ECONOMIC AND SOCIAL EVOLUTION.

Failure to locate and tax intangible property made little difference in the early days of Michigan when the ad valorem general property tax system was established. At that time agriculture was the principle industry. Property was homogeneous, consisting mainly of real estate and tangible personal property dependent upon the ownership of real estate. There was very little intangible property. Wealth was distributed comparatively even, the range of investments was narrow, earnings, and profits were generally converted into property of the same nature as that which produced them. But a wonderful change has taken place in recent years in the character of property, brought about largely through the operations of what may be declared the greatest instrument of modern commercial life, the limited liability corporation and its accompanying secured debt feature, through which an individual may invest in any business wherever located and hazard only his original investment, his interest represented by intangible securities easily transferable. The resulting commercial and industrial expansion has been almost beyond comprehension. Agriculture has been displaced as the leading industry. The homogeneous character of property has disappeared and, instead, it is now widely diversified. Many new forms of property have been brought into existence as a result of invention, commercial and industrial development, and legal and corporate contrivance. Income has increased greatly, and is derived from numerous and often entirely new sources. It is, for the most part, no longer re-invested in the business which produced it, but seeks investment in intangible and, wherever possible, non-taxable securities. To appreciate the extent to which profits that are fluid are passing into intangible, non-taxable investments, one has but to glance over the columns of any metropolitan daily newspaper and notice the offering of new securities. To-day, a very considerable portion of the wealth of the State is in intangible property, and failure, at this time, to properly tax the owners of such wealth, whether as a result of legislation or administration, relieves many from all taxation.

RISE OF PROFESSIONAL AND SALARIED CLASS.

This

At the same time, and largely as a result of industrial and commercial expansion, a class of citizens has been developed in every community whose income is not derived from capital represented by property, but from salaries, from earnings as professional men, and from particular kinds of business that are being daily brought into existence. class is generally well educated, and requires more from society and government than the average individual requires. But the general property tax fails to reach this class of citizens, they contribute little through taxation, either for the support of government or the development of social welfare.

REAL ESTATE BEARING THE TAXATION BURDEN.

The accumulative effect of all these conditions:-a constant increase in the purposes for which taxation is now levied; a constant increase in the volume of taxation; a constant narrowing in the base of taxation

through legislation and administration; changes in the character of property, due to commercial and industrial development, and in the comparative wealth of individual citizens; failure of the general property tax to reach intangible property at a time when such property is increasing faster than any other form of wealth and is absorbing the profits of all kinds of business; the rise of a highly prosperous class whose income is not drawn from property but from individual effort and from new and strange forms of business, has produced this inevitable result; that practically all the increase in the tax burden falls upon tangible property, which is mainly real estate; and heaviest of all upon that form of real estate which, because it is visible and easily valued, is always highest assessed, the farm and the home.

This condition,-that under our general property tax law real estate must inevitably stand practically alone in bearing the increased burden of taxation arising out of new social and economic conditions, has not been appreciated in the past because of the universal undervaluation of all property assessed for taxation. But now that the assessment of tangible property is very close to cash value throughout the State, continued increase in assessment, sufficient to keep the rate of taxation from mounting, will no longer be possible; and the ad valorem general property tax, as the only base of taxation, will be clearly recognized to be unfair and unequal, as exempting many from all taxation, and as falling with the greatest force upon those least able to pay.

FUTILITY OF REMEDIES PROPOSED.

The change in the purposes for which taxation is now levied and in the character of property, and the shifting of the burden imposed by new social and economic conditions upon real estate, have not been unnoticed, and attempts to remedy this situation have been made by the Legislature at different times. But because of a desire to maintain as far as possible the general property tax and because of the constitutional limitation imposing a uniform rule of taxation, such attempts have been limited to the substitution of specific taxation for the general property tax upon certain forms of intangible property; the mortgage tax is an illustration of the attempts of the Legislature to reach intangible property with some form of taxation.

Can we further amend or so administer the general property tax law as to overcome the opportunities for concealment and enable us to locate such property, and derive from its taxation revenue in any way proportionate to the amount of such property, taxable in the State? The experience of other States that have had the same system of taxation and the same problem to solve, and that have attempted to reach this class of property by drastic measures, has been universally the same. They have either failed to locate any considerable amount of such property or it has again disappeared after having been once located and taxed. We cannot take away from the owner the state of mind that justifies concealment, namely, that taxation of such property is unjust in theory and confiscatory of income in practice. cannot destroy the opportunities that exist for concealment of such property. We cannot in all cases convince the assessing officer that such property exists and should be taxed, and that it is his duty to find and tax it. A Judge of the United States Court of Appeals in com

menting upon the taxation of intangible property under general property tax laws expressed himself as follows: "There is a monotonous uni formity in the reports of the failure of every system attempted. However stringent may be the legislation, or however arbitrary and des potic may be the powers with which the assessors are clothed, the result is that always and everywhere no appreciable part of such in tangible property is reached by laws however ingeniously framed or severely enforced."

If we continue attempts to apply the ad valorem general property tax law, as now framed and amended, to intangible property, and should, through the application of drastic methods, reach any considerable degree of success, what permanent increase in revenue would result? In the first place, the laws of our State exempt from taxation stocks and securities of Michigan corporations whose tangible property is taxed in the State; therefore the individual whose intangible property is all of Michigan origin would pay no direct tax, regardless of the amount of his wealth: Next, the mortgage tax law, now extended so as to include bonds of foreign governments and muicipalities, and all forms of secured debts, makes such property exempt from taxation for all time on the payment of a single tax of five mills. If this law be not repealed, the individual whose intangible property has once paid the five mill tax will thereafter pay no direct personal tax. If the law be repealed and all such property brought again under the general property tax, all present holdings of such property that have paid the five mill tax would still remain exempt. Again, the large and growing class of citizens who have little property, but enjoy large salaries or large incomes as the result of personal effort or professional service, and who receive more than the average citizen from government, would pay no tax. There would remain only those having deposits in banks, unsecured debts, and certificates of stock in foreign corporations, to be reached by the general property tax. There are more than a thousand million dollars on deposit in Michigan banks, but no bank. official can be compelled to disclose the names of his depositors, or the amount of their balances. The State of Connecticut once attempted to compel such disclosure for the purposes of taxation, and had it not been that the strong insurance companies of Hartford had millions of money available for deposit, every bank in that State would have failed over night. As for certificates of stock in foreign corporations, should we once succeed in reaching them, they would seek safety in concealment before the next assessment. We can see but little permanent relief to real estate from the most successful administration of the ad valorem general property tax law applied to intangible property. A solution of the problem of taxing intangible property is sometimes attempted by classifying such property and imposing different rates upon different classes,-a low rate upon savings bank deposits, a somewhat higher rate upon bonds and mortgages, and still another rate upon more profitable classes of intangible property, the assumption being that by lightening the burden, the owners of such property will ea e to conceal it and it can be made to yield some revenue. The State Tax Commission in its report to the Governor in 1914 recommended changes in our tax laws so as to allow classification of intangible property. The experience of other States where classification of prop

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erty is practiced shows that even in such form the law is persistently evaded. The opportunities for concealment still remain. The belief of the taxpayer, that such form of taxation is double taxation and consequently unjust, still remains. Classification of property would require a constitutional amendment, and the experience of other States shows it to be almost impossible to convince the voters that intangible property, if directly taxed, should be taxed on any other basis than general property. The farmer assessed $5,000 on his farm and paying $100 in taxes upon the same would not vote that the owner of a $5,000 bond or stock certificate should pay only $25.00 in taxes.

How then can we remedy taxation conditions? How broaden the base of taxation? How introduce universality and equality of burden into our taxation system and at the same time increase revenue to meet the new social and economic conditions?

FUNDAMENTAL PRINCIPLES OF TAXATION.

Students of tax legislation recognize three fundamental principles as more or less developed in the taxation systems of the various States, which, taken together, conform to all requirements of a model taxation system:

First, that tangible property of whatever character and by whomsoever owned should be taxed by the jurisdiction in which it is located because of benefits and protection there received;

Second, that every person having "taxable ability"-and by that we mean "who is able to pay"-should pay a direct personal tax to the government under which he is domiciled, and from which he receives the direct personal benefits and protection that government and society confer;

Third, that business carried on for profit in any locality should be taxed in that locality because of benefits and protection there received.

TANGIBLE PROPERTY TAXATION.

The first proposition-that tangible property, whether real estate, livestock, machinery, merchandise or raw materials, should be taxed where located regardless of ownership has always been accepted by the lawmakers of Michigan without reservation, and is now developed, in practice and legislation, by the experiences of more than three-quarters of a century. Those experiences, we believe, make it certain that this principle should not be modified as far as real estate is concerned, except as to forest property. With respect to tangible personal property, we recognize that there may profitably be departures from it in certain cases, such as the substitution of specific taxation for the general property tax with respect to motor vehicle property. We also recognize that where the second and third propositions above outlined are fully developed, certain kinds of tangible personal property, such as tools, implements, livestock, may properly be exempted in whole or in part from the operation of this first principle, but the principle, itself should stand practically without amendment.

DIRECT PERSONAL TAXATION.

It

The second proposition,-that every person having "taxable ability", that is, "able to pay", should pay a direct personal tax where he is domiciled while equally as just and logical as the first proposition, and as widely recognized, has been practiced far less successfully. has been attempted through poll taxes, rental taxes, taxes upon professions and occupations; but the more general practice has been to attempt it by making "intangible property owned" the measure of the individual's "taxable ability", and assessing him for such securities and credits as he might declare, or the assessor locate. Michigan has adopted this method and includes all kinds of intangible property under the general property tax, applying the uniform rate, and has only in recent years modified it by the adoption of the so-called "Mortgage Tax Law". She has recognized the principle of direct personal taxation, but has destroyed its vitality by her method of enforcing it.

NET INCOME THE UNFAILING INDEX OF TAXABLE ABILITY.

The most universal, the most complete and the most accurate measure of the ability of the individual to pay personal taxes is "net income." "Personal property owned", correctly determined and expressed in dollars, will measure the taxable ability that comes from the ownership of certain kinds of wealth, such as securities and credits. "Net income" will measure such wealth equally as well, and will measure "taxable ability" resulting from the earnings of the salaried man, the professional man, the business man, the laborer; it measures "taxable ability" resulting from rents and royalties, and introduced into a system of taxation, it materially broadens the base of taxation.

Adam Smith, years ago, laid down this proposition: "Subjects of every State ought to contribute to the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State." Other students of taxation, holding that taxes are the part of the citizen's property or earnings he contributes for public use in order to insure protection for the rest of his property or income, have supported Adam Smith's proposition that taxation should be proportional; declaring that as protection or benefit received is propor tional to the amount of property protected or income enjoyed, it necessarily follows that taxation, to be equitable, must be directly proportional to property or income. Most modern writers, while not objecting to proportional taxation of tangible property, hold that direct personal taxation, through an income tax, should not be proportional, but progressive. Even Adam Smith modified his famous principle by declaring: "It is not unreasonable that the rich should contribute to public expense not only in proportion to their revenues but something more than in proportion". Practically all agree that it is not wise to exact a personal tax for support of government from any class, if by so doing the standard of living of that class is necessarily reduced below a proper level, and therefore exemption from any personal tax is recognized as proper for those whose net income does not exceed the sum recognized as the minimum necessary for proper subsistence. This exemption is a departure from proportional taxation. Protection or