under aristocratic influences, some of the most hideous fiscal enormities were found in this category, even though it may be doubted whether the abuses of the indirect taxes on consumption in France or Italy were really much worse than the abuses of the direct taxes on the poor. In the face, however, of general excises or of the multiplicity of taxes on commodities the weight of which rested primarily on the poor, it was but natural that the reaction should take the form of an attempt to develop direct taxes. But the modern democratic movement in all civilized countries has succeeded in framing a system of internal revenue taxes which preserves most of the good points and eliminates most of the bad points of the older system. Everywhere the tendency is to concentrate the excises upon a very few articles which, like tobacco and spirituous liquors, combine in a marked degree the seemingly opposite qualities of luxury and of mass consumption. Such taxes, as in the United States to-day, are not only susceptible of affording an immense revenue, but accomplish this result in a way which does not contravene any principle of justice. In so far as the tax tends to restrict consumption, the argument in favor of these taxes is specially strong, since here if anywhere the restrictive effect of taxation is to be welcomed; while the prodigious revenue derived from such sources renders to that extent unnecessary the resort to the higher rates or the more burdensome kinds of direct taxes.

The general argument, then, that an income tax is needed for federal purposes in order to countervail the weight of the customs duties and the internal revenue taxes, is doubly weak. For in the first place, if these national taxes require a compensation, the compensation already exists, or can easily be made to exist, in the state and local property taxes; and in the second place, entirely apart from this, a system of customs duties and internal revenue taxes may be so arranged as to require little, if any, compensation at all to the direct taxes. Our internal revenue taxes are already for the most part on the proper basis, and it is not entirely hopeless to expect that the tariff duties may gradually be

so changed as to retain the good, and to eliminate the evil, features.

In the preceding argument there is, however, one important gap. We have proceeded on the assumption that even if the tariff be so changed as to remove some of its objectionable features, a makeweight to the indirect taxes on expenditure exists, or can be made to exist, in the state and local system of property taxes. Here, however, is the difficulty. In theory the system of state and local taxation is calculated to reach the respective abilities of the propertyowners; but in practice, as has repeatedly been pointed out, the general property tax has broken down completely; and, especially so far as personal property is concerned, the wealthier classes stand from under. Everywhere we meet the growing complaint that great wealth does not bear its share of the public burden. If, then, the tariff, as it actually exists, imposes too large a share of the burden on the expenditure of the poorer classes, and if the state and local revenue systems do not succeed in reaching the abilities of the more well-to-do classes, the argument becomes exceedingly strong in favor of some form of tax which will redress the inequality.

It is this argument which, as we have seen, was really at the bottom of the movement for the income tax of 1894, and which explains the great development of income taxes abroad. Although we may well concede that the principle of faculty is not the only one to be borne in mind by the fiscal administrator, it is none the less undeniable that a general movement which runs counter to the principle of faculty is doomed to failure. Under existing conditions in the United States the burdens of taxation, taking them all in all, are becoming more unequally distributed, and the wealthier classes are bearing a gradually smaller share of the public burden. Something is needed to restore the equilibrium; and this something can scarcely take any form but that of an income Without prejudicing the question whether it should be a state or a federal tax, it is difficult to escape the conclusion

tax.

that some form of income taxation is needed to redress existing inequalities.

We come finally to the fourth possible argument in favor of an income tax. We have called attention to the breakdown of the general property tax in state and local taxation. In almost all our states there is such a diversity between the legal system and the practical situation that the attempt to assess personal property gives rise to the most striking abuses and the most shocking injustice. The efforts on the part of tax-reformers to bring about a change in the law have heretofore failed, very largely because of the perfectly explicable feeling on the part of the great mass of the voters that the wealthier classes, with their great ownership of personal property, should in some way be made to bear their share of the burden. Unfortunately the attempt to accomplish this laudable result by a strict enforcement of the local property tax has turned out to be a dire failure. If now the average citizen could see that the wealthier classes were actually subject to some form of income taxation, even if they paid this tax to the state or to the federal government, rather than to the local government, the opposition to a reform of local taxation on sound lines would very disappear, and it would doubtless be far easier to effect a readjustment of the entire fiscal system without the present complications of a general property tax. It is significant that this is precisely what happened in England. There the local taxes were for a long time assessed on personalty as well as realty, and the attempt to confine the local rate to real estate met with somewhat the same difficulty that is encountered at present in the United States. It was not until shortly before the middle of the nineteenth century that the local taxes, or rates, as they are called, were limited to real estate; and it was only a few years prior to this that the national income tax was imposed. To ascribe to these events the character of cause and effect would doubtless be extravagant; but it is scarcely open to doubt that the opposition to the change in the system of local taxation

conclusion

would have been far more pronounced had there not been in existence some method of reaching the income from personal property. Is it too much to hope that a similar result will ensue in the United States?

To sum up: We have seen first that the income tax is not needed for purposes of revenue in either the state or the nation; and in the second place, that the elasticity argument does not hold good at all in the state, and is of very slight weight in the nation. We have seen, in the third place, that the compensatory or makeweight argument has been considerably exaggerated, and that if the tariff were altered on correct lines, and if the system of state and local taxation could be changed, as might well be the case, the income tax would then not be needed for either state or local purposes.

But on the other hand, it is obvious that there is no immediate likelihood of a fundamental change in the tariff, and we have learned that the system of state and local taxation is becoming in some respects progressively worse rather than better. In the face of this situation the argument for some kind of an income tax becomes very strong. When we join to this argument the further consideration that the adoption of an income tax would not only tend to redress existing inequalities, but would also in all probability make a reform of our entire system of state and local taxation more easy of accomplishment, the arguments in favor of the adoption of an income tax acquire additional weight. When, finally, we add to these considerations the reflection that the income tax is in harmony with a pronounced tendency throughout the civilized world, and that wherever we find the

spread of democracy, we find the growth of income taxation, d

the argument for the adoption of some form of income tax becomes well-nigh irresistible.

§ 2. Shall the Income Tax be a State or a Federal Tax? If, then, an income tax is a desirable adjunct to the American fiscal system, the next problem is, shall it be a federal

or a state tax? This question is now becoming an acute one because of the emergence of the demand for a state income tax in one or two of our western commonwealths. In a previous chapter, 1 we have already touched upon this question to a certain extent; but it seems wise to consider the problem here from a somewhat broader point of view.

In order to help us to form a conclusion, four sets of considerations must be borne in mind. First, what is the basis of the tax? Second, what are the chances of administrative success? Third, how far is the problem complicated by considerations of double taxation? And fourth, are there any dangers involved to the fiscal autonomy of the states? us take up these points in order.

Let

In the first place, the problem of the basis of taxation involves the question as to whether a given source of revenue is naturally more suitable for utilization by one tax jurisdiction rather than by another. It is obvious that in proportion as the basis of a tax is more widely extended, the argument in favor of its utilization by the broader tax jurisdiction becomes correspondingly stronger. 2 One of the chief reasons, for instance, why a tax on real estate is not employed by the central government is because the basis is so narrow. And it is largely because the tax on real estate is unsuitable even for state revenue that it is in many places gradually being relegated to the local jurisdictions. In the United States, at all events, there is no doubt that a tax on real estate is obviously unfitted for the federal government. We have had but three instances of such a federal tax, and the last experiment was so unsuccessful that its repetition is exceedingly doubtful.

While real estate, with its narrow basis, stands at one extreme of the scale, we find at the other extreme, with a very

1 Supra, p. 426 et seq.

2 For an elaboration of this point see the article by the present writer, "The Relations of State and Federal Finance," in State and Local Taxation. Third International Conference. International Tax Association, Columbus, 1910, pp. 212 et seq.