The American System of Taxation

The American System of Taxation

In concluding this chapter on taxation we shall review briefly the present tax structure in the United States. There was a time in American history when taxes were levied only by the state and local governments. At that time the federal government received money only by assessments upon each state. This federal depend­ence upon the states was one of the weaknesses of the Articles of Confederation and resulted directly in the framing of the Con­stitution. While federal taxation is usually the most controversial, state and local governments still remain the primary taxing agencies. To a large extent local governments depend upon the property tax for their revenues. This tax is levied at a uniform rate upon the assessed value of real and personal property. Except for the rather feeble gestures in some states the difficulties of as­sessment of personal property have led to its abandonment. The general property tax arose when land and buildings were virtually the only kind of property a man could possess, and his ownership was therefore a real criterion of his ability to pay.

Now that intangible property in the form of stocks, bonds, and mortgages is such an important part of total wealth, a tax upon real property alone represents an excessive tax upon one portion of the population. With the rapid rise in state and local functions, an increase in revenue became essential, but the sources of property taxes were drying up, so a search for new tax sources was in order. First came inheritance taxes. They are usually doubly progressive, that is, they get heavier the larger the inheritance and the greater the distance from the deceased in kinship. The yield on inheritance taxes is unpredictable. Who knows what per­sons will die in a given year and how much of an estate they will leave? Consequently inheritance taxes do not constitute a stable source of revenue. Then came taxes upon personal and corporate incomes. Each year the person or the corporation taxed must file a true statement of his earnings and pay according to an estab­lished rate. Income taxes are progressive, a higher rate applying to higher incomes. Interesting political problems have arisen over the question of taxes upon persons and corporations living or chartered in one state and carrying on business in another. In gen­eral the policy has been to tax in the state where the income is earned. The newest types of state and local taxes were added during the depression of 1930-1940, although they originated long before that time. Important among these were the sales taxes. Beginning with a tax upon the sale of each gallon of gas­oline, the tax was extended by some states to cover most if not all commodities. Excise taxes on tobacco, alcohol, and amuse­ments were also introduced. A few states retained the poll tax, that is, a specific charge upon every adult individual as a condi­tion of his voting. This tax was developed in the early part of the 19th century as a more liberal voting requirement than the dis­criminatory property qualification which had restricted the fran­chise previously. The few remaining states using this tax have been inspired to abandon its use by the threat of federal legisla­tion on the subject.

It is obvious that even without considering federal taxes a great deal of duplication, or double taxation, is bound to occur, and the dependence of both state and local governments upon the same tax sources has led to endless confusion and needless ad­ministrative expense.

In the national government the scramble for sources of taxes is even more pronounced than in the states. Barred by the Consti­tution from taxing property directly, the federal government relied for more than a century upon customs duties. When the United States began its industrial development and experienced keen competition from abroad, the use of protective tariffs became commonplace.

There was one difficulty that was not foreseen: As a tariff becomes completely protective, by its very nature it ceases to produce revenue. Therefore at a time when more revenue was needed, its source was curtailed. The framers of the American Constitution were intent upon creating a federal government of limited powers. It is natural that they should have laid severe restrictions upon such an important power as the tax power. "The power to tax is the power to destroy," said Chief Justice Marshall of the Supreme Court. The Constitution says that Con­gress may not levy any tax except "to pay the debts and provide for the common defense, and general welfare of the United States." Great legal battles have been fought over the question of what constitutes general welfare. The meaning fortunately has been interpreted liberally, so that the functions of the federal govern­ment have been kept abreast of the times. In addition to the restrictions upon the use of taxes, the Constitution requires that federal taxes be uniform. This means that taxes must bear with equal weight upon all persons subject to the tax; but this does not prevent progressive taxes upon incomes and inheritances. No tax may be levied upon exports. The reason for such a prohibition was the necessity of protecting the southern states, which at that time were the largest exporting states. With careful use, such a tax might have been a useful tool in protecting natural resources. Finally, the Constitution states that direct taxes must be appor­tioned among the several states according to population. This clause has prevented the federal government's use of the property tax, and for years was an obstacle to the levying of a federal in­come tax. A constitutional amendment was finally passed to overcome the constitutional objections to the income tax raised by the Supreme Court. Federal taxation today includes customs duties; excise taxes upon luxury items such as gasoline cigarettes playing cards, alcoholic beverages, and amusement tickets- per­sonal and corporate income taxes, inheritance taxes, and payroll taxes. The rapid changes in the amount and kind of taxes levied by the federal government in. recent years make it quite impos­sible to give enlightening figures on per capita taxes. The problem of taxation continues to call for careful study.