and those for spending. But we have seen that the law disturbs this natural competition when it taxes savings, not when it spares them; for as the savings pay at any rate the full tax as soon as they are invested, their exemption from payment in the earlier stage is necessary to prevent them from paying twice, while money spent in unproductive consumption pays only once. It has been further objected, that since the rich have the greatest means of saving, any privilege given to savings is an advantage bestowed on the rich at the expense of the poor. I answer, that it is bestowed on them only in proportion as they abdicate the personal use of their riches; in proportion as they divert their income from the supply of their own wants, to a produc⚫tive investment, through which, instead of being consumed by themselves, it is distributed in wages among the poor. If this be favoring the rich, I should like to have it pointed out, what mode of assessing taxation can deserve the name of favoring the poor.

No income tax is really just, from which savings are not exempted; and no income tax ought to be voted without that provision, if the form of the returns, and the nature of the evidence required, could be so arranged as to prevent the exemption from being taken fraudulent advantage of, by saving with one hand and getting into debt with the other, or by spending in the following year what had been passed tax free as saving in the year preceding. If this difficulty could be surmounted, the difficulties and complexities arising from the comparative claims of temporary and permanent incomes, would disappear; for since temporary incomes have no just claim to lighter taxation than permanent incomes, except in so far as their possessors are more called upon to save, the exemption of what they do save would fully satisfy the claim. But if no plan can be devised for the exemption of actual savings, sufficiently free from liability to fraud, it is necessary, as the next thing in point of justice, to take into account in assessing the tax, what the different classes of contributors ought to save. And there would probably be no other mode of doing this than the rough expedient of two different rates of assessment. There would be great difficulty in taking into account differences of duration between one terminable income and another; and in the most

frequent case, that of incomes dependent on life, differences of age and health would constitute such extreme diversity as it would be impossible to take proper cognizance of. It would probably be necessary to be content with one uniform rate for all incomes of inheritance, and another uniform rate for all those which necessarily terminate with the life of the individual. In fixing the proportion between the two rates, there must inevitably be something arbitrary; perhaps a deduction of one fourth in favor of life incomes would be as little objectionable as any which could be made, it being thus assumed that one fourth of a life income is, on the average of all ages and states of health, a suitable proportion to be laid by as a provision for successors and for old age.

Of the net profits of persons in business, a part, as before observed, may be considered as interest on capital, and of a perpetual character, and the remaining part as remuneration for the skill and labor of superintendence. The surplus beyond interest depends on the life of the individual, and even on his continuance in business, and is entitled to the full amount of exemption allowed to terminable incomes. It has also, I conceive, a just claim to a further amount of exemption in consideration of its precariousness. An income which some not unusual vicissitude may reduce to nothing, or even convert into a loss, is not the same thing to the feelings of the possessor as a permanent income of £1000 a year, even though on an average of years it may yield £1000 a year. If life incomes were assessed at three fourths of their amount, the profits of business, after deducting interest on capital, should not only be assessed at three fourths, but should pay, on that assessment, a lower rate. Or perhaps the claims of justice in this respect might be sufficiently met by allowing the deduction of a fourth on the entire income, interest included.

These are the chief cases, of ordinary occurrence, in which any difficulty arises in interpreting the maxim of equality of taxation. The proper sense to be put upon it, as we have seen in the preceding example, is, that people should be taxed, not in proportion to what they have, but to what they can afford to spend. It is no objection to this principle that we cannot apply it consistently to all cases. A person with a life income and

precarious health, or who has many persons depending on his exertions, must, if he wishes to provide for them after his death, be more rigidly economical than one who has a life income of equal amount, with a strong constitution, and few claims upon him; and if it be conceded that taxation cannot accommodate itself to these distinctions, it is argued that there is no use in attending to any distinctions, where the absolute amount of income is the same. But the difficulty of doing perfect justice, is no reason against doing as much as we can. Though it may be a hardship to an annuitant whose life is only worth five years' purchase, to be allowed no greater abatement than is granted to one whose life is worth twenty, it is better for him even so, than if neither of them were allowed any abatement at all.

32. Wagner's Socio-political Theory of Taxation. - A radically different point of departure is represented by the eminent German economist, Adolph Wagner, who distinguishes between the purely fiscal and the socio-political theories of justice in taxation. In earlier times, Wagner says, financial problems were treated from the purely fiscal point of view, that is, with a view solely to raising a sufficient revenue to meet the needs of the government. But the modern view, he says, is, or should be, different:

The modern science of economics not only recognizes the mutual dependence of public and private economic activity, and their mutually complementary character; it also renounces the optimistic view of the present organization of private industry, and recognizes the great evils in the system of free competition. It has come to know that the organization of productive industry by private initiative, the existing institution of property-especially in land and productive capital, and the distribution of wealth which takes place upon this basis, have a decisive social influence. It knows that through this process the power and relations both of individuals and of classes are determined in modern economic society. At the same time our science recognizes the influence which the state exercises directly or indirectly

1 Finanzwissenschaft, Vol. I, § 27.

upon the distribution of wealth and position of social classes, by the form which its activity takes, by the manner in which it spends its revenues, by the kinds of taxation it adopts, and by the creation of public debts.

From this knowledge our science has developed two demands. In the first place, the state should so order its expenditures, tax system, and loans as to remove certain economic and social evils which have attended them in the past. And in the second place, the state, by adopting appropriate policies, should remedy evils which are not due to its previous action in financial or other matters. From this second demand it follows that, in the domain of public finance, expenditures should increase in order to enable the state to assume new functions; and that taxation, in addition to serving the purely financial purpose of providing sufficient revenue, should be employed for the purpose of bringing about a different distribution of wealth from that which would result from the working of free competition upon the basis of the present social order. It is the modern "social problem," influencing both scientific and public affairs, which is here beginning to work this transformation in the science of finance.

Later on Professor Wagner discusses, from his "socio-political" point of view, the question of justice in taxation. He says that one's views on this subject will depend upon what one thinks of that distribution of wealth which free competition would bring about upon the basis of the existing economic order. Thus he continues: 1

One who considers the present economic order unconditionally just, and the only justifiable order, as the liberal school of the Physiocrats and Smith did, must logically consider the existing distribution of wealth, which results from this order, as the only righteous and just distribution. This conclusion the keener thinkers of the school have drawn and definitely formulated. For a person of this opinion the existing distribution of wealth is, therefore, a fact admitting of no further discussion and to be accepted with all of its consequences. One of these consequences

1 Finanzwissenschaft, Vol. II, § 159.

is that the expenditure of the same amount of money presses with unequal severity upon persons with different incomes and in different economic circumstances; or, conversely, that the ability of these persons to bear the same expenditure varies according to the conditions just mentioned. It follows, then, that taxation should not alter the existing distribution, which is considered to be just. In this view of the case, therefore, taxation will be confined strictly to the purpose of raising sufficient revenue; and the socio-political theory of taxation, which has already been stated, will be rejected.

The consequences of this view, so far as the concept of justice and the demand for universality and equality in taxation are concerned, is briefly as follows:

1. The duty of all to pay taxes (universality) is interpreted literally. Every citizen is required, as a matter of principle, to pay taxes, whether his income is small or large, whether it is derived from invested property or from personal exertions. There should be no exemption of the "minimum of subsistence."

2. Equality in taxation is believed to be proportionality of taxes to income; that is, every one should pay in taxes the same proportion of his income. The result is proportional taxation, or levying the same per cent upon all incomes, and the rejection of progressive taxation of the larger incomes, as well as the equal taxation of funded and unfunded incomes.

...

The theory thus briefly, but sufficiently, sketched may be called the purely financial or fiscal theory of taxation, in order to distinguish it from the theory now to be presented. The correctness of the conclusion concerning universality and justice of taxation is not to be questioned if the premise is conceded to be true. This premise is the justice of the distribution of wealth brought about by free competition. The conclusion stands or falls with the premise.

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Again referring to my earlier discussion of competition in my Grundlegung,1 discussion which cannot be repeated here, it is to be said that the premise cannot be admitted to be true, least in the universal application given it by the liberal school of economics. . . . Therefore the conclusion that the distribution established by competition is not to be disturbed by taxa1 Grundlegung der politischen Oekonomie, especially Bk. V, ch. 2.— - ED.