duplicate taxation arising from interstate complications. The second form will be omitted here, as it is not peculiar to the property tax but may arise in connection with almost any direct. tax. The existing chaos on this point will be discussed in another article. I confine myself here to the first form.

Perhaps the greatest weakness of our general property tax, and the one which has given rise to the most interminable discussion, is connected with the subject of debt exemption. On the one hand it is maintained that an offset should be made for all indebtedness, whether mortgage debt on real property or general liabilities on personalty. Individuals should be taxed on what they own, not on what they owe. To tax both borrower and lender is double taxation. This is the view of the Connecticut commission,1 and the practice of a few states accords with it. On the other hand the majority of American. investigators assert that deduction for indebtedness results practically in such injustice and deception as to be utterly unendurable. They therefore demand that there should be no offset of debts against property. This is the view of the Massachusetts and New Jersey commissions,2 and the practice in many

states.

Both these views are correct. To tax both lender and borrower for the same property is plainly double taxation, and therefore unjust. The fallacy of the contrary opinion consists in looking at the property rather than at the owner. What the state desires to reach is primarily the individual. It taxes his property simply because it considers this a test of his ability to pay. But his ability is manifestly reduced pro tanto by his debts. His true taxable property therefore consists in his surplus above indebtedness. Otherwise one would be taxed for what he has, and another for what he has not. This is the view accepted by all European authorities.3 The only American scientist who holds to the contrary opinion, Amasa

1 Commission of 1887, p. 26.

2 Massachusetts Commission of 1875, pp. 95-98; New Jersey Commission of 1880, P. 20.

* Roscher, Finanzwissenschaft, p. 336; Wagner, Finanzwissenschaft, II, 432.

Walker, does so in a half-hearted way; for he bases his view on utterly arbitrary data, confesses that much hardship will ensue, and finally concludes that the income-tax principle is the only just one.1 To tax both property and credits, both lender and borrower, is plainly incorrect in principle, and inequitable in practice.2

On the other hand it is equally true that deduction for debts is thoroughly pernicious in its operation. It is the universal testimony that no portion of the tax laws offers more temptations to fraud and perjury than this system of offsets. The creation of fictitious debts is a paying investment. In the states where such deductions are permitted, attempts to obtain immunity from taxation in this way are universal and generally successful. And they are most successful in the case of property which already bears less than its share of the burdens. The great majority of officials cry out against debt-exemption. as an utter abomination.3

Both methods are thus unendurable. Debt-exemption and no debt-exemption are equally bad. The states shift from one policy to the other in equal despair. We are therefore forced to the conclusion that the whole system is unsound. The fault lies not in the exemption but in the taxation of property. The general property tax under either of these two methods produces crying injustice. As there is no third method possible, the inference is that the injustice is of the essence of the general property tax. The New York commission, indeed, came. to the very illogical conclusion that mortgage debts should be deducted from realty, but that there should be no offset for debt in the assessment of personalty. This would be a legal discrimination wholly subversive of the first principles of justice. There is no logical escape from one of the two methods, debt

1 A. Walker, Science of Wealth (7th edition), p. 339.

2 The best statement of the impolicy of double taxation is found in W. Endicott, Jr., The Taxation only of Tangible Things (Boston, 1875). For a late strong plea, see J. P. Quincy, Double Taxation in Massachusetts (1889).

3 Report of the Commissioners of Assessment and Taxation in Oregon, 1886, p. 9. 4 First Report, pp. 60-69, 71-79. Cf. the sharp criticism in the Massachusetts Tax Commissioners' Report, p. 96.

taxation or debt-exemption; and under either plan the general property tax stands convicted by the test of experience.

Under a system, indeed, where there is no general property tax but simply a tax on real estate, the question of taxing mortgages assumes a different aspect and must be decided independently. In the United States many writers dilate upon the manifold advantages that would accrue from the exemption of mortgages. The benefits of exemption would be diffused throughout the community, they say. This is a sentimental view. The taxation of mortgages will not produce any material change, because, as experience has shown, the mortgagee will always shift the burden on the mortgagor in the shape of an increased rate of interest to compensate for the tax. Even were this not the case, the theory of the property tax cannot possibly permit a man whose wealth consists in mortgages to go scot-free. His ability remains the same, whether his property consists in mortgages or in other income-bearing investments. Exemption of mortgages is illogical and unjust. On the other hand, the rational theory of the property tax demands, as we have seen, the exemption of the mortgage debt, i.e. of the mortgagor. His ability is really reduced by the amount of the mortgage. The profits of his land go to pay the interest on his debt. To tax both lender and borrower is indeed double taxation. But the remedy consists in exempting not the lender, as our states sometimes do, but the borrower; not the credit of the mortgagee but the liability of the mortgagor. Tax the mortgagee on the amount of the mortgage and the mortgagor on the value of the property minus the mortgage. That is the only rational system.

The exemption of mortgage debts, however, has engendered so many practical difficulties owing to our interstate complications, that three commonwealths, California, Massachusetts and Oregon,1 have been led to adopt a new system. The mortgagor there can offset the amount of the mortgage debt. The mortgage, on the other hand, is taxable in the hands of the

1 California constitution, art. xiii, secs. 4, 5; Massachusetts law of 1883; Oregon law of Oct. 26, 1882 (code, §§ 2730, 2734, 2753).

mortgagee, but it is treated as realty, not as personalty. That is, it does not follow the situs of the mortgagee but is taxed in the locality where the mortgaged property lies. If the tax is paid by the mortgagor, he may recoup it from the mortgagee. In Massachusetts, indeed, this provision is practically void, because nearly all mortgages contain a clause requiring the mortgagor to pay taxes upon the mortgaged estate, and a further agreement to pay all taxes upon the debt in the event of the repeal of the law. The practical result is that the lender, not the borrower, reaps the benefit. The mortgagor bears more than his share, for the rate of interest has not fallen to an amount equal to the tax, and the mortgagee goes scotfree. The Massachusetts system, notwithstanding the fact that it is much lauded by the moneyed interests,1 is hence practically unjust. In California, however, all such agreements between mortgagor and mortgagee are void. The California system in so far satisfies the requirements of justice. The state is not defrauded of its income from the land, as would be the case if both mortgagor and mortgagee were exempt and as generally is the case even where only the mortgagor is exempt. The burdens are justly shared by those who are logically if not legally co-proprietors of the soil. But this system, I repeat, which regards the mortgage as realty and taxes the legal owner of the land only on the surplus above the mortgage, - this California system is defensible only on the assumption that there is simply a tax on real estate. As soon as we have the general property tax, the exemption must logically be accorded to all debts. And we are then immediately confronted by the dilemma discussed above.

If we sum up all these inherent defects, it will be no exaggeration to say that the general property tax in the United States is a dismal failure. No language can be stronger than that found in the reports of the officials charged with the duty

1 Cf. the report of the Special Committee of the Boston Executive Business Association on Taxation (1889), which calls it a "grand stride toward wise and just taxation[!]" P. 31.

of assessing and collecting the tax. Whole pages might be filled with such testimony from the various states. I give only the following extracts from the New York reports, as samples:

A more unequal, unjust and partial system for taxation could not well be devised.1

The defects of our system are too glaring and operate too oppressively to be longer tolerated."

The burdens are so heavy and the inequalities so gross as almost to paralyze and dishearten the people.3

The absolute inefficiency of the old and rickety statutes passed in a bygone generation [is patent to all].*

The hope of obtaining satisfactory results from the present broken, shattered, leaky laws is vain."

The system is a farce, sham, humbug.

6

The present result is a travesty upon our taxing system, which aims to be equal and just.?

[The general property tax is] a reproach to the state, an outrage upon the people, a disgrace to the civilization of the nineteenth century, and worthy only of an age of mental and moral darkness and degradation, when the "only equal rights were those of the equal robber." 8

After such self-criticism nothing more need be said. In comparison with this, the view of the European scientists is moderate, that "a cruder instrumentality of taxation has rarely been devised." 9 And yet, notwithstanding all this criticism, our methods limp along almost unchanged.

II. The Development of Taxation.

In all primitive societies voluntary offerings constitute the first form of common contributions. It is out of the question to levy any direct tax. Every man feels the necessity of upholding the political and military organization by his own personal

1 First Annual Report of the State Assessors, 1860, p. 12. 2 Comptroller's Report, 1859.

* Assessors' Report, 1877, p. 5.

3 Assessors' Report, 1873, p. 3.

Report of Commissioners of Taxes and Assessments, 1876, p. 52.

Assessors' Report, 1879, p. 23.

Assessors' Report, 1879, p. 7.

7 Comptroller's Report, 1889, p. 34.

Leroy-Beaulieu, Science des Finances (3me éd.) III, 498: "Rarement, dans la fiscalité moderne, on a inventé d'instrument plus grossier."