10. The clearing house. (White, _Money and Banking_, part iii, chapter iii; Fiske, _The Modern Bank_, chapter x.)

11. The credit department of a modern bank. (Fiske, _The Modern Bank_, chapter xvii.)

12. Bank reserves. (Fiske, _The Modern Bank_, chapter xxii.)

13. Greenbacks. (White, _Money and Banking_, part ii, chapter iii.)

14. The check system. (Dunbar, _Theory and History of Banking_, chapter iv.)

15. Colonial finance. (Dewey, _Financial History of the United States_, chapter i.)

16. The First United States Bank. (White, _Money and Banking_, part iii, chapter vi.)

17. The Second United States Bank. (White, _Money and Banking_, part iii. chapter vii.)

18. The national banking system. (White, _Money and Banking_, part iii, chapter xiv; Dewey, _Financial History of the United States_, chapter iv; Fetter, _Modern Economic Problems_, chapter viii.)

19. The panic of 1907. (Coman, _Industrial History of the United States_, pages 335-337; Noyes, _Forty Years of American Finance_, chapter xv; White, _Money and Banking_, part iii, chapter xviii.)

20. The Bank of England. (Dunbar. _Theory and History of Banking_, chapter viii.)

21. The Bank of France. (Dunbar, _Theory and History of Banking_, chapter ix.)

22. The German bank. (Dunbar, _Theory and History of Banking_, chapter x.)

23. Organization of the Federal Reserve System. (_Annals_, vol.

lxiii, pages 88-97.)

24. The Federal Reserve act and foreign trade. (_Annals_, vol. lxiii, pages 132-141; Kemmerer, _The A B C of the Federal Reserve System_, chapter ix.)

FOR CLa.s.sROOM DISCUSSION

25. Should we adopt a centralized banking system such as exists in England, France and Germany? (See the Debaters' Handbook Series.)

26. Should all State banks and trust companies be required by law to become members of the Federal Reserve System?

27. What would be the best method of acquainting the general public with the fundamental principles of banking?

CHAPTER x.x.xII

TAXATION

394. THE INCREASING COST OF GOVERNMENT.--In the United States, as in other modern civilized countries, the cost of government is steadily increasing. The settlement of the Great West, the depletion of natural resources and the transition from a primitive to an industrial economy have obliged our government to pay out larger and larger sums for the services of public officials, and for the materials and commodities used for public purposes. The growth--of our cities and the increasing complexity of our industrial life have greatly increased the number of activities which it is to our advantage to carry on, not individually, but collectively or through the agency of government. The spread of altruism and the widening of the concept of social service have caused the extension of governmental activity in such new fields as social insurance, recreation, and public health. Altogether, our total government expenditure is more than seventeen times as large as it was a half century ago, while the per capita expenditure is more than five times as great.

395. SOURCES OF PUBLIC REVENUE.--Writers on taxation generally enumerate as sources of public revenue, public industries, the public domain, gifts, confiscations, fees, special a.s.sessments, fines, and taxes. At various times and in different countries of the world, all of these have been important, but in the United States at the present time taxes are by far the most important source of public revenue.

A tax may be defined as a compulsory contribution exacted from the individual by the government, for the purpose of defraying expenses incurred for the common welfare. The government does not return to the individual taxpayer a definite commodity or service. In return for taxes the government indeed renders many valuable services, such as public education, the safeguarding of health, and protection from domestic violence and foreign war. But on account of the collective character of these services, no attempt is made to apportion the payment exacted of the individual to the benefit which he as an individual receives.

Until recently our national government secured most of its revenue from taxes on imports, and from excises or internal taxes on such commodities as tobacco and liquor. Since national prohibition went into effect (1919), the Federal revenues are derived mainly from taxes on imports, from income and inheritance taxes, and from taxes on corporations.

More than three fourths of the receipts of state and local governments are derived from the general property tax, the amounts collected from other sources being as yet relatively unimportant. The general property tax is supposed to be levied upon all the property in the possession of taxpayers, though as we shall see a little later, this tax works out very badly. The old "poll" or head tax was formerly important, but at present less than two thirds of one per cent of state and local revenues are derived from this source. In most states it is being abandoned because of its small yield, and because of the difficulty and expense in collecting it.

A. DEFECTS IN AMERICAN TAXATION

396. LACK OF A TAX SYSTEM.--The fundamental defect of American taxation is the lack of a definite and coordinated system. The tax laws of most states have been radically changed during the last few decades, and are still in a process of development. In many states old taxes are being modified or abandoned, and new taxes adopted. But too often this is being done without regard for the taxation reform of other states or of the Federal government. As a result, the tax burden weighs unequally upon different cla.s.ses, while between state and state, or between state and Federal government, there is an overlapping of tax power. The effect of this overlapping is to create undue confusion, and to demoralize both tax officials and taxpayers.

397. LEGAL RESTRICTIONS UPON TAXING POWER.--A serious defect of American taxation is the lack of correspondence between taxing power and fiscal needs. Let us inquire into this.

The Federal government has important functions to perform, but has practically unlimited taxing power. So far as the national government is concerned, the problem of finding sources of revenue is relatively simple.

The functions a.s.sumed by the state governments are as yet relatively few and inexpensive, while the power of the state to tax is but slightly abridged by the Federal Const.i.tution. States have relatively little difficulty in making both ends meet.

Local governments, and especially munic.i.p.al governments, have a large number of functions which are increasingly important. Of the total government expenditure in this country, about 35 per cent is made by the Federal government, 10 per cent by the state governments, and 55 per cent by the local governments. But whereas Federal and state governments have relatively adequate taxing powers, the taxing powers of local governments are narrowly restricted by the state const.i.tution and statutes. Such local functions as health, public school education, and recreation are constantly demanding greater expenditures, yet local governments as yet have few opportunities for securing necessary funds.

398. DEFECTS IN TAX a.s.sESSMENT.--The defects of tax a.s.sessment are clearly ill.u.s.trated in the workings of the general property tax, called by some authorities the worst tax in the civilized world. The basis of levy is the work of local a.s.sessors, who are generally elective. The a.s.sessors estimate the value of millions of dollars'

worth of property, and their estimates are the basis of the tax rates for not only township and county, but generally for the state as well.

Incapable and dishonest a.s.sessors often work injustice by underestimating the value of some forms of property, and overestimating the value of other forms. In addition, political pressure is brought to bear upon the a.s.sessor to cause him to undervalue the property of the township or county as a whole, so that the local unit will bear a relatively small share of the taxes of the state.

The estimates of the local a.s.sessors are commonly subject to correction by a county, and sometimes by a state, board of equalization. The duty of such a board is to make a.s.sessments uniform and just, but notwithstanding the efforts of these bodies, unequal and unfair a.s.sessments have persisted.

399. DIFFICULTY OF TAXING INTABGIBLE PROPERTY.--Where taxation is on the basis of a.s.sessment, it often happens that the tax burden rests unequally upon different forms of property. Property in tangible form, such as land, cattle, and houses, is easily discoverable, and hence cannot easily evade the payment of taxes. But intangible property, such as bonds, stocks, or mortgage, can easily be hidden, so that owners of this type of property often evade their share of the tax burden.

This evasion is often practiced in the case of the general property tax, which is intended to reach both tangible and intangible property.

The general property tax worked well a century ago when the greater share of wealth existed in tangible form, because local a.s.sessors could easily locate such things as land and live stock. But the rapid development of corporations, bringing with it a rapid increase in the proportion of intangible forms of property, has rendered the general property tax grossly unjust. The a.s.sessors of the general property tax cannot easily discover intangible property, unless taxpayers cooperate with them. The all too frequent lack of such cooperation causes a disproportionate share of the tax burden to fall upon tangible property. The general property tax is haphazard, ineffective, and demoralizing to both tax officials and taxpayers.

400. DOUBLE TAXATION.--By double taxation is meant the taxation of an individual or different individuals twice for the same thing. Double taxation is of two kinds.

The first type of double taxation is ill.u.s.trated by the taxation of both tangible property and the paper claim upon that property. For example, a state may tax a land-owner on his land, and also tax another resident of the state on the mortgage which he holds against that land. Or it may happen that a state will tax the land, buildings and other tangible equipment of a corporation, and at the same time tax those of its residents who hold stock in that corporation, _i.e._ individuals who hold paper evidence of ownership in the tangible equipment of the corporation. More generally, however, this type of double taxation arises when the holder of the paper claim resides in one state, while the tangible property lies in another state. In such a case, it is common for one state to tax the paper claim, and for the other state to tax the property itself. This type of double taxation is manifestly unfair, and often imposes a ruinous burden upon property.

The second type of double taxation is ill.u.s.trated by the overlapping of similar taxes between state and state, or between Federal and state governments. Because it is the practice of most states to seek revenue without regard to the taxing activities of other states, or of the Federal government, it may happen that corporations, incomes, or inheritances are taxed by more than one agency of government. If a scientific and coordinated tax system were deliberately to provide for this, the supposition would be that such taxation were reasonable and just, because intended to bear with equal weight upon all forms of property in the taxable cla.s.s. But because such taxation is haphazard, it bears with unequal weight upon corporations and individuals, and is therefore unjust.

Moreover, it encourages the evasion of tax burdens. Individuals and corporations sometimes migrate from localities or states in which they are subject to double taxation, to localities or states in which the danger of such taxation is less. This in turn has the evil effect of tempting states and munic.i.p.alities to neglect taxes on corporations, incomes, and inheritances for the sake of attracting wealthy individuals and large industrial organizations from neighboring areas.

B. SOME SUGGESTED TAX REFORMS

401. IDEALS OF TAXATION.--Summarizing the views of the more generally accepted writers on taxation, we may say that the following are the basic ideals in taxation:

Taxes should take as little as possible from the people and still meet the needs of government. Taxes should be uniform, that is, all taxable articles of the same cla.s.s should be levied upon at the same rate. It is also important that the time, manner, and amount of the tax should not be arbitrary, but that the individual's convenience as regards the terms of payment should be considered. From the standpoint of the government, taxes should be easy to administer and economical to collect.

A good tax system will be elastic, so that taxes may easily be increased or decreased, according as the revenue needs of the government change. The ability to pay ought to have some influence upon the extent to which an individual is taxed. Taxes should adapt themselves somewhat to the local sentiment as to what is expedient or socially desirable.