THE INCOME TAX AS A MEASURE OF RELIEF FOR INDIANA WILLIAM A. RAWLES Professor of Political Economy, Indiana University, I The system of taxation in operation in Indiana is the general property tax. It worked fairly well in the early period of its use, because tax rates were low and the economic conditions were simple. When the practice of taxing property (including notes, bonds, and mortgages) on the ad valorem basis was first introduced into Indiana in 1835 and 1836, the rate for state purposes was only five cents on each hundred dollars. During the period of internal improvements the rates were increased. But at the time of the adoption of the present constitution they were still very low, being, in 1851, 30.5 cents for state purposes and 43 cents on the average for the local government a total of 73.5 cents. During the next three years the state rate decreased and the average rates for all purposes were about 65 cents on each hundred dollars in 1852 and 1853, and 60 cents in 1854. Agriculture was the chief, almost the sole, industry. Tenancy was rare. The corporate form of business was seldom found, and then only in the case of banks, insurance companies, and transportation companies. There was little intangible property. Flatboats, turnpikes, state canals, and a few miles of railroads furnished. the means of public transportation. The population was not concentrated in cities and people generally knew the financial standing of their neighbors. The salaried class was insignificant and wealth was evenly distributed. The functions of government were limited. Expenditures were comparatively small and the burdens of taxation relatively light. Under such conditions the general property tax was reasonably just and fairly practicable. But now, while our industry is becoming highly diversified, while corporations have multiplied in number and financial power, while property has become heterogeneous in character and intangible property constitutes probably one-third of the private wealth of the citizens, while the people are bound together in a network of iron wire, copper strands, and steel rails, while cities are growing in number and size, while business relations are concealed in the intricate web of commercial and industrial life, while salaried officials and prosperous professional men who bear small part of the burden of taxation are increasing in number, while disparity in wealth and taxpaying ability is accentuated more and more, while the functions of government have expanded to satisfy the legitimate demands of the people for larger and better service, while expenditures have been enlarged to enable the government to perform more fully its proper functions, while the average tax rate has mounted up to more than $2.50 on the hundred dollars, while the opportunity for the evasion of taxes has become greater and the incentive stronger-while all these changes have been wrought in our social and economic life-the general property tax, once appropriate but now out-of-date and impracticable, once equitable but now confiscatory and iniquitous, once respected but now condemned as "a farce, a sham, and a humbug," and as having "no parallel except in the records of the Middle Ages and of the Inquisition" this system of taxation has persisted in substantially its original form. Its long-continued retention has been due in part to the fact that the people have been deceived by its ostensible fairness, in that it appears to apportion the burdens of taxation in proportion to the economic status of taxpayers, in part to the hope that its defects might be remedied by improving the efficiency of its administration, and in part to the natural inertia of the voters. I would not be justified in discussing at length before this conference the notorious defects of the general property tax. They are well known to all its members. I wish, however, to state briefly, for the sake of the unity of this paper, its chief faults as exemplified by the experience of this state. II FAULTS OF THE GENERAL PROPERTY TAX 1. It works injustice because it lacks two essential characteristics: equality and universality. Its inequality arises from the unfair assessment of property. It is not universal, for it permits the concealment of property and it fails to reach the salaried and professional classes having little or no property. The weight of such injustice always falls upon those least able to bear the burden-the poor, the helpless, the ignorant, the widow and the orphan, and the scrupulous. The powerful, the cunning, the unscrupulous escape. 2. It perverts the conscience of the people. It fosters dishonesty and places a premium on perjury. The debauching of the moral sense is the natural fruitage of an unjust tax. Men scrupulous in their ordinary social and business relations are forced in self-preservation to falsify their tax returns. They feel no moral obligation to obey a tax law which is unjust and, therefore, immoral. 3. It represses the economic development of the state. The sequestration of the great mass of intangible property and its consequent escape from taxation throws a heavier burden upon other forms of property and the rates must, therefore, be increased. The average tax rate in Indiana in 1914 was over 2.5 per cent; in 97 cities it was over 3.7 per cent; in five towns and cities it was 5.0 per cent or more. When such excessive rates are imposed upon intangible property and the taxes are actually collected, it amounts to confiscation. When they are applied to tangible property assessed at its true value, they absorb from 30 per cent to 100 per cent of the incomes derived from such property. What is the economic effect of such rates? One of the striking characteristics of the modern industrial society is the mobility of labor and the fluidity of capital. This is especially marked in the United States. Enterprisers in Indiana must produce in competition with their rivals in neighboring states where the item of cost due to taxation is much less. The excessive tax rates in Indiana tend to repel investors from the state, to drive capital and industry out of the state, to discourage saving, to increase interest rates, to prohibit lending by individuals to neighbors, and to place a decided handicap upon the enterprise of young men. 4. It is impracticable. The Act of 1891 provided for the centralization of authority in the state board of tax commissioners to a degree at that time scarcely known in other states. After twenty-five years of experience we hear everywhere complaints concerning the concealment of property, the unequal assessment of real estate and personal property, and the extortionate charges imposed upon the honest taxpayers. The failure of the many honest efforts on the part of other commonwealths to secure the drastic enforcement of stringent laws proves the impossibility of applying the general property tax to personal property. The experience in this country has been forcefully described by the United States Court of Appeals in commenting upon the taxation of intangibles : "There is a monotonous uniformity in the reports of the failures of every system attempted, however stringent may be the legislation, or however arbitrary and despotic may be the powers with which the assessors are clothed. . . . The result is that always and everywhere no appreciable part of such intangible property is reached by laws, however ingeniously framed or severely enforced." For fifty years the system has been condemned by taxing officials who have been charged with the responsibility of its administration. The reports of special tax commissions from that of the New York Commission of 1872 down to that of the New York Commission of 1916 have with rare exceptions declared that the general property tax was not adapted to the taxation of personal property. Not one of the dozen commissions of the last eight or ten years has had the temerity to express any hope that the administration can be so improved as to make it effective and equitable. Why fly in the face of such testimony from practical men? Let us be frank enough to admit the impracticability of the system and abandon the vain hope of making it effective. 5. It is unsound in theory. Herein lies the main cause of its impracticability. The tax is inherently wrong. Most tax officials feel this, whether they admit it or not. It is unsound because it is unjust whether viewed from the standpoint of "faculty" or "benefit"; it attempts to apply a uniform rule to classes of property essentially different in nature; it ignores the effects of the shifting of taxes; it does not reach all persons having taxpaying ability; it disregards variations in the productive capacity of different parcels of property; it assumes that intangible property is wealth in an economic sense. In view of these fatal defects in the system, is it not time to make a more vigorous effort to convince the people that it is wrong in theory and vicious in practice, that its improvement is hopeless, and that there are substitutes more just and practicable? III POSSIBLE SUBSTITUTES FOR THE PERSONAL PROPERTY TAX Inasmuch as it is the personal-property-tax feature of the system which has broken down most completely, I shall limit my discussion to some substitutes for it. 1. Exemption of intangible property. The demand for the exemption of moneys and credits is based upon the fact that they are property in a legal sense only, not in an economic sense. They are merely representative of tangible propertythe evidence of ownership in some form of wealth. If both the tangible property and the evidence of ownership are taxed, it results in double taxation, and is, therefore, unjust. Hence, it is urged that taxes on intangibles should be abolished. On the other hand, it must be said that the owner of securities enjoys the protection of his government, derives an income from his property rights, possesses taxpaying ability, and owes economic allegiance to his place of residence. He should, therefore, contribute something to the support of the government. Exemption of intangibles would run counter to the trend of tax reform. It is rather an acknowledgment of weakness in dealing with the situation. But a candid exemption of securities would be more honorable and less harmful to public morals than the continuance of the present farce of pretending to tax intangibles when only the helpless and the unusually conscientious pay such taxes. |