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Modern Economic Problems by Frank Albert Fetter

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party to redeem its promise in this regard. Many changes of rates were
made, both downwards and upwards. 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 (before taxed 15 per
cent), 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 300 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]

No other tariff since "the act of abominations" in 1828 has called
forth such widespread criticism as 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."

Sec. 13. #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

(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 evident 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 normal conditions we can judge little
from the actual experience. The first eight months that the act was in
operation, the _ad valorem_ rate on dutiable goods proved to be 36 per
cent (about 4 per cent less than in the preceding year) and the rate
on free and dutiable together about 14 per cent (over 3 per cent less
than the preceding year). The first complete fiscal year (that of
1915) under the act, the average rate on dutiable goods was 33.5 per
cent and that on all imports was 12.5 per cent. Evidently this is far
from a "free trade tariff." The reduction in the average _ad valorem_
rate is 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 will force the
less efficient plants in some industries touched 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 is
in progress during the war. Imports from Europe have fallen greatly,
while exports are enormously increased. Old industrial establishments
have been converted to different and temporary uses. 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.[12]

Sec. 14. #Some lessons from our tariff history.# Can we draw from the
checkered course of tariff history in America clear lessons of wisdom
for the future? 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.

Our tariff history is too largely a record of special favors granted
to classes of citizens, to the 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.[13]

The revision of the tariff of 1913, viewed with non-partizan eyes,
appears to have been carried out, to say the least, 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 contains on the whole a large
measure of protection. 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 it still more prohibitive. But one lesson of our
tariff history is that such an act should be given a period of fair
trial before extensive changes are made in it. Even further reductions
should be cautiously undertaken and put into effect gradually. 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.[14]

[Footnote 1: 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.]

[Footnote 2: Usually given as 20 per cent. However a good many rates
under the full operation of the act worked out as 21-1/2 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

[Footnote 3: The political argument that the small tariff reduction of
1857 caused the crisis of 1857 will not bear serious examination. See
below, sec. 13.]

[Footnote 4: See ch. 14, sec. 2.]

[Footnote 5: See above, sec. 2, note 1.]

[Footnote 6: 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.]

[Footnote 7: Other issues absorbed public attention in this
period--the Spanish war, colonial policy, "imperialism," railway rate
regulation, corporation control, etc.]

[Footnote 8: See above, sec. 2.]

[Footnote 9: Compare with ch. 13, sec. 5.]

[Footnote 10: Probably resulting from the rising prices, as explained
above, sec. 2. 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.]

[Footnote 11: This "competitive principle" is essentially the same as
the so-called "true principle" of equalizing the cost of production
(see above, sec. 11). It is essentially 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. See ch. 14, sec. 3.]

[Footnote 12: Such changes are logically related to the subject of
financial crises rather than to that of the tariff. See note at end of
the next section.]

[Footnote 13: See Vol. I, e.g., pp. 228, 431, 445ff, 466, 490, 506ff.]

[Footnote 14: #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

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 which has in some--not
all--cases, followed their enactment; and requires further that the
present act be not held accountable for the next reaction in trade,
whenever it may occur, inasmuch as a reaction would be sure to occur
no matter what kind of tariff act we might chance to have at the



Sec. 1. Public finance as a division of economics. Sec. 2. The police function.
Sec. 3. Social and industrial functions. Sec. 4. The enlarging sphere
of the state. Sec. 5. Industrial revenues of governments. Sec. 6. Governmental
receipts from loans. Sec. 7. Nonrevenue character of receipts from
loans. Sec. 8. Revenues from taxation. Sec. 9. Forms of taxation. Sec.10.
Defective tax "systems." Sec.11. Various standards of justice suggested.
Sec. 12. Social welfare as the aim. Sec. 13. Principles of administration.
Sec. 14. Shifting and incidence. Sec. 15. Taxes as costs.

Sec. 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, tho not the whole, of political

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.

Sec. 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 larger, 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.

Sec. 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.

Sec. 4. #The enlarging sphere of the state.# A mere police state would
leave to private initiative the provision of every kind of economic
agencies 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.[1]

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.

Sec. 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.

(1) 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
been proceeding 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.

Sec. 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.[2]

The indebtedness (less funds available for payment of debt) of the
aggregate governments of the United States in 1913 was:

Nation ................................. $1,028,000,000
States ................................. 346,000,000
Minor divisions ......................... 3,476,000,000
Total .................................. $4,850,000,000

The larger part of nearly every national debt has been incurred for
purposes of war and preparation for war, while 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 of late to erect public buildings, purchase forest lands,
improve roads, and construct canals. The minor divisions are counties,
cities, villages, boroughs, towns, townships, school districts,
drainage, irrigation, and levee districts, fire districts, poor-relief
districts, road districts, and various other subdivisions of states
and of counties. 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 sometimes indicated in
the names (e.g., drainage, irrigation), while the regular political
divisions of counties, cities, villages, towns, townships, incur debts
for a large variety of objects, such as streets, sewage disposal,
water supply, electric light or gas plants, school houses, 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 school houses for the children).

Sec. 7. #Nonrevenue character of receipts from loans.# The proceeds
from loans (and certain other items of sales) are called nonrevenue
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 10, or 20, or 30. 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 which 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.[3]

Sec. 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.[4] _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

Sec. 9. #Forms of taxation.# The following are the forms of taxation most
frequently referred to.

(a) The simplest form of 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,[5] this being only .6 of 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, if not always, 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, so 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

Sec. 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.

Sec. 11. #Various standards of justice suggested.# There have not been
lacking earnest attempts to arrive at some general principles. 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 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.

Sec. 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

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

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.

Sec. 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. 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. 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. But the greatest evils, in practice, result from the
failures in assessment. 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 lightly off. 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 laws[6] an insuperable obstacle to
even-handed justice.

Sec. 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

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.[7] 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 rise, or the cost of the factors fall, 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.

Sec. 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 of 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

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.

[Footnote 1: Meaning here not a certain political party, but a
principle of social action.]

[Footnote 2: 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. (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 for which are not
to be had.) The new debts created by the war give already more than
double the foregoing total.]

[Footnote 3: The special assessment is thus in its nature, in part a
private investment. The plan, of special assessments could easily be
applied in many more cases than is done at present.]

[Footnote 4: 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 for service (as water rates, etc.), and special assessment
(as for street paving) 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

[Footnote 5: The figures do not include returns from incorporated
places having a population of less than 2500 where the poll taxes may
be a considerable sum.]

[Footnote 6: Particularly the difficulties noted in the next chapter,
sees. 2-5.]

[Footnote 7: See Vol. I, p. 374.]



Sec. 1. Importance of taxation as a public question. Sec. 2. The general
property tax; nature and difficulty. Sec. 3. Ambiguity of the term
"property." Sec. 4. Various temporizing policies. Sec. 5. A consistent policy
of wealth-taxation. Sec. 6. Needed reform of assessment. Sec. 7. Separation of
state and local taxation. Sec. 8. Federal taxation of merchandise in
commerce. Sec. 9. The proposal of the single tax on land values. Sec. 10.
Various reforms in land taxation. Sec. 11. Difficulties in taxing
corporations. Sec. 12. Special taxes on banks. Sec. 13. Special taxes on
insurance. Sec. 14. Special taxes on transportation. Sec. 15. Alternative
policies of corporate taxation. Sec. 16. General plan for corporate

Sec. 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

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 the ardent controversy
regarding social reform. Ultimately, almost every proposal of social
change and betterment involves 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.

Sec. 2. #The general property tax; nature and difficulty.# The rates both
of assessment and of levy of the general property tax 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 government[2] 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.
The usual thought is that if all property could be 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
than this, is an inherent fallacy in the apparently simple principle
of the tax.

Sec. 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
evidently 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. At the rate of 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 $120 on the amount of his mortgage. 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.

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.

Sec. 4. #Various temporizing policies.# The general property tax in
practice is 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, no matter how 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 association 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 (in
New York 1/2 of 1 per cent) is levied, and otherwise mortgages
are free from taxation. Small as this rate is, the fiscal yield of
mortgage taxation under this plan exceeds that 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

Sec. 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.

Sec. 6. #Needed reform of assessment.# The assessment of the present
general property tax is 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 underassessment, 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.

Sec. 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.

Sec. 8. #Federal taxation of merchandise and acts in commerce.# Tariff
and internal revenue duties constitute the two chief revenues of the
federal government. Both of these are mainly taxes on wealth. Unlike
the general property taxes they are not levied upon the main body
of wealth held in possession, but almost entirely upon articles of
merchandise and upon acts in course of trade. 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 whatever 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.

Sec. 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.

The special taxation of land, or of land values, has been strongly
urged by Henry George and his followers since the publication of the
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 men; 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

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

Sec. 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 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.

Sec. 11. #Difficulties in taxing corporations.#[8] 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. 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 forms the dual
conception of property.[9] 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
popular will declared (and still declares) that "all kinds of property
ought to bear their fair share of the burdens of taxation." Yet to
apply this principle would obviously be double taxation and result
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

Sec. 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
which 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.

Sec. 13. #Special taxes on insurance companies#. 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 which 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 owners. If such
an interpretation were practically enforced it would result in triple
taxation to be drawn from 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
two 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, 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.

Sec. 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.[10]

Telegraph companies are still locally assessed in most states, but in
over 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

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

Sec. 15. #Alternative policies as to 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

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.[12] 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.[13]
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.[14]

Sec. 16. #General plan for corporate taxation.# The main features in such
a plan of reform would be as follows:

(a) Assessment of all wealth by a state agency, with expert nonlocal
assessors, appointed and serving only under the merit system.

(b) 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) 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) Taxation of interstate enterprises only in due proportion to the
whole business, by mileage or other rules; inter-state comity to be
further developed in this matter.

(e) 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) 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) Exemption of the holders of securities and evidences of
indebtedness of corporations.{15}

(h) 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.

[Footnote 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.]

[Footnote 2: The general property tax in the United States

Of the revenue receipts of the states 38 per cent.
Of the revenue receipts of the counties 76 per cent.
Of the revenue receipts of the incorporated places. 60 per cent.

The total amount collected in this way in 1913 was over

[Footnote 3: See above, ch. 2, secs. 2, 3, and reference there to Vol.

[Footnote 4: See above, ch. 2.]

[Footnote 5: See Vol. I, pp. 116, 117, 145, 445-455.]

[Footnote 6: See Vol. I, pp. 117, 146, 453.]

[Footnote 7: See above, sec. 4.]

[Footnote 8: No reference is made in what follows to fees 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.]

[Footnote 9: See above, sec. 3.]

[Footnote 10: E.R.A. Seligman, "Essays on Taxation" (1895), p. 156.]

[Footnote 11: Seligman, op. cit. p. 136.]

[Footnote 12: See above, sec. 7.]

[Footnote 13: See above, sec. 5.]

[Footnote 14: The assessment feature of this proposal is exemplified
more nearly than anywhere else, tho still imperfectly, in the "Indiana
plan," in which, however, the true concept of property is recognized
only in so far as the shares of corporations of which all the wealth
is taxed are not assessed to the shareholders.]

[Footnote 15. This need not prevent a supplementary system of
graduated taxation on incomes. See below, ch. 18, sec. 10.]



Sec. 1. Inheritance tax laws. Sec. 2. Fiscal importance of inheritance taxes.
Sec. 3. Income taxes; general nature. Sec.4. Income taxation by the states.
Sec. 5. History of federal income taxation. Sec. 6. Events leading up to the
law of 1913. Sec. 7. Main features of the law. Sec. 8. Exemptions and
stoppage at source. Sec. 9. The graduation principle. Sec. 10. A system of

Sec. 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] These are the
inheritance and the income taxes.

Until 1916 little use had been made of inheritance taxation for
federal purposes. In that year, however. Congress passed a law which
was expected to obtain about $20,000,000 a year from inheritances.

Forty-one states in America have inheritance tax laws (in 1915)
which 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

(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).

Sec. 2. #Fiscal importance of inheritance taxes.# The fiscal importance
of inheritance taxes has been comparatively not very great (except in
New York State), but it has rapidly grown. In 1903 the receipts from
this source (in 27 states) were over $7,000,000; in 1913 they were (in
35 states) $26,000,000. 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).[5] In
New York legacies of over $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 but 1 per
cent, but to others it may go as high as 12 per cent on legacies over
$100,000. In Wisconsin, somewhat similarly, the tax may rise to 15 per
cent on the excess above $500,000.

Sec. 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[6] 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. 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
(tho 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.

Sec. 4. #Income taxation by the states#. Income taxes have been used
widely in European countries, but not so much 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 are (in 1913) but seven states with
anything resembling a personal income tax.[7] 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 county, 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.

Sec. 5. #History of federal income taxation.# The income tax seems
destined to play a more important part in the fiscal system of the
federal government. Until 1913, however, its part had been small. It
began to be used under the law of 1867 (when the law passed in 1861
was replaced before it went into effect). This was repeatedly 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 is direct, and must therefore 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 a renewed attempt to
get such legislation by amending the Constitution. This was shown by
the remarkable fact that a bill for the sixteenth amendment to
the Constitution was passed unanimously by the Senate, and almost
unanimously by the House. It was ratified by three-fourths of the
states and became a law in 1913.[8]

Sec. 6. #Events leading up to the law of 1913.# Meantime, in 1909 and
excise tax law had been passed, applying to corporations in a manner
not open to the objections found by the Supreme Court to the law of
1894. 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.

Sec. 7. #Main features of the law.# The law as enacted[9] imposes (a)
a "normal" tax of 1 per cent on the entire net income of every
corporation (engaged in business for profit);

(b) a "normal" tax of 1 per cent on the excess above $3000 of every
unmarried individual's income (or $4000 for husband and wife, as
indicated in the next section); (c) an "additional tax" (often called
a super-tax) ranging from 1 to 6 per cent on individual incomes of
larger amounts than $20,000. There are thus eight classes of persons,
those entirely exempt, those paying only at the normal tax rate, and
six different classes paying a super-tax.[10]

A person with an income of $1,000,000 thus pays $60,020, this being
the amount indicated, $25,020 for the first half million plus 7 per
cent on the second half million.

Sec. 8. #Exemptions and stoppage at source#. There are various
exemptions, the first being that of $3000 on every individual income
and of $4000 on the aggregate income of husband and wife living
together.[11] Among other exceptions 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 which 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." In
our law 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, affords an ingenious way of checking up the
returns of individuals in respect to a class of investments which is
steadily increasing in importance.

Sec. 9. #The graduation principle#. The most disputed feature of the
income tax is the principle of graduation, or of 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 over one-half of the total
paid by individuals and one-fourth of the total from corporations and

The income tax returns for the first ten months of the law (March to
December, 1913) showed 356,598 taxable individual incomes, equal to
about 1 per cent of the taxable population (considering minors to be
usually not taxable). Even this proportion, small as it is, is much
larger than that of the European countries having a general income

The first ten months' yield (March 1, 1913, to December 31, 1913) was
over $60,000,000. A remarkable fact is that 21 per cent of all taxable
incomes (not persons) were in the single Borough of Manhattan (the
main part of New York City). The receipts from the income tax in
1913 were nearly 10 per cent of the ordinary receipts of the federal
government, and about 2 per cent of total revenue receipts of all
branches of government, the income taxes paid by individuals being
about 1 per cent of the same total, and the super-tax about 1/2 per
cent of the same.

The receipts from the income tax during the fiscal year ending
June 30, 1915, were $80,000,000, of which $39,000,000 was paid by
corporations and $41,000,000 by individuals. Of the latter sum, over
$24,000,000 was from the super-tax.

Sec. 10. #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 which 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.[12] 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.[13] 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 revenue taxes. These become a part of business costs, and are
diffused over the whole population in general prices.[14]

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 so far as this is, by public opinion, deemed
desirable either for fiscal or for social reasons.

[Footnote 1: See above, ch.17, sec. 3, note, and sec. 5, on this
distinction. The poll tax also is personal: see ch. 16, sec. 9.]

[Footnote 2: In Utah the tax is 5 per cent on all estates over

[Footnote 3. Exception, Utah.]

[Footnote 4: Exceptions are Missouri, New Hampshire, Vermont,

[Footnote 5: It would be more consistent with the purpose of
equalizing fortunes to vary the rate not according to the size of the
legacy but according to the size of the fortune which the legatee has,
or would have, after receiving the legacy.]

[Footnote 6: See Vol. I, p. 26.]

[Footnote 7: 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.]

[Footnote 8: 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.]

[Footnote 9: It constitutes sec. 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."]

[Footnote 10: This may be seen in the following table:
Normal Rate on excess Total
tax on in next class tax on
lower Nor- Addi- upper Total rate
limit mal tional limit per cent
Under $3,000 0 0 0 0 0.00 to 0.00
$3,000-$20,000 0 1 0 170 0.00 to 0.85
$20,000-$50,000 170 1 1 770 0.85 to 1.54
$50,000-$75,000 770 1 2 1,520 1.54 to 2.02
$75,000-$100,000 1,520 1 3 2,520 2.02 to 2.52
$100,000-$250,000 2,520 1 4 10,020 2.52 to 4.00
$250,000-$500,000 10,020 1 5 25,020 4.00 to 5.00
In excess of $500,00 25,020 1 6 upwards 5.00 to 7.00

By legislation in the summer of 1916, after the foregoing was in type,
the "normal" rate was doubled and the additional rates were raised.]

[Footnote 11: The exemption is $3000 for each if they are not living
together. Thus the law offers a reward of $20 to make marriage a

[Footnote 12: See above, ch. 17, sec. 5.]

[Footnote 13: See above, ch. 17, secs. 15, 16.]

[Footnote 14: See above, ch. 15, sec. 14, first paragraph.]





Sec. 1. Workers subordinate in early societies. Sec. 2. Workers in the Middle
Ages. Sec. 3. Growth of the wage system. Sec. 4. Practicability of the
wage system. Sec. 5. Time work. Sec. 6. Task work. Sec. 7. Piece work.
Sec. 8. Premium plans. Sec. 9. Aim of profit-sharing. Sec. 10. Examples of
profit-sharing. Sec. 11. Difficulties in profit-sharing. Sec. 12. Defective
theory of profit-sharing. Sec. 13. Purpose of producers' cooeperation.
Sec. 14. Limited success of the plan. Sec. 15. Its main difficulty.

Sec. 1. #Workers subordinate in early societies#. As far back as the
history of settled and populous communities can be traced, the masses
of workers have been subordinate. Civilization began with direction,
with obedience to superiors on the part of the mass of men. Even in
the rudest tribes, the women and children were subject to the will of
the stronger, the head of the family. Among the Aryan races the family
system was widened, and the patriarch of the tribe secured personal
obedience and economic services from all members of the community.
Chattel slavery, the typical form of industrial organization in early
tropical civilization, seems to have been one of the necessary steps
to progress from rude conditions; students to-day incline to view it
as an essential stage in the history of the race. But as conditions
changed with industrial development, chattel slavery became an
inefficient form of industrial organization and a hindrance to

Sec. 2. #Workers in the Middle Ages#. Serfdom for rural labor and many
limitations on the workman's freedom in the towns were the prevailing
conditions in medieval Europe. Serfdom was both a political and an
economic relation. The self was bound to the soil; the lord could
command and control him; but the serf's obligations were pretty
well defined. He had to give services, but in return for them he got
something definite in the form of protection and the use of land.
Between the lord and the serf there continued an implied contract,
which passed by inheritance from father to son, in the case both of
the master and of the serf. In the towns conditions were better for
the free master class of the artisans who owned their tools and often
a little shop where they both made and sold their products. But the
mass of the workers, shut out from special privileges, bore a heavy
burden. There were strict rules of apprenticeship; gild regulations
forbidding the free choice of a trade or a residence; laws against
migration into the town; settlement laws making it impossible for
poor men to remove from one place to another; arbitrary regulation of
wages, either by the gilds in the towns or by national councils and
parliaments, forbidding the workmen to take the competitive wages
that economic conditions would have forced the employers to pay;
combination laws forbidding laborers to combine in their own interest.
These conditions prevailed even in the periods and in the countries
often referred to as particularly favorable for the working classes
(such as England in the fifteenth century).

Sec. 3. #Growth of the wage system#. Throughout the Middle Ages these
conditions were gradually changing, and the changes were hastened
by the discovery of America, by the social unrest accompanying the
Reformation, and by other forces. Servile dues in the rural districts
were, by the sixteenth century, commuted for cash payments in England
and had begun to disappear in the other Western countries of Europe.
The agricultural work was done partly by the peasant landowners,
partly by yeomen farmers on their own land, and partly by laborers
hired by landowners or by tenant farmers (enterprisers with some
capital for equipment). The growth of commerce and of the mechanical
trades in the towns required larger ships, factories, and shops,
and increasing investments. This required in the towns an increasing
proportion of hired laborers having little or no capital invested
in industry, and living on wages. This change went on more and more
rapidly with the introduction of machinery in the eighteenth and
nineteenth centuries, and "the wage system" grew steadily to be a more
and more important part of the whole economic structure.[1]

Sec. 4. #Practicability of the wage system#. This change has brought with
it grave problems of social organization and social welfare, which it
is not the place here to discuss. But whatever be the difficulties of
the wage system it has certain practical merits of workableness which
account for its progress and dominance.[2] The larger the market and
the longer the waiting period in industry, the greater the element of
uncertainty and financial risk. Under the wage contract the employer,
as the one best prepared to do it, takes the risk as to the future
selling price of the product; the worker gets in a definite sum at
once the market value of his services. Wage payment, therefore, is
a form of insurance to the workingman; he gets something definite
instead of taking chances he is ill prepared to take. Wage payment is
a form of credit to the laborer whose labor is applied to producing
the goods for customers distant in time and in place. The employer
advances to the workman the present value of the future sale,
discounting it at the prevailing rate of interest.

Wage payment implies a contract by which the employee on his part
agrees to render service and the employer on his part agrees to pay
for it. The methods of determining and measuring the amount of service
of the employee are called "methods of industrial remuneration." The
many varieties may be grouped in two classes: time payment and piece
payment, corresponding with the two modes of measuring labor, time
work and piece work.

Sec. 5. #Time work.# Time work came first and was long almost the only
method. In time work the employee is paid by the hour, day, week,
month, or year, as the case may be. This is very satisfactory for
small enterprises, where the master works with his own hands alongside
of the employee, overseeing him, teaching him, and stimulating him by
his own presence and example of industry. This method prevails still
in nearly all farming work, in many kinds of manufacturing, in most
transportation, in clerical positions in trade, and in general where
the employee must perform a variety of tasks.

Considering a brief period, it might seem that in time work the worker
is paid by time regardless of his effort or performance. However,
in every industry there is a recognized, fairly definite standard of
accomplishment for those getting the regular market rates of wages,
so that the time-standard implies some performance- or piece-standard
also. But this is judged by the employer only in a general way, and
very commonly men of different degrees of efficiency continue for
some time to receive the same money wage. Still, where any differences
become noticeable to the employer in quantity of work, quality of
work, or personal qualities of honesty, reliability, and good temper,
the better workman is likely to obtain a better position, higher pay,
more regular employment, or some other form of reward. The employer is
more likely at the end of any period of employment, to discharge the
man who falls short either in quantity or quality of work, and to
retain and advance the better worker. The method of time-payment does
not directly tempt the workman to slight the quality of his work by
haste. It does not keep constantly before the worker the thought of
his own interest in rapid work, often with an accompanying nervous and
mental strain. In most occupations, therefore, the workers prefer time
work. It does not take exclusive account of the quantity of material
product, but leaves place for estimating various personal qualities of
the employee which are of value in a business.

Sec. 6. #Task work#. There are thus both advantages and disadvantages
in time work, and their relative importance varies in different
industries and industrial conditions. Especially is the difficulty
of supervising workers and of ensuring the performance of a certain
standard, or minimum, amount and quality of work great in larger
enterprises. Various methods of measuring the performance of the
worker directly by some other than the time-standards have been
developed. All of these, in a general way, involve the piece work

Task work is nominally time work, with a penalty if a certain amount
of product is not turned out within a given period. The agreement may
be that if the specified task is not done within the regular time,
it must be completed in overtime without additional pay. This is also
called "doing a stint." This method has been extensively used in
the ready-made clothing business in America, and is to some extent
involved in many cases of wage payment in manufacturing.

Sec. 7. #Piece work.# Piece work of the simpler, or ordinary kind, is
that where the payment varies just according to the amount of the
product, by some physical measurement, as yards of cloth woven, number
of pieces turned on a lathe, or amount of type set by a printer.
Usually careful inspection by some agent of the employer serves to
keep the quality up to a certain standard. The rejected pieces are not
paid for, and sometimes also the workmen are required to pay for the
materials wasted by their poor work. Piece payment is convenient for
home work, such as that of rural peasants weaving cloth for commission
merchants or as that of tenement workers in cities. It is also
employed very widely in the larger factories in textile and mechanical
industries. Selling on commission is a form of piece work.

In piece work the motive to activity is ever present to the worker,
and almost always the worker turns out a larger product when paid by
the piece than when paid by time. The employer benefits by the more
efficient use of his machinery and equipment even when the price per
piece is not reduced with the larger output per worker. The worker's
earnings may increase rapidly under this plan, but as the manual
dexterity acquired is usually of a very special kind which can be used
only on one particular machine, the worker has little opportunity to
resist a cut in his wages. For this reason and because of the undue
strain upon the worker that often occurs, piece work is in many trades
not favored by the workers.[3]

Sec. 8. #Premium plans.# Various modifications of piece work have been
developed of late, all involving the features of a minimum task and
of a premium for performance beyond that point. These plans are called
"premium plans," "progressive wage systems," and "gain sharing." One
of the first of these, Halsey's premium plan, fixes a standard time
for a job and if the worker falls short of, or merely attains to,
that standard he gets the regular pay; but if he takes less than the
standard time he receives a fixed premium per hour for the time saved.
For example, if the standard time is 10 hours for a $3.00 job and the
premium for speed is ten cents per hour, the worker would receive 20
cents premium if he did the work in 8 hours ($2.40 +.20, total $2.60),
and 50 cents premium if he did it in 5 hours ($1.50 + 50, total
$2.00). His average wage per hour thus rises as his speed increases;
it becomes 32.5 cents per hour when the job is done in 8 hours, and 40
cents per hour when the job is done in 5 hours. The reduction of cost
per job to the employer evidently would be 40 cents in the first case,
and $1.00 in the second. This is Halsey's plan, by which the worker
gets one-third and the employer two-thirds of the time saved.

The same plan has been applied (Weir's method) with a premium that
equally divides between the workman and the employer the time saved.
By Rowan's method the premium is not a fixed sum but a percentage of
the standard rate per hour equal to the percentage of reduction in
time consumed. For example, if in the foregoing example the time were
reduced 20 per cent (to 8 hours) the premium would be 20 per cent of
30 cents, and the workman would receive 36 cents per hour. By this
plan the premium becomes less for the later reductions than in either
of the other plans. The utmost possible wages would be double the
standard rate.

A number of other variations have been worked out by the promoters of
recent scientific management, and are known as Taylor's, Gantt's,
and Emerson's plans. The authors of all these plans agree as to
the importance of fixing the standard rate so that it will leave a
possibility of considerable improvement with unusual effort, and of
leaving the standard rate and premium unchanged as long as no new
process or new machinery is introduced into the business. If this is
not done the employees lose faith in the plan and refuse to make the
necessary effort to earn the premium. Most of these plans of
payment recently have been connected with experiments and studies in
scientific management to reduce the time and increase the ease of the

In a variety of ways a bonus or a premium may be paid for quality, or
for economy in the use of materials (as to a fireman for using less
coal), or for various other results. Every business has its peculiar
conditions, which make certain results especially desirable, and
certain methods of reward practicable. In some industries, for
example, the various plans of piece work and of premium payment are
applied to groups of workers (as in collective piece work), the total
payment being then divided among the members of the group in some
agreed proportion.

Sec. 9. #Aim of profit-sharing.# Profit-sharing is rewarding the laborer
with a share of the profits in addition to his usual contract wages.
Payments by the piece and premiums for output are solely dependent on
the efforts of the particular workman (or collective group), but
in the plan of profit-sharing a premium is given in addition to the
regular wage if, at the end of the year, the business as a whole has
yielded a profit above a certain amount. Profit-sharing is not merely
a gift; it is done usually in accordance with a definite promise in
advance. The employer adopting the plan does not intend to lose by it.
His purpose is to stimulate the industry of the workers, thus reducing
waste and cost of labor and supervision, and thereby increasing
profits. He offers to divide with the workman the additional profits
which are expected to result from their efforts. There is, in every
factory, greater or less waste of materials, destruction of tools, and
loss of time, that no rules or penalties can prevent. If the worker
can be made to take a strong enough personal interest he will use care
when the eye of the foreman is not upon him. The product also can
be slightly increased in many ways by the workman's exertions or
suggestions. In some cases the quality of the work cannot be insured
by the closest inspection as well as it can be by a small degree
of personal interest. Either responsibility for the fault cannot
be fixed, or the defect is one not measurable by any easily applied
standard. Strikes may be averted, good feeling promoted, and
contentment furthered if the interest of the worker can be made to
approach, and in large measure to become in harmony with, that of the
employer. The economic result of the plan, if it can be made to work,
should be to reduce the costs of these establishments below what
they are. The crucial question is whether profit-sharing alone in any
particular case will insure that the costs will be less than those of
competitors, thus giving a source out of which an increased amount,
really a wage, can be paid to the laborer. For the amount of profits
is affected not only by the amount of output, but also by a number of
other things that are quite outside the control of the workmen.

Sec. 10. #Examples of profit-sharing.# The profit-sharing plan seems
first to have been successfully tried in Paris, in 1842, by Leclaire,
a house-painter. In house-painting there is often a great waste
of materials and time by men working singly or in small groups in
different parts of the city. By this new method Leclaire enlisted the
aid of the workmen, reduced the costs, and increased the profits. It
is a remarkable fact that the plan has been continued successfully by
the same firm to the present time. It has been tried in many hundreds,
possibly thousands, of cases, and is operating in some form or another
in more than a hundred firms in Europe and America. The most notable
examples of profit-sharing in the United States are the Pillsbury
Mills in Minneapolis, Procter and Gamble's soap-factories, in
Ivorydale, Ohio, the Nelson Mfg. Co., in Leclaire, Ill., and the Ford
Automobile Works, in Detroit. In some cases both manufacturer and
workmen value the system highly. It probably has its greatest success
when applied in prosperous establishments where profits are regular
and large, and where a steady working force is especially desired.
The proportion of business done in this way is not large. One hundred
firms is a very small fraction of 1 per cent of the total number of
firms in Germany, France, England, and America. A still more important
fact is that true profit-sharing has spread little since 1890, tho
various practices have developed under that name. The most noteworthy
of these is the selling of stock, usually at a somewhat lower price,
to the employees of a corporation so that, as stockholders, they may
have a motive to work for the success of the company (e.g., the United
States Steel Corporation). This method as applied to a select few
of the employees, who are advanced to official positions in a
corporation, is very widely adopted.

Sec. 11. #Difficulties in profit-sharing.# It seems at first difficult to
explain this comparative failure of a plan that looks so attractive
in spirit and of which so much was hoped. Yet objections come from
the side both of the workman and of the employer. The workman lacks
knowledge of the business and is suspicious of the bookkeeping. If
at the end of the year the books show no profits, the workman loses
confidence, considers the plan to be mere deception, and rejects
it. The working of the plan remains in the employer's hands, and the
workman really is not a partner in the business. Moreover, the plan
puts a limitation upon the workman's freedom to compete for better
wages by changing his place of work. It is indispensable to make
length of service in some degree a condition to the sharing of
profits. Workmen, coming and going, cannot be allowed to share; the
percentage given to the others increases with length of employment.
Whenever men are thus practically subject to a fine (equal to the
amount of shared profits) if they accept a better position, there is
danger of a covert lowering of wages. The plan tends to break up the
trade-unions, which is one of the reasons that the employers like it,
and is the main reason that organized labor opposes it.

The employer on his part objects to the interference with his
management, the troublesome inspection of the books, and the constant
complaints of the workmen. He dislikes to have the profits known; if
they are large, the advertisement of success invites competition; if
they are small, publicity may injure credit and depress the value of
the enterprise. In view of all these difficulties it is not surprising

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