Delphi Complete Works of Stephen Leacock, page 449
Throughout the entire United States opinion is agreed as to the inefficiency and iniquitousness of the general property tax. It has been condemned by a long series of state tax commissions held within the last forty years, and by all the highest authorities on the subject of public finance. “Instead of being a tax on personal property,” said the New York commissioners of 1872, “it has in effect become a tax upon ignorance and honesty. That is to say, its imposition is restricted to those who are not informed of the means of evasion, or, knowing the means, are restricted, by a nice sense of honor from resorting to them.” The Illinois commission of 1886 spoke of it as “a school for perjury, promoted by law.” The New York report of 1893 says, “It puts a premium on perjury and a penalty on integrity.” The recent industrial commission in its final report (vol. xix) quotes as illustrative of the general feeling, the words of a special committee on taxation which reported to the California senate in 1901: “From Maine to Texas and from Florida to California, there is but one opinion as to the workings of the present system. That is, that it is inequitable, unfair, and positively unjust. Theoretically all property is called upon to bear a share of the public burdens in exact proportion to its present value. In practice that end is admittedly not even approached. Scarcely a fractional part of the property in any commonwealth is brought to the tax rolls. This is especially true of personal property in its most coveted forms, money and credits.” That the reform of local taxation is one of the crying needs of the American system of government is only too obvious. But before considering the steps that have already been taken in that direction, and the various plans suggested, it will be well to set in comparison the systems adopted in other countries.
8. Systems of Local Taxation in Other Countries. Complicated as is the local administration of England, there are certain features of its financial system which merit attention in connection with the present question. In the first case the central government does not divide or apportion taxes among the county councils for collection, so that all question of competitive under-assessment as between counties is set aside. Nor is there, for reasons which will appear presently, competitive under-assessment between the minor areas. In the next place the whole field of personal property, tangible and intangible, is left out of local taxation. Thus the American difficulty of finding “invisible property” is avoided. But at the same time such property contributes to the national finance through the income tax, an adjustable tax ranging from two to five per cent, or even higher, and which, among its other categories, is levied on stocks, shares, etc., and paid at the source. Though the operation of the income tax is of course fallible, and allows the more fluid forms of income (professional, etc.) to partially escape, it nevertheless serves to make the intangible forms of property contribute to the general revenue of the state.
The actual revenues of the local authorities consist partly of sums handed over to them by the central government, and partly of “rates” (proportional taxes) which they levy on real property. To the first class belong certain payments made by the national government to the counties (administrative counties, and county boroughs), representing a fraction of the amount received as the proceeds of license taxes (liquor, dogs, guns, etc.), a fraction of the estate duties collected, and, under a statute of 1890, the proceeds of certain duties on spirits and beer. In other words the national government collects various taxes, and shares them among the counties. The rest of the local income comes from direct taxation. The rate is levied not, as in America, on the capital value, but merely on the annual value of real property. A committee of the county council fixes the county rate, assigning to each parish a standard of what the rate is to produce. This involves assessment as in America of the property value in the parish, but the valuation is never made by an elected parish officer. The county authorities follow the valuation made by the national government for the raising of the income tax, or that of the poor-law authorities, or at times make a valuation of their own. Boroughs, districts, and parishes levy similar rates on the annual value of real property. The difference in conditions between England and America is seen in the fact that while the American property tax ranges (nominally) from about one and one half to ten per cent on capital value, the total of various kinds of English local rates for the year 1895-96 stood at 4s. 5d. on the pound of annual value; in other words, while the nominal American rate is at one to ten per cent of capital, the English rate is twenty-two and one half per cent of income. Even this rate is considered in England alarmingly high. In the year 1899-1900, something over forty and a half million pounds was raised by direct taxation, and twelve and a quarter million pounds derived from the contributions of the central government.
It must not be thought, from what has been said above, that the situation in regard to local finance in England is altogether felicitous. There, however, the feature which occasions grave apprehension is not the method of assessment and levy, but the great increase of local expenditure and local debt. The local expenditure of England and Wales in 1868 was only thirty million pounds; in 1900 it reached one hundred and one million. Much of this has been paid for with borrowed money, and the total of local indebtedness stands at about three hundred million pounds. As a result local rates have increased to a great, indeed to an alarming extent. The rate per pound in 1891-92 stood at 3s. 8d.; in 1895-96 at 4s. 5d. It is true that the borrowing power of local bodies is subject to the sanction of the local government board, and the accounts of most local bodies are audited by district auditors, appointed by the same authority, and having a power to disallow items. A further extension of this application of central control would seem justified by the circumstances.
In France local government presents certain features differing in a marked degree from the systems both of England and America. In the first place, use is made of a sort of internal customs duty, the octroi, levied on various classes of goods brought into towns. This is one of the main resorts of communal finance, the towns as already seen being organized as communes. The same form of local tax is used in Paris and Lyons. In the year 1896 no less than 1513 French cities, towns, and villages made use of the octroi, the revenue thus produced being about one third of their total revenue. The chief articles thus taxed are wines, beer, and spirits generally, oil, meat, combustibles, fodder, and building materials. This part of the French system is certainly to be condemned. It hampers trade, and is troublesome and expensive in collection. Unfortunately, like other indirect taxes, it has the insidious quality which renders its use tempting to municipal authorities. The employment of the octroi, though abolished at the time of the French Revolution, has steadily increased in the nineteenth century, and in 1899 about one third of the population of France were subject to it.
For the rest of the municipal revenue and for the revenue of the department, a quite different plan is used. There are four great direct taxes levied by the French national government, — the tax on real estate, tax on personalty and persons (impôt mobilier et personnel), the door and window tax, and the tax on business. Of these the last named is a graded tax on all forms of business enterprise, varying according to the kind of business, the magnitude of the business, and the location of the business. The whole classification falls within the scope of the central government; there is no apportionment among departments, etc., and hence no chance of competitive under-assessment. It is as if the state of Massachusetts imposed a license tax on all forms of business, which, other things being equal, would be higher in Boston than in a town of fifty thousand people, and higher in the case of banking business, other things being equal, than for a grocery business, and finally would be higher in the case of a business employing one hundred men than one which only employed twenty, still with the condition that other things were equal. The total tax collected would therefore vary with the changing factors. Its use by the government of France is meant to supplement the lack of a national income tax. Of the other taxes, that on real estate is based on what is called a “cadastre,” or fixed valuation made by the government on a basis of area, productivity, value of buildings, etc. The part of this valuation referring to land remains unchanged for a long time together (1821-90). That on buildings has been frequently revised. The former portion of the tax is apportioned, that is to say, the government decides on a total sum and collects it from the departments in proportion to the valuation of their land, the rate thus varying as in the United States. In the case of the latter portion of the tax, the government fixes the rate and takes the proceeds. It is the duty of the local authorities in the arrondissements to share the apportioned tax among the communes; but as the valuation on which they proceed is made for them, they are in a totally different position from that of the American assessors. The so-called personalty and persons tax (impôt mobilier et personnel) is in reality an apportioned tax on houses together with a capitation tax of the value (according to locality) of three days’ labor. Finally the “door and window tax” is an apportioned tax on houses.
It has been necessary to show the nature of these direct taxes in order to explain the French system of local taxation. The local revenue is obtained by the addition of a certain percentage to the sums thus collected. The “centimes additionnels” as they are called, are settled by the central government, and collected by its agents. It is for this reason that it can be said of the general council of the department that it has no power of taxation. The “centimes additionnels,” or sur-tax, added to the “principal” of the French direct taxes, is greater than the principal itself. No sur-tax is added to the capitation tax mentioned above.
In Prussia use is made of the octroi as in France, its burden falling upon mill-ground articles, cattle, meat, etc. There are also, as in France, sur-taxes added to the direct taxes of the state government and other direct taxes whose proceeds go wholly to the local authorities. The direct taxes of the first class include the income tax and the tax on circulating business; those of the second class comprise the taxes on land, houses, and fixed business. The extra percentage, or sur-tax, actually collected varies greatly, but is under the control of the central government. The land assessment is made by commissioners appointed by the state government, together with a staff of technical experts in each province. The persons liable to the income tax are divided into classes within which all pay the same. The assessment is made by a special board in each circle or county, partly appointed by the local authorities, but in the majority elected by the persons liable to the tax. Unfortunately the method of ascertaining income has not proved satisfactory. Till recently (1891), the board relied largely on circumstantial evidence of income (style of house, obvious expenditure, etc.). The objection that this was an inquisitorial proceeding led to the adoption of self-assessment by declaration. In spite of the severe penalties for fraud, a great part of income escapes. The mode of assessing the business tax is peculiarly interesting. The French system of classification by industries and by population of locality was abandoned in 1891. Instead of it businesses are grouped into four classes on a joint basis of capital invested and earnings made. The assessment of the top class is made province by province, by assessors of whom one third are nominated by the minister of finance, and two thirds by the committee of the province (the executive committee of the elected portion of the provincial government). The tax amounts to about one per cent of earnings. The two middle classes are taxed district by district (Bezirk), and the lowest class is taxed in each “circle,” or county. The government assigns a lump sum (based on the average earnings of included businesses) to be collected from all businesses of the same class in the same district (or minor district), and this is shared among the individual business concerns by a tax committee elected from their number. It must be observed that this elected committee has no power to spare its constituents as a total. This form of tax has proved singularly efficient.
9. Reform of the American System. Let us now in the light of what has been said in regard to foreign countries consider some of the chief proposals for the reform of the American system of local taxation, and the steps that have already been taken in that direction. In the first place we have the frequent suggestion of a more stringent enforcement of existing laws. This is what has been done in Ohio under the “tax inquisitor law,” whereby county commissioners engage an individual to “discover” personal property, paying him a proportion of the tax thereby realized. In view of the obnoxious character of the property tax so generally condemned, mere rigor of enforcement only aggravates the situation. The Ohio system introduces a feature of management which should have no place in public administration, except in dealing with the criminal class. Nor is the system of making the legal assessment value (as recently done in Chicago) only a fraction of the true value, of any permanent efficacy. It affords, it is true, the opportunity for a general repentance and a new start, but the viciousness of the assessment system is not altered thereby. The proposals which appear to be substantiated by the experience of foreign countries are (1) the separation of the sources of state and local revenue, and the abandoning of the system of apportionment, (2) the abolition of the property tax on personal property, and (3) the creation of other forms of revenue to fill the void thus created and to satisfy the equities of taxation.
The first of these proposals has been endorsed by the American League of Municipalities, by the New York State Commerce Convention, and by various other bodies. In Oregon under a statute operative in 1905, apportionment of state taxes among the counties is abandoned. The proportion of state taxes paid by each county will depend on the ratio of its own expenditure to the total expenditure of the counties. The Industrial Commission in its Final Report (1902) recommends that the states (not the localities) abandon the property tax altogether. In the second place the abolition of the tax on personalty would leave only land and buildings subject to the property tax. The motive for concealment would be lessened, since there would no longer exist the sense of injustice at the escape of personalty from a tax to which it was legally liable. The experience of England and Prussia certainly falls in with the suggestion of the commission that this tax should be for local purposes only. It might seem advisable that when the system of elected assessors exists it should be abandoned in favor of assessors appointed by the government of the state and holding an independent tenure of office. Such a suggestion is but little consonant with the current political ideas of American people. But the experience of European countries certainly favors it. A valuation of land on the French system by general survey and estimate would reduce that portion of the tax to a stable basis.
In reference to the third question, that of creating other sources of revenue, much has already been done in some states and there is much that naturally suggests itself. The successful business taxes of Prussia and France seem to indicate a useful form of taxation. The Industrial Commission recommends the adoption of taxes of this nature as a supplement to the property tax. In several of the Southern states there already exist “licenses” or “privilege taxes” which are of this kind. They are by no means so elaborate as the Continental taxes, varying only according to population or other evident criteria, but not proportional to the volume of business transacted. A more elaborate form of business tax with the Prussian system of assessment would be a decided gain. The taxation of income is also recommended by the commission; theoretically the income tax is the most equitable of all, but experience shows it liable to grave inequalities. It might well form a part of a reconstructed tax system for state purposes, especially if income from real estate were omitted, being already taxed under the local property tax, and if the English system of tapping the income at its source were put into force. Separate income taxes have recently been levied in Virginia, North Carolina, and South Carolina. Massachusetts has an income tax which exempts income from taxed property, and which dates from colonial times. Pennsylvania and Louisiana attempt, but not very successfully, to tax income under the property tax. An amended taxation of corporations — which are now taxed in various ways, on the value or on the cost of property, on capital stock, on bonded debt, on gross earnings, on dividends, on net earnings, etc. — is also proposed. In summary it may be said that what is needed is a complete reconstruction of local taxation. The general object should be to avoid the present evils of competitive under-assessment and invisible property and to institute a new composite system of revenue calculated to properly distribute the burden of taxation.
