[Sidenote: Taxation for public defense]

The primary purpose of taxation is public defense. War often has driven men into closer social relations. Public defense requires sacrifice on the part of the family and of the individual. In family or patriarchal communities all share a common income and combine in the common defense, but self-preservation compels such small communities to form a larger, stronger state for the common defense. Personal service in the field gives place to money taxes permitting a more regular, continuing, and perfect organization of military forces.

[Sidenote: To preserve domestic order]

Next comes the need of civil government to insure domestic tranquillity.

As political unity grows, 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.

To maintain and operate the social machinery requires ever-increasing resources. The courts which settle disputes between men, and which interpret their contracts, are agencies of peace, displacing physical contests. Many other public expenses tend to enlarge, as those for legislative bodies, public buildings, statistical inquiries, the printing of public doc.u.ments. Government on these accounts has become in modern times an increasingly costly inst.i.tution.

[Sidenote: Developing public wants; social and industrial welfare]

2. _The promotion of the social and industrial welfare of society has come to be an important purpose of taxation._ Some functions of government, less essential than the primary ones just mentioned, seem naturally to grow out of them. In a democratic society, popular education is one of the necessary conditions of good government, as it appears that domestic order is not possible in a democratic state without intelligent citizens. Step by step the functions of government are widened. 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, beginning in the political need of keeping official representatives in foreign lands, has grown to be a great economic agency. Consuls are commercial travelers, advancing the trade-interests of their countries in all quarters of the globe. These social and industrial functions have been increasing of late. As the national and local governments engage more in industry, they usually make larger demands in the shape of taxation.

[Sidenote: The sphere of the state expands]

It is along the border-line between the primary and the secondary purposes of taxation that the contest goes on regarding the proper functions of government. If they are to stop short of the extreme of socialism, where shall the line be drawn? The movement has been of late toward greater government activity; more of the wants of men are thus supplied through the agency of the state. That year by year a greater sum is taken by taxation and spent for the citizen is a fact that may be recognized without debate here. The toll-road becomes a public road, the toll-bridge becomes free, more is supplied by taxation for schools, for advanced research, and for technical training. In our country great wealth was given by the Morrill Act to scientific and technical schools.

The state universities, against much opposition, have become in many states of the Union the dominant educational force. Moreover, taxation often is used as a means not merely of raising revenue, but of discouraging one kind of industry and encouraging another. One industry wanes or dies under increasing burdens, another waxes strong by fostering exemptions and bounties. A large share of this "protective legislation" is done under the guise of taxation.

[Sidenote: Government as a consumption good and as a means of production]

3. _Shifting of the limits of state action and corresponding changes in the weight of taxation are constantly affecting value and incomes._ Society as a whole is made up of many groups of industry. Government is the largest of these, collecting and expending more than any individual or corporation. Government is in one aspect a consumption good. 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 a greater product than is possible by individual action. Government can maintain lighthouses more economically than individuals could otherwise secure them.

[Sidenote: Apportioning of the cost]

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 of twelve. The average result 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 a measure of taxation according as it affects their own income. Thus taxation is inevitably an economic question.

-- II. FORMS OF TAXATION

[Sidenote: The various forms of taxes]

[Sidenote: On incomes]

[Sidenote: On property]

[Sidenote: On expenditure]

[Sidenote: On business]

1. _Taxes usually are a portion taken from the income arising from labor or from wealth._ In rare cases more than the net income of wealth may be taken, but the aim of taxation in general is to take only a portion of the income for public uses. As economic income has many sources, it may be intercepted at many different points, and taxation may take various forms. First, private income may be appropriated by a tax on income.

This is the simplest in thought, but the administrative difficulties of the income-tax are great in practice. It is not easy to determine the money value of the various sources of enjoyment that come into a man's possession in the course of a year, including, as the ideal requires, the immaterial gratifications along with the material. A second form is a tax on property in proportion to value. Since the value of material wealth is the capitalization of the rentals at the prevailing rate of interest, the property tax, so far as it applies to material wealth, should take an approximately equal proportion of incomes. If it were accurately a.s.sessed, it would be in some respects better than a tax on actual rents, for it reaches the prospective, or speculative, rental. A third form of tax is one on consumption, or expenditure. This is but another mode of attacking income, for in the long run 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. The princ.i.p.al consumption taxes in the United States are the tariff duties and the internal revenues of the national government. In time of war, internal revenues are extended in the United States to a mult.i.tude of articles, but usually they are limited (with minor exceptions) to liquor and tobacco. A fourth form of tax is one on selected agencies of industry; such are business taxes, licenses, taxes on investment in business, corporation taxes, etc. These burdens are diffused and rest eventually on some income, not always exactly ascertainable. Actual tax systems combine these forms in great variety, subtracting many minute fractions from each citizen's income in ways unsuspected by him.

[Sidenote: Changes of taxation and in capitalization]

2. _The immediate effect of a change in the form of taxation is a change in the market value of goods._ If the new tax reduces the net rent of any productive agent, it reduces likewise its value, which is but the capitalization of its net rental. If taxes are taken off of factories and put upon farm rents, factories rise and farm-land falls in value.

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.

Taxes are reckoned by enterprisers as a part of the cost of production whenever the conditions of compet.i.tion and of subst.i.tution make it possible to do so. In such a case the products rise in price and most of the tax falls 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 recently the tax on tea was increased in England, all dealers who had acc.u.mulated 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 antic.i.p.ate a change in tax laws or to get, from those in power, information of a proposed change, makes speculation possible and political corruption profitable.

[Sidenote: Shifting and incidence of taxation]

3. _After every change in taxation, compet.i.tion among bargainers goes on and a new equilibrium of prices results._ The citizen who pays a tax into the public treasury is not always the one whose income is reduced in the long run. In most cases the final and regular burden of the tax is distributed over a number of incomes. The pa.s.sing on of the burden is called the shifting of the tax; the location of the final 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.

Certain it is that the new tax, both in its collection and in its expenditure, 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. As property thus fluctuates in value, as investments become more or less remunerative, the market price of corporation stocks rises and falls. The rate of adjustment varies greatly under different conditions. The inflow and the outflow of labor and capital are more or less rapid in the various industries.

[Sidenote: Many personal incomes affected]

The fact that a change in taxation is a disturbing element in price is not to be thought 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.

-- III. PRINCIPLES AND PRACTICE

[Sidenote: Various standards of justice suggested]

1. _Taxation should be adjusted with reference to the general social interest._ Many standards have been suggested to measure the distribution of the burden of taxation, such as benefit, equality, and ability. 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 measured with exactness.

The standard of equality 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 thus 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.

[Sidenote: Social welfare as the aim]

The conflicting interests of the cla.s.ses in each period are to some degree softened by 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 will give the best social results. The exemptions from taxation in feudal times were great, and viewed from our standpoint were inequitable, for it was the upper cla.s.ses who escaped while the peasants bore all the burdens. The landlords and n.o.bility who were a.s.sumed to be performing important social functions, often had outgrown their usefulness. Exemptions are granted liberally in most states to-day for some purposes and to some cla.s.ses of citizens; to educational, religious, and charitable inst.i.tutions; to the homes of priests and ministers; to homesteads purchased with pension money, etc. California alone of all the states in the Union continued until 1903 to tax churches and private schools. 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 social opinion, guided by the social conscience.

[Sidenote: Principles of administration]

2. _The administration of taxation should be economical, certain, and uniform._ Whatever taxes are adopted, whether on property or income, whether at a proportional or a progressive rate, their justice and expediency depend largely on their administration. Principle and practice in this as in most affairs may go far apart. 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. As to the time, method of payment, and amount, the utmost certainty is desirable. Taxation that is variable, shifting, dependent on personal whim and favoritism, is despotism. Above all, the administration of the law should be uniform and impartial,--yet this is a principle most frequently departed from in practice. The a.s.sessment of taxes has to be intrusted to men with fallible judgment, imperfect knowledge, and selfish interests. The a.s.sessor is as near a despot as any agent of popular government to-day.

Not infrequently it is to men incapable of earning two dollars a day in any private business that the power is given of pa.s.sing judgment on the value of millions of dollars' worth of property. Under the circ.u.mstances, evils are to be expected and they occur. The small property-owner often is crushed under the unequal a.s.sessment while the large owner comes lightly off. Political friends are favored, political foes are made to suffer. Woman nearly everywhere pays more than her fair share of taxes, a fact that the advocates of woman suffrage do not fail to urge as an argument for their cause, although women's disadvantage in this matter is little greater than that of any man without special political influence.

[Sidenote: Importance of taxation as a public question]

3. _The relation of taxation to private incomes makes it one of the largest public questions of the day._ 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 frequently was the occasion of conflict between the monarch and the people. Taxation was a leading issue in the American Revolution. While, therefore, it cannot be said that the subject has been of no great importance in the past, it is true that in our own national history since the adoption of the Const.i.tution, taxation has not been much discussed, except in the one aspect of the tariff. Const.i.tutional and political questions, states rights, and the question of slavery, long absorbed the interest of citizens and legislators. But with the aroused interest of the public in economic problems, taxation is attracting, and is certain to attract in the next few years, increasing attention in local, commonwealth, and national politics.

CHAPTER 50

THE GENERAL THEORY OF INTERNATIONAL TRADE

-- I. INTERNATIONAL TRADE AS A CASE OF EXCHANGE

[Sidenote: The motive of individual gain in foreign trade]

1. _International trade is exchange between individual men, and has the same object as other exchange of goods._ The term international trade should not be misunderstood as meaning that nations rather than individuals engage in it. International trade differs from domestic trade only in the fact that the parties are citizens of different sovereign states. Exchanges between men in the same village, between those in neighboring villages, and between those in different countries, are prompted by essentially the same economic motive--the wish to increase the want-gratifying power of goods. In every such case both parties gain or think they are gaining. 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 on continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another, is rarely applied now except to 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.

[Sidenote: Natural differences affecting foreign trade]

[Sidenote: Political boundaries and trade]