GRADUATED OR PROGRESSIVE TAXATION[59]

The recent message of the President to the Congress has strikingly brought to the attention of the American public the subject of graduated or progressive taxation upon inheritances and incomes. Acting upon the suggestions contained in the message, bills providing for such taxes have already been introduced in the House of Representatives. Amendments to the Constitution have also been proposed, one of which is to authorize Congress to tax inheritances amounting to or exceeding $50,000 and to levy an income tax without apportionment. The pending bills provide that successions of $10,000 and under and incomes of $4,000 and under are to be wholly exempted from the proposed taxes. The proposed graduated scales are to run from three-quarters of one per cent. on inheritances or successions over $10,000 and not exceeding $25,000 up to twenty-five per cent. on inheritances or successions exceeding $30,000,000, and from two per cent. on incomes exceeding $4,000 per annum and not exceeding $8,000 up to six per cent. on all incomes over $64,000. It is also suggested that Congress by means of such taxes should seek, not merely to raise revenue for the support of the national government, but also to solve social problems by breaking up fortunes assumed to be swollen to an unhealthy size and thus bring about a redistribution of wealth.

In considering these proposed measures, it should be borne in mind that, if they or any similar propositions become laws, the result will be—and such undoubtedly is the intention—to exempt the majority of property owners from this form of taxation and to cast the burden upon a very small minority. It should also be realized that this proposed progressive taxation, particularly as to inheritances, is conceded to be only a first step, and that increases in the scale of progression are contemplated and will certainly follow. Indeed, the President declares that "at first a permanent national inheritance tax ... need not approximate, either in amount or in the extent of the increase by graduation, to what such a tax should ultimately be." As the states have full power to levy taxes on inheritances and at the present time are deriving probably as much as $10,000,000 per annum from this source, it must be manifest that, if the scale adopted by Congress be high, the resources of the states will be correspondingly curtailed. In case of conflict, national taxes would take precedence over state taxes. We should also bear in mind that the power to tax is the strongest of all governmental powers, that it involves the power to destroy, that it generally knows no limitation except the discretion and moderation of the lawmakers, and that of all powers it is the one most liable to abuse.

From the time of the Declaration of Independence to the present hour, the distinctive feature of the American system of government has been equality before the law, not merely equality of rights but equality of duties and equality of burdens. Equality has been demanded in all things including especially taxation. The few exceptions in taxation, particularly in times of war, do not affect the general rule that has been followed. The courts have declared that according to American ideals "common justice requires that taxation, as far as possible, should be equal." Experience has shown that the only effectual protection against injustice and discrimination in taxation lies in the observance of some rule of equality and apportionment; and, although it is true that absolute equality is not always attainable, nevertheless an approximation to equality should be regarded as indispensable. As Hamilton said, "The genius of liberty reprobates everything arbitrary or discretionary in taxation." And Judge Cooley in his famous work on "Constitutional Limitations" said: "It is of the very essence of taxation that it be levied with equality and uniformity, and to this end, that there should be some system of apportionment. Where the burden is common, there should be common contribution to discharge it. Taxation is the equivalent for the protection which the government affords to the persons and property of its citizens; and as all are alike protected, so all alike should bear the burden, in proportion to the interests secured."[60]

In proportional or equal taxation, whereby every property owner contributes toward the expenses of the common government according to the amount of property he owns or inherits, or according to the income he enjoys, we find a perfectly safe and consistent rule and a definite and logical principle upon which to work. Proportional taxation subjects to the burden of government fairly and equally all property owners without distinction and without discrimination. Nothing is left to mere discretion or to the play of arbitrary and irresponsible power, and no class is likely to be unjustly singled out or discriminated against. Where property is as generally distributed as it is in this country, a proportional tax ordinarily reaches in one form or another a majority of the constituents of those who vote the taxes, and the sense of responsibility to these constituents operates as a conservative force and as a check upon unfair and unjust taxes, as well as upon improvident and extravagant expenditures. A proportional tax generally creates a large body of tax-paying voters whose property interests impel them to watch their representatives closely and to hold them to strict accountability. We then have taxation in its practical operation going hand in hand with representative responsibility, which was the cardinal principle for which our War of Independence was fought. A legislator who is conscious of the fact that a large, if not a controlling, number of his constituents will feel the burden of any tax he votes, is necessarily more careful, more prudent, more economical and more inclined to be just than if no such sense of responsibility exists.

On the other hand, where the great majority of voters are to be exempted from taxation, and where, accordingly, they will feel that they have no personal interest in governmental expenditures, they will be likely to take little or no pains to see that there is a fair apportionment of taxes which others must pay, or any economy in governmental expenditures for which others must provide. Their sense of justice and civic duty will become blunted. It will follow that, if the lawmakers are at liberty to enact laws which exempt the great majority of their constituents from taxation and cast the burden and expense of government on the few rich, frequently less than two or three per cent. of the voters in their respective districts, there will exist no practical restraint upon expenditure, but, on the contrary, every temptation to extravagance, wastefulness and injustice.

A graduated or progressive tax is necessarily arbitrary, for there is no definite rule or principle to apply to the scale. The rate, reasonable at first, may ultimately become confiscatory. There is nothing to check or stop the ascending scale. One act of injustice will lead to another. The appetite will grow and produce fresh injustice. If a tax of twenty-five per cent. on large fortunes now seems to some but a moderate beginning, where will the tax stop, and who is to determine what is or is not reasonable and beyond what point a legislative body shall not go? A few advocates of progressive taxation have already suggested fifty per cent. as a maximum applicable to the so-called surplus of large fortunes, but others more radical and less responsible may readily advocate a tax of one hundred per cent. upon the surplus they regard as superfluous or unhealthful. There is, indeed, no limit to the possible ascent in the scale of progression, and no power to prevent abuse and oppression on the part of temporary and irresponsible majorities. The rich would then be completely at the mercy of mere numbers.

During the French Revolution, the experiment was tried under the name of compulsory loans. These loans finally absorbed fifty per cent. of such incomes as the majority of the legislative assembly saw fit to consider as abondants, and one hundred per cent. of all incomes which they thought were superflus.

The late W.E.H. Lecky, one of the most eminent historians of our day, wrote as follows of progressive taxation in his work on "Democracy and Liberty": "When the principle of taxing all fortunes on the same rate of computation is abandoned, no definite rule or principle remains. At what point the higher scale is to begin, or to what degree it is to be raised, depends wholly on the policy of governments and the balance of parties. The ascending scale may at first be very moderate, but it may at any time, when fresh taxes are required, be made more severe, till it reaches or approaches the point of confiscation. No fixed line or amount of graduation can be maintained upon principle, or with any chance of finality. The whole matter will depend upon the interests and wishes of the electors; upon party politicians seeking for a cry and competing for the votes of very poor and very ignorant men. Under such a system all large properties may easily be made unsafe, and an insecurity may arise which will be fatal to all great financial undertakings. The most serious restraint on parliamentary extravagance will, at the same time, be taken away, and majorities will be invested with the easiest and most powerful instrument of oppression. Highly graduated taxation realizes most completely the supreme danger of democracy, creating a state of things in which one class imposes on another burdens which it is not asked to share, and impels the state into vast schemes of extravagance, under the belief that the whole cost will be thrown upon others."

In McCulloch on "Taxation," for fifty years the standard treatise in England on the subject, the following language is used: "It is argued that, in order fairly to proportion the tax to the ability of the contributors, such a graduated scale of duty should be adopted as should press lightly on the smaller class of properties and incomes, and increase according as they become larger and more able to bear taxation. We take leave, however, to protest against this proposal, which is not more seductive than it is unjust and dangerous.... If it either pass entirely over some classes, or press on some less heavily than on others, it is unjustly imposed. Government, in such a case, has plainly stepped out of its proper province, and has assessed the tax, not for the legitimate purpose of appropriating a certain proportion of the revenues of its subjects to the public exigencies, but that it might at the same time regulate the incomes of the contributors; that is, that it might depress one class and elevate another. The toleration of such a principle would necessarily lead to every species of abuse."

The well-known French political economist and scientist Leroy-Beaulieu in his works, Traité d'Economie Politique and Science des Finances, discusses at length the whole subject of graduated or progressive taxation, and condemns it as vicious in theory and unwise and unjust in practice. Among other things he says: "Progressive taxation constitutes actual spoliation. It violates, besides, the rule, established by all civilization, that taxation ought to be imposed with the full consent of the taxpayer; for, it is quite clear, that in this case, it is the mass of the voters who relieve themselves of the heavy weight of the tax and cast it upon the few, and these few do not consent, even tacitly, to the excess with which the government wishes to burden them. When the rate of the tax is equal for all, we can consider that the vote for the tax by the legislature carries with it the implied acquiescence of all the assessable; otherwise not.... Every system of progressive taxation, however attenuated, is iniquitous and dangerous."

And the same conclusions have been reached by a number of other distinguished French scholars and statesmen, among whom may be cited Thiers, Beauregard and Stourm.

The right of the states to levy progressive and unequal taxes on inheritances and testamentary dispositions is frequently sought to be upheld upon the theory that the power of our legislatures over successions to the property of decedents is unlimited, that the right to succeed is a mere statutory privilege, and that our lawmakers may arbitrarily grant or withhold that privilege at their will and discretion. It is, however, far from established that any such arbitrary and unrestrained power is vested in our state legislatures as that of denying wholly the right of inheritance or of testamentary disposition, or of discriminating in the regulation or grant of the privilege. The power to regulate the exercise of any right does not necessarily imply the power to deny it altogether. All rights of property as well as of personal liberty are subject to reasonable regulation, but this does not involve the power absolutely or arbitrarily to destroy such rights. The right of inheritance by children was not originally the creation of statute law at all, although the contrary is often assumed. It was a customary right long before the Conquest and prior to any statute of which we have record. It is treated by legal historians as "our common law of inheritance." In the latest authoritative history of the English law, that by Pollock and Maitland, the authors say that "in calling to our aid a law of intestate succession, we are not invoking a modern force," and that "the time when no such law existed is in strictest sense a prehistoric time." We find that it was a right already established in every one of the thirteen original states at the time the national government was founded; that it has always existed in civilized countries, so far as we have any knowledge; that it was recognized in the Twelve Tables as a right among the Romans; that it was a right long before among the Egyptians, and that it pervades the Mosaic law. A distinguished writer declares it to be the general direction of Providence itself. And Chancellor Kent said that "nature and policy have equally concurred to introduce and maintain this primary rule of inheritance in the laws and usage of all civilized nations."

The power of testamentary disposition undoubtedly developed as a limitation upon the right of inheritance and in order to prevent escheat for want of heirs. But however originating or evidenced—whether in old customs or in the practice of post-obit gifts—the right has been recognized from time immemorial. As Blackstone said in his "Commentaries," "in England this power of bequeathing is coeval with the first rudiments of the law, for we have no traces or memorials of any time when it did not exist."

Whatever may be the general language to be found in some judicial decisions, and whatever may be the extreme power of our state legislatures in the abstract, it is hardly conceivable that any state would attempt to escheat or confiscate all the property of decedents to the exclusion of children and near relatives, or that it would wholly deny the right of testamentary disposition. At any rate, if escheat or confiscation were ever decreed, it would have to be by laws applying equally to all decedents, and not merely to a selected class. The guaranties of the fourteenth amendment would prevent any discrimination.

But, however unlimited the power of the states may be in this regard, there can certainly be no doubt that it was not the intention of the framers of the Constitution of the United States to delegate to Congress the power to regulate successions to the estates of decedents or the privilege of testamentary disposition or inheritance. No one has yet seriously claimed that any such authority is within the legitimate sphere of the national government as contemplated by its founders. The power of regulating successions to the property of decedents was reserved to the states, and the courts would undoubtedly hold that any direct attempt on the part of Congress to regulate successions as such, or the ownership or transfer of property, was in excess of its powers. In dealing with successions, therefore, Congress can only exercise the power of taxation.

Yet it is urged that, as Congress has the power to tax successions, it may under the guise of exercising that power regulate inheritances and thereby break up large fortunes and force a redistribution of wealth. In other words, the argument is that Congress may, under the cover or pretense of a tax law, accomplish indirectly an object which, for want of power, it could not accomplish directly, although the accomplishment of this object would constitute a deliberate encroachment upon the reserved rights of the states.

There is great danger in this view, and it opens the door to abuse by Congress of the power of taxation. If a federal statute purports on its face to be a tax measure, and in fact to some extent operates to that end, the courts cannot ordinarily set it aside, even though the motive for its enactment be to accomplish an object not entrusted to the national government. The jurisdiction of the courts is limited. Legislation which seeks to effect illegitimate ends cannot always be nullified. The power of Congress to levy a graduated inheritance tax as a revenue measure would be practically unlimited unless, in the particular instance, the law were so extravagant, and its unconstitutional object so plain, as to establish beyond doubt an unauthorized purpose. It is not within the province of the judicial power to determine whether a given tax which raises revenue is reasonable or unreasonable, or to inquire into the motives of Congress in enacting the law. The courts might not, therefore, be able to set aside an inheritance tax law passed by Congress even if it absorbed fifty per cent. or more of successions, although it might be quite apparent that the real object of the law was to invade the province of the states and to regulate inheritances in clear violation of the spirit of the Constitution.

Nothing could be better calculated ultimately to undermine our whole system of constitutional government than the idea that the courts alone are the guardians of the Constitution and that Congress may rightfully enact any statute which the courts cannot properly nullify. The truth is that the duty of preserving and defending the Constitution in all its integrity is vested in Congress and the President far more than in the courts, and that if Congress and the President do not observe the restraints and limitations imposed by the Constitution, Congress may pass many statutes which are unconstitutional in substance but which the courts cannot set aside. It is often urged that all questions of constitutionality should be left to the courts and not be passed upon by Congress or the President. The true doctrine, however, is that Congress should not enact and the President should not approve any statute which they, as the agents and representatives of the people, are not satisfied seeks to accomplish a legitimate end within the scope of some power delegated to Congress and not reserved to the states or to the people. They should first determine, as their oath of office requires, whether, according to their best judgment, the act is or is not constitutional. It was the distinct intention of the framers of the Constitution, and they so provided in express words, that every member of Congress, every senator and every representative, should be bound by oath or affirmation to support the Constitution, and that the President, especially, should be charged with the duty of preserving, protecting and defending it to the best of his ability. This duty extends not only to the letter but to the spirit of the Constitution. It will be a lamentable exhibition of a lack of what may well be termed constitutional morality if, in the debates on the pending measures, we shall again hear the suggestion that objects concededly outside the scope of any power delegated to the national government may nevertheless be accomplished indirectly by means of a federal inheritance tax, in violation of the reserved rights of the state governments.

If, in framing an inheritance tax law, Congress will bear in mind that the regulation of successions to the property of decedents is a matter solely within the jurisdiction of the states and ought not to be usurped by the federal government, the object of raising revenue alone may lead to fair and reasonable taxes levied impartially upon all who should be called upon to pay for the support and maintenance of the common government whose protection they enjoy. It would then, perhaps, be better appreciated that the states have important and extensive governmental functions to perform; that they need inheritance taxes for the support of their governments, schools, charities, police and public improvements, and that any heavy federal succession taxes would embarrass and cripple them. It is, of course, one thing to resort to a federal inheritance tax as a temporary war measure, when patriotism inspires ready acquiescence and willing sacrifice, and quite a different thing to establish such a tax as a permanent method of raising national revenue in times of peace and prosperity when the effect may be to withdraw that source of revenue from the states.

The subject of federal income taxes remains to be considered. There is no doubt that any state may levy income taxes. Nor is there any doubt that, under the federal Constitution as it now stands, Congress may levy an income tax provided it be apportioned according to population as required in regard to all direct federal taxes. There is also no doubt that Congress, by means of an excise tax, may reach income derived from any business or profession, and that any such tax, being essentially an excise tax on business, need not be apportioned but need merely be uniform throughout the United States. For example, a tax on the earnings of railroads and manufacturing businesses could be levied without apportionment, and it would produce a large revenue. It would also have the advantage of tapping income at the source. A tax by Congress on lands and personal property as such would, no one disputes, be a direct tax and subject to the rule of apportionment, and a tax on the income of property is in substance and practical and legal effect the equivalent of a tax on the property itself.

As Chief Justice Fuller said in the Income Tax cases: "The acceptance of the rule of apportionment was one of the compromises which made the adoption of the Constitution possible, and secured the creation of that dual form of government, so elastic and so strong, which has thus far survived in unabated vigor. If, by calling a tax indirect when it is essentially direct, the rule of protection could be frittered away, one of the great landmarks defining the boundary between the nation and the states of which it is composed, would have disappeared, and with it one of the bulwarks of private rights and private property."[61]

Nor is the rule of apportionment in itself unfair, even under the conditions existing to-day. If a direct income tax were now levied and duly apportioned among the states according to population as required by the Constitution, the smaller states would pay comparatively little and the more populous and richer states would have to bear what would seem to be their full share of national taxation. New York would then have to pay approximately ten per cent. of such a tax, Pennsylvania eight per cent., Illinois six per cent., Ohio five per cent., whilst Nevada would pay only one-twentieth of one per cent. and Delaware one-quarter of one per cent., although these two states have a representation in the Senate equal to that of New York and Pennsylvania. Indeed, ten states would have to pay more than one-half of any direct tax, leaving the balance to be divided among the remaining thirty-six states according to their population. On the other hand, if a graduated income tax such as is now proposed were levied without regard to apportionment, and all incomes of $4,000 and under were exempted, the effect would be to cast more than ninety per cent. of the entire tax upon the inhabitants of less than one-third of the states.

Nearly twelve years have passed since the decision of the Income Tax cases, and there has been ample time to amend the Constitution if the people had so desired. But, instead of submitting an amendment such as was introduced in the House of Representatives last week, it is suggested by some that an attempt should be made to disregard or circumvent the Constitution as interpreted by the Supreme Court and to speculate on the change of its personnel and the chance of different views on the part of new incumbents. Surely, the simpler and wiser course would be to ascertain the wishes of the people in the manner provided by the Constitution. Assuming, as is so frequently asserted, that the people generally want a federal income tax, ratification of an amendment can be readily secured. The Congress, by a vote of two-thirds of both houses, can at once propose the necessary amendment, which will become effective when ratified by three-fourths of the states. The ratification can probably be secured in less than six months if there really exists any general sentiment in favor of such an amendment, for more than three-fourths of the state legislatures meet this winter. If deemed necessary, conventions could be called to meet within a few months. In any event, the delay ought not to exceed fourteen months.

No student of our institutions can doubt that amendments to the Constitution will soon be thought necessary, and that such amendments will be submitted to the people. Our political system has not ceased to grow. Conditions are constantly changing, and powers which were adequate for the government of a federation of agricultural states may become insufficient for the necessities of the national government of a highly commercial and manufacturing people, with world-wide interests. Mr. Root's eloquent speech last night before the Pennsylvania Society has shown us how inevitably and irresistibly we are tending toward centralization. But it is mischievous and dangerous for the people to be taught that there is great or insurmountable difficulty in securing amendments to the Constitution in order to supply its defects or to meet changed conditions and that they must therefore accomplish their wishes by indirect means or by perverting delegated powers. The future contentment of the American people requires that they shall feel that they may readily, and are at liberty to, amend their organic law according to their mature judgment whenever they deem it necessary to do so. All that can be asked is that they shall act deliberately in the manner provided by the Constitution and under circumstances calculated to afford time and opportunity for error to be exposed, for theorizing and clamor and prejudice to exhaust themselves and "for the sober second thought of every part of the country to be asserted." If, then, it be determined to give to the national government the power to levy income taxes without apportionment, or to control successions to the estates of decedents, or any other power, the will of the sovereign people will have to be obeyed. But let us hope that when amendments are adopted they will be conservative and wise, that the reserved powers of the states will not be heedlessly curtailed to the embarrassment of the states, and that it will be appreciated that local self-government is still essential to the perpetuation of our republican and federal institutions.