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The Power to Destroy
The Power to
Destroy
How the Antitax Movement
Hijacked Amer­i­ca

Michael J. Graetz

pr i nce­t on u n i v e r sit y pr e ss
pr i nce­t on & ox for d
Copyright © 2024 by Michael Graetz
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intellectual property our authors entrust to us. Copyright promotes the pro­gress
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Published by Prince­ton University Press
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Editorial: Bridget Flannery-­McCoy and Alena Chekanov
Production Editorial: Jenny Wolkowicki
Text and jacket design: Karl Spurzem
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This book has been composed in Arno Pro and Neue Haas Grotesk
Printed on acid-­free paper. ∞
Printed in the United States of Amer­i­ca
10 ​9 ​8 ​7 ​6 ​5 ​4 ​3 ​2 ​1
For our grandchildren, Jordan, Edison, Eliot,
The little boy on his way,
And those to come
 Contents

chapter 1 Reset from the Right 1

Part I Takeoff (1978–1981)

chapter 2 A ­Political Earthquake 21

chapter 3 Christian Evangelicals Join the Antitax Movement 35

chapter 4 Prophets of the Supply-­Side Gospel 52

chapter 5 Reaganomics 68

Part II Turbulence (1982–1994)

chapter 6 ­Resistance 85

chapter 7 An Uneasy ­Political Marriage 99

chapter 8 The Triumvirate 115

chapter 9 A President Undone 133

chapter 10 Showdown and Shutdown 149

Part III Resurgence (1997–2023)

chapter 11 Moving the Goalposts 167

chapter 12 The Apple Sometimes Falls Far from the Tree 181

chapter 13 The Nation Splits Apart 198

vii
 viii Con t e n ts

chapter 14 Tax Cuts Are Trump 216

chapter 15 Tax the Rich? 232

chapter 16 The End of American Exceptionalism? 252

Acknowl­edgments 267
Notes 269
Index 339
 Chapter 1

Reset from the Right

The year 1978 was a remarkable turning point. Almost unconsciously it seemed
the body politic rejected the gestalt that had dominated tax policy.
—­r obe rt ba rt l e y, e ditor , wa l l st r e et jou r na l

In 1897 Charles Dudley Warner, the editor of the Hartford Courant, said, in an
observation frequently attributed to Mark Twain, “Every­body talks about the
weather, but nobody does anything about it.”1 During the half c­ entury from
the late 1920s ­until the late 1970s, much the same could be said about taxes:
­people across the land complained about taxes but did nothing about it. In
1978, starting in California, ­people sprang into action—­galvanizing an antitax,
antigovernment movement that remains remarkably strong more than a gen-
eration ­later. What started as an obsessive fringe movement to cut taxes, bol-
stered by spurious economic claims and camouflaged racist rhe­toric, grew into
a power­f ul force that transformed American politics and undermined the
nation’s financial strength.
The modern antitax movement is the most overlooked social and politi-
cal movement in recent American history. It has impeded the nation’s abil-
ity to protect its ­people from the vicissitudes of life, produced massive
public debt, and contributed to the country’s exceptional i­ nequality. Like
all social movements, some antitax protagonists have acted out of self-­
interest, ­others out of deep-­seated ideological commitments; many have
been motivated by both.

1
 2 Chapter 1

American Taxes and ­Resistance to Them

All governments—­including the United States—­are financed by some com-
bination of four kinds of taxes: taxes on consumption, income, wages, or
wealth. ­These taxes are sufficiently robust to produce adequate revenues to
finance a modern government and may also be described as fair—­connected
to p­ eople’s ability to pay.
­Resistance to taxes in the United States has a long pedigree: it is as Ameri-
can as apple pie and fried catfish.2 Taxes are the primary link between the
­people and their government: in the United States, more ­people file tax returns
than vote in presidential elections. Antitax efforts are necessarily about the
public’s relationship to their government. Debates over “fair” taxation involve
disputes over what constitutes a just society. Issues of whom and what to tax
and how much necessarily involve fundamental cultural, social, and economic
decisions. The nation’s ­founders understood taxation as a “means for shaping
the national economy, bringing foreign nations to fair commercial terms, regu-
lating morals, and realizing . . . ​social reforms.”3
The Boston Tea Party in 1773 was a response to legislation of the British
Parliament providing a tax advantage for tea sold in the American colonies by
the British East India Com­pany. It remains the most iconic antitax symbol:
ratifying the princi­ple of “no taxation without repre­sen­ta­tion” and helping
trigger the American Revolution.4 Attacking the tax collector—­always a prom-
inent feature of the antitax movement—­also has a long history: Samuel
Adams, frequently called the “­Father of the American Revolution,” was elected
Boston tax collector before the revolution on a platform of not collecting
taxes.5
During the nation’s early years, antitax protests w
­ ere sometimes violent. In
1786 and 1787, ­after Amer­i­ca had secured its ­independence from ­Great Britain,
armed Mas­sa­chu­setts rebels attempted to overthrow the state government
­because of its attempts to collect higher taxes than the British had. This upris-
ing, known as Shays’ Rebellion, is frequently credited with inducing the Con-
stitutional Convention to create a stronger national government with the
power to tax. In 1791 the Whiskey Rebellion—­a violent protest against the first
tax levied by the new federal government on a product produced
domestically—­began in western Pennsylvania and lasted for three years dur-
ing George Washington’s presidency. ­After concluding that tariffs on imported
goods would not suffice, Alexander Hamilton de­cided taxing whiskey was
essential to pay off the nation’s Revolutionary War debts and to validate the
 R e set f rom t h e R ight 3

new federal government’s authority to tax. (The whiskey tax was repealed in
1801 ­after Thomas Jefferson became president.) In 1799 Pennsylvania Dutch
farmers, in what became known as Fries’s Rebellion, began an armed rebellion
against a new federal tax on real estate and slaves to help pay for a naval war
with France.6 Like the Whiskey Rebellion, this protest was halted by the fed-
eral government, costing the Federalists support in Pennsylvania in the 1800
election.
The United States first enacted an income tax b­ ecause the country needed
the money to finance the Civil War a­ fter T ­ reasury Secretary Salmon P.
Chase told President Lincoln the U ­ nion government could not borrow
enough money, a doleful truth that eluded the Confederacy u­ ntil it was too
late. A
­ fter the war, the income tax was allowed to lapse. By 1893 when the
federal government again moved to tax income, revenue needs no longer
solely justified the tax. An income tax was viewed as necessary for economic
justice in an industrializing nation. The 1893 income tax was struck down by
the Supreme Court two years ­later, but in 1913 the nation overcame the diffi-
culty of amending the Constitution to enact the Sixteenth Amendment, en-
abling the federal government to tax income.7
Before World War I and to a lesser extent ­after, the United States relied
heavi­ly on tariffs, taxes imposed on imported goods. Tariffs typically produce
higher prices for imported and domestically produced goods that are subject
to them, much like excise or retail sales taxes. A ­ fter World War II u­ ntil 2017,
the United States (along with much of the rest of the world) decreased and
eliminated tariffs to reduce barriers to international trade.
The modern income tax was initially l­ imited to high-­income Americans and
corporations with the tax’s scope and rates varying depending on the nation’s
need for revenues. When our nation faced massive challenges to finance World
War II, Congress transformed the income tax from a class tax to one on the
masses. Then, for the first time, our nation became full of income taxpayers.
In 1939 fewer than four million Americans paid income tax, but by 1945 that
number had increased tenfold to more than forty million p­ eople. By the time
World War II ended, individual income taxes accounted for 40 ­percent of fed-
eral revenues, and corporate income taxes contributed another third. In the
­decades since, the individual income tax has remained the centerpiece of the
federal tax system.
In 2021 more than half of all U.S. federal revenues ­were supplied by income
taxes on individuals. About 9 ­percent came from the corporate income tax,
which typically applies only to publicly traded businesses. (Unlike most
 4 Chapter 1

countries, about half of U.S. business income is earned by partnerships and

privately held companies, the income of which is taxed only to its o­ wners.)
Taxes on wages and earnings from self-­employment finance Social Security,
Medicare’s hospital insurance, and unemployment insurance and accounted
for another 31 ­percent. Together, t­ hese payroll and income taxes comprised
more than 90 ­percent of the total. Excise taxes on the consumption of speci-
fied goods, such as fuels, alcohol, and tobacco, added another 2 ­percent, as did
tariffs on imported goods. The estate and gift taxes—­the only federal taxes on
wealth, imposed when very rich ­people transfer their wealth by gift or at
death—­supplied only a fraction of 1 ­percent of federal receipts.8
Consumption taxes, such as retail sales taxes, are prevalent in states and
localities, which also impose property taxes on real estate, automobiles, and
sometimes securities. The United States relies much less heavi­ly on consump-
tion taxes than does the rest of the world. About 170 countries worldwide
impose national value-­added taxes (sometimes called goods and s­ ervices
taxes) on purchases of goods and ­services. ­These taxes are a type of sales tax
with withholding required from producers and ­wholesalers so that collection
does not depend solely on compliance by retailers. An income tax includes
income ­whether saved or consumed, while a consumption tax exempts in-
come p­ eople save.
Income taxes are typically imposed with progressive rates, which means
the tax rate goes up as income increases. Consumption and wage taxes are
typically levied at flat rates without any personal exemptions or thresholds,
and are often regressive, which means they impose greater burdens on the
poor than the rich, but flat-­rate sales and value-­added taxes can be made pro-
portional to income. For a long time, Americans viewed the income tax as the
fairest tax, but beginning in the 1970s, polling showed the public considered
income taxes to be the least fair and approval of sales taxes ­rose.9

Distrust of Government
When the modern antitax movement began in 1978 with a property tax limita-
tion referendum in California, economic and social conditions ­were ripe for
a populist antitax movement. The economy was stagnant, inflation was raging,
and American society was ripping apart. As the historian Dominic Sandbrook
wrote, the “single most compelling theme of the 1970s” was the “notion of the
virtuous citizen locked in b­ attle against big government, big business, and a
de­cadent elite.”10
 R e set f rom t h e R ight 5

From the end of World War II ­until the mid-1970s, fortune smiled on the
United States. The U.S. economy expanded for nearly a generation—­fulfilling
Amer­i­ca’s promise as a land of exceptional opportunity. For young (white)
men back from the war, the government offered a ­free college education. Even
unskilled workers without a college degree typically had good jobs that could
last a lifetime or started small businesses with excellent chances of success
given the coming years of robust, broadly distributed economic growth. One
salary could finance a f­ amily’s living expenses and frequently the purchase of
a federally subsidized home.
Public and private institutions ­were strong. Public education provided a
ladder up for white ­children nationwide. ­Unions represented more than a third
of all private-­sector workers—­negotiating good wage and benefit packages
and providing middle-­class workers and their families an effective voice in
federal and state legislatures. Churches and synagogues, along with other re-
ligious and secular civic o­ rganizations, offered substantial social supports.
Having defeated Hitler in the war and enjoying the fruits of robust economic
growth, Americans generally had confidence in their government and believed
their ­children’s lives would be better than their own.
This happy picture, of course, was dominated by the color white. In the
South, Jim Crow ruled. Black Americans ­were ghettoized in American cities
everywhere. Public schools rarely created economic opportunities for Black
­children.
Together, the civil rights revolution and the w ­ omen’s movement challenged
long-­standing social and p­ olitical arrangements. Efforts by Black families to
desegregate public schools met ­resistance across the country. White men ­were
threatened by new competition for jobs from minority and ­women workers.
Long-­standing ­family arrangements suddenly became contested. Historian
Ruth Rosen aptly titled her modern history of the ­women’s movement The
World Split Open.11 President Lyndon Johnson asserted in his June 1965 com-
mencement address at the historically Black Howard University, “You do not
take a person who, for years, has been hobbled by chains and liberate him,
bring him up to the starting line of a race and then say, ‘you are f­ ree to compete
with all the o­ thers,’ and still justly believe that you have been completely fair,”
indicating his support for affirmative action.12 While both movements
achieved impor­tant pro­gress, turmoil became palpable in the 1960s, and con-
fidence in government eroded during the 1970s.
The 1970s was a hinge ­decade, a time of dramatic change. The era of indi-
vidualism and isolation described by Harvard p­ olitical scientist Robert
 6 Chapter 1

Putnam in his 2000 book Bowling Alone emerged in the 1970s.13 The seeds of
disquiet and distrust of government and other institutions planted in the 1960s
blossomed in the 1970s, setting the agenda for much of what tran­spired over
the rest of the twentieth ­century and well into the twenty-­first—an effect well
documented once the ­decade became a fit subject for historians.14 The 1970s
was a time of divisiveness and upheaval, a period of cultural clashes, racial divi-
sion, and economic distress. The 1970s began, as historian Daniel T. Rod­gers
put it, a long “age of fracture” in Amer­i­ca.15
Epic government failures, such as Watergate (along with corruption by
other government officials), the disastrous Vietnam War, and illegal domestic
intelligence operations by the CIA and FBI against antiwar protestors and
other dissident groups, along with more common deficiencies, fueled disdain
for and distrust of government that had been suppressed by more than two
­decades of postwar prosperity and U.S. global dominance.16 Antigovernment
skepticism pervaded the nation.
As World War II became more distant and the Vietnam War more costly
and less ­popular, antitax sentiment grew. Tax increases to support widely ac-
cepted wars have long been supported by the American p­ eople, but public
support for tax increases to fund controversial military ventures abroad or
increases in domestic spending has been more difficult to muster.17
­After Richard Nixon resigned the presidency in disgrace, Gerald Ford, a
long-­time Michigan congressman who replaced Spiro Agnew as vice president
­after Agnew pled nolo contendere to a felony charge of tax evasion and re-
signed, became the first vice president to become president without having
been elected. On September 8, 1974, President Ford issued an unpop­u­lar, con-
troversial “full, ­free and absolute” p­ ardon of Nixon for any crimes he commit-
ted while in office.
Two months ­later, on November 5, 1974, ­Democrats won 49 seats in the
­House of Representatives, producing more than a two-­thirds majority.
­Democrats also gained 4 Senate seats, giving them a 60-­vote majority, and 4
governorships. ­Democrats mistook ­these victories as public endorsement of
liberal government policies rather than the temporary repudiation of Repub-
licans they w ­ ere. Many D ­ emocrats failed to recognize that their New Deal
co­ali­tion of blue-­collar workers, racial minorities, white southerners, and
urban intellectuals was disintegrating.
In his State of the U
­ nion Address on January 19, 1976, the beginning of the
nation’s bicentennial year, President Ford said, “We must introduce a new
balance in the relationship between the individual and the government—­a
 R e set f rom t h e R ight 7

balance that ­favors greater individual freedom and self-­reliance. . . . ​The Gov-
ernment must stop spending so much and stop borrowing so much of our
money. More money must remain in private hands where it ­will do the most
good. To hold down the cost of living, we must hold down the cost of govern-
ment.” He also called for about $10 billion in tax cuts in an effort to stimulate
the economy.18 Ford presided over a weak economy that had not fully recov-
ered by January 1977, when Jimmy Car­ter, a former Georgia governor and
“born-­again” Christian, moved into the White ­House.

Stagflation
From 1973 through 1975, the United States experienced its most severe reces-
sion since the end of World War II. Unlike previous recessions, this downturn
was accompanied by double-­digit inflation that did not abate u­ ntil the 1980s.
The toxic mix of unemployment and inflation, known as “stagflation,” was a
major catalyst for the antitax movement and inculcated widespread beliefs that
government no longer worked.
In his most feckless effort to ­battle inflation, President Ford urged Ameri-
cans to wear “WIN” buttons, standing for “Whip Inflation Now.” Alan Greens-
pan, Ford’s chairman of the Council of Economic Advisers, ­later described this
idea as “unbelievably stupid.”19 President Car­ter fared no better in his efforts
to control inflation.
Making m ­ atters worse, productivity growth—­the most impor­tant con-
tributor to wage growth and rising standards of living, which had been strong
for nearly thirty years following World War II—­began to decline and dis­
appeared for many workers by the end of the 1970s. Beliefs that the nation’s
economy would continue to expand robustly, producing many winners and
few losers, vanished si­mul­ta­neously.20
The unpre­ce­dented stagflation of the 1970s energized the antitax movement.
Rising prices took more out of families’ pockets, just as wages ­were flattening
and job security disappearing. Income and property taxes made m ­ atters worse.
As housing prices r­ ose, so did property taxes, increasing costs for both home-
owners and renters without providing corresponding benefits. Progressive in-
come taxes increased as inflation pushed ­people into higher tax brackets even
though their wages purchased fewer goods and ­services. Fixed dollar allowances
for standard deductions and personal exemptions became less valuable as the
dollar’s purchasing power declined. Inflation also overtaxes investment income
when it ­measures current year’s income by subtracting historical costs from
 8 Chapter 1

current receipts, such as with capital gains. Inflation makes p­ eople appear richer
to property and income taxes than they actually are.
In 1980 MIT economist Lester Thurow published a gloomy bestseller, The
Zero-­Sum Society, relating the nation’s economic decline during the 1970s. Thu-
row emphasized the slippage in U.S. standards of living relative to the rest of
the world and observed how such a decline engendered dissatisfaction with
government. He rejected the “hard-­core conservative solution” of deregula-
tion, cuts in “social expenditures,” and tax cuts for “­those who save, the rich.”
Any solution to the nation’s economic ills, he wrote, “requires that some large
group . . . ​be willing to tolerate a large reduction in their real standard of liv-
ing.” The United States, Thurow contended, had entered a “zero-­sum game,”
where the stakes are over the distribution of costs and benefits, and each group
wants government to protect it from losses and push costs onto ­others.21
The time was ripe for an antitax movement. Economic challenges and in-
securities, however, w ­ ere not the only disruptions confronting the United
States. Social and cultural turmoil also helped incite antitax fervor. Contrary
to common views, taxation is not solely about economics: cultural values are
also at stake. In the 1970s, racial conflict was manifest.

An American Dilemma
In 1938 Swedish Nobel Laureate in economics Gunnar Myrdal undertook a
comprehensive study of social and economic prob­lems of African Americans
in the United States, famously leading him to describe race relations as “An
American Dilemma.”22 Over nearly 1,500 pages Myrdal and his colleagues de-
tailed “an ever-­raging conflict” between the “American Creed” of “national and
Christian precepts”—­including belief that all ­people are created equal and a
commitment to equality of opportunity—­and personal and local economic
and social interests limiting the education of Black c­ hildren and job opportu-
nities of Black workers, a conflict that persists.23 Racial divisions played an
impor­tant role in advancing the modern antitax movement. This was not new.
The Constitution’s constraints on federal taxation w ­ ere s­ haped in part by
­political compromises over how slaves should be counted in determining the
size of the population for repre­sen­ta­tion in Congress. The absence of federal
taxing power ­under the Articles of Confederation, which preceded the Con-
stitutional Convention, rendered the national government helpless when the
states ignored the Continental Congress’s requests for revenue.24 To correct
that shortcoming, the Constitution grants Congress the power “to lay and
 R e set f rom t h e R ight 9

collect Taxes, Duties, Imposts and Excises” so long as all “Duties, Imposts and
Excises s­ hall be uniform throughout the United States.”25 The Constitution
also requires any “Capitation, or other direct Tax” to be apportioned among
the states based on population.26 The phrase “other direct tax” is not defined
in the Constitution but clearly includes taxes on land.27 Slaveholding and ra-
cial prejudice ­were impor­tant components of arguments on behalf of strong
“states’ rights” and a weak national government. The limitation on direct taxes
was part of the Constitution’s original three-­fifths compromise over slavery,
which determined how slaves should be counted in apportioning seats in the
­House of Representatives and how capitation or other direct taxes w ­ ere to be
distributed among the states.28
­After the Civil War, rising public expenditures in the South by new biracial
governments responding to the expansion in the number of f­ ree citizens de-
manding public s­ ervices, such as public education, hospitals, railroad con-
struction, and law enforcement, required rising taxes to finance substantial
growth in the costs of government. The increasing tax burdens, in turn, in-
flamed white opposition, exacerbated by falling property values, especially
when they weakened plantations and promoted Black owner­ship. Rising
taxes, especially property taxes, became a rallying cry for Reconstruction’s
opponents.29
Beginning in the 1890s, poll taxes ­were used to keep African Americans
from voting. Some poor whites ­were exempted from ­these taxes if they had an
ancestor who voted before the Civil War. Not u­ ntil 1964 did the Twenty-­
Fourth Amendment to the Constitution prohibit poll taxes for federal elec-
tions. In 1966 the Supreme Court struck down the remaining poll taxes used
by some southern states for state elections.30 Jim Crow and ongoing racial ani-
mus also elicited calls for strong states’ rights and a weak national government.
Racial conflicts have long played a central role in American tax politics and
policy.
Support for taxes to pay for social insurance, including to alleviate poverty,
is lower when nations are more racially heterogeneous. Racial animosity
makes paying for re­distribution to the poor, who are disproportionately Black
in the United States, objectionable for many voters.31 Beginning in the mid-
1960s, the U.S. population became even more heterogeneous due to changes
in immigration policies. By the 1970s conflicts over race ­were con­spic­u­ous.
In 1954, in Brown v. Board of Education, the Supreme Court issued perhaps
its most impor­tant decision of the twentieth c­ entury—­requiring desegrega-
tion of public schools in Amer­i­ca. Federal appellate judge J. Harvie Wilkinson
 10 Chapter 1

captured its momentousness, writing, “Its greatness lay in the enormity of

injustice it condemned, in the entrenched sentiment it challenged, in the im-
mensity of how it both created and overthrew.”32 But the Court underesti-
mated the intransigence of school segregation.
It took ­until May 1968, fourteen years ­after the Brown decision and a month
­after Martin Luther King’s assassination, before the Court ruled delays in
desegregating schools w ­ ere “no longer tolerable.”33 Three years l­ ater, the Court
approved busing students as the main method for integrating schools.34 Pub-
lic opposition to busing for desegregation intensified, producing violent
clashes in cities across Amer­i­ca and exacerbating anger of working-­class whites
­toward poor Blacks. The transformation of the composition of public schools
fueled antipathy to property taxes, the main source for financing public
schools, and for income taxes paying for other government expenditures, es-
pecially welfare.
Concurrently, the Immigration and Naturalization Act of 1965 added fuel
to the anti-­property-­tax and anti-­income-­tax fires by transforming immigra-
tion into the United States. From the 1920s ­until 1965, the United States based
immigration quotas on national origin, favoring immigrants from northern
and western E ­ urope. The 1965 legislation made unification of families an im-
migration priority. Mas­sa­chu­setts senator Edward Kennedy, a strong sup-
porter of the changes, assured his Senate colleagues that immigration would
remain “substantially the same” and the “ethnic mix of this country w ­ ill not be
upset.”35 But that did not happen.
In the 1950s more than 70 ­percent of U.S. immigrants came from Canada
and ­Europe, but by the 1980s immigration from ­these regions had dropped to
11 ­percent. More than 85 ­percent came from Latin Amer­i­ca, the C ­ aribbean,
and Asia. By the late 1970s, particularly in southwestern states, Latino ­children
of immigrants w ­ ere flooding into public schools.36 The new immigration law
changed the composition of public schools and the workforce, fomenting anti-­
immigrant, antigovernment, and antitax attitudes that profoundly affected the
nation’s tax policies and politics.37
Si­mul­ta­neously, efforts by colleges and universities to admit African Ameri-
cans and other minority students fomented further discord, intensifying
antigovernment sentiments. Affirmative action in admissions by colleges
and universities and by employers—­initially for African Americans and ex-
panded in the 1970s to include Native Americans, Puerto Ricans, Mexican
Americans, and some Asian Americans—­splintered the nation. Many white
Americans came to believe that ­others ­were “cutting in line” and blamed the
 R e set f rom t h e R ight 11

government.38 They did not want to pay taxes to finance expanding public
benefits for Black or Latino p­ eople or the salaries of government workers dis-
tributing them.

Government Spending on the Poor

President Lyndon Johnson pushed the 1964 Civil Rights Act and the 1965 Im-
migration Act through Congress. In Johnson’s “war on poverty” and “­Great
Society” programs, Congress during the 1960s also greatly expanded govern-
ment spending on the poor and el­derly, through Medicaid, Medicare, food
stamps, housing, education, and welfare. This induced backlash from middle-­
class whites who believed most of the money was g­ oing to poor urban African
Americans and Latinos. Although the majority of spending on welfare, food
stamps, and subsidized housing assistance went to whites, t­ hese minorities,
whose median ­family income was less than 60 ­percent that of whites and
­were disparately poor and unemployed, received a disproportionate share of
­these benefits.39 Resentment over paying taxes to support growing transfers
to the poor grew as inflation eroded paychecks’ values and the economy strug­
gled during the 1970s.
In his 1976 presidential campaign, Ronald Reagan famously complained at
nearly ­every stop of a “welfare queen” with “80 names, 30 addresses, and 12
Social Security cards” who drove a Cadillac and was collecting “veterans’ ben-
efits on four n­ onexistent deceased husbands,” along with Social Security, Med-
icaid, food stamps, and welfare “­under each of her names.” Reagan said, “Her
tax-­free cash income alone is over $150,000.” He continued speaking about this
­woman during the next four years in his p­ opular radio shows and in his suc-
cessful 1980 campaign for president.40 Reagan never mentioned the recipient’s
race, but his diatribes intensified anti-­poor, antigovernment, and anti-­Black
sentiment, reinforcing widespread views that government spending on the
poor was riddled with fraud and abuse. No one had volunteered to pay higher
taxes to support crooked “welfare queens.”
Few foresaw the ­political toxicity of the combination of a massive increase
in Latino immigration and the expansion of civil rights for African Americans.
One who did was Kevin Phillips, a young, controversial, Republican strategist.
In his 1969 book, The Emerging Republican Majority, Phillips predicted much
of what happened. “All the talk about Republicans making inroads into the
Negro vote is persiflage,” Phillips said. “The more Negroes who register as
­Democrats in the South, the sooner the Negrophobe whites w ­ ill quit the
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secured. It is expected that in time the national bank notes will go out
of existence altogether, their place being taken by these federal
reserve bank notes.
Since their establishment in 1913 the work of Value of the Federal
these federal reserve banks has been of great Reserve system.
value. They have enabled the banking operations of the country to
expand and contract in accordance with changes in business
conditions, thus obviating serious danger of financial panics. In
helping the government to float the various Liberty Loans they
rendered great service. There is no doubt that the system has
improved and strengthened the banking facilities of the country.[206]
This will appear more clearly when the relations of banking and
credit are discussed a few pages further on.
The Practical Operations of Banking.— Commercial and
There are some elementary things connected savings banks
with the practical operations of banking which distinguished.
everyone ought to know. Generally speaking, there are two kinds of
banks, commercial banks and savings banks; or, in some cases the
same bank may have two departments, a commercial department
and a savings department. Both commercial and savings banks
receive deposits; the former may or may not pay interest according
to the amount of the deposit and the length of time it is left in the
bank; the latter always pay interest if money is left on deposit a
prescribed length of time. When money is deposited in a commercial
bank the depositor is said to have an “account” and he may issue
checks up to the amount of his deposit. A check Bank checks.
is an order, addressed to the bank, and calling
for the payment of a designated sum. This check may be cashed at
the bank on which it is drawn, or the person who receives it may
have it cashed at the bank where he has his account. Banks cash
checks for their own customers no matter what bank the checks
happen to be drawn upon.
One result of this is that every bank at the close of each day’s
business will have on hand a large number of checks drawn against
other banks. It receives payment on these The clearing house
checks through the medium of the “clearing system.
house”, an institution which is maintained by the banks in every large
city. To the nearest clearing house a clerk takes each morning all the
checks on other banks that have come in during the previous day.
These are sorted out and exchanged for checks drawn on the bank
itself which are held by other banks. Whatever difference there
happens to be is paid in cash.
When any person desires to borrow money How bank loans are
from a bank he gives his note, which is a made.
promise to repay the bank at a designated time. The bank may ask
the borrower to obtain an endorsement upon his note, that is, to
have some responsible person put his name on the back of it, which
means that the endorser assumes liability for the amount of the note
if it is not paid by the maker on time. Or the bank may ask the
borrower to deposit “collateral” as security for the payment of the
note. This collateral may be in the form of bonds, stocks, mortgages,
or any other intangible property that has sufficient value. The bank
holds this collateral until the loan is repaid.
When a bank lends money and takes a man’s The process of
note, with or without collateral, it is said to “discounting.”
discount the note. It gives the borrower the face value of his note
less the interest, whatever it is, calculated at the current rate. Thus if
the rate is six per cent and the person gives his note for one
thousand dollars payable in six months, the bank would hand him
$970 in money. Business men obtain large sums of money from the
banks by getting their notes discounted; they borrow money in this
way to buy goods and then pay off their notes when the goods are
sold. Such notes are called “commercial paper”.
Now the federal reserve banks help the “Rediscounting.”
member banks by “rediscounting” this
commercial paper for them. Suppose a small bank has loaned on
notes all the money it has to spare. Then it receives applications
from its customers for more loans. What does it do? It takes a bundle
of business men’s notes, or commercial paper, from its vaults and
sends this to the nearest federal reserve bank. The latter does just
what the member bank did in the first instance; it deducts the
discount at current rates and gives the balance to the member bank
in money, that is, in federal reserve notes. The member banks are
enabled, in this way, to loan a great deal more money than would be
the case if there were no way of getting their commercial paper
“rediscounted”.
Drafts or bills of exchange are used to make How the banks
payments at distant points. If a person lives in transfer funds.
San Francisco and wishes to pay a small bill in New York, he will
probably go to the post office and buy a postal money order; but if
the amount is large, he may find it more convenient and cheaper to
go to a bank in San Francisco and buy a draft on some New York
bank. This draft he then sends to New York in payment of his bill. A
draft payable in a foreign country is usually called a bill of exchange.
From any American bank one can buy a bill of exchange payable in
Paris, Madras, Hong Kong, or elsewhere. When the money of one
country is worth more than that of another, as is the case throughout
the world at the present time, allowance is made for this difference.
Bills of exchange are “cleared” through the great clearing houses in
London or New York, and any balances are paid by the shipment of
gold.
 The Credit System
What is Credit?—Credit is simply the giving The five chief
and taking of promises in place of money. The instruments of
most common form is “book credit”, which credit.
means that wholesalers and retail merchants give out goods with
nothing but charge accounts on their books to show for it. These
accounts are merely the records of credit which has been extended
to customers. But in many transactions something more than a book
record is desired, in which case the person giving the credit may ask
for a “promissory note”. This is a written promise to pay a designated
sum either on demand or at a definite date. Bank checks are also
instruments of credit; so are drafts and bills of exchange. Anything
that expresses or implies a promise to pay a sum of money is an
evidence of credit.

THE RELATION OF MONEY AND PRICES

The general relation between the amount of money
in circulation and the course of prices is shown by the
two statistical diagrams on the other side of this page.
It will be noticed that per capita circulation began to
decline in 1921. Prices also commenced to fall during
that year, and if the table of prices were extended to
cover the last year or two it would show the price-lines
moving downward. The data for continuing the lines of
the lower diagram may be found in the publications of
the United States Bureau of Labor Statistics.
MONEY IN CIRCULATION PER CAPITA (Figures for first day
of month)
 COURSE OF WHOLESALE AND RETAIL PRICES[207] IN
THE UNITED STATES
JANUARY, 1913, TO MAY, 1920

[Average Prices, 1913 = 100]

The Relation of Credit to Money.—A large part of the world’s

business is done on credit. If all debts had to be paid tomorrow, there
would not be enough money in the world to pay one cent on the
dollar. But all debts do not fall due at once, and a huge credit system
is able to stand with comparative safety upon a relatively small
amount of gold. There is a limit, however, to the There is a limit to
expansion of credit and this limit is roughly the expansion of
determined by the amount of gold available to credit.
be held as a reserve. Hence it is that when the volume of gold
increases, credit usually expands also. With their reserves full to
overflowing the banks are more ready to lend money on notes, and
the rate of discount goes down. Conversely, as the volume of gold
declines, credit usually contracts. The rate of discount then goes up
and business men find it harder to borrow money upon commercial
paper. In the one case we speak of an inflation or expansion in
money and credit; in the other we speak of a contraction or deflation.
Credit and Prices.—The general level of prices depends upon the
value of money. The price of a thing is merely its value expressed in
terms of money. To say that prices have gone up is to say exactly the
same thing as that the value of money has gone down.[208] The
general level of prices, to put the matter in another way, is
determined by the demand for goods on the one hand and the
supply of goods on the other. The demand for goods, however, is
represented by the amount of gold currency available plus the
amount of credit which is built upon this gold. The credit, as has
been seen, bears a definite relation to the gold. How the general
Hence it can fairly be said that the amount of level of prices is
gold is an index of demand for goods or determined.
services. So, if the supply of goods remains approximately the same,
any large increase in the available amount of gold would send prices
up; and conversely, if the supply of goods is greatly increased, while
the available amount of gold remains approximately the same, prices
would go down.
This is the so-called quantity theory of the The quantity theory
relation between money, credit, and prices and it of money and
holds good in a general way although it does not prices.
work out as simply as it reads. The adjustment of supply and
demand sometimes takes place very slowly. The volume of credit
which can be built upon a given reserve of gold is not absolutely
fixed, moreover; in some circumstances it may be more extensive
than in others. During the World War, for Defects of the
example, credit ran away from the gold reserve quantity theory as
in all the European countries. Enormous shown by recent
amounts of paper money were issued with very experience.
little gold in reserve to protect them. Due to reduced production, the
supply of ordinary goods sharply declined. A combination of these
two things, inflation of credit (i. e., potential demand for goods) and
decreased production, sent prices sky-high.[209] In the United States
credit was also inflated during the war and prices went up, though
not to the same extent as in Europe. Since 1920 the process of
“deflating” credit has been going on. This process of deflation is
guided by the federal reserve banks, which are able to contract the
volume of credit by charging higher rates for rediscount.
The Advantages and Dangers of Credit.—It is probable that at
least two-thirds of the buying and selling in the world is done on
credit. Nearly all large transactions are put through by the use of
credit for short or long terms. Credit affords many advantages to
modern industry and commerce; without it, indeed, our whole
economic system would break down. A few of Four functions
these advantages may be mentioned: (a) It which credit
economizes the use of gold and silver, by doing permits.
away with the necessity of passing gold and silver coin from hand to
hand at every transaction. (b) It enables large payments to be made
at distant points without an actual shipment of metallic money. (c) It
permits men to engage in business operations beyond their own
means by borrowing capital and using it productively. (d) It enables
people to invest their savings (by depositing in savings banks,
lending money on mortgages, buying bonds or stocks, etc.) so as to
secure a profitable rate of interest without great risk.
But there are also some disadvantages. The Credit may also
credit system often encourages extravagance in harm.
that people are tempted to buy goods which they eventually find it
hard to pay for; it tends to encourage speculation which frequently
results in heavy losses; and it sometimes enables promoters to
obtain capital when there is little or no chance of their being
successful. By strict governmental supervision, however, the
advantages can be retained and most of the dangers eliminated.
 The Stock Exchange.—A word should be said about the place
where instruments of credit are most commonly bought and sold,
namely, the stock exchange. As its name implies, this is a market in
which men buy and sell stocks, bonds, and other securities.[210]
There is a stock exchange in every large city. The buying and selling
is done through brokers, who are members of the exchange and who
receive a small commission for their work, this commission being
paid by the persons for whom they buy or sell. A broker, at your
request, will buy or sell on the exchange any security that is listed
there. The amount of the purchase may be paid in full, or, if the
buyer desires, a partial payment of five, ten, or twenty per cent may
be made. This is called “buying on margin”. The Trading on margin.
current prices of all securities are kept posted on
the exchange; they go up and down from day to day in keeping with
market conditions. Shrewd investors try to buy when prices are low
and to sell when prices are high, but in this they are not always
successful. Many fortunes have been made—and lost—on the stock
exchange.
General References
F. W. Taussig, Principles of Economics, Vol. I, pp. 227-235 (Coinage); 236-251
(Quantity of Money and Prices); 265-273 (Bimetallism); 348-359 (Banking
Operations); 375-385 (The Banking System of the United States);
Isaac Lippincott, Economic Development of the United States, pp. 550-580;
H. R. Burch, American Economic Life, pp. 336-371;
W. A. Scott, Money and Banking, pp. 1-116;
W. S. Jevons, Money and the Mechanism of Exchange, pp. 3-41;
Marshall, Wright, and Field, Materials for the Study of Elementary
Economics, pp. 443-546;
C. J. Bullock, Introduction to the Study of Economics, pp. 224-246;
D. R. Dewey, Financial History of the United States, especially pp. 383-413;
Everett Kimball, National Government of the United States, pp. 460-479;
Horace White, Money and Banking (5th edition), passim;
F. A. Fetter, Modern Economic Problems, pp. 31-163.
Group Problems
1. How money and credit are related to prices. The meaning of “prices”. The
quantity theory of money. Relation of money to credit. Reserves for paper money.
Bank reserves. Discounting and rediscounting. How inflation of money and credit
affects prices. Index numbers. American experience during the years 1914-1921.
References: F. W. Taussig, Principles of Economics, Vol. I, pp. 427-445; C. J.
Bullock, Introduction to the Study of Economics, pp. 242-278; Irving Fisher,
The Purchasing Power of Money, pp. 8-32; Ibid., Stabilizing the Dollar, pp. 1-12; J.
A. Hobson, Gold, Prices, and Wages, passim; David Kinley, Money, pp. 199-223.
2. The American banking system: how it is organized and how it functions. D.
R. Dewey, Financial History of the United States, pp. 320-328; 383-390; F. W.
Taussig, Principles of Economics, Vol. I, pp. 375-399; C. F. Dunbar, Theory and
History of Banking, pp. 132-153; C. A. Conant, A History of Modern Banks of
Issue, pp. 396-447; E. W. Kemmerer, The A, B, C of the Federal Reserve System,
pp. 28-65; H. P. Willis, The Federal Reserve System, passim; A. B. Hepburn,
History of the Currency and Coinage of the United States, pp. 411-418; 511-544.
3. The controversy over free silver and its lessons for the future. D. R.
Dewey, Financial History of the United States, pp. 101-104; 210-212; 403-413;
436-437; 468; F. W. Taussig, Principles of Economics, Vol. I, pp. 265-273; J. L.
Laughlin, History of Bimetallism in the United States, especially pp. 266-280.
Short Studies
1. The early history of money. W. S. Jevons, Money and the Mechanism of
Exchange, pp. 19-30; David Kinley, Money, pp. 14-26.
2. The quantity theory of money. F. W. Taussig, Principles of Economics, Vol.
I, pp. 236-251.
3. American and foreign banking systems compared. E. R. A. Seligman,
Principles of Economics, pp. 524-550; or F. W. Taussig, Principles of Economics,
Vol. I, pp. 360-385.
4. Can the dollar be stabilized? Marshall, Wright, and Field, Materials for
the Study of Elementary Economics, pp. 474-483; Irving Fisher, Stabilizing the
Dollar, especially pp. 12-30.
5. The free-silver campaign of 1896. C. A. Beard, Contemporary American
History, pp. 164-198; D. R. Dewey, National Problems, pp. 220-237; 314-328.
6. Banking operations and accounts. C. F. Dunbar, History and Theory of
Banking, pp. 20-38.
7. American institutions for saving and investment. F. A. Fetter, Modern
Economic Problems, pp. 146-166.
8. Financial panics. F. W. Taussig, Principles of Economics, Vol. I, pp. 400-
426.
9. The high cost of living. J. H. Hammond and J. W. Jenks, Great American
Issues, pp. 143-159.
10. Economic crises. T. N. Carver, Principles of National Economy, pp. 427-
442.
Questions
 1. Are the qualities of money given in this book in the order of their importance?
If not, rearrange them so. Can you think of any other essential qualities? What
objections would there be to the use of platinum as money? Pearls? Porcelain?
2. Gold dollars are not coined in the United States at all. How is it, then, that the
gold dollar can be the legal standard of value?
3. Name all the different kinds of money that are circulated in the United States
(including paper money) and tell when the issue of each kind was first authorized.
Examine the money you have with you. Tell where each coin was minted. In the
case of bills what is the security behind each? Can you detect counterfeit bills?
How?
4. Why was the action of Congress in demonetizing silver called “the crime of
1873”?
5. At the Democratic National Convention of 1890 Mr. Bryan said: “You shall not
crucify mankind upon a cross of gold.” Explain in full what he meant. Was there
any good reason for believing that the free coinage of silver at a ratio of sixteen to
one would (a) increase prices; (b) give relief to the debtor class; (c) benefit the
wage earner?
6. Explain the process by which, under a dual system of coinage, the metal
which is over-valued at the mint will drive the other out of circulation. Is it correct to
say that “cheap money drives out dear money”?
7. If you were engaged in business as a manufacturer, name all the different
dealings that you might have with a bank.
8. Explain what is meant by each of the following terms: demand note; endorser;
trustee; commercial paper; rate of discount; rediscounting; collateral; deflation;
coupon bond; preferred stock; broker; buying stock on margin.
9. Show how the volume of credit helps to determine prices and how the volume
of credit is related to the amount of gold coin in hand. Why does the quantity
theory of money not work out with mathematical accuracy in practice?
10. Does the argument in McCulloch vs. Maryland impress you as logical? Does
the decision mean that officials of national banks and of federal reserve banks are
exempt from state taxes? Does it mean that when a national bank occupies a
leased building the landlord pays no taxes to the city?
Topics for Debate
1. All banking institutions should be brought under the supervision of the federal
government.
2. A “compensated” dollar (adjusted to the general level of prices) should be
established as a measure of deferred payments.
3. The national and state governments should guarantee depositors against loss
in all banks chartered by the nation and the states, respectively.
 CHAPTER XXIII
TAXATION AND PUBLIC FINANCE

The purpose of this chapter is to explain what taxes are, how they are
levied, and how they are spent.

The Cost of Government.—The cost of Taxation per capita.

maintaining the national government and all its
activities is now about four billion dollars per year, in other words
about forty dollars per annum for every man, woman, and child in the
country. The cost of maintaining state and local government varies in
different parts of the country, but it would be safe enough to put it
down as three billion dollars more, or thirty dollars per head. In round
figures, therefore, the average tax payment every year for each
individual in the United States is at least seventy dollars.[211]
Bear in mind, however, that only a small part The extent of the
of the whole population is earning the income burden upon the
which enables these taxes to be paid. When we income-earner.
eliminate all the children, all the women who are not employed in any
income-earning occupation, all the public officials who are paid out of
taxes, all the delinquents, cripples, paupers, unemployed, and so on
—when we subtract all these from the total it will be found that only
one person in five is an actual income-earner. From the earnings of
these twenty million people the entire seven billions in taxes must be
paid; there is no other source from which the taxes can come. A little
mental arithmetic will readily demonstrate, therefore, that every
income-earner in the United States pays, on the average, at least
$350 per year in taxes of one sort or another, in other words about a
dollar a day.[212]
 Who Pays the Taxes?—“Oh yes”, someone Everyone is a
will say, “but most people earn small incomes taxpayer, directly or
and pay no taxes at all, or almost none. The indirectly.
heavy taxes are paid by wealthy men and women who own property
and have large incomes.” That is misleading. People who own
property and earn large incomes are the ones who actually hand the
collector his tax-money, to be sure; but they merely give him, for the
most part, money which they have collected from others. The owner
of an apartment house collects taxes from his tenants in the form of
rent; the storekeeper collects taxes in the price of his goods; the
lawyer and the doctor collect taxes when they charge fees. Taxes
are an element in the cost of everything, an element just as certain
as interest, wages, or profit. Everyone who rents a house, buys
goods, or hires any form of service pays taxes. If you analyze the
various items which make up the price of a suit of clothes, for
example, you will find that they usually come in this order of
importance; wages, cost of materials, taxes, profits, interest.[213] The
chief factors which make up the rent of a house are interest, taxes,
and profits in the order named. Hence it is that while landlords,
merchants, manufacturers, and others make the direct payment of
taxes to the government, they in turn pass the burden to tenants and
consumers.[214]
The Incidence of Taxation.—Taxes, The way in which
therefore, do not usually stay where they are taxes are shifted.
levied. They are shifted from one shoulder to another until they
finally reach someone, usually the ultimate consumer, who cannot
unload the burden upon anybody else. This ultimate resting-place of
a tax is called its incidence, and an important thing about any tax is
to discover just what its incidence is; for the justice or injustice of
taxation depends upon the ability of the actual taxpayer to bear the
burden and not upon the wealth of the ostensible taxpayer. If the
government were to levy a tax of one cent per loaf upon bread, there
would be a storm of protest because everybody would recognize it
as a direct tax upon one of the necessities of life. But a tariff duty on
wheat, or a property tax on flour mills or bakeries, is just as certainly
a tax on bread and is paid ultimately by those who buy it. The chief
difference is that in the latter case the payment is made by the
consumer without his knowing it.
Most people pay taxes unknowingly. Their Relation of taxes to
taxes are concealed in rents or prices, and they rents and prices.
complain bitterly that these things are high. It does not occur to the
average American wage-earner that if taxes were lower, rents and
prices would be lower, and that if there were no taxes, it would be
exactly the equivalent to finding every morning, on coming down to
breakfast, a crisp, new dollar-bill on his plate. Demagogues tell us
that trusts, and profiteers, and other forms of organized avarice are
responsible for high prices; but one of the biggest factors in the high-
cost-of-living is the high-cost-of-government.
If this enormous flow from the nation’s If waste were
earnings into the public coffers were wholly, or avoided the tax
even largely, used to promote and encourage burden would be
production, it would not be so bad. Much of it is diminished.
wasted, or spent without adequate return. This takes place because
the people do not keep close watch on the officials whom they elect
to public office and do not hold them to a strict accountability when
public money is squandered. More than a hundred years ago the
most eminent of American jurists, Chief Justice John Marshall,
pointed out that “the power to tax involves the power to destroy”. He
was right; the power to tax is the most far-reaching power that any
government can possess. By the use of the taxing power a
government can take from the people what they would otherwise
save, thus preventing the increase of the nation’s wealth and
ultimately breaking down its prosperity.
How Taxes Differ from other Payments.— Taxes are:
Taxes differ from most other payments in two
respects. First, they are compulsory. No one (a) compulsory.
need pay interest, rent, wages, or prices unless
he bargains to do so; but the payment of taxes is not the result of
any bargain. Taxes are levied without any reference to the initiative
or wishes of the individuals upon whom they may fall, except, of
course, in so far as these individuals by their votes may have an
influence in determining the general taxing policy of the government.
Second, taxes are not payments made to the government by
individuals and corporations in return for (b) levied without
services rendered. The man who rides a reference to service
hundred miles on a railroad pays twice as much rendered.
as one who goes half that distance, because he gets twice as much
for his money. But the man who pays a thousand dollars in taxes
does not get twice as much in benefits from the government as the
one who pays only five hundred dollars.
Nearly all payments that we make are in the The basis of
form of a quid pro quo; they are in proportion to taxation is ability to
the benefits which we receive. This is the case pay.
in payments for all forms of goods or services—the one great
exception is the payment of taxes. Taxes have no direct relation to
benefit; those who pay very little in taxes, either directly or indirectly,
sometimes receive a large return in the form of public services. Take
for example the taxes that support the public schools. The fact that a
wealthy man has no children, or prefers to send his children to a
private school, does not relieve him of the obligation to pay his full
share of what public education costs the community. On the other
hand, a man whose contribution in taxes is very small may send a
dozen children, one after another, through the public schools without
any extra cost.
It would not be possible to base taxation upon Why taxes cannot
service, because there is no way of knowing be adjusted to
how much benefit each individual receives from service.
the government’s work. Do some individuals, for example, obtain
more benefit than others from the maintenance of law and order or
do all derive benefit alike? Who gets the greater benefit from clean
streets, the rich man who drives his motor car over them, or the poor
man whose children use the streets as a playground? Taxes could
not be adjusted to benefit. Even if they could be so proportioned, it
would be unwise to do so. The general interest requires that
everyone should enjoy the benefits of police protection, the public
schools, the parks, the playgrounds whether they are able to pay for
them or not.[215] So taxes are levied in order to pay for these things,
not on a basis of individual benefit, but simply by putting the heaviest
burden in the first instance upon those who are best able to pay it,
letting them shift it if they can.
 Principles upon which Taxes are Levied.—How is the ability of
individuals to pay taxes estimated? It is done by taking some such
thing as property or income as the basis. Those who have more
property or income are called upon to contribute more than those
who have less. About a hundred and fifty years The basic principles
ago a famous writer on economics, Adam Smith, of taxation
laid down four principles to which all taxation according to Adam
should conform. These maxims of taxation are Smith.
now everywhere recognized as valid and are worth remembering.
Briefly stated, they are as follows: People should be taxed according
to their ability to pay; all taxes should be definite and not uncertain or
arbitrary; they ought to be levied at the time and in the manner which
causes the least inconvenience to the people; and they should be so
contrived as to take out of the pockets of the people as little as
possible over what is needed by the public treasury. Those who
make the tax laws do not always heed these maxims, and taxes are
sometimes levied on the principle of getting the most money with the
least trouble.[216]
Local Taxes.—The greater portion of the Taxes on property.
taxation levied by cities, counties, towns, and
villages is in the form of taxes on property. This is a direct tax and as
a rule it is levied on all private property, of whatever sort, at a uniform
rate of so much per thousand dollars of valuation. A tax levied in this
uniform way on all private property is called a The general
general property tax. In some states, however, property tax.
provision has been made for classifying the various kinds of property
and taxing each kind at a different rate. Property is first classified into
two divisions, real property, and personal property.[217] Real property
(or real estate) consists of land, buildings, and other fixtures
established on the land; personal property consists of, first, tangible
things of a movable nature such as household furniture, machinery,
merchandise; and second, intangibles such as bonds, mortgages,
and bank deposits. Where there is a classified The classified
property tax, each of these three forms (real property tax.
property, tangibles, and intangibles) is taxed at a different rate. One
reason for taxing them at different rates is that real estate requires a
great deal more in the way of public services (for example, in paved
streets, water supply, sewerage, etc.); another reason is that while
real property cannot evade taxation intangibles can usually do so
when the tax is too heavy.[218] If the rate of taxation on intangibles is
lowered, the temptation to evade is not so great. It will usually be
found that more money will come into the public treasury from a
moderate rate of taxes on stocks and bonds than from an
oppressively high rate.
A few communities also obtain some revenue Other local taxes.
from another direct tax, the poll tax, which
amounts to one or two dollars per year on each adult. In some cities
franchise taxes are laid upon public service companies (such as gas,
electric lighting, and street railway companies). The proceeds from
these sources do not form any large proportion of the total revenue.
All collecting of taxes is preceded by a formal Assessments for
step known as assessment. No tax can be purposes of
legally collected unless it has been assessed in taxation.
ways prescribed by law. Property of all kinds is valued for taxation by
officials known as assessors. Usually they are county or city officials,
sometimes appointed, sometimes elected. They re-value property at
stated intervals and set their assessment at what they believe to be
the market value (unless they are instructed to assess at a
percentage of the market value as is the case in some states).
Income taxes, corporation taxes, and inheritance taxes are assessed
by the tax officials on the basis of sworn statements made to them
by the taxpayers.
In the case of such public improvements as Special
sewers, street pavements, and sidewalks it is assessments.
the custom in many cities to levy a special assessment upon the
owners of the property that is benefited. These special assessments
are levied in proportion to the benefit received; they are not taxes in
the ordinary sense. When the nation or state or Taking property for
city requires land for public improvements it has public use.
the right to acquire it from the owner, even though he be unwilling to
sell. The public authorities, by their right of eminent domain, can take
land or other property for public use at any time, but must give the
owner just compensation. If the amount of compensation cannot be
agreed upon between the government and the private owner, it is
fixed by the courts.
State Taxes.—The states obtain their revenue The sources of
in various ways. One common method is by state revenue.
requiring the cities, counties, or towns to pay over to the state a
certain fraction of the sums which they collect on property. Thus,
when the citizen gets his bill for local taxes he finds it itemized—so
much for state taxes, so much for county taxes, and so much for city
or town taxes. Most of the states also levy taxes on corporations,
including railways, telephone companies, insurance companies, and
banks. These taxes may be calculated upon capital or net earnings
or deposits or upon some other basis. A few states tax inheritances
and a few levy a state income tax. Taxes on inheritances are usually
progressive, that is, the rate is higher in the case of large inherited
fortunes. State income taxes are levied upon the net earnings of
individuals or partnerships, a certain minimum income being left
exempt. Most of the states have other miscellaneous sources of
revenue, some of them important, as, for example, the annual
license fees imposed upon all owners of motor vehicles.
National Taxes.—The national government, Income and excess
by reason of its need for larger revenues in profits taxes.
recent years, has resorted to many forms of taxation. At the present
time the principal sources of national revenue are the taxes on the
incomes of corporations and individuals, the customs duties, the
excises, and the inheritance taxes. The national income taxes are
levied upon the net earnings of all individuals, partnerships, and
corporations above a certain minimum. The rate of taxation, in the
case of individual incomes, is progressive—a normal tax is laid upon
all incomes up to a certain figure and surtaxes are levied upon
incomes above this amount.[219] Under the original provisions of the
constitution, the national government could not levy direct taxes
unless it apportioned them among the several states according to
their population, and according to a decision of the Supreme Court in
1894 an income tax is a direct tax.[220] But the Sixteenth Amendment,
adopted in 1913, now gives the national government authority to tax
incomes “from whatever source derived” without the necessity of
apportionment among the states. Once a year every person or
corporation earning a net income above the prescribed minimum
must make a sworn statement setting forth the exact amount of such
earnings, and upon this “income tax return” the legal rate is
assessed.
Duties on imports still yield a large revenue, Duties on imports.
as they have done every year since 1790. No
duties may be laid upon exports, such duties being forbidden by the
constitution. This is in some respects unfortunate, because duties on
exports go into the price of the exported goods and thus fall upon the
foreign consumer. A tariff on exports (such as lumber, coal, and ore)
would not only yield a considerable revenue but would help to
conserve the natural wealth of the United States. The excises are
levied upon tobacco, theatre tickets, and other things which are rated
as luxuries.[221] The national government also levies an inheritance
tax, the rate of the tax depending upon the value of the property
inherited. These various taxes bring in between three and four billion
dollars per year.
The Two Purposes of Taxation.—The main Taxes for revenue
object of all taxation is to produce a revenue. and taxes for
But this is not the only object. Taxation may also regulation.
be used to bring about such social reforms as the nation or the
community may deem desirable, and taxes are sometimes adjusted
to this end. For example, the manufacture of goods by the use of
child labor can be checked by placing a heavy excise tax upon such
products.[222] It is believed that the growth of large fortunes can be
checked by the imposition of heavy surtaxes on large incomes and
on inheritances; the present national taxes on incomes and
inheritances have been framed with this end in view to some extent.
In other words the system of taxation can be used and is being used
in some measure to secure such economic and social readjustments
as Congress and the state legislatures think desirable. The question
is: How far should the law-making bodies go in this direction? Many
people believe that “swollen fortunes” are an evil in a democratic
society and that all earnings above a certain point should belong to
the community. Others feel that heavy surtaxes place a damper upon
ambition, that they lessen the amount of money saved by the whole
people, thus reducing the amount of capital available for industry,
and that they give the government large sums which are spent
wastefully.[223]
Tax Exemptions and Extravagance.—When Taxation and class
taxation is regarded as a means not only of prejudice.
raising a revenue but also of redistributing wealth it takes on grave
possibilities of abuse. The majority among the voters can always find
reasons for increasing the burdens on the minority; the wage-
earners urge that more taxes ought to be placed on the rich and
insist that they themselves be exempted from taxation upon their
incomes. The chief evil in all this is not the injustice to the rich, for
they usually manage to shift the burden down the line till it comes
back upon the wage-earner; the unfortunate part of it is that the
masses of the people, proceeding under the delusion that they pay
none of the taxes, are quite unconcerned when they see large sums
of money being collected by the government and spent wastefully.
They do not realize that it is their money; that they earned every cent
of it before the government obtained it to spend. If they could be
induced to see matters in this light, they would never permit their
representatives in Congress, in the state legislatures, and in city
councils to throw money around with such a lavish hand. Tax
exemptions and extravagance are twin brothers.
Proposed Reforms in Taxation.—Various The single tax.
new forms of taxation are proposed from time to
time. Many years ago a well-known American social reformer, Henry
George, advocated the placing of all property taxes on land alone,
allowing buildings and personal property to go untaxed altogether.
His argument was that the high value of land in cities and towns is
created by the community, not by the owner. Vacant land in the
downtown portion of a large city is sometimes worth many hundred
dollars per foot. What gives it this high value? Not the owner, for he
has done nothing to improve it. The growth of the city round about
this land has made it valuable. This “unearned increment” of value,
therefore, Henry George proposed that the community should take
by levying a very heavy tax upon it.[224]
The single tax proposition, as above outlined, Objections to the
has many earnest advocates; but it has made single tax.
very little progress as a practical policy in this country. The objection