taxes. The business income tax is a tribute which business may properly be called upon to pay for the protection afforded by the state and the opportunities provided to exploit the commercial opportunities of a given district. Business income taxes accordingly should be paid at the source, where the income arises, and should go to the tax jurisdiction in which the income arisesnot the jurisdiction in which the recipient of the income resides. Personal income taxes, on the other hand, are paid for the benefits which the individual receives from the state as a consumer, for the streets on which he walks, the parks in which he takes his recreation, the schools which his children enjoy, the personal protection which he and his family receive from the police, the health commissioner, and other officials. Personal income taxes should be adjusted to the entire ability of the taxpayer, and should be paid to the jurisdiction in which he resides. A state legislature levying a business income tax may properly tax every dollar of income arising in the state, whatever its ultimate destination. The state legislature levying a personal income tax may legitimately tax a resident on all his income, whatever its source. The legislature in question may levy the business tax alone, in which case it should keep its hands off mere residents and abstain from taxing income arising outside the state; or it may levy the personal income tax alone, in which case it should keep its hands off mere business and abandon all taxes on income arising in the state but accruing to non-residents; or it may levy both kinds of taxes, in which case it may tax both species of income without injustice and without inconsistency. Either principle or both principles may be applied and no difficulty will result so long as the application is consistent and thorough. Evil results when the legislature tries to juggle the two principles to its own advantage, taxing only once those citizens who both reside in the state and earn all their income there, but endeavoring in addition to tax those non-residents who draw an income from the jurisdiction in question.

Fortunately for my contention at this point, but unfortunately for the practice of taxation, the difficulty now under discussion applies to the general property tax, the inheritance tax, and many other forms of direct taxation. The introduction of a state income tax would make the situation neither better nor There is much double taxation of an inequitable kind at present. It arises from legislative greed and confusion concern

worse.

It can

ing the difference between real and personal taxation. be remedied in two ways: (a) by a constitutional amendment empowering the federal government to control the assessment of direct taxes by the states; or (b) by a process of education which will lift state legislatures above the greed and confusion which are responsible for the present situation. I do not believe that we shall ever get the constitutional amendment, and I do believe that on this point our legislatures can be educated. In point of fact, it is probable that the income tax, because of the earnest discussion that would almost necessarily attend its introduction, would materially assist in the helpful educational process on this subject which is now going on. In any event, it is hard to see how the reproach of double taxation can be consistently urged against state income taxation, when we remember that such a tax is proposed as a substitute for the present tax on personal property and it is the tax or taxes on personal property which are responsible for most of the double taxation that now exists.

4. Much the same attitude, it would seem, must be taken toward the criticism voiced by high authority that state taxation of incomes would lead to the migration of capital and impel the wealthy citizens of states employing such taxes to take up their residences elsewhere. European experience in the smaller continental states does not justify such apprehension. One occasionally finds in the literature on the subject some casual reference to such danger, but the general absence of this reproach in European discussion warrants the inference that it is not a real defect of the lump-sum income tax common on the Continent.

I am perfectly willing to confess here, as in other aspects of this subject, that European experience is not conclusive. But it is difficult to see any logical ground for the fear that income taxation would cause a migration of the millionaires. A state income tax, if introduced, would take the place of existing taxes on personal property. The amounts raised by the income tax would be subtracted from the general property tax, thus lowering its rates. I can see no reason why desirable citizens should withdraw under such circumstances and seek a new environment in which the general tax burden would be just as heavy and where in addition they would be pestered with the personal property tax, a form of taxation which is always disagreeable and which not infrequently forces the taxpayer to resort to what, in a strict construction of the law, must be regarded as perjury.

5. As stated above, it must be confessed that the success of the lump-sum income tax on the continent of Europe does not prove that such taxation could be made to work in this country. But for similar reasons it must be insisted that American experience with the state income tax furnishes no conclusive argument against its practicability. In his valuable work entitled "Income Taxation", Mr. K. K. Kennan concludes a discussion of the Massachusetts income tax in these words: "On the whole it must be conceded that the experiences of the State of Massachusetts in attempting to tax incomes, in spite of the fact that those experiences extend over so long a period, are of such a character that they form no proper basis for an argument either for or against state taxation of incomes." That verdict, in my opinion, must be passed upon the general experience with state income taxes in this country. The laws themselves are in many instances absurd on their face; in other states the heart is taken from the whole project by exempting from income taxation all income arising from property taxed under the property taxes, thus leaving practically nothing for the income tax to reach; in still other states a fairly reasonable law has been left to enforce itself and no real effort has been made to meet the administrative problems involved; while these states in which some little effort at enforcement really has been made are primarily agricultural states, in which, as I shall show hereafter, income taxation is least needed and most difficult of enforcement. We have merely played at state income taxation in this country; we have never given it a fair trial.

Many students will conclude from this that we are administratively incapable of giving it a fair trial, and there is much to be said for this view. It is probably not true, however, for all parts of this country. As a people we are going to do some things in the near future which we have unsuccessfully tried to do for generations. We are going to suppress lynching in my opinion; we are going to reform-substantially if not perfectly-the antiquated tax on personal property; and it is not at all impossible that in some places the removal of the personal property tax will be followed by a fairly successful local income tax. The scholars of this country may be economic determinists, but the people

are not.

K. K. Kennan, Income Taxation, p. 222.

6. Success in taxation, of course, demands as a condition precedent good administration. But, it will be urged, if you have good administration you can enforce almost any tax, even the general property tax. This criticism is in my opinion unsound. There are some fiscal tasks beyond the powers of any American administrative machine, however good, which we have any legitimate reason to hope for in the next fifty years. One of these tasks is the detection and accurate appraisal of all forms of personal property. The property tax does not lend itself to lump-sum assessment. Its logic requires that property shall be listed and separately appraised. The tax is on the thing. The income tax does lend itself to lump-sum appraisal. Finally, income may be approximated much more successfully from external indicia than property. The dwelling of an individual and his general mode of life tell a great deal about his income. They tell almost nothing about the property to which he possesses the title, and which may in the greater part be covered by indebtedness for which the tax law entitles him to no exemption. A reasonably complete enumeration and appraisal of personal property at the residence of its owner seem to me impossible; but a reasonably complete enumeration and appraisal of incomes to their recipients, appeals to me as distinctly practicable.

II

A state income tax properly devised compares favorably with any of the proposed substitutes for the tax on personal property.

1. The first alternative plan of reform which must be considered is the attractively simple scheme of abolishing the tax on personal property, leaving the necessary revenue to be raised by a single tax on real estate, or upon real estate plus a few simple forms of tangible personalty. It is impossible here and now to give to the single tax as thorough a discussion as it deserves, and it will be necessary to state rather categorically the reasons why in my opinion it does not offer a practicable method of reforming the general property tax.

(a) The first of these reasons is the unwearied persistence of the people in their demand for some form of personal taxation. Nowhere in the world over a large territory within my knowledge is there any sign of the abandonment of the principle that men owe a personal fiscal allegiance to the state and that they ought

to pay some taxes in the district in which they live, whether they possess any property in that district or not. In New York City, perhaps, and a few similar places, personal taxation may be abandoned in the next fifty years, but in such event there will still be room for the income tax in the taxation of business.

(b) In the minds of a majority of the people in most communities land is too heavily taxed at the present time; and I agree with popular opinion in the belief that to a certain extent the taxation of real estate increases rent and real estate values. I realize that good economic theory justifies the conclusion that a tax on land is not shifted, but this applies only to "land" as that word is used in economic theory, that is, to those elements of real estate that are durable and not capable of multiplication. Accordingly, the theory of the single tax does not apply to buildings, nor to any part of the value of urban real estate which is created by the investment of capital or labor, nor to the fertility of agricultural land which is neither durable nor incapable of reproduction.

(c) To the extent that the value of land is reduced by special taxation it involves an expropriation of the present owners. If the tax promises to increase, it involves a further degree of expropriation. Such expropriation may be just or unjust; it is not necessary to decide that question here. The important point for us at the present time is that no such measure of expropriation has a chance of acceptance by the people of this country in the near future. Fortunately or unfortunately, the abolition of all taxation upon property other than real estate at the present time in this country is not a practicable project of reform.

2. The second substitute for the taxation of personal property presents a twofold aspect. It proposes the habitation tax in lieu of the present taxation of household goods and purely personal property, and the rental tax or the graded license tax in lieu of taxes on the machinery and stock, credits and other personal property of manufacturers, merchants, and other business men. The fundamental idea underlying these taxes is the same. The ideal is to adjust the tax burden to income, but to measure income by certain external indicia which are supposed to simplify indefinitely the work and responsibility of both the assessor and the taxpayer.

(a) The Habitation Tax. The weakness of the habitation tax lies on the surface. The richest man in a city in which I