wheat is sold in Liverpool. These differences in relative prices within each country have important effects in the degree of intensiveness of utilization of economic agents, both human and material. Men often speak carelessly as if America were a country of uniformly high prices, compared with Europe, but that is because they are thinking only of the kinds of goods that we import. American (wholesale) prices of the things we export to Europe are lower than European prices; if they were not the things could not profitably be exported. These facts and principles are contrary to much of the popular and political opinion with regard to protective tariffs.
§ 7. Equation of international exchange. Foreign trade, of course, can take place as barter, and in earlier times very commonly did so. But in the existing monetary economy nearly all trades are expressed in terms of monetary prices. It was shown in the last section that both the prices of all the particular objects of international trade and the general levels of prices in any two trading countries come to be pretty definitely interrelated. Changes in the one country at once compel readjustments in the other. To understand in the most general way how this occurs, a knowledge at least of the elemetary principles of foreign exchange is required, and to this we may now turn.
Let us begin with the proposition known as the equation of international exchange, which is sometimes given thus: The valuation (that is, the estimated total price) of the imports of a country must in the long run equal the valuation of the exports. But this proposition (especially the words “imports” and “exports”) must be understood in a much broader sense than that of the movements of merchandise merely. The proposition might better be expressed: the total credits in international trade, created by whatever means, by a nation (including money actually sent abroad) must constantly just equal its total debits (including money imported). Into the balance of accounts between any two nations enter many items: the cash values of the imports and exports of merchandise; freights, insurance premiums, and commissions; the expenses of citizens while traveling abroad; money brought in or taken out by immigrants; the cost of the governmental foreign services (such as the salaries of consuls and of diplomatic representatives); subsidies and war indemnities received from or paid to foreign nations; the investments of foreign capital; and credit items of many kinds on both sides of the account.
The effect of loans upon the equation differs at different periods, according as they are just being made, are continuing, or are being repaid. When foreign capital is first invested in a country, whether it is lent to the government or to individuals or to corporations, either gold must be remitted to the borrowing country or goods be sent. But later the interest payments and the eventual repayment of the principal of the loan act in the opposite direction. Accruing interest must be offset annually by exports from the debtor country, and the repayment of the principal requires that either money or goods be exported equal in value to the original obligations. In popular opinion an excess of exports of merchandise is an index, if not the real cause, of national prosperity; but evidently it is no true index whatever on this point. An excess of exports may at any given moment indicate that the country is rich and is lending abroad, or that it is in debt and is paying interest, or that it is repaying the principal. On the other hand, an excess of imports may indicate either that a country is poor, and is borrowing from abroad, or that it is rich, with many foreign investments, and is receiving the income from them in the form of a regular shipment of goods from the debtors.
The following statistics of the foreign commerce (merchandise imports and exports) of the principal countries of the world are given in significant groupings which call for various explanations. As the war altered all the lines of commerce, these figures are retained as illustrating the principle and the normal conditions better than could recent figures.
Figures are in million dollars ($1,000,000) and are mostly for the year 1908. (Statistical Abstracts, 1908, p. 769.)
§ 8. Balance of merchandise movements. The first group apparently consists of the older, creditor countries which are drawing some of the income of their investments from abroad each year in the form of food and of raw materials of many kinds. The second group includes countries of very diverse conditions, possibly all having some investments abroad; Italy receives large imports in return for the services of many Italians working in foreign countries, and the three Scandinavian countries (especially Norway) carry on a large commerce for other nations which is paid for in these ways. The excess of imports in the third group probably is the result of new investments that were being made in Canada by English and American capitalists, in Turkey especially by Germans, and in China by Americans and Europeans.
The countries in the second column are doubtless on the whole debtors, but in varying degrees. The excess exports of some are insufficient even to pay all the current interest, and they are borrowing still more (possibly the British colonies, Japan, and several South American countries); others have ceased to borrow and are simply paying interest; whereas the United States at least with its excess of exports was at this time both paying interest and getting out of debt. With the outbreak of the war in 1914 the United States began rapidly buying up its foreign-held securities, and became a creditor nation. Its imports must therefore in future more nearly equal if not exceed its exports, the actual outcome being dependent as well on various other items in the balance as on those here considered.
§ 9. Cancelation of foreign indebtedness. In the international business of any two important countries to-day, such as England and America, the number of credit and debit transactions is enormous. If each trader had to attend to the forwarding of the means of payment for his purchases, he would, of course, deduct from the amount of his indebtedness the amount due him from his foreign correspondent, and might from time to time “remit” the balance in the form of a shipment of gold. This simple offsetting and cancelation of debits and credits would greatly limit the amount of gold that would have to be shipped. But still, under such conditions, there must be a very large number of shipments of gold by different individuals, and a large proportion of these shipments would be going in opposite directions at the same time. Now, a merchant in New York called M may have a balance to pay in London to X, and at the same time a merchant in London called Y have a balance to pay in New York to a man called N. If M can buy from N his claim in the form of an order, draft, or bill of exchange, and send it to X, the latter may through his bank collect the sum from Y. In this way a further cancelation of indebtedness would occur.
When all persons having either debits or credits to be paid in New York and in London, respectively, are dealing with the banks in these cities, and the banks and special exchange brokers are constantly buying and selling these bills, a market is created for London exchange in New York (and conversely in London), and a much easier and more nearly complete cancelation of indebtedness results. In effect, all the debits and credits between the two countries are merged into one big ledger balance, and the international shipment of gold bullion finally made is just the amount needed to balance the accounts payable at the time. Industrial indebtedness is represented in various forms: bills of lading for goods shipped, drafts made by the creditor on his debtor for goods shipped or property sold, checks or letters of credit for travelers, bonds and notes public and private. These are the objects dealt in by the bankers who are the agents to carry on the work of exchange.
The balance of foreign exchanges is of essentially the same nature as the domestic cancelation of indebtedness. It is going on constantly between the two merchants in the same town, between two banks in the same town who represent groups of merchants, between men in neighboring towns, and between distant states like New York and California.6 The price of exchange to the individual is reduced by the specializing of the business in the hands of a few dealers, permitting the cancelation of indebtedness or offsetting of exchange, and greatly reducing the amount of bullion to be transported in making the payments. The cost to the bank of providing this exchange for its customers varies as conditions change, but in any case is not great, so that in domestic business when any charge is made it is usually at a fixed rate, and is mainly for the service.
§ 10. Par of exchange. Foreign exchange from America to Europe is, however, in two features different from domestic exchange: (a) the cost of shipment of gold is greater; (b) the monetary units of the two countries usually differ in name, weight, and fineness, and sometimes in materials. We may define foreign exchange as the purchase and sale of the right to receive a given kind and weight of metal or its monetary equivalent in current funds at a specified time and place, or as the funds so purchased. Par of exchange between two countries using the same metal as a standard is the number of units of the standard coin of the one country that contains the same amount of fine metal as the standard coin of the other country. There is no fixed par of exchange between gold-using and silver-using countries; par of exchange between them fluctuates with changes in the comparative values of the two metals. The gold-shipping points for importing or exporting gold are respectively par of exchange plus or minus the cost of moving the actual metal. These points vary with means of transportation and communication. The par of exchange between New York and London being nearly $4.866 and the cost of expressing and insuring a gold pound between New York and London being approximately $.02,7 the shipping point for the export of gold from New York is $4.886 and for the import of gold to New York is $4.846. At these upper and lower limits, there is a motive for shipping gold as a commodity.
When large sales have been made to Europe and credits are accumulating in New York and the importation of gold is imminent or already begun, the claims are bought by bankers in New York at less than par. At such a time one needing to remit a sum to London can buy exchange for less than par, for every such draft remitted reduces London’s indebtedness and, by so much, the need of shipping gold to this country. As a rule, then, accumulating credits here mean a low rate of exchange, accumulating debits a high rate of exchange from this to the foreign country.
These are the merest rudiments of the subject. The many problems arising, such as the adjustment of foreign credits to changing needs, and such as arbitrage (the readjustment of the rates of exchange prevailing among different financial centers), make foreign exchange both a complex science and a difficult art.
§ 11. International monetary balance and price levels. The balance of all accounts for or against a country (including new loans, current interest, and repayments) must thus eventually be settled in money. This cannot fail to effect the general level of prices in both countries, though this is brought about often only in indirect and gradual ways. The flow of money out of a country causes the loan market of a country to tighten (interest and discount rates to rise) in proportion as the reserves of the banks are reduced. Then “general prices” begin to fall.8 When prices fall, imports decline, as the country is not so good a place in which to sell: when prices rise, imports increase, as it is a better place in which to sell. The opposite effect is produced on exports, and thus in a short time the national credits and debits are again brought into equilibrium. A slight movement of money in either direction is enough to influence prices and set in motion forces to counteract a further flow of money. Decade after decade the circulating medium of leading countries changes very slightly in amount, and the fluctuations in its amounts during periods of so-called “favorable balance of trade” and of “unfavorable balance of trade” are only the smallest fraction of the value of goods passing through the ports of the country.
It is therefore absurd to imagine, as is sometimes done, that a country could continually import goods until it was drained of all its money, or that by any possible set of devices it could forever have an excess of exports to be paid for by a continual inflow of gold. Long before either of such movements could go far, the automatic readjustment of international prices would inevitably check it, and secure and retain for each country its due portion of the money.
THE POLICY OF A PROTECTIVE TARIFF
§ 1. Military and political motives for inteference with trade. § 2. Revenue and protective tariffs. § 3. Growth of a protective system. § 4. The infant-industry argument. § 5. The home-market argument. § 6. The “two-profits” argument. § 7. The balance-of-trade argument. § 8. The claim that protection raises wages. § 9. Tariffs and unemployment. § 10. Exports and exhaustion of the soil. § 11. Protection as a monopoly measure. § 12. Equalizing “costs of production.” § 13. Tariff legislation and business depressions. § 14 Harm of sudden tariff reductions. § 15. Some lessons from our tariff history.
§ 1. Military and political motives for interference with trade. The considerations set forth in the last chapter raise a strong presumption in favor of the sovereign state permitting its citizens to trade freely across its boundaries, as the best way to further their own prosperity and, on the whole and in the long run, that of the nation. Indeed, this presumption and belief has been held by nearly all serious students of the question, with more or less of modifications and qualifications, ever since Adam Smith published his work on the “Wealth of Nations” in 1776.1 But in conflict with this belief has been the all but unanimous policy of nations from early times, throughout the Middle Ages, and down to this day, of interposing some special hindrances (of varying degrees and kinds) to this kind of trade. Sometimes this has been done by prohibitions, but more often by taxes imposed upon either imports or exports. Sometimes the attempt is made to justify the policy of governmental interference with foreign trade by arguments which crumble before the slightest examination, and again it is admitted that free trade is true in theory, but it is declared to be false in practice. The latter view is not to be entertained for a moment. If free trade in theory (as an explanation) is complete and true, it will in practice (as a plan of action) be sound and workable. In truth, however, the practical policy of governmental interference with foreign trade has always in part rested on other than simple economic grounds.
Interference with free trade with the foreigner has always been in large measure due to political motives. In every petty medieval state or self-governing city, the aim was to make the economic boundaries coincide as nearly as possible with the political boundaries. Except for the trade in a few articles of comparative luxury, this aim was at that time nearly attainable. The peasantry surrounding a fortified town and enjoying its protection were compelled to trade there. Down to our own time it has seemed to statesmen expedient to forbid or discourage trade that might nourish the economic power of future enemies. Sometimes governments have used embargoes, bounties, or tariffs as weapons to injure the trade of other nations and to secure diplomatic or commercial concessions. Often they have sought by tariffs to encourage the building of ships and the manufacture of armaments and of all kinds of munitions by private enterprise within their own borders, even when the immediate cost of these products was greater than if they were purchased abroad. In such cases it is always a question whether an outright expenditure would not be better, whether the government could not build its own arsenals and shipyards more economically than it can foster private enterprise by means of a protective tariff. However, the political (or military) argument for protection recognizes that it is in itself a costly (not a profitable) policy, and that the cost is justified only on the grounds that military necessity warrants the outlay.
The military argument as applied to the preparation of ships and munitions has no application to a tariff on those articles that have no bearing upon military power. But the most recent application of chemistry, physics, and the mechanical arts to the uses of war has given new significance to a larger policy of industrial preparedness for military purposes. The year 1914 probably ushered in for the world a new epoch of protective and discriminatory tariff legislation determined by political rather than by direct economic considerations. Yet it is possible that if the nations agree to limit armaments they will, at the same time, move toward freer trade and the open-door policy.
§ 2. Revenue and protective tariffs. An important distinction in principle is to be made between a tariff for revenue and a tariff for protection. A revenue tariff is a schedule of duties on goods entering or leaving a country, so arranged that the collection of taxes may cause the least possible disturbance to domestic industry. Speaking generally, the duties may be on either imports or exports; but, as export duties are unconstitutional in the United States, our tariff discussions are concerned only with import duties. The purest type of revenue tariff is one touching only articles that, even at the higher prices, are not in the least to be produced profitably in the home country. A good example is that of England with most of the duties levied on tropical products.
A protective tariff is a schedule of import duties so arranged as to give appreciably higher prices to some domestic enterprises than they could obtain with free trade. It shuts out some foreign goods that would otherwise enter, and in so far it “protects” the domestic producer from the foreign competitors who would sell at lower prices than those at which he can or will sell. In other words, “protection” means governmental interference with the freedom of trade.
The distinction between revenue and protective tariffs, thus clear in principle, is not always easy to make in practice. It does not lie in the intention of the taxing power, but in the actual effects produced. Most tariffs combine the characteristics both of revenue and of protective measures. A tariff that reduces imports but does not cut them off entirely may be called either a revenue tariff with incidental protection or a protective tariff with incidental revenue. The difference is one of degree. But notice particularly that the two features of protection and of revenue are mutually exclusive. To the extent that one is present the other is impossible. A tariff rate that in whole or in part excludes the foreign article to that extent affords “protection” but does not yield revenue. Whenever the government collects a cent of tariff taxes, the domestic producer in so far and as respects that unit of goods is “unprotected.” Likewise, whenever a tariff gives to the domestic producer “protection” in respect to any unit of goods, it does so by prohibiting the importation of the goods, and the government is deprived of any revenue whatever derived from the importation and sale of that unit of goods. In short “protection,” just in so far as it “protects,” is prohibition of imports. Non-importation and revenue are mutually contradictory.
§ 3. Growth of a protective system. The protective policy developed at first accidentally, as it were, out of the practice of levying taxes for revenue only. Tolls, dues (or duties), customs (that is, in former times the customary dues paid by merchants, now the dues fixed by law), tariffs (that is, schedules or lists of rates of duties) were at first intended to raise revenues for the sovereign, the city, or the state. The unintended, and to some degree inevitable, result of the taxation of goods in commerce, whether imports or exports, is to prevent and discourage trade and to raise the prices of the goods imported. Any change in tariff duties, therefore, at once alters the previously existing adjustment of profits and of industries in a country.
The first effect of the tariff is the same as that of any new factor in enterpriser’s cost; the same, for example, as that of a new domestic tax on an article or as that of a rise of freight rates—the domestic price of the taxed article tends to rise. Other results then follow. If the article cannot, even at the higher price, be produced within the country (as in the cases of oranges, spices, and coffee in England, Norway, and Sweden), its consumption is reduced. The lessening of demand may, however, depress somewhat the price in the producing country. But as such a tariff does not increase home production of the taxed article, it is therefore for revenue, not for protection.
But if the article can be profitably produced in the importing country at the new price, “home industries” will start. Where the transportation charges are low, as on the coasts and on the main lines of railways, some imported goods may be bought, while farther inland, where transportation charges are higher, home production of some or all grades of such goods may take place. If the whole demand at home is supplied and all imports stop, therewith cease all revenues to the government from that source. A completely protective tariff is completely prohibitive.
Experience abundantly shows that, with a few exceptions, due to climate and natural resources, it is impossible to put into effect the most moderate schedule of duties without the increase in price at once causing some men to shift their occupations, and to begin producing articles of the kinds that have risen in price. At once appears a group of “protected industries,” the owners of which are dependent for the safety and profits of their investments, and workmen in which are dependent for the security of their present jobs (possibly for the chance to continue the pursuit of highly skilled trades), on the continuance, if not the increase, of the existing tariff rates. A tariff may be adopted mainly from stress of financial need (as in our own history in 1789 or in 1861), but its modification or repeal cannot be decided by fiscal considerations. The “incidental protection” it affords has created a wealthy and influential group of employers and a large body of employees who are irresistibly tempted to exercise their influence in politics almost solely in favor of continuing and of increasing the rates to the sacrifice of the higher civic life of their communities. Of course, the beneficiaries of the tariff usually believe sincerely that it is indispensable for the prosperity of the country as a whole, and they can do much to persuade others to the same opinion. This commercial motive for maintaining existing protective tariffs explains in large part their wide prevalence, whatever other reasons may be adduced in their justification.
§ 4. The infant-industry argument. Most free-trade writers concede a limited validity to the claim that protection may be used to encourage infant industries and thus diversify the industries of the country. If the natural resources of a land are adapted to an industry, it may be called into being earlier by a fostering protective tariff. This is merely anticipating and hastening the natural order of progress. In the American colonies the manufactures of such goods as iron, cloth, hats, ships, and furniture sprang up and continued not only without “protection,” but despite numerous harassing trade restrictions made in the interest of English merchants. Can it be doubted that many of these industries would have developed and flourished after the adoption of the Constitution with no other favoring influences than those of rich resources and of economy in freights? In the Mississippi Valley since 1880 natural gas, abundant coal, ore, and timber have made possible a great growth of industries without protection against the eastern states. Industries capable of eventual self-support must in most cases naturally appear in due time. Economic forces will bring them out. Protection of infant industries may be likened to a hothouse, anticipating the season by a few weeks and at great cost. The question is whether the mere possession of the hothouse is a luxury worth the price, if meantime the products can be got more cheaply by trade. English manufacturers flourished in the nineteenth century because they were well established, had excellent coal supplies, good stores of iron ore, and low-paid labor which did not have the opportunity of better alternatives, as did the American workman. If America had imported more (it would not have been all) of her iron and coal, the English mines would have begun to shown signs of exhaustion earlier, and America’s advantage surely would have asserted itself in time. Her iron manufactures undoubtedly were hastened—they cannot truly be said to have been created—by the protective tariff.
The peculiar advantages of a new country attract labor and enterprise into a few lines. Industries are forced into an earlier diversification by tariffs. Which is the better economic situation? Contrast the life of the workers in Iowa, the Dakotas, and Minnesota, or Kansas, if you please, with that in crowded tenements of New York and in the mining regions of Pennsylvania. Is it so certain that a dense population congested in cities and crowded in factories and mines is a more ideal social aggregation than is a community of prosperous farmers? The smoky industrialism fostered by protection often puts a premium on a low grade of immigrants, crowds them into city slums and into forlorn mill towns, and keeps them aliens to the American spirit. It would be surprising if Americanism on the western plains were not as sound as in the crowded cities. But the infant-industry argument appeals strongly to the enterprise and the speculative spirit of Americans, who like to do all things rapidly and on a large scale. Every village aspires to be a great industrial center. Americans are impatient of the suggestion that things “will come in time”; they like things to come at once.
It must, however, be recognized that in a new country there is often a certain monotony and poverty of life because of the lack of diversified industries. There are not sufficiently varied avenues for the expression and use of the manifold talents of the nation. There are unused materials and opportunities; but the initial expense of experimentation, the initial difficulties of gathering and training a working force, are discouraging to individual enterprise, prices being as they are. A protective tariff is not necessarily and always the best way, but it is one way of helping private enterprise to establish and conduct such industries through their initial period. But, as has been pointed out by many writers, the infant-industry argument is self-limiting, and involves always the assumption that the industries selected as fit for protection are such as ultimately, and within a moderately short period, can grow into self-dependence. The infant must sometime grow to be a man and stand on his own legs, or he is either a chronic invalid or a degenerate.
§ 5. The home-market argument. The home-market argument seeks to show a more permanent need for a tariff. At the same time it appeals to the farmers, whom it has been hard to reconcile to a policy that in America2 has been peculiarly favorable to manufacturers. The home-market argument extols the advantages of having near to the farms customers for agricultural products, and dwells on the greater steadiness of domestic trade. War or political changes, it is said, may change the demand for products. This is true, but no other changes have affected American agriculture so radically as the peaceful development of domestic transportation and the opening of the West.
The main economic claim made in the home-market argument is that the shipping of food to Europe and the importing of manufactures involve a great cost for double freights that could be saved by manufacturing at home. The farmer is supposed to pay this cost. The obvious defects in this view are: first, there is nothing to show that the freight is not partly or entirely paid by the European, either the manufacturer or the food consumer; secondly, home trade “saves the freights” for the farmer only in case he can buy goods under a tariff with less of his own labor and products than under free trade. The payment of freight charges is true economy when the goods can be bought at a distance on more favorable terms than near home. The freight argument attempts to prove too much, for it condemns every trade within the country of goods produced a stone’s throw away from the consumer.
The home-market appeal is strongest when addressed not to all farmers, but to one class of farmers—those whose lands are situated nearer the manufacturing cities. As city population grows, some land is converted from the extensive cultivation of corn and wheat to dairying, fruit- and market-gardening in the neighborhood of cities, and perhaps at length is used for factory sites or as city lots. There is, thus, a partial validity in the argument as applied to a comparatively small number of farmers, who gain as landlords, not as tillers of the soil. Even greater gains have sometimes been reaped by the owners of timber-lands, ore-mines, coal-lands, and other natural resources, the values of which have been raised by tariff legislation. But, unless these gains come from truly productive additions due to the tariff, there is no benefit to the community as a whole.
§ 6. The “two-profits” argument. Somewhat related to this idea of the home-market and the saving of two freights is the “two-profits” argument. It is said that the tariff keeps “two profits” at home; foreign trade gives but one. The word “profits” is here used in the popular sense of gain from a single transaction. Both parties are said to profit, and both profits are thought to be secured at home when two citizens are forced to trade with each other. The view that there are “two profits” in a trade is an advance upon the notion that “one man’s gain is another’s loss,”3 but there is an error in elementary arithmetic here, both as to the number and as to the aggregate amount of profits. The purpose of a protective tariff is to compel two citizens of a country to trade with each other instead of trading with two citizens of a foreign state; the number of profits made by each country is therefore not increased by substituting domestic for foreign trade.
What, then, as to individual size and aggregate amount of the profits? The gain is not the same in all trades; the trade is made if there is a gain to each party, no matter how small it is; but the generous “profit” on one transaction where the conditions of the two parties are very different may be greater than the total of petty gains on a dozen trades between two traders of evenly matched powers. Indeed, the greater the difference in the conditions and capacities of two groups of traders, the greater is the sum of the profits that they may secure through the members of each group trading with those of the other, rather than by the members of each group trading only among themselves. Can it safely be assumed that every trade with a foreigner is less advantageous than one with a fellow citizen? Diamond cuts diamond, but two Yankees left to themselves should not be worsted in bargains with the universe. If they could exchange to better advantage with each other, they probably would discover it as soon as the interested manufacturers and political orators who can prove so eloquently that they know the other man’s business better than he knows it himself. Forcing the home trade by making our citizens trade with each other, whether both wish or not, may be to the advantage of one citizen, but it is not likely to be to the advantage of both citizens.
§ 7. The balance-of-trade argument. At the foundation of nearly all belief in the virtues of a protective tariff will be found the “favorable balance-of-trade” notion. The ideal of the more thoroughgoing upholder of a protective policy is to keep merchandise constantly flowing out of the country, and to have nothing coming in—in any case, nothing that by any fair amount of effort (whatever that be) could be produced at home. This is called maintaining a “favorable balance of trade.” Sometimes the emphasis is more on the advantages of an excess of exports of goods, sometimes more on the importance of the need “to keep money at home.” The simple error in these opinions is clearly apparent in the explanation of foreign exchanges and of the principles regulating the international flow of money.4
An interesting commentary on the opinion before us is the fact, already noted,5 that an excess of exports is the usual situation in poor debtor countries having constant interest payments to meet; while, on the contrary, rich creditor countries have an excess of merchandise imports.
The “favorable balance-of-trade” argument, with the emphasis on money rather than on goods, is that the protective tariff keeps money at home which, if trade is free, will be sent abroad to buy foreign goods, thus impoverishing the country. This doctrine, as presented in the seventeenth and eighteenth centuries in Europe, was known as mercantilism. It had great influence upon the commercial policies of all the great European nations. A superficial glance at the trade relations of an old rich country with a new province seems to give evidence for such a belief. A richer country that is lending capital (sent to the debtor country in the form of goods) has at the same time a larger supply of money. The lack of money and the poverty of the newer country are looked upon by the protectionist as due to the importation of goods. The common cause of the imports to newly settled districts and of their scanty stocks of money, it need hardly be repeated here, is the comparative poverty of settlers and pioneers.6 Often these are paying for imports by means of loans, and in any case their monetary stocks are not decreased either by their foreign trade or by their domestic trade with the older and richer parts of the same country. Europe and the United States, in their trade with China and South America, usually do not get gold in exchange, but merchandise of various sorts. It is true that in the trade of England and New York with great gold-producing districts, such as California, South Africa, and Alaska, gold is received in return for merchandise, for much of the gold in gold-producing districts is merely merchandise, and its export does not drain them of their due portion of money. There was a time when the states of Kansas, Nebraska, Iowa, and their neighbors were filled with resentment against the money-lenders of the eastern states. There was a widespread belief that hard times were due to an insufficient currency.7 Attempted action took the form of the greenback and free-silver movements, which were defeated by the opposition of the East; but there can be little doubt that if the Federal Constitution had not forbidden it, the discontented states would have established a protective tariff “to keep their money at home.” Few advocates of protective tariffs are ready to admit that the monetary stock of the country is dependent on the general wealth of the country and on the methods of doing business, rather than on a protective tariff.
§ 8. The claim that protection raises wages. The most effective popular claim made for protection is that it raises, or maintains, the general scale of wages in the country. This argument takes two forms: first, when wages are low in a country it is claimed that a tariff is needed to raise them; and, secondly, when wages are high it is argued that a tariff alone can preserve them. In Germany the fear was of the higher paid and more efficient labor of England. In America, where general wages at all times have been higher than in England, it was first argued (in the time of Henry Clay) that because of the greater cost of production, due to high wages, the tariff was needed to start certain industries; but after the tariff had long been established and the old argument had been forgotten (even since 1865), it has been urged that the tariff is the cause of high wages, and must be maintained to protect against the “pauper” labor of the older countries. The higher wages in new countries where a tariff exists are always claimed to be the fruits of a protective policy.
The true cause of the high general scale of wages in America is the greater efficiency of industry under existing conditions.8 Labor is surrounded here with advantages in the forms of rich natural resources and of mechanical appliances such as never before were combined. Because of the scarcity of workers in particular protected industries, wages may be temporarily higher in them than in some other industries; but such workers form a small fraction of the population, and it is impossible to show that the general scale of wages in all occupations is raised by the tariff protecting this fraction.
There is, of course, no question that every tariff change affects certain enterprises and classes of workmen. Enterprisers already acquainted with and engaged in a business always may hope to gain by the higher prices immediately following a rise in the tariff rates on their particular products. Though they are granted no enduring monopoly by the protection, they for a time enjoy the advantage of being on the ground, and may reap the first fruits of the favoring conditions. The enterpriser usually profits when the price of his product suddenly rises. Usually skilled workmen are affected slowly by competition when there is any considerable increase of prices in their special industries. The important question is, Who bears the burden of the higher prices that result from a tariff? The burden is very soon distributed. A part of it may be for a short time borne by the retail merchants, but ultimately nearly the whole of it must be borne by their customers, the unfortunate, less favored citizens. The weight falling on each is usually small, often unsuspected, always hard to measure. The increased benefit is concentrated in a few industries and accrues to a comparatively few producers. Here is a recipe for riches: get everybody to give you a penny; it’s so little that no one will miss it, and it will mean a great deal to you. Something like this happens in the case of many protected industries; every consumer of the article pays a few cents more, a small group of wage-earners temporarily gains, and a few enterprisers wax wealthy.
§ 9. Tariffs and unemployment. The claim that a low tariff is bad for the workers is made with peculiar success in any period when unemployment is greater than usual. It is usually unconvincing to reply that again and again equally bad periods of unemployment have occurred when a high tariff was in force, and that often the most highly protected industries are most affected. It is unconvincing to suggest that fluctuations of unemployment are related rather to the rhythm of industrial cycles and panics, than to any particular level of the tariff, whatever it be.9 The fact that at the moment is seen is that here are some men for the time out of work, and here are some foreign goods coming in. Of course, what is not seen is that if we stop importing goods we thereby eventually will stop the exportation of goods of equal value now being sent in payment, and this must throw as many men out of jobs as we helped into jobs by raising the tariff. But the view easy to take is the short view, and the ulterior consequences seem to the popular mind to be vain imaginings.
An explanation of periodic unemployment involving the same error in a smaller degree is to attribute it to immigration. It is true that after a crisis has occurred, and during the period of widespread unemployment, limitation or prohibition of immigration may prevent aggravating the evil at the time. But immigration as a continuing policy is not the cause of periodic unemployment, but its bad effects will rather be shown in the permanent lowering of the general level of wages.10 But, whatever be the general level of wages, periods of unemployment will recur as long as means have not been found to control marked credit and price fluctuations within the business cycle.
§ 10. Exports and exhaustion of the soil. It has been ingeniously argued that a tariff may keep some of the natural agricultural resources of a new country from becoming quickly exhausted. The export of food takes out of the soil and out of the country fertile qualities never to be returned. The shipment of several hundred million dollars worth of food products year after year represented a tremendous drain from the soil of the United States, but this has now largely ceased. The assumption, however, that the use of the food in this country preserves the fertility of our own fields is in the main mistaken. The fertile material in the food for human consumption hauled to a town five miles away from the field is almost as entirely lost as if it were shipped to Europe. Engineering skill has as yet succeeded in returning economically to the fields from which it comes hardly a fraction as much fertile organic matter as that which flows into the sewers, that is dumped into river and ocean, and that is buried in heaps at the borders of our own cities. Artificial fertilizers are increasingly used, to be sure, but they are obtained in other ways. On the other hand, the increased use of iron, coal, and timber, as a result of encouraging manufacturers, has very effectually hastened the exhaustion of the natural resources of the country.
§ 11. Protection as a monopoly measure. It has rightly been observed that a new country has a limited potential monopoly in certain kinds of products and that a tariff may make it effective. The rapid opening up of America with its rich natural resources greatly benefited the average consumer in western Europe, although it caused a loss to a special class of landowners.11 Whether the citizens of the older or of the newer country shall reap the greater benefit in the trade depends on the reciprocal demand for the two classes of goods, as was seen in discussing the equation of international demand. A wide margin of advantage may go to one party and a narrow margin to the citizen of the more favored land. To put it concretely: America, having great natural resources for agriculture, might continue to trade food for manufactured goods even though England reaped most of the benefits of the trade. An American tariff on manufactures from England would, under such conditions, check the demand for English products and compel some Americans to leave farming. This reduction of the American supply of wheat or corn and of the American demand for English manufactures compels a new ratio of trade (expressed in prices). It is conceivable that trading fewer goods with a larger gain on each trade would give a larger total of gain to the favored nation. Thus, foreigners may conceivably be compelled to pay a part of the tariff duties to enjoy the favored market. This is but a special case of the monopoly principle; the government by law artificially limits the supply of goods offered by its citizens.
This argument is somewhat subtle, but probably is the soundest one in the theory of protection. The supposed conditions seldom occur in a marked measure, but they may exist, and probably have existed in America. When the great system of internal transportation was developed in the United States before that of the other new countries (say from 1840 to 1894), this country had such peculiar advantages for the production of food that the quantity was enormously increased and agricultural prices fell.12 At such a time the tariff may have worked toward checking the fall and earlier reëstablishing a more favorable ratio. It did this by making prices of manufactured goods in this country artificially higher and thus tempting men from rural to urban callings. But the limited application of the principle must be recognized. The potential competition of undeveloped countries on all sides, seeking to develop their resources, and profiting by the higher prices of food in the world-market caused by our tariff, threatens the peculiar advantages of the favored land. Russia, Argentine, and Australia have rapidly taken the place of America in supplying food to western Europe, in part, no doubt, because we refused to take Europe’s goods in trade. A great nation with its manifold interests is not eminently fitted to practise the gentle art of monopoly.
The period in America from about 1840 to 1890 shows certain absurd contradictions in economic policy. By governmental action, national, state, and municipal, enormous grants of money and lands were made in aid of transportation. Canals, roads, and railways were built into new agricultural territory far faster than was healthy and normal. A prodigal land policy put a premium upon a wastefully rapid extension of the farming area. These things were done to favor the agricultural states; but agricultural prices fell so greatly that our farmers for a long period were nowhere prosperous, and great numbers of them, both in the East and in the West, were ruined. At the same time a high tariff on nearly everything the farmers needed to buy was the political spoil obtained by the eastern and middle states. This further depressed the condition of the farmers and forced them or their sons into urban industries. A slower development would have occurred without the waste of national resources in such conflicting policies of artificial stimulation.
§ 12. Equalizing “costs of production.” An idea advanced incessantly by American advocates of a protective tariff is that the tariff on every article imported ought always be high enough to equal the difference between the higher costs here and the lower costs abroad. The equalizing-cost rule was laid down in different words by each of the two leading political parties in the campaign of 1912. The Republican platform set forth what it called the “true principle.”13 The fallacy of this rule appears, however, in the study of the confusion connected with the idea of monetary costs.14
“Costs of production” in the “true principle” means the monetary costs of the enterpriser. Now a first difficulty is that costs are not uniform for all establishments in any one industry, and a tariff high enough to protect some is entirely too low to protect others. As long as a tariff rate is too low to exclude every unit of the foreign product, its importation is conclusive proof that for some home producers the tariff rates fall short of the “true principle” (better proof, indeed, than the most elaborate investigation by any tariff board could be). The indubitable truth is that no trade ever can take place (in a monetary régime) unless the monetary price is lower in the exporting than it is in the importing country. This virtually means that the product cannot be profitably exported unless the monetary costs of production (“together with a fair profit”) of the article exported are for each party less than those of the other party in the other country. The so-called “true principle” would lead thus to absolutely prohibiting the importation of every article to which it was applied.
In the enactment of the Underwood tariff, the Democratic party, traditionally committed to a tariff for revenue, applied what was called the “competitive principle.” This “competitive principle” is essentially the same as the Republican so-called “true principle” of equalizing the cost of production. It is a prohibitive, not a free-trade, principle. Strictly applied, it would cause complete exclusion of imports. But, as applied to selected articles which it is desired to exclude in order to “protect” the domestic producer, this principle would simply prevent the rate being placed appreciably higher than was needed to exclude them. Anything beyond that point but offers temptation and opportunity for the formation of a monopoly by domestic producers. Then, too, the rate may intentionally be fixed so as to make just possible the survival of the most favorably located or most efficiently operated establishments, while compelling the abandonment of other establishments.
It will be seen that the rule of equalizing the cost of production is really not an additional argument for protection, but rather is a rule for fixing the proper rate, on the assumption that “protection” is desirable on grounds of any or all of the staple arguments offered in its support. Just how high ought and must the rate on a particular article be to start an infant industry, to preserve the home market for any group of producers, to retain both profits, to give a “favorable balance of trade,” to raise wages, and to prevent unemployment? The answer given by the rule is: high enough to prohibit the importation of goods. Either the rule of equalizing monetary costs, or the competitive principle, if strictly applied in favor of all producers, would prohibit all imports. If applied in varying measure in favor of the more favorably situated producers (as regards location, transportation, natural resources, skill, capital, etc.), the rule would protect some and eliminate other home producers. Here again is seen the truth that protection, if it protects, is prohibition of imports.
§ 13. Tariff legislation and business depressions. The relation between new tariff legislation and the business conditions following it has been the subject of much debate in political campaigns. In the few cases where a relationship has been most often asserted to exist, it is more probable that the tariff change was the result of business conditions preceding it than that it was the cause of the conditions following it. For usually a tariff has been revised downward because a few years of prosperity with large imports had so increased customs duties that the government has had surplus revenues. Just when the tariff was reduced, the conditions were ripe for a crisis. This happened in 1857 (already in 1856 there had been a preliminary halt of business), again in 1872, and on a small scale in 1883. But the main reduction resulting from the compromise act of 1833 did not occur until after the crisis of 1837-39; the Walker Act of 1846 was passed just as business was starting upward on a long wave of prosperity; and the act of 1894 was passed a full year after the severe crisis of 1893, when business had already entered upon a period of depression. In none of these cases does it seem reasonable to attribute business depression to the reduction of the tariff, as is commonly done in protectionist arguments even to the point of attributing the panic of 1893 to the reduction of the tariff a year later!
At several times the tariff has been raised soon after a crisis when a good occasion was presented by the need of larger revenues, as in 1842, 1860, 1875, and 1897. Business at such times is just at the point of the cycle when prosperity is due. The higher tariff of 1842 was succeeded by the low tariff of 1846 without any check to business. The war obscured the ordinary industrial effects of the tariff acts of the sixties. The increase in the year 1875 was followed by four years of hard times and slow recovery. The increase of the tariff in 1890 occurred as business was nearing the top of the cycle, and was followed by two years of prosperity, culminating in the very severe crisis of 1893. The authors of the tariff of 1897 were peculiarly fortunate in the time of their action, for the country was just fairly recovering from the very severe crisis of 1893, and prosperity was to continue (with brief hesitation in 1900 and 1903) until the severe crisis and panic of 1907.
The advocates of higher rates are, of course, correct in declaring that the great business prosperity of the years 1915 and 1916 resulted from the unexpected demands in foreign trade growing out of the war, and is not to be credited in large measure to the act of 1913. But reason requires that the same restraint be exercised in crediting to higher protective acts the prosperity that has in some—not all—cases followed their enactment; and requires further that the act of 1913 be not held accountable for the reaction of trade in 1920, inasmuch as a reaction was sure to occur soon after the war ended no matter what kind of tariff act we might chance to have at the time.
§ 14. Harm of sudden tariff reductions. It is rarely appreciated how great is the tactical advantage which the advocates of a high tariff enjoy in popular political discussion. They can so easily impress the popular judgment with the evident fruits of their own policy and with the immediate dangers of the policy of their opponents. When a protective rate is first applied or is increased, it calls into existence something visible and tangible, which can be measured in terms of factories built, men employed, and products turned out. The increased cost of these results is diffused among many consumers and reaches them in such indirect ways and in such small increments of price that they are quite unaware of the way they are affected.15
On the other hand, reduction of the tariff works in a direction the reverse of its enactment. It may cause local crises and may even bring on a general crisis. The benefits of the lower prices are diffused and lost to view; the immediate injury is concentrated and strikingly evident. Factories are closed, investments depreciate, laborers are thrown out of employment. The organic nature of local industry causes these evils to be felt by many classes. Merchants, professional men, servants, and skilled laborers, that are tributary to the depressed industry, suffer. The effects are transmitted to commercial and financial centers and often credit is much shaken. Then follows a slow and painful process of readjustment.
The low-tariff advocates in America undoubtedly have underestimated these immediate effects. They have been too abstractly doctrinaire, have argued too absolutely for the merits of free trade, to be applied instantly regardless of the existing distribution of investments and of occupations. They have opposed one extreme system by another, with no thought of the inexpediency and injustice of sweeping changes. There is a strong feeling among business men that any tariff, be it high or low, is better than a shifting policy. Despite the great preponderance of domestic production over foreign trade, it is perhaps too much to say that the tariff is unimportant in our present conditions. It can, however, be truly said that business can adjust itself in large measure to any settled conditions, and that radical changes, especially sudden and large reductions, are fraught with evils. Long before a new tariff law goes into effect, even months in advance of its passage, while it is merely in prospect, the course of trade is abnormally affected. If the rate is likely to be raised, large importations take place under the lower rate, and for a considerable time after the law goes into effect imports are small, while prices rise and domestic production gradually increases. But if the rate is likely to fall, importations are for months meager, stocks of goods are reduced to the lowest point, and when the lower rate goes into effect, large importations follow to the injury of domestic producers. In many cases a year or two of notice, time given to enterprisers to adjust their business, would probably do away with a large part both of the serious losses and of the lottery-like gains that otherwise occur.
The obvious measure of precaution and of justice would be to put any new rate into effect gradually.16 The difficulties are of a political nature and in the desire of the party in power to “make a showing” at once of the results of its campaign pledges, in the one case by starting and stimulating industries through a higher tariff and in the other by reducing prices to consumers through a lower tariff. Under the new permanent tariff board, constituted to suggest tariff changes and to administer the tariff laws, it would be possible to apply some such feature.
§ 15. Some lessons from our tariff history. From the checkered course of tariff history in America it is difficult to draw clear lessons of wisdom for the future; but at least certain negative conclusions may be safely drawn. It is a history of a vacillating public opinion toward the policy of protective duties. Always the policy has kept some hold on public sentiment, but it has varied in strength, now waxing, now waning. The time of revisions has been determined nearly always by varying needs of revenue. When more income has had to be raised, this has nearly always been made the occasion and pretext for increasing the degree of protection for many industries. This is not at all a necessary connection, for it would be possible to couple internal revenue taxes and customs duties in such a way that the rates would go up and down together and give the varying amounts of revenue required for the government without appreciably altering the relative profitableness of various private enterprises. Now that customs duties are no longer the chief source of revenues for the federal government, and are outweighed many times in fiscal importance by income taxes and internal revenues, the question of fostering favored industries should be more easily kept distinct from that of raising public revenues.
Our tariff history is too largely a record of special favors granted to classes of citizens, to citizens of certain localities, and to particular enterprises. This is apparent even in a general survey, but almost every more detailed examination of particular protective rates reveals evidence of suspicious and sometimes scandalous personal influences at work. The protective policy has always professedly been advocated for the general welfare, to raise wages or to make the country prosperous; but the initiative has always been taken, and the valiant work in contributing funds for campaign purposes and in lobbying bills through Congress has been done, by the interested manufacturers. Even if it were beyond question sound in principle to exclude goods that can be bought more cheaply by trade, it is very doubtful whether any net good could have resulted from this policy as it has been in fact applied and followed. The frequent and unpredictable changes have been a great evil, and have again and again brought unmerited losses to the many in business and still greater and unearned gains to a favored few. It is incredible that such a hit-or-miss, in large part selfishly determined, policy could have been an important cause of our national prosperity. The fundamental causes of the general high wages and popular welfare that we have enjoyed is to be found rather in our rich natural resources, our capacity for self-government with free institutions, and the industrial energies of our people.17
OBJECTS AND PRINCIPLES OF TAXATION
§ 1. Public finance as a division of economics. § 2. The police function. § 3. Social and industrial functions. § 4. The enlarging sphere of the state. § 5. Industrial revenues of governments. § 6. Governmental receipts from loans. § 7. Non-revenue character of receipts from loans. § 8. Revenues from taxation. § 9. Kinds of taxes. §10. Defective tax “systems.” § 11. Various standards of justice suggested. § 12. Social welfare as the aim. § 13. Principles of administration. § 14. Shifting and incidence. § 15. Taxes as costs. § 16. Taxation and socialism.
§ 1. Public finance as a division of economics. Men live together in politically organized societies which employ public officials as agents to carry on the functions of government. Every governmental unit, large or small, may be viewed not only as a political body, but as an economic enterprise. Each has its economic aspects, such as receipts and expenditures, employer and employee, borrowing and lending, etc. Each political unit is in this sense an “economy.” The study of the public economy, of the economic aspects of government as distinguished from its political aspects, constitutes the science of public finance, an important division, though not the whole, of political economy.
The primary fact determining the public finances is the extent of the sphere of “the state,” meaning by the state the totality of political powers and functions in a community. There are two typical ideals of a state, each with corresponding functions: the ideal of the police state, and that of the social-industrial state. In fact, every system of government provides for the exercise of both functions in some measure. The police function is primary. All governments alike exercise it, but they differ most in respect to the degree in which they exercise the social-industrial functions.
§ 2. The police function. The police function is that of public defense and the maintenance of domestic order. In family or patriarchal communities all share a common income and combine in the common defense; but self-preservation often has compelled such small communities to form a large, stronger state for the common defense. Public defense requires sacrifice of some independence on the part of the family and of the individual. Personal service in the field gives place later, in some measure, to the payment of taxes, so that a regular income may permit the government to attain a more regular, continuing, and perfect organization of military forces.
As political unity and power grow, the citizens need less often protection against foreign foes, and they need more often, relatively, defense against the aggressions of some of their own countrymen. The preservation of domestic order requires police, courts of justice, and other agencies. The ideal of the anarchist to do without government is nowhere realized. Everywhere there must be government to preserve peace and to protect property. Unfortunately, this need grows with the growing density of population. Crime increases when men swarm in great cities. The courts, which settle disputes between men, and which interpret their contracts, are agencies of peace, displacing physical contests. To maintain and operate the various parts of the social machinery requires ever-increasing governmental revenues. From many causes government has, in modern times, grown increasingly costly.
§ 3. Social and industrial functions. The social and industrial functions of government seem naturally to grow out of the primary ones just mentioned. In a democratic society, popular education is a necessity, as it appears that domestic order is not possible in a democratic state without intelligent citizens. The system of public education has, in many states, expanded to include a publicly supported university as the dominant educational and scientific organ of the community. Some industrial functions are performed by the government in connection with the primary needs. Lighthouses are necessary to guide the navy, but they also serve to guide the merchant marine and to aid industry. The post was established as an agent of political and military government to connect the ruler with the outposts (a fact the name post indicates), but the postal service has grown in every country to be a great industrial and social agency. The consular service, originating in the political need of keeping official representatives in foreign lands, has become a valuable economic agency; consuls are commercial agents, advancing the business interests of their countries in all quarters of the globe.
§ 4. The enlarging sphere of the state. A mere police state would leave to private initiative the provision of every kind of economic agency not needed for political government. The state might, for example, even leave the provision of roads and bridges to private individuals or to companies, permitting them to charge tolls to obtain a return on their investment. Whenever a toll-road is made public and a toll-bridge becomes free, and the state maintains the roads, it is becoming less strictly a mere police state. Reacting from the ideal of the police state, which was most highly praised in the first half of the nineteenth century, the functions of government have been extending in many directions in the last half century. More and more, economic functions are performed through the agency of government. If we think of an act as done by the government for private citizens, we call it paternalism; but if we think of an act as done by citizens collectively for themselves, as the best way to get these things done, we may call it, in a broad sense, socialism, (meaning not a political party, but a principle of social action).
Government is in one aspect a direct good to its citizens. In return for its collective cost, men collectively get the enjoyment of social organization, markedly in contrast with the uncertain ties and hazards of primitive communities. But government becomes also a mode of social investment, an indirect agent, a productive enterprise. Wealth applied through it secures in some cases a greater product than is possible by individual action.
But when the government undertakes these various tasks the expense falls unequally on individuals and affects differently their incomes. When free schools take the place of private schools, the law compels every one to contribute to education. To many individuals it is a matter of indifference whether they pay tuition or taxes, but the wealthy bachelor sometimes grumbles when forced to help in educating the day-laborer’s family. The average result of a certain social policy may be right, but individuals diverge from the average and thus have constantly a motive to attempt to change the limits of governmental action. Happily, the subject is not always viewed with selfish eyes. The ethical and patriotic thought is not, “How will this affect my interests?” but, “How will it affect the general interests?” But, as the question of value is always involved, men are usually found favoring or opposing the industrial and social activity of the state according as it affects their own incomes. Thus the determination of the sphere of the state is in large part an economic question.
§ 5. Industrial revenues of governments. The costs of government at any stage are met in varying degrees in one of three ways: (1) from industrial sources, (2) by borrowing and thus creating a public debt, (3) from taxation.
Receipts from industrial sources in the broad sense include all rents from wealth owned, interest on loans made, and proceeds of sales from enterprises conducted, by the government. In feudal times, these were mostly obtained in the form of rents from the private domains of kings and nobles. In many early and medieval states these sources of receipts were adequate to the need of government; then they decreased in many countries, both relatively and absolutely, because of the sale of publicly owned wealth (lands and mines), and with the recent extension of the functions of government have again increased very rapidly. Now industrial revenues come not only from the rents of forests, mines, docks, lands, and buildings, but from profits in the operation of industrial enterprises, such as waterworks, railways, mines, and factories, and from interest on funds deposited in banks or otherwise invested. At present the industrial revenues of the aggregate governments of the United States (national, state, and municipal) amount to about a fifth of all revenue receipts. Since the middle of the nineteenth century the number and variety of the industrial enterprises undertaken by governments has been steadily increasing, and this increase has been most marked in the cities. The change in this respect in the United States, great as it has been, has proceeded more slowly than in the European countries.
In 1913 the receipts of this nature (earnings of departments and of public service enterprises) were nearly $500,000,000. The larger part of this sum comes to the national government ($288,000,000), mostly from the post-office department. Most of the remainder comes to the minor divisions ($176,000,000), and but little to the states. The total “earnings” (this means here receipts, not profits) of public service enterprises in incorporated places were $120,000,000. Revenues obtained by the sale of goods are prices, such as water rates, or (if paid for the performance by an official for a service to legalize an act, as recording deeds, issuing licenses, etc.) are fees (frequently constituting the income, in lieu of salary, of the official, but sometimes paid into the public treasury).
§ 6. Governmental receipts from loans. The funds to invest in these commercial undertakings are originally obtained in nearly all cases from public loans. Almost every unit or division of government may become a borrower to provide for its citizens at once certain needed advantages and improvements when the funds are not at hand and immediate taxation is deemed too heavy a burden.
The indebtedness (less funds available for payment of debt) of the aggregate governments of the United States in 1913 was:
The debts of the states and the minor divisions slowly and steadily increased after this date, and that of the nation leaped up in 1918 to $11,000,000,000 and in 1919 (at the maximum) to $25,000,000,000.
Nearly all public debt other than national has been created for the purpose of peaceful social and industrial development. The debts of the American states have partly been made necessary to meet deficits in current expenses, but largely to construct canals, to erect public buildings, and of late to purchase forest-lands and to build roads. The minor divisions are counties, cities, villages, boroughs, towns, townships, and special districts for schools, drainage, irrigation, levees, fire protection, poor relief, roads, and various other purposes. Every one of them has more or less legal power to incur debts and to levy taxes for the purpose of paying the interest and of repaying the principal. The purposes for which the debts are incurred by specially organized districts are mainly indicated in the names (e. g., drainage, irrigation), while the regular political divisons of counties, cities, villages, towns, townships, incur debts for many objects, such as streets, sewage disposal, water supply, electric-light or gas plants, schoolhouses, libraries, and other public buildings. Large expenditures for these purposes are necessary because the local governments are undertaking new functions, and either existing equipment (such as waterworks systems and street railways) must be bought from private companies or new ones must be built. They are necessary further because the rapid growth of population calls for an immediate “capital investment,” the payment of which may be, through borrowing, more easily spread over a series of years (e. g., in the extension of streets and paving and in the provision of schoolhouses for the children).
The larger part of nearly every national debt has been incurred for war or preparation for war. The total debts of the national governments of the world just before the outbreak of the Great War in 1914 were estimated at about $44,000,000,000.1 The total at the close of the war is estimated to be near $300,000,000,000.2 This amount has been, and will be, very largely increased in the later figures for the war period and for the after-war period, while almost everywhere expenses continue to exceed revenues. It is impossible to appraise at all definitely the ultimate fiscal burden of these debts in the present disordered condition of the monetary systems and in the precarious state of the finances in many of the countries. Russia, under the Bolshevik régime, has blankly repudiated its debt of $25,000,000,000 but doubtless will reacknowledge parts of it ultimately as a condition to the establishment of its national credit. Numerous states are near the verge of bankruptcy and it is now impossible to predict what adjustments they may be forced to make with their creditors. The debts of some leading solvent countries, as estimated in 1920, are
§ 7. Non-revenue character of receipts from loans. The proceeds from loans (and certain other items of sales) are called non-revenue receipts, because they are but in anticipation of receipts from other sources. The economic theory of such loans is essentially the same as that of private loans, but it is the people of the political district collectively that are the borrowers. To get the present uses of goods, they sell their promise to make future payments totaling a larger amount. The loan is the present worth of those promises. In the case of loans made for local purposes, provision is now usually made for their complete repayment within a definite number of years, usually ten, or twenty, or thirty. Meantime interest is payable annually or semi-annually, and from some source an additional sum is collected to repay a part of the loan, sometimes by redeeming a certain part annually, sometimes by accumulating a sinking fund until that amounts to the whole debt.
The minor divisions in the United States are thus constantly creating debts at the rate of about $2,000,000,000 each year, and at the same time paying former debts in instalments, in a total amount somewhat less than this. In the case of some municipal investments that are commercial enterprises (such as those supplying gas, electricity, and water), these annual payments can be made out of the profits; in the case of others, the payments come from special assessments upon the owners; and in most other cases they are collected by the usual methods of taxation. In America a large part of these costs are, by the law of special assessments, placed upon the owners of adjacent lands, whose outlays are usually more than offset by the increased value of their lands as a result of the improvements. In this case also, the present investment is in anticipation of the future incomes which the owners of the improved lands will get.
§ 8. Revenues from taxation. Much the largest part of the receipts of most governments, apart from loans, and in many cases nearly all such revenue receipts, come from taxation. Tax (as a verb) meant originally to touch or handle, then to estimate or appraise, and then to charge a burden upon some one, especially to impose a payment of services, goods, or money upon persons or property for the support of government. Taxation is the legal process of taking income, services, or wealth from private persons for public uses.
Taxes are of various kinds, but they always are incomes, or wealth representing future incomes, transferred from private ownership of the taxpayers to the government. In rare cases, more than the net current income of a certain kind may be taken for public uses. As economic income has many sources, it may be intercepted at many different points, and taxation may take various forms. The differences are so manifold that it is difficult to classify particular taxes satisfactorily. There are border-line cases where it is difficult to decide whether a particular payment to the government in the form of a fee, price, or special assessment is in the legal sense a tax or not. Some courts have, for example, decided that for certain purposes a special assessment is to be called a tax, and in certain other cases it is not to be if this would defeat the evident and just intention of the legislature.
§ 9. Kinds of taxes. The following are the kinds of taxes most frequently referred to.
(a) The simplest tax is a poll tax, a uniform amount payable by every person of the taxable class. This form of tax is being less and less used in America, and now amounts to little more than $17,000,000,3 this being only .6 of the 1 per cent of the aggregate taxes in the United States. The national government gets about one fourth of this amount from a tax on immigrants, and the rest is collected by (some of) the states, counties, and minor divisions. Usually the poll tax is imposed only upon voters, as a condition to the right to vote.
(b) Taxes may be laid upon incomes, as they come into the possession of the owner. Usually only monetary incomes that arise in commercial transactions are taxable, and no attempt is made to estimate the value of psychic incomes. Commercial incomes are more easily measured, but the omission of the other elements must cause many inequalities in the burden of the tax as between two individuals controlling equal incomes of real things.
(c) Taxes may be on property, either general, upon all property in the taxing district, or special, upon certain forms of property. A property tax may be specific or ad valorem, in proportion to value, as to the method of its determination. Since the value of material wealth is the capitalization of the rentals at the prevailing rate of interest, a general ad valorem property tax, as far as it applies to material wealth, and if it were accurately assessed, would take an approximately equal proportion of wealth-incomes. It does not, of course, touch directly incomes derived from wages and salaries, but it reduces their purchasing power in many cases. It is in some respects more searching than a tax on actual rents, for it reaches the prospective, or speculative, rental.
(d) Taxes may be on expenditure (sometimes called taxes on consumption). This is but another mode of attacking income, for in the long run most income is spent, not always by the individual who earned it, but by some one, and thus it is reached by a tax on expenditure. Usually in the United States the tariff duties are accounted to be taxes on expenditure, as also the internal revenues (also called excises) of the national government. In time of war, internal revenues are extended in the United States to a multitude of articles, but usually they have been limited (with minor exceptions) to liquor and tobacco. Most of these taxes are in fact levied not at the time of purchase by the ultimate consumer, but upon the specific goods in the hands of some merchant or business agency, and some of them are essentially special property taxes and others are business taxes of the kind next to be mentioned.
(e) Taxes may be levied on selected agencies of industry or on the process of business; such are business taxes, licenses, taxes on investment in business, and corporation taxes. These burdens are diffused and rest eventually on some income, rarely to be ascertained exactly.
§ 10. Defective tax “systems.” The actual tax laws of each division of government in a country combine the various forms in different proportions. Most of the federal taxes are from tariff duties and from internal revenues, the latter include a variety of special business and property taxes and, since 1913, the federal income tax. The largest receipts of states, of counties, and of minor divisions are from property taxes, some special but most of them general in form. Among the various states a wide diversity is found. Some use the general property tax for all the divisions (state and local), while others (several of the northern states and California) have separated the sources of state and local taxation, taxing corporations for state purposes and most other forms of wealth for local purposes. Some states, particularly those of the South, make large use of licenses and taxes on business both for state and local purposes.
The tax laws of many states have been much modified of late and are still in process of change. It is only in a loose sense that one can speak of the tax “system” of any state, made up as it is of so many diverse elements, each used to tap in some independent way some source of private income for public purposes. Every tax “system” has grown up more or less accidentally, guided by no more of a general principle than the advice of the cynical old statesman—so to pluck the feathers of the goose that it will squawk as little as possible. Thus, everywhere, the existing situation must be largely accounted for by custom and ignorance, by the weakness of some classes and the undue influence of other classes, rather than by clearly thought out principles soundly administered.
§ 11. Various standards of justice suggested. There have not been lacking earnest attempts to arrive at some general principles. Various standards have been suggested to measure the distribution of the burden of taxation, the chief being benefit, equality, ability, sacrifice, and social welfare. Each of these terms is capable of various interpretations which have changed from time to time. The benefit derived by any citizen from most of the public services evidently cannot be applied in any literal sense to strong and weak, to rich and poor. It is possible, however, to interpret equality with reference not to objective goods, but to the psychic sacrifice occasioned by taxation. Ability is of many kinds and may be differently understood. Some think ability to bear taxation is “in exact proportion to the money income”; others believe that it increases at a greater rate than money income, and favor, therefore, progressive taxation, that is, higher rates on the larger incomes. The standard of sacrifice is closely related to that of ability, looking, however, to the psychic effect of depriving the taxpayer of his income. It lends itself even more readily than does the standard of ability to the application of the marginal principle of valuation, and results in progressive taxation.
§ 12. Social welfare as the aim. The conflicting interests of the various classes of taxpayers in each period are to some degree softened by the prevailing public opinion, sometimes called the social conscience, and taxes are adjusted according to a vaguely held ideal of the social welfare. Social expediency, more or less broadly interpreted, determines who shall be taxed and what social results are to be sought. The exemptions from taxation in feudal times were great and, viewed from our standpoint, were inequitable, for the upper classes escaped while the peasants bore most of the burdens. The landlords and nobility, who were assumed to be performing important social functions, generally had outgrown their usefulness in the period preceding the French Revolution, which swept away many of these abuses.
Exemptions from taxation are granted liberally in most states to-day on some kinds of wealth and to some classes of citizens, because of their supposed relations to the public interest. Real estate and equipment devoted to educational, religious, and charitable purposes, the homes of priests and ministers, homesteads purchased with pension money, as well as all public lands, buildings, and equipment, are exempt.
The social interest requires that taxes be both elastic and productive, so that the needs of the government shall be amply provided for. The harmonizing of these needs in the laws of taxation requires a high degree of wisdom, of foresight, and of integrity in the legislator and in the citizen. No hard-and-fast rule for the apportioning of taxes can be laid down. The decision must be made in each generation by the public opinion as to what is most expedient for the general welfare.
§ 13. Principles of administration. Whatever forms of taxes are adopted, whether on property or income, whether at proportional or at progressive rates, their justice and expediency depend largely on their administration. Principle and practice in this, as in most affairs, may go far apart. The administration of taxation should be economical, certain, and uniform. (1) Some laws are more easily and economically executed than others. The time of collection should be as convenient as possible for the citizen, and the mode of payment should be the most simple. (2) The utmost certainty is desirable as to the time, method of payment, and amount. Taxation that, in its principle, is variable, shifting, or dependent on personal whim and favoritism, is despotism. (3) But the greatest evils, in practice, result from failures in uniformity as between individuals. The assessment of taxes has to be intrusted to men with fallible judgment, imperfect knowledge, and selfish interests. The assessor is as near a despot as any agent of popular government to-day. Not infrequently men of proved incapacity in every private business they have attempted are, for partizan or corrupt reasons, selected as assessors, and are given the power of passing judgment on the value of millions of dollars’ worth of property. Under the circumstances, evils are to be expected, and they occur. The small owner often is crushed under the unequal assessment, while the large owner comes off lightly. Political friends are favored, political foes are made to suffer. Even the most honest and capable of assessors find in the imperfections of the tax laws4 an insuperable obstacle to even-handed justice.
§ 14. Shifting and incidence. The person paying a tax into the public treasury is not always the one whose income is reduced in the long run. This is most clearly seen in the case of taxes paid by middlemen. In most cases the final and regular burden of the tax is distributed over a number of incomes. The passing on of the burden is called the shifting of the tax; the final location of the burden is called the incidence of the tax. The lawmaker cannot tell exactly where the weight will fall. The principles of value give some guidance in the inquiry, but the workings of the principle are difficult to follow.
Consider a situation where certain taxes have been for some time levied. They have become a part of the general adjustment of prices. If paid by any one in business they may be looked upon as a deduction from the gross proceeds or product of the business, prior to cost, or as a part of cost.5 In either case, every one choosing that business does so in the light of this fact. Unless the business promises to yield as good incomes (wages, profits) as other lines, the number engaging in it, and the output, must diminish, and thus the price of the product rises, or the cost of the factor falls, or both in some proportion. The tax on any durative agent or on any established business thus becomes incorporated after a time in its price and in the prices of the products, and any purchaser pays a price based on the net income remaining to the owner of the wealth after the tax is paid. Viewed in this way, taxes are seen to be borne to some extent by every one, by those who do not as well as by those who do actually meet the tax-collector face to face. The citizen with no taxable property is affected, far more than he realizes, by extravagance of government and by inequities in taxation, for the effects of most taxes are diffused so that every self-sustaining member of the community has some share in them.
§ 15. Taxes as costs. Now, if a new tax is levied, or an old tax changed in amount or in its incidence, it becomes a new influence in industry. Some occupations are made more attractive, others less so. Some places are made more, others less, desirable to live in. Property thus fluctuates in value, and investments become more or less remunerative. If the new tax reduces the net income of any productive agent, it reduces likewise its value, which is but the capitalization of its net rental. If taxes are taken off factories and put upon farm rents, factories rise and farms fall in value in the hands of their owners. The immediate change in value is much greater than the annual tax, for if five dollars is to be taken permanently from the annual rental of the farm, nearly one hundred dollars is taken at once from its selling value when the prevailing yield on investment is 5 per cent. The rate of adjustment varies greatly under different conditions, and the inflow and the outflow of labor and capital are more or less rapid in the various industries.
Taxes that enterprisers are unable to shift to others are reckoned by them as a part of their costs of production whenever the conditions of competition and of substitution make it possible to do so. Every new tax that curtails the supply of any necessary agent must raise the price of the products and cause more or less of the tax to fall upon the consumers. In the Civil War an increase in the tax on whisky increased its selling price, and distillers who owned stocks on which a smaller tax had already been paid reaped profits of millions of dollars. When the tax on tea was increased in England, all dealers that had accumulated a stock before the law went into effect were gainers. Every change in taxation inevitably affects, either favorably or unfavorably, many interests. The chance to anticipate a change in tax laws, or to get, from those in power, information of a proposed change, makes speculation possible and political corruption profitable.
The fact that a change in taxation is a disturbing element in price is not to be deemed insignificant merely because “all comes out right in the end.” Every change in taxation is an element of uncertainty in business and increases the fortunes of some men at the expense of others. Hence no considerable change should be made without good reasons in its favor. The older taxes have the virtue of stability, but in many cases they have grown out of harmony with the industrial conditions. While, therefore, from time to time there is a real need of a reform in the tax system, it should not be undertaken without recognizing the many and complex interests involved.
§ 16. Taxation and socialism. Because of its effect on costs, the taxing power gives to the government a means of encouraging some and of discouraging other persons and industries. “The power to tax is the power to destroy,” is the notable dictum of the Supreme Court. At the same time it is the power to favor and to enrich the favored. So it is but to be expected that, under the guise of taxation, greedy men, mistaken reformers, sentimentalists, and true philanthropists should constantly attempt to upbuild or to destroy the chosen objects of their favor or of their antagonism. Taxation has been used, for example, to make impossible the issue of bank-notes by state banks, to discourage the use of whiskey and tobacco, to prohibit child labor, to decrease the use of oleomargarine, and to upbuild chosen industries. The purpose in such legislation is sometimes subtle, at other times frankly recognized. Rarely is it admitted, however, by those who use taxation as a means of interference with the ordinary course of business, that this is socialism in the correct sense of the term.6 Many active business men who generally oppose any interference with private business, and strongly denounce as socialism the use of legislation intended to favor the weaker industrial classes, nevertheless support a “protective” tariff. But a protective tariff is intended to make selected industries more profitable than they would be if left to the usual rule of supply and demand, and it compels men in other industries to cease exporting goods, and forces many others to pay higher prices than they otherwise would. That such use of the taxing power, either with selfish or unselfish purposes, will cease, is not to be expected; but it is well to recognize the truth nature of the case, and to watch carefully the results.
PROPERTY AND CORPORATION TAXES
§ 1. Importance of taxation as a public question. § 2. The general property tax; nature and difficulty. § 3. Ambiguity of the term “property.” § 4. Various temporizing policies. § 5. A consistent policy of wealth-taxation. § 6. Needed reform of assessment. § 7. Separation of state and local taxation. § 8. Federal taxation of commerce. § 9. Proposal of the single tax on land values. § 10. Various reforms in land taxation. § 11. Difficulties in taxing corporations. § 12. Special taxes on banks. § 13. Special taxes on insurance. § 14. Special taxes on transportation. § 15. Alternative policies in corporate taxation. § 16. General plan for corporate taxation.
§ 1. Importance of taxation as a public question. The discussion of taxation has accompanied the growth of free government in England and America from the time of Magna Charta. The control of the public purse has been found to give the key to political power, and therefore it has frequently become the occasion of conflict between the monarch and the people. But in our own national history, since the adoption of the Constitution, taxation has not had a leading place in politics except in the one aspect of the tariff. The constitutional question of states’ rights long absorbed most of the interest of citizens and of legislators. But, with the quickened attention of the public to economic questions, the problem of taxation became of increasing importance.
It has come to be recognized that taxation can be made to play, and is bound to play, a leading part as an agency in the distribution of wealth, and thus it is the center of much of almost every proposal of social change and betterment involves the ardent controversy regarding social reform. Ultimately, some cost. The question then must be answered, Who is to receive the benefits and upon whom and how shall new taxes be levied to pay the cost? Further, it is often urged that this result of taxation in redistributing incomes is in itself (or can be made) a virtue; and some even see in tax reform the answer to the largest social questions of our time. We are now to take up a few of the more important problems of taxation, to see the difficulties, and to suggest the direction in which their solution is to be sought. The tariff having been already separately considered, the chief kinds of taxes we have here to treat are property taxes, general and special, and inheritance and income taxes.
§ 2. The general property tax; nature and difficulty. The general property tax is a tax of which the rates both of assessment and of levy are uniform and equal in proportion to the value of all (or nearly all) property in the taxing district.1 There are always some exceptions of certain kinds of property, or of the property of certain persons, or of property and things put to certain uses—public, educational, religious, and charitable in their nature.
The federal government levies no general property tax, but the other branches of government2 receive about three fifths of all their revenues from it.
At first view nothing would seem to be simpler and juster in principle than such a plan of taxation; but those who have most carefully studied its practical operation, almost with one accord pronounce it to be a “dismal failure.” The chief reason assigned for this failure has been that the assessment of the tax is imperfect and incomplete because of the incompetency or dishonesty of officials. The usual thought is that if all property could be justly assessed the plan would be excellent. Undoubtedly the difficulty of just assessment has its part in the weakness of the tax; but back of and more important that this is an inherent fallacy in the apparently simple principle of the tax.
§ 3. Ambiguity of the term “property.” Unfortunately, the word property is applied, even by the most competent courts, both to the intangible right of ownership (the fundamental meaning) and to the concrete thing that is owned, the source of the income.3 But apparently the value of the right to the income yielded by a house, for example, is merely the value of the house. The value of the property in the one sense (the abstract ownership, the intangible right) is merely a reflection of the value of the property in the other sense (the concrete wealth). There are not here two independent bodies of economic wealth. Whatever value belongs to the one is subtracted from the other. Nor is it rational to take the paper document called a deed (which is but the evidence of ownership) and call it tangible property having a value in addition to the house itself. Yet, in fact, all these confusions are constantly made in taxation. The term “intangible personal property” is applied to such things as mercantile credits, promissory notes, bonds—in general to the right to collect sums from another person, whether these rights arise out of sales or of loans—and all are treated as parts of taxable property. Sometimes the evidences of indebtedness, the promissory notes or the mortgage papers, are even called tangible property, the same term that is applied to land, houses, and machinery. By universal practice supported by a long line of court decisions, these rights (whether evidenced by paper or not) are made subject to taxation, except as by piecemeal legislation certain grudging exceptions have been made. These views and this practice are supported by the popular desire to tax money-lenders. The result is “double taxation” of many sources of income. This involves a burden that is ruinous in some cases, both to borrowers and to lenders, and that tempts in all cases to the evasion of the tax.
Take, for example, a house assessed at $10,000 which is owned free of debt and which has a rental value of $600. If the rate of taxation is 1.5 per cent, the tax paid would be $150. Now if the owner borrows $8000 he is still taxable $150 on the full value of the house, and the lender nearly everywhere is taxable on the amount of his mortgage, which would be $120 additional. The total tax payable out of the one source of income, the house, is then $270. The same analysis will show that any credit is but a contractual claim upon some other source of income which is, or should have been, already taxed under the general property tax.
If one person owns all the capital-value invested in a specific piece of wealth, no attempt is made to tax both the capital and the wealth; but if it happens that two or more persons share the capital-value invested in the same wealth, the attempt is made to tax as a unit the full value of the wealth and, in addition, some part of the capital also. It is, however, easy in most cases to conceal this “intangible property” from the assessor’s eyes, and a comparatively small amount of it is ever taxed. This means inequality and hardship in the operation of the tax and, as a result, unceasing temptation to perjury by the taxpayer and to favoritism and graft by public officials.
§ 4. Various temporizing policies. The general property tax in practice is now usually unjust and demoralizing. What, then, shall be done about it? Various policies have been followed. One has been to declare that the law would be good if it could be enforced, but that as in practice it cannot be, the best thing is to go on as before, catching a few “tax-dodgers,” and letting the rest go. Another policy is to hire “tax ferrets,” paying them large commissions to discover cases where intangible property of this sort has been concealed from the assessors. This method, even when most stringently applied, has never reached more than a small proportion of the cases, and becomes a potent agency of political favoritism and corruption.
Another policy is to maintain the general principle, but to make exceptions here and there. Usually the exceptions are made just at those points where the law would with earnest effort be most easily enforceable, and therefore where it has become most inconvenient. As a result of these changes the state laws display a bewildering and illogical variety. By constitutional interpretation, United States notes and federal bonds are exempt from state and local taxation; generally, by state law, building and loan associations and savings-bank loans are exempt, as, in a majority of states, are state and municipal bonds if held within the state. In at least eight states, bonds of the state are exempt, but those of the municipalities are taxable, while in a few states the reverse is the case. In several states both kinds of bonds, when issued after specified dates, are exempt, but in Ohio state bonds are exempt only if issued prior to 1913. All but seven of the forty-eight states, however, attempt to tax the resident holders of state and municipal bonds of other states; but the exceptional states are those in which most of the investors in this class of securities reside. In many cases private debts receivable are allowed to be offset against debts payable. In some states mortgages on real estate are exempted or (in Massachusetts) treated as an interest in the real estate. Rarely mortgages are exempted up to a certain amount (in Indiana to $700, the purpose being to tempt the borrower to reveal the name of the lender). Sometimes a special mortgage registration tax, payable but once (New York ½ of 1 per cent), is levied, and otherwise mortgages are free from taxation. Small as this rate is, the fiscal yield under this plan exceeds that formerly obtained from mortgage taxation under the general property tax.
By the overlapping of these laws, so contradictory in principle, it may happen that securities held by taxpayers residing in other states than those of the issue are taxable two or three or more times; but few if any loans of this kind are made except by those evading all taxation.
§ 5. A consistent policy of wealth-taxation. These exceptions still leave the law in its general principles as to the taxation of intangible property illogical and unjust. A solution can be found only by abandoning the ambiguous legal concept of property and making use of economic concepts. A consistent tax law might take either wealth or capital as the basis of assessment, but not sometimes the one and sometimes the other. Wealth is an impersonal basis of taxation; each piece of wealth might be taxed once as a unit no matter how the ownership were divided. Or the other alternative might be chosen. Capital would be a personal basis of taxation; each person’s capital might be taxed, no matter from what sources the incomes were derived (the concrete wealth, of course, then being left untaxed).
The wealth basis is much nearer to the present general property tax as actually administered. The assessment of general tangible wealth would undoubtedly be more easily done than would that of individual capitals, and likewise be both easier and juster than the present inconsistent policy. Tangible things are comparatively easy to find, measure, and evaluate where they are, and if they are all taxed it is evidently the same as if all the capital values based upon them were taxed in the owners’ hands. The various equitable claims of different owners in one source of income could be left to adjust themselves through shifting, mainly in the choice of investments, once the plan had become generally applied.
In legal theory a distinction is sometimes made between qualified and unqualified rights of property. Unqualified property covers all the rights of ownership in a specific piece of wealth, for example, in a house and lot held in fee simple and unencumbered; qualified property is any portion of the total as modified and limited by another’s right; for example, the rights of a mortgagor and of a mortgagee in the house are both qualified. The application of these conceptions to questions of taxation would have led legislators and judges to a very different understanding of the general property tax, quite like that above suggested. And this way out of the present difficulties is open to any court that will use it. But, unfortunately, as far as appears, the courts in dealing with the subject have failed to recognize the usual qualified nature of property rights.
§ 6. Needed reform of assessment. The assessment of the present general property tax is in many communities notoriously inefficient and unjust. The root of most of the present evils (other than those above discussed) is the method of local election of assessors, which usually is by townships, but in some cases by counties. The local assessor’s estimate of value is used as a basis for taxation not only for his district but for the larger units (county and state). Thus every local assessor is tempted by the conflict of interests not only among the taxpayers in the district which elects him, but by the conflict of interests between his district as a whole and other districts. The lower the ratio of assessment to true valuation in any township compared with that of the other tax districts, the smaller the proportion of county and state taxes that the people of the district have to pay. Willingness to under-assess property often becomes thus the chief virtue of an assessor in the eyes of his political constituents. This has led in many cases to absurd under-assessment, which boards of equalization have proved powerless to remedy in any great measure. A sounder plan would be general state assessment, with a permanent expert board of commissioners employing a corps of state assessors under the merit system of appointment. This plan has as yet been applied only to assessment of railroads and some other public-service corporations.
§ 7. Separation of state and local taxation. For the reason just indicated the failure of the general property tax has been most conspicuous where it is used as a basis for state taxation. This has led some financial students to advocate the plan of separation of state and local taxation. This means the assignment of certain sources of revenue (such as corporations and the liquor business) primarily or exclusively to the state, leaving all real estate and the general property of non-corporate persons to be taxed by the counties and minor divisions under the general property tax. The plan has been increasingly applied in New York, until, in 1906, it became almost complete. In 1910 the plan was adopted in California; and it is largely used in New Jersey, Connecticut, Delaware, and Pennsylvania, and to a small extent in some other states. An efficient state assessment of general wealth would accomplish most of the advantages claimed for this plan, while avoiding some of its dangers.
§ 8. Federal taxation of commerce. Customs and internal revenue (including the income tax) constitute the chief revenues of the federal government. Unlike the general property taxes, these are not levied upon the main body of wealth held in possession, but upon income as it accrues or upon articles of merchandise in course of trade and upon business activities. Stamps on receipts, checks, deeds, bills of sale, and licenses on the sale of liquor and tobacco are taxes on business acts which are necessary to the acquisition, use, or expenditure of wealth. Goods imported are taxed at the time of entering the country; domestic products, such as cigars, spirituous or malt liquors, playing cards, and (at times) matches, pig iron, and other products, are taxed usually at the time of exit from the factory.
It has already been shown that when the tariff duty prevents the importation of foreign goods and by raising the price encourages domestic manufacture of the article, there is virtually taxation of the consumer to subsidize the private manufacturer. A system of properly adjusted compensatory duties (tariffs and internal duties combined) which would prevent tariff duties from having any prohibitive effect could, in a great country like ours, be made to produce any revenues desired. Such a system, combined with the federal income tax, seems destined to be the chief dependence for the national government.
The increasing needs of revenue between 1913 and 1920 led to the development of many forms of federal taxation on business. The most important of these, under the names of the taxes on corporate incomes and excess profits, will be more fully discussed with the income tax, with which, though of a different nature, they have been closely connected in legislative development.
§ 9. Proposal of the single tax on land values. Besides the general property tax, there are found in the country as a whole a large number of special property taxes. Some of these have been introduced as substitutes for the general property tax; such is the special taxation (above referred to) of mortgages, and bonds. Other special property taxes have been introduced because they were believed to be good in themselves; such are special franchise taxes on corporations and some kinds of taxes on land. A much more drastic policy of special taxation of land, or of land values, was proposed by Henry George and has been advocated by his followers since the publication of his remarkable book “Progress and Poverty” in 1879. The doctrine there set forth is that the state should “appropriate land rent by taxation,” should “tax land values, irrespective of improvements.” It is maintained that a “single tax” of this kind would be quite sufficient for all the purposes of government. The main arguments adduced for this plan may be reduced to three propositions: first, private property in land is essentially unjust, because land is made by nature, not by man; second, the plan would make assessment simple and certain by limiting it to the unimproved land and making unnecessary the more difficult assessment both of tangible improvements and of intangible personal property; and third, it would work a marvelous reform in social conditions, abolishing poverty and greatly increasing production.
It is impossible within our limits of space to discuss this proposal further than to indicate that: (1) It assumes an untenable theory of property.4 (2) It overlooks the difficulty of distinguishing the value of the land, “irrespective of improvements,” from that of the land as it actually is, a difficulty especially great in the case of agricultural land.5 The difficulty is present even in the case of urban land when the improvements of filling, draining, and leveling have become incorporated with the site.6 (3) The plan ignores the stimulus (motivating force) which private ownership has given and still gives to the maintenance and fuller productive use of land. Nowhere has production thriven where the state was the universal landlord.
§ 10. Various reforms in land taxation. While the single tax plan is defective in principle, its wide discussion has served to direct attention toward the need of reform in the taxation of land. Some proposals looking toward this end are widely favored by opponents as well as by advocates of the single tax. Such are the following:
(a) The abandonment of the taxation of mortgages.7
(b) A more correct assessment, in accordance with the present laws, of lots and lands held for speculative purposes, which in usual practice are now greatly under-assessed.
(c) More adequate special franchise taxation upon corporations for special privileges in the public highways.
(d) Exemption, in value equal to the costs, of improvements on land, such as buildings, drains, fences, and fertilizers, for a limited time after they are made, perhaps five years.
(e) The separate assessment of urban lands used as mere building sites and of the buildings on them.
(f) Taxation of the increase (“increment”) of urban land values, periodically or on the occasion of transfer of ownership.
§ 11. Difficulties in taxing corporations. Until near the second quarter of the nineteenth century, business corporations (of which there were few) were taxed just as was the general property of individuals, excepting that fees were charged, usually payable but once, for the incorporation of new companies, or at times of increasing the capital stock of an old one, variously called taxes on corporate charters, license taxes, incorporation fees, organization fees, and charter fees. This still continues to be the case in the main in most of the states. The methods and machinery of assessment were (and still are) essentially local and simple, and have proved to be inadequate to reach or justly assess the larger and more complex corporate enterprises when their equipment and business extend beyond town, then county and, finally, state lines. Moreover, the corporate forms of organization presented in complex and puzzling ways the dual conception of property.8 Here was the tangible wealth of the corporation, and there were the diffused rights of ownership, the capital of individual stockholders and bondholders. Confused by this ambiguity, the men of that time believed (as many still believe) that there were here two separate and justly taxable funds of value, the tangible wealth and the paper evidences (or the mere intangible rights) of ownership. The popular view was, and still is, that “all kinds of property ought to bear their fair share of the burdens of taxation.” The real question is, what is “fair”? To treat the object owned and the right of ownership (or the equity in it) as separate bodies of property is surely double taxation, and results in confiscation in many cases. Between this doubt and the practical difficulty of assessment, it turned out that corporate wealth, far from being doubly taxed, was largely escaping even its due single burden.
§ 12. Special taxes on banks. Attempts to deal with the difficulty without clear perception of its cause took the form of legislative tinkering and patching. Taxes were gathered from corporations by any device that seemed workable. The banks, being the earlier important corporations, were first experimented upon. Taxes on capital stock and on circulation were tried first (in 1805, by Georgia), then a tax on dividends (in 1814 in Pennsylvania, and in 1815 in Ohio), examples that were followed or modified by a number of states. After the national banking system was started in 1864, attempts to tax both the capital of the banks and the stock in the hands of individuals led to federal court decisions and then to state legislation, by which now in many of the states the banks are separately taxed on their real estate and the shares are assessed to the individual holders (by various rules), but the taxes deducted from dividends and paid by the bank. There are, besides, special franchise taxes and fees paid by banks in various states.
§ 13. Special taxes on insurance. Insurance companies present in a striking manner the complexities of the ambiguous property concept. The assets of the insurance companies (we refer here particularly to the reserve companies), which belong in equity to the policy-holders (less the claim of the stockholders in the case of the stock companies), are nearly all invested in stocks and bonds of corporations and in mortgages on real estate. Now, under the general property tax, strictly interpreted, the policies are assessable at their surrender or reserve valuation in the hands of the policy-holders; secondly, the securities and credits that compose the assets are assessable to the company; and, thirdly, the railroads, factories, and houses, built with the outstanding loans made by the insurance companies, are assessable as tangible wealth to the various owners (individuals or, usually, corporations) of the wealth. Even more complex problems may and do arise. If such an interpretation were practically enforced it would result in double or multiple taxation levied upon the same economic source, and would be utterly prohibitive of the insurance business. The enforcement has, however, been impossible in practice. Insurance companies have comparatively little tangible wealth excepting real estate for offices. This is taxed locally. Several methods have been tried (beginning as early as 1824) to make insurance companies pay taxes (usually for state purposes) on something besides tangible wealth. A tax on receipts from premiums proved most workable, first as applied to “foreign corporations” (that is, to those of other states) and later, generally, to domestic companies also. Now, amid bewildering variety and interstate rivalries in tax laws, the most usual rate is 2 per cent on gross (in a few cases on net) premiums collected. The taxes on premiums, with various licenses and fees, now amount to 2.15 per cent of the total receipts from life insurance premiums in the United States. This is taxation not on an existing body of accumulated wealth, or upon income, but upon the process of accumulation, a tax directly on the act of saving. A consistent policy of wealth taxation, combined with income taxation, would require the abandonment of the present forms of special insurance taxes.
§ 14. Special taxes on transportation. Another great group of businesses whose taxation has been especially complex, because they are distributed throughout different taxing districts, are agencies of transportation and communication, especially railroad, sleeping-car, express, telegraph, and telephone companies. A state tax on railroad tonnage (Pennsylvania, 1860) was declared unconstitutional by the United States Supreme Court. But many other plans have been tried to compel the railroads to contribute, the chief being by taxes on dividends, gross earnings, equipment, and valuation of capital stock, taxed either to the company or to the stock-holders, (Connecticut since 1849). About a third of the states no longer make the physical plant the basis of taxation, except that in most of them some part or kinds of real estate are taxed locally.9
Telegraph companies are still locally assessed in most states, but in more than a third of the states are taxed either on gross receipts or on mileage of wire. Telephone companies are similarly taxed, but sometimes on the number of transmitters, or of subscribers, or on each plant, or otherwise. In a similar manner, express and sleeping-car companies are taxed, in the same group of states, on mileage, or on capital stock proportional to mileage, or by license and privilege taxes.
In the case of these corporations, and also of various other miscellaneous kinds of companies, no clear-cut principles serve to guide. The result is “a chaos in practice—a complete absence of principle.”10
§ 15. Alternative policies in corporate taxation. If the taxation of corporations is not to continue to be treated in a mere hit-or-miss manner, with every possible kind of inconsistency among the various states, some general principles must be recognized and some clear policy be formulated. But there is no general agreement to-day among jurists and economists upon a definite and consistent plan in this matter.
Two alternative policies appear. The first is to make the scheme for taxing corporations quite different in principle and plan from that for taxing natural persons. The assumption in this is that the “general property tax” is an irremediable failure, and is particularly inapplicable to corporations. This plan goes along with the separation of state and local taxation.11 An unfortunate result of this is to relieve the great mass of taxpayers of the state from any apparent and measurable part of the tax burden for state purposes, and thus to separate responsibility and power in state government. This policy nevertheless is favored by some of the leading authorities on finance.
The other policy is to tax the wealth and business of corporations (excepting those enjoying special privileges) in essentially the same way as other wealth and business. The improvement of corporate taxation would thus be but a part of the transformation of the “general property tax” into a general tax on tangible wealth.12 If first there is recognized the error of assessing the equitable ownership interests in addition to the body of wealth, and secondly there is created an efficient agency of assessment, the taxation of corporations can be logically and easily brought into accord with a harmonious system of state and local taxation.
The assessment feature of this proposal is exemplified more nearly than anywhere else, though still imperfectly, in the “Indiana plan.” By this all the wealth of the corporation is assessed as a whole, but the shares of corporations are not taxed in the hands of the shareholders.
§ 16. General plan for corporate taxation. The main features in such a plan of reform would be as follows:
(a) State assessment: assessment of all wealth by state agency, with expert non-local assessors, appointed and serving only under the merit system.
(b) Unit rule: the assessment of the value of each enterprise and body of wealth as a unit for the whole state, and apportioned to the minor divisions as the basis for levying local taxes.
(c) Mileage rule: apportionment of the total value in the state among the localities by general rule, in the case of transportation and transmission companies, by mileage with due regard to the presence of local real estate and of special industrial equipment such as repair shops and power plants.
(d) Interstate comity: taxation of interstate enterprises only in due proportion to the whole business, by mileage or other rules; interstate comity to be further developed in this matter.
(e) Intangible factors in unit valuation: account to be taken, in assessment, of various factors determining the earning power, such as good-will, patents, and other monopolistic elements, pertaining to and helping to determine the value of the tangible plant of the enterprise.
(f) Securities not separately taxable: account to be taken of the market value of securities and notes owned by a corporation, in determining the taxable value of the whole business, but these not to be treated as a separately assessable “property” (in addition to the tangible plant).
(g) Investors exempt on normal tax: exemption of the holders of securities and evidences of indebtedness of corporations, (though this need not prevent a supplementary system of graduated taxation on incomes).13
(h) Special franchises: treatment of special privileges granted to public-service corporations for the use of streets and public highways on the principle of rent-payment to the community rather than by levying a percentage on an assessment.
§ 1. Inheritance-tax laws. § 2. Fiscal and social aspects. § 3. Income taxes; general nature. § 4. Income taxation by the states. § 5. Obstacles to federal income taxation. § 6. Federal taxation of individual incomes. § 7. Important features. § 8. Development and yield. § 9. Corporate income and excess profits. § 10. Defective theory of corporate income taxation. § 11. A system of taxation.
§ 1. Inheritance-tax laws. There remain to be considered at least two important forms of taxation that are essentially personal in their unit of assessment, in contrast with the foregoing, which are (or should be, if consistent) essentially impersonal.1 There are the inheritance and the income taxes. Property received by bequest or intestate inheritance for taxing purposes is usually viewed as essentially income accruing but once under peculiar conditions, and therefore taxable to the individual beneficiary. However, inheritance taxes still retain some traces of a legal origin in feudal times, when the estate reverted to the overlord until released upon the payment of certain dues, and the tax is collected in the course of the probating of wills under the direction of court officials.
Forty-three of the American states had inheritance tax laws in 1921 (all but South Carolina, Florida, Alabama, Mississippi, and New Mexico). These laws apply generally to property passing either by will or under the intestate laws of the state. The tax is for state purposes. These laws differ in many ways, but are nearly all alike in certain respects:
(1) In applying to the separate legacies rather than to the estate as a whole.2
(2) In taxing legacies to relatives in the direct line at a lower rate (or even exempting them entirely) than those to collateral relatives.3
(3) In exempting legacies below a certain amount.4
(4) In having rates progressing with the size of the legacy; (this feature is less general, but is prominent in most of the later laws).
The federal government has until lately made little use of an inheritance tax. The law passed in 1862 in the midst of the Civil War yielded little and was soon repealed. But in 1916 was enacted an “estate tax” (amended and increased in succeeding years) which is imposed upon every estate (as a whole, not on the several shares) on the excess over $50,000, at progressive rates from 1 to 25 per cent, the maximum being on estates exceeding ten million dollars.
§ 2. Fiscal and social aspects. The fiscal importance of inheritance taxes in the states has been comparatively not very great, but has rapidly grown. In 1903 the receipts from this source (in twenty-seven states) were more than $7,000,000; in 1913 they were (in thirty-five states) $26,000,000, and are doubtless now much greater. In New York state alone the receipts range between ten and fifteen million dollars a year. The yield of the federal estates tax by fiscal years has been as follows:
The spread of inheritance taxes and the higher and progressive rates applied are an expression in part of the need of additional revenues and in part of the growing popular concern regarding the concentration of wealth. Yet the actual legislation is something of a compromise between fiscal policy (to get revenues) and social policy (to reduce or to distribute the larger fortunes. In New York legacies of more than $1,000,000 are now taxable at 4 per cent to relatives in the direct line and to all others at 8 per cent. In Washington the tax to relatives in the direct line is from 1 to 5 per cent, according to the amount of the share, but to others it may go as high as 15 per cent. In Wisconsin, somewhat similarly, the tax may rise to 15 per cent on the excess above $500,000. These taxes are of considerable importance, not only fiscally, but as the means for reducing large inherited fortunes. For this latter purpose, however, it would be more consistent and effective to make the progressive rates apply to the distributive shares rather than to the estates as wholes.
§ 3. Income taxes; general nature. All taxes, whether assessed upon the capital value of goods or not, come out of (reduce) the incomes now or later available for individuals. But there are various ways of attacking incomes, i. e., of apportioning the tax burden. Income taxation is that form in which the basis of the assessment and levy is the income of the taxpayer as it arises (not accumulated wealth, or capital, or business processes, or expenditures). Of the various conceptions of income,5 the one mainly employed in income taxation is monetary income arising in the course of business, supplemented occasionally (but not consistently) by some items of material income that are expected to come to the person.
There is not in the long run such a contrast between wealth taxation and income taxation in their ultimate burden and effect as is usually supposed. Indeed, wealth (or capital) taxation as applied to accumulated wealth is more far-reaching than income taxation, for it falls upon the present worth alike of monetary and of psychic incomes (e. g., the value of a house, whether it is let to a tenant or occupied by the owner). But, on the other hand, income taxation attacks directly the monetary incomes from labor, coming as wages, salaries, fees, and profits in business (unfunded as distinguished from funded incomes). This feature goes naturally with the fact that the income tax is essentially a personal tax, grouping the items of assessment about a person, whereas the “property” taxes are mainly (though not consistently) impersonal, making the piece of wealth the primary object of assessment. This summation of each person’s income makes income taxation peculiarly suitable for progressive taxation with the social-welfare motive of equalizing the distribution of wealth. It is doubtless this technical assessment feature, rather than any essential advantage as a mode of taxation, that has led to its recent growth in popular favor.
§ 4. Income taxation by the states. Income taxes have been used widely in European countries, but until 1913 very little in the United States. Numerous attempts have been made by the states to tax incomes, but with small results. Personal incomes, when sought by local assessors, proved to be most elusive. There were (in 1913) but seven states with anything resembling a personal income tax.6 These are Virginia, North Carolina, South Carolina, Mississippi, Oklahoma, Massachusetts, and Wisconsin. Of these states Wisconsin has the most recent law, and one the widest in its application and the most important fiscally. The law applies a progressive rate to all incomes (with exemption of $700 from wages and salaries) and contains elaborate provisions for corporate taxation. The proceeds are distributed 10 per cent to the state, 20 per cent to the country, and 70 per cent to the municipality in which the tax is collected. In the six other states the tax is on incomes only exceeding a certain amount (North Carolina, $1000, the other states from $2000 to $3500 exemption); some apply to incomes from any source, but others do not apply to incomes from property otherwise taxed. The total receipts from these state income taxes in 1913 were but $314,000.
In 1919, four states, Alabama, New Mexico, North Dakota and New York adopted a general income tax. In New York the rate is 1 per cent on incomes up to $10,000, 2 per cent on the next $40,000, and 3 per cent on all over $50,000. The yield the first year was $20,000,000.
§ 5. Obstacles to federal income taxation. The income tax has now come to play a most important part in the fiscal system of the federal government. Until 1913, however, it had been used only in a small way under the law passed in 1861, frequently amended, and finally repealed in 1870, to continue in force until the year 1872. The rate was 3 per cent on the excess of incomes over $600, and 5 per cent on the excess over $10,000. This law was repeatedly upheld by the United States Supreme Court as not in conflict with the Constitution. Its fiscal results were not large, as it was never effectively administered.
The next income-tax law was that of 1894, enacted in connection with the tariff revision of that year. It was declared unconstitutional before it had gone into effect. The main ground for the decision was that a tax on incomes from rent of land as well as on incomes from personal property was direct, and must therefore, according to the Constitution, be apportioned among the states according to population.
In the active discussion of social legislation in the years following this decision public sentiment developed, favoring an amendment to the Constitution. It is a remarkable fact that, when the bill for the sixteenth amendment to the Constitution was finally passed, it was voted unanimously by the Senate and almost unanimously by the House. It was ratified by three fourths of the states, and became a part of the Constitution February 25, 1913.7 The Democratic party, which had passed the law of 1894, was pledged to the passage of an income-tax law when it came into power again in 1913. The reduction of the tariff, as well as growing expenditures, moreover, made necessary the development of new sources of revenue for the national government. In other countries the income tax had been found to be a part of a system of taxation especially valuable as a “balance wheel” to equalize the revenues and expenditures. It was deemed by some to be an additional advantage of an income tax that it would make the richer citizens better realize the nature and burden of public expenditure. Most other federal revenues, being derived from the tariff and from taxes on merchandise, are borne mainly by the purchasers and consumers.
An income tax was opposed as sectional taxation by many in the eastern states, where the owners of most of the larger fortunes reside. But to this Senator Elihu Root replied that the states where there was the greatest ownership of wealth pay the largest taxation under any scheme, and ought to.
§ 6. Federal taxation of individual incomes. The law as first enacted constituted section 2 of the tariff act of 1913 entitled, “An act to reduce tariff duties, and to provide revenue for the government and for other purposes.” The development of this law, and the growth of taxation under it as it was successively amended between 1913 and 1919 to meet new needs, is one of the most remarkable chapters in our financial history. The law of 1913 applied both to individuals and to corporations. As “incomes” in these two cases are so different in nature, and as these two features in the law have had somewhat different developments, we may do well to treat them separately, beginning with the tax upon individuals.
The law of 1913 imposed upon individuals a “normal” tax of 1 per cent (on the excess above exemption), and an “additional tax” (in later amending laws called a surtax) ranging from 1 to 6 per cent on individual incomes of larger amounts than $20,000. There were thus eight classes of persons: those entirely exempt; those paying only at the normal tax rate; and six different classes paying a surtax, which on the portions of income exceeding a half million dollars was at the maximum rate of 7 per cent. This law applied retroactively to the last ten months of the calendar year 1913 (beginning March 1), and continued to apply for the calendar years 1914 and 1915. The act was then successively amended (or superseded by new laws) beginning in 1916. These changes will be tabulated below to simplify as far as possible the somewhat complex details.8 Let us note first, however, some important new features of taxation involved in this act.
§ 7. Important features. There were various exemptions, $3000 on every individual income and $4000 on the aggregate income of husband and wife living together (this distincton, it will be observed, offers a reward of $20 per annum to make marriage a failure). Among allowable deductions are sums paid for taxes (except assessments for local benefits), necessary business expenses, losses sustained, and (for the normal tax only) those parts of individual incomes derived from corporations that have paid the tax on them.
The difficulty of getting an honest and complete assessment of incomes is great. All taxation is deemed by the taxpayer to be “inquisitorial” in some degree, and this is particularly true of an income tax. In England had been developed the plan called “stoppage at source,” by which corporations and other businesses were required to deduct taxes before paying dividends, salaries, etc., to taxable persons. The taxation of corporations at the rate of the normal tax, while requiring them to report the names of those receiving dividends and interest payments, gave an ingenious way in our law of checking up the returns of individuals in respect to a class of investments that is steadily increasing in importance. By amendment, stoppage-at-source was in many cases changed to the requirement of reporting-at-source, as less troublesome and equally efficient.
The most disputed feature of the income tax probably was the principle of graduation, called also progression. It is upheld in part because in this case it but offsets regression, that is, relatively heavier taxation on the smaller incomes, in the case of the other kinds of taxes (tariff, property taxes, etc.). It is urged further that those of larger incomes, especially the largest, have marked advantages over others in making investments. Further it is urged that the higher the income the less does a certain rate cut into the “amount necessary for good living” (as was said in Congressional debate). This is in accord with the psychological principles of choice, of value, and of diminishing gratification. Finally, there is a widespread approval of the progressive rate just because it in so far acts as a leveling influence upon fortunes. The “additional” tax is already important fiscally, yielding more than one half of the total paid by individuals and one fourth of the total from corporations and individuals.
§ 8. Development and yield. The income tax was made retroactive to include incomes accruing from March 1, 1913, to the end of the year, and continued to apply to December 31, 1915, and the personal income tax yielded approximately $28,000,000 in the ten months of 1913, $41,000,000 in 1914, and $68,000,000 in 1915. In September, 1916, the law was changed by doubling the normal rate and increasing the surtax rates to a maximum of 13 per cent. This law also was applied retroactively to incomes accruing from January 1, 1916, and continued in force during the calendar year 1916, yielding more than $173,000,000.
After our entry into the war was passed the act of October 3, 1917, called the War Revenue Act, reducing the normal exemption from $3000 to $1000 ($4000 to $2000 in case of married persons living together), imposing under the name of an “additional normal tax” a new surtax of 2 per cent on all incomes of more than $3000 for single persons and $4000 for married persons, increasing the surtax maximum rate to 63 per cent and reducing to $5000 (taxable income) the point at which it began. The number of returns (that is, taxable persons) was thereby increased to nearly three and one half millions, and the yield of the calendar year 1917 was more than $675,000,000.
The war tax legislation of February 24, 1919, attempted to meet the financial needs of the government when they were at the maximum. The principal changes in the individual income-tax law were in the normal and the additional normal rates, both being trebled to apply retroactively to incomes in the calendar year 1918, and the increase of the surtax by rearranging the classes and applying the maximum rate of 65 per cent to all incomes of more than $1,000,000 (half the amount previously paying the maximum). Under this act there were nearly four and one half million taxable persons, and the yield for the calendar year 1918 was $1,128,000,000. The act provided for the reduction of the normal rates (regular and “additional”) each from 6 to 4 per cent for the calendar years 1919 and 1920.
§ 9. Corporate income and excess profits. Along with the federal taxation of individuals under the income tax has since 1913 been closely linked a new and special form of taxation of corporations. Important legislative changes in the one have been nearly always accompanied by equally important changes in the other.
Before the adoption of the sixteenth amendment, the need for new revenue in the Taft adminstration led to the enactment, August 5, 1909, of an “excise tax” on corporations, measured by net profits within the taxing period. This yielded in the four years that it was in force an average of about $32,000,000 annually.
This excise-tax feature was abandoned in 1913, or it may be better to say that it was incorporated into the income-tax law of that year, by which net corporate profits (“incomes”) were made subject to a normal rate of 1 per cent, as were those of individuals. This yielded between 1914 and 1916, between $30,000,000 and $60,000,000 a year. In 1916 this normal rate was increased to 2 per cent, at which the yield increased to $180,000,000 in the fiscal year 1917. At the same time a tax of 12½ per cent was laid upon net incomes derived from the manufacture of munitions (a business then most prosperous through enormous sales to the Allies); and the capital stock of certain large classes of corporations was subjected to a tax of 50 cents (soon doubled) on each $1000 par value in excess of $99,000. These various taxes on corporations in the aggregate were capable of yielding nearly a quarter billion dollars. But this was only the beginning of corporation taxation. While continuing the normal income rates on corporations, the law of March 3, 1917, laid the first excess profits tax (8 per cent on corporate profits exceeding 8 per cent of actual capital invested); but this law was superseded by the War Revenue Act of October 3, 1917, which levied war excess profits taxes upon incomes alike of individuals, partnerships, and corporations. The details are too complicated for discussion here, but a few features may be noted. A distinction was drawn between incomes derived chiefly from personal or professional service (taxed at a flat rate of 8 per cent, after the exemptions) and incomes derived primarily from invested capital (taxed at progressive rates in accordance with the percentage that profits bore to “invested capital” value). In the case of the latter the lowest rate, 20 per cent of profits, was applied on “net income” not in excess of 15 per cent of the invested capital; and the highest rate, 60 per cent on “net income” in excess of 33 per cent of invested capital. The amount of income exempted was $3000 for corporations and $6000 for partnerships and individuals, and also, in all cases, an amount of new income equal to a specified percentage of the invested capital during the “pre-war period,” defined as the years 1911, 1912, and 1913. The yield from this tax was enormous, the total from corporate incomes and excess profits (mostly the latter) in the calendar year 1917 being nearly $3,000,000,000 and in 1918 more than $4,000,000,000.
§ 10. Defective theory of corporate income taxation. There is apparent in all this legislation the attempt to treat corporations and individuals on the same principles, especially in applying to both of them alike exemptions and progressive rates. There is much confusion of thought here, for (1) “income taxes on individuals” and (2) “income and excess profits taxes on corporations” are very different in their nature and their sources. The term “net income” as applied to individuals is charged with psychological meaning. The whole modern theory and justification of progressive rates as applied to income taxation assumes that the income on which the rates are imposed is a total of the various income items (real and monetary) of an individual. His net income within the year is available for spending and enjoyment, or to add to his capital as a net addition. If this net income total is small, it should not be taxed at all, for that would take away part of what is conceded to be necessary for the minimum of comfort. Hence, exemptions are granted not only to the poorer citizen, but to all citizens, for even the richer taxpayer should not be taxed on that portion of his income necessary to existence or minimum comfort. Hence, also, progressive rates on larger incomes, since the sacrifice, the psychic cost, of giving up the marginal portion of incomes is assumed to become progressively less to the individual as his income increases. The second reason for progressive taxes, namely, the social benefit of leveling somewhat the larger fortunes, is likewise applicable only to individuals, or at most to large corporations owned by one or by few men.
In truth, the concept of income is not applicable at all to corporations without confusion of thought. Only individuals have net incomes, enjoyable or available for reinvestment. Corporations have receipts and expenditures, have net profits (or losses), at the end of the year, the equitable title to which belongs to various individuals, as evidenced by the securities they hold. But a moderately small corporation may have virtually but one owner, and he very rich, whereas an extremely large corporation may have many partial owners, most of them with very modest incomes. Exemptions and progressive rates, varying in accordance with the total of the profits (“income”) of corporations, have therefore no relationship in principle to those in the case of individuals.
Nor can taxation of corporate profits at progressive rates in accordance with the ratio of profits to invested capital be justified on the same grounds as progressive income taxation. “Invested capital” is a term that in practical business has a wide range of meanings, and the excess profits tax, when first imposed, caught the corporations with the most varied book values of capitalization. In general, the more recklessly they have been financed and the larger the amount of watered stock they had issued, the smaller the rate of profits on which they were taxable, and vice versa. The imperative necessities of war finance may relatively justify any measure of taxation that produces the results immediately desired; but the fundamental defects soon produce grave abuses and widespread protests, and will compel revision of our federal corporate taxation. The income tax is here as a permanent feature of our tax system. Eventually it should be reconstructed on the sound principle that only individuals have incomes. In various ways increments in capital value and undistributed profits of partnerships and corporations might be periodically assessed as income to the individual owners, thus verging into one simple whole the many diverse elements in our present complex of income and excess-profits taxation.
§ 11. A system of taxation. The task of reforming and developing the various kinds of taxes and of uniting them into a just and consistent plan for each of the divisions of government in the United States is a vast and difficult one. There are many conflicting interests among states, between states and nation, among the various minor political divisions, and among individuals and classes. There are also conflicting opinions regarding many features of the possible practical plans. Because of these it is safe to predict that progress will not be made quickly, steadily, nor always directed toward a clear ideal. If progress is to be rapid, the public must, however, have consistent principles by which its steps may be guided. In the foregoing kinds of taxation are the various elements that may be united into a system of taxation. It is useful to consider how this might be done.
At the basis of the whole tax structure is taxation, by value, of concrete wealth at the place where it is situated (in situ). This should be regardless of the distribution of ownership or of the residence of the owner. The present misnamed “general property tax” already presents the main outlines of this form of taxation, and the general changes necessary in law and method of assessment have been indicated above.9 Corporation taxation may be adjusted to this either by separate treatment and assignment to state purposes only, or more simply for most states, by assimilating it with the general taxation of wealth and allotting due shares of the proceeds to the various taxing divisions.10 The national government can, because of its exclusive power of levying tariff duties and also because of its exclusive control over interstate commerce, reach the tax-paying ability of the nation effectively by a combination of tariff and internal duties levied upon business acts. These mostly become merged into business costs, and are diffused over the whole population through general prices.11
This system of impersonal wealth taxation may then be supplemented by personal taxation, applied through inheritance and income taxes. These forms of taxation extend over and reach many of the same persons and incomes as do ultimately the impersonal taxes. But the summation of personal incomes gives the necessary condition for applying the principle of progression as far as this is, by public opinion, deemed desirable either for fiscal or for social reasons.
[1 ]See Vol. I, ch. 17, § 10.
[2 ]It is evident that it is only through ad valorem rates that it is possible to compare the average rate of duty for one tariff act with that for another. As, however, every tariff act is made up of both specific and ad valorem duties, it is only at the end of the year that an average ad valorem rate can be estimated by comparing the total of duties collected with the total estimated value of the goods imported. Average ad valorem rates are estimated in this way both on the dutiable goods alone, and on all goods, free and dutiable combined. There may be an element of error, even of misrepresentation, in such estimates. They do not give the simple test of the relative height of duties or of the degree of “protection” that we might at first suppose. Just to the extent that a new and higher rate really operates to exclude imports (and thus is protective in its effect) the goods subject to that rate cease to form part of the total imports. For example, if the average rate of duty were 25 per cent, and a 50 per cent rate on an article were increased to 75 per cent, it is possible that this rate would prove to be absolutely prohibitive. This raise of rate, therefore, would tend to reduce the average rates collected on all dutiable articles. Changes in general conditions of industry from causes quite apart from the tariff may result in shifting the proportions of imports that are dutiable so that the average rates go either up or down while the tariff law has remained unchanged on the statute book. A failure to consider these and related facts leads to much confusion in popular and political discussion of the tariff.
[3 ]Usually given as 20 per cent. However, a good many rates under the full operation of the act worked out as 21½ or 23 per cent, and a few at 26 and at 29 per cent. Besides, there were numerous specific rates, the ad valorem force of which cannot be determined.
[4 ]The political argument that the small tariff reduction of 1857 caused the crisis of 1857 will not bear serious examination. See ch. 16, § 13.
[5 ]See ch. 16, § 2.
[6 ]See above, § 3, note 2.
[7 ]Internal revenue receipts in 1866 had been $309,000,000; in 1872 they had fallen to $131,000,000, yet the government’s surplus for the three years 1870-1872 was little less than $100,000,000 a year. This was almost half of the total receipts from customs, which were $216,000,000.
[8 ]See above, § 3.
[9 ]See § 12 in ch. 16.
[10 ]Probably resulting from the rising prices, as explained above, § 3. For example, in one year, from 1899 to 1900, the average ad valorem rate collected on dutiable goods fell 3 per cent, and that on all goods fell 2 per cent; in the two years from 1904 to 1906 the average rates on dutiable fell 4 per cent and on all goods fell 2 per cent. See Fig. 2, ch. 14.
[11 ]On this see further ch. 15, § 5, § 6; ch. 16, § 12.
[12 ]First edition of this work, pp. 236, 238.
[13 ]See below, ch. 16, § 13.
[1 ]See Vol. I, ch. 5, § 1 and § 7.
[2 ]See Vol. I, ch. 6, § 11, on the origin of markets.
[3 ]See Vol. 1, chs. 36 and 37.
[4 ]Recall ch. 3, in general, on the nature of monetary demand.
[5 ]See Vol. I for numerous statements of the effects of varying quantities of agents upon the economy of utilization; e.g., pp. 138, 163, 164, 213, 228, and chs. 34 and 35 entire.
[6 ]See, e. g., Vol. 1, pp. 71, 162, 213, 227, 399-404, 438.
[6 ]See ch. 7, sec. 8.
[7 ]This varies also with conditions; after the outbreak of the war in 1914 it was for a time as high as $.05 because of high war rates of insurance.
[8 ]The connection between a high rate of interest and falling prices is a dynamic phenomenon of a very temporary nature. In long-time static conditions the general level of prices and the prevailing rate of interest are dependent on entirely different sets of forces. See on the theory of interest, Vol. I, p. 308. In long-time movements of prices, in contrast with brief changes due to foreign trade such as are referred to above, high rates of interest are connected with rising prices, and vice versa. See above, ch. 6, § 12, on fluctuating price levels and the interest rate.
[1 ]See ch. 3, § 12 and § 13.
[2 ]In European countries, on the contrary, the rates that have been mainly effective have been those levied upon food products, and the agricultural landholders have been the “protected interests,” such as the England “landed aristocracy,” the German agrarian “Junkers,” and the French peasant landowners.
[3 ]See ch. 15, § 1.
[4 ]See ch. 3, § 7 and ch. 15, §§ 7-11.
[5 ]In ch. 15, § 8.
[6 ]See ch. 2, § 8.
[7 ]That there is a certain measure of truth in this opinion is recognized in our discussion of the standard of deferred payments, ch. 5, § 9. But the relation of a world-wide appreciation of the standard money commodity with the burden that this change puts upon debtors has nothing to do with the question now before us, viz.: Does a protective tariff enable a country to keep and increase its proportion of the world’s stock of gold; and if it could, would it be a general benefit?
[8 ]See Vol. I, especially p. 228, and chs. 34 and 36.
[9 ]See on wages in times of crises, ch. 10, § 6 and § 7; and on tariff changes, ch. 10, § 11 and § 13 below.
[10 ]See ch. 25.
[11 ]See Vol. I, pp. 361 and 443.
[12 ]See Vol. I, p. 436, for average wheat prices in England, practically in the world-market.
[13 ]See ch. 14, §12
[14 ]See ch. 15, § 5 and § 6.
[15 ]See § 8. On the next paragraph, see ch. 10, § 11.
[16 ]For example, the maximum alteration in any year might be limited to 3.65 per cent of the value of the goods and in any case not to exceed one tenth of the old duty, this change to be applied day by day. Thus, if, on a valuation of $1000, the duty collected under the old rate has been $400 and under the new law is to be $290.50, three years would be required for the full change to become effective, the reduction each day being $.10 per $1000 valuation. The administration of such a rule would be simple, and it has been favored by men of practical commercial experience.
[17 ]See Vol. I, e. g., pp. 228, 431, 445ff, 466, 490, 506ff.
[1 ]These figures include the debts of the separate states in the federal unions of Australia and the German Empire, and the separate debts of European colonial governments, but not those of the states of the United States, and in no case including the debts of minor divisions the total figures of which are not to be had.
[2 ]As computed by the statistician of the National City Bank, from figures at various dates from 1916 to 1920, the total was $279,000,000,000.
[3 ]The figures do not include returns from incorporated places having a population less than 2500, where the poll taxes may be a considerable sum.
[4 ]Particularly the difficulties noted in the next chapter, §§ 2-5.
[5 ]See Vol. I, p. 374.
[6 ]See ch. 35.
[1 ]For example, the constitution of Alabama declares: “All taxes levied on property in this state shall be assessed in exact proportion to the value of such property,” etc. And the constitution of Indiana declares: “The general assembly shall provide, by law, for a uniform and equal rate of assessment and taxation of all property, both real and personal, excepting,” etc. Similar statements occur in most state constitutions.
[2 ]The general property tax in the United States constitutes:
The total amount collected in this way in 1913 was over $1,083,000,000.
[3 ]See Vol. I, pp. 264-267.
[4 ]See ch. 32.
[5 ]See Vol. I, pp. 116, 117, 145, 445-455.
[6 ]See Vol. I, pp. 117, 146, 453.
[7 ]See § 4 and § 5.
[8 ]See above, § 3.
[9 ]E. R. A. Seligman, “Essays on Taxation” (1895), p. 156.
[10 ]Seligman, op., cit. p. 136.
[11 ]See above, § 7.
[12 ]See above, § 5.
[13 ]See ch. 19, § 11.
[1 ]See ch. 18, § 3. note, and § 5, on this distinction. The poll tax also is personal; see ch. 17, § 9.
[2 ]In Utah the tax is 5 per cent on all estates over $10,000.
[3 ]Exception, Utah.
[4 ]Exceptions are Missouri, New Hampshire, Vermont, Virginia.
[5 ]See Vol. I, p. 26.
[6 ]In addition, certain items of receipts of companies or incomes of individuals are arbitrarily defined as property for purposes of taxation in a few cases in about fifteen other states. See Wealth, Debt, and Taxation, Report of the Bureau of the Census, 1907, p. 622.
[7 ]Article XVI. The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census enumeration.
[9 ]See above, ch. 18, § 5.
[10 ]See ch. 18, § 15, and § 16.
[11 ]See ch. 16, § 12 and § 14, first paragraph.